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    Annual Report 2018 Infineon Technologies AG


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    Infineon at a glance Infineon Technologies AG is a world leader in semiconductor solutions that make life easier, safer and greener. Microelectronics from Infineon is the key to a better future. In the 2018 fiscal year (ending 30 September), the Company reported sales of approximately €7.6 billion with some 40,100 employees worldwide. Infineon is listed on the Frankfurt Stock Exchange (ticker symbol: IFX) and in the USA on the over-the-counter market OTCQX International Premier (ticker symbol: IFNNY). Automotive Industrial Power Control Page 40 Page 42 Applications Applications › Assistance systems and safety systems › Charging stations for electric vehicles › Comfort electronics › Energy distribution › Powertrain › Home appliances › Security › Industrial drives › Industrial power supplies Product range › Industrial robots › 32-bit automotive microcontrollers for powertrain, › Industrial vehicles safety and driver assistance systems › Renewable energy generation › 3D ToF sensors › Traction › Discrete power semiconductors › IGBT modules Product range › Industrial microcontrollers › Bare die business › Magnetic and pressure sensors › Discrete IGBTs › Power ICs › Driver ICs › Radar sensor ICs (77 GHz) › IGBT modules (low-power, medium-power, › Transceivers (CAN, LIN, Ethernet, FlexRay) high-power) › Voltage regulators › IGBT module solutions including IGBT stacks › Intelligent power modules with integrated Key customers 1 control unit, driver and switch Aptiv / Bosch / BYD / Continental / Delphi / › Silicon carbide MOSFETs and modules Denso / Hella / Hitachi / Hyundai / Keihin / Lear / Mando / Mitsubishi Electric / Omron / Preh / Key customers 1 Valeo / Veoneer / ZF ABB / Alstom / Bombardier / CRRC / Danfoss / Eaton / Emerson / Goldwind / Inovance / Midea / Market position2 Nidec / Rockwell / Schneider Electric / Siemens / # 2 with a market share of 10.8 % Sungrow / Toshiba / Vestas / Yaskawa Source: Strategy Analytics, April 2018 Market position2 # 1 with a market share of 27.1 % for IGBT-based power semiconductors Source: IHS Markit, Technology Group, September 2018 1 In alphabetical order. Infineon’s major distributions customers are Arrow, Avnet, Intron, Jingchuan, Macnica, Weikeng and WPG Holding (SAC).


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    Infineon at a glance Power Digital Security Management Solutions & Multimarket (previously Chip Card & Security) Page 45 Page 47 Applications Applications › Cellular infrastructure › Authentication › Charging stations for electric vehicles › Automotive › DC motors › Governmental identification documents › HiRel (high-reliability components) › Healthcare cards › Internet of Things › Internet of Things › LED and conventional lighting systems › Mobile communications › Mobile devices › Payment system, mobile payment › Power management (adapters, chargers, › Ticketing, access control power supplies) › Trusted computing Product range Product range › Control ICs › Contact-based security controllers › Customized chips (ASICs) › Contactless security controllers › Discrete low-voltage and high-voltage › Dual-interface security controllers power MOSFETs (contact-based and contactless) › GPS low-noise amplifier › Embedded security controllers › Low-voltage and high-voltage driver ICs › MEMS and ASICs for pressure sensors Key customers 1 › MEMS and ASICs for silicon microphones Gemalto / Giesecke & Devrient / Google / HP / › Radar sensor ICs (24 GHz, 60 GHz) Idemia / Lenovo / Microsoft / Samsung / › RF antenna switches US Government Publishing Office / Watchdata › RF power transistors › Silicon carbide diodes Market position2 › TVS (transient voltage suppressor) diode # 1 with a market share of 24.2 % for smart card and secure ICs Key customers 1 Source: ABI Research, October 2018 Airbus / Alibaba / Artesyn / Baidu / Boeing / Cisco / Dell / Delta / Ericsson / Google / Hewlett Packard Enterprise / HP / Huawei / Lenovo / LG Electronics / Lite-On / Makita / Nokia / Osram / Panasonic / Quanta / Samsung / ZTE Market position2 # 1 with a market share of 26.3 % for standard power MOSFETs Source: IHS Markit, Technology Group, September 2018 2 All figures for 2017 calendar year. The market share of the five largest competitors is shown in the “Market position” section of the relevant segment. The figures provided in those sections with respect to changes in market share relate to the 2017 and 2016 market share figures as calculated in 2018. Due to changes in the way the market is analyzed, these figures may differ from the 2016 market share figures reported in 2017.


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    Infineon key data As of and for the fiscal years ended 30 September (under IFRS) ¹ Fiscal year from 1 October to 30 September 2018 2017 2018/2017 € in in % of € in in % of Change millions revenue millions revenue in % Infineon at a glance Revenue by region 7,599 7,063 8 Europe, Middle East, Africa 2,443 32 2,272 32 8 therein: Germany 1,171 15 1,094 15 7 Asia-Pacific (excluding Japan, Greater China) 1,129 15 1,071 15 5 Greater China 2,599 34 2,376 34 9 therein: China 1,921 25 1,735 25 11 Japan 534 7 463 7 15 Americas 894 12 881 12 1 therein: USA 719 9 714 10 1 Revenue by segment 7,599 7,063 8 Automotive 3,284 43 2,989 42 10 Industrial Power Control 1,323 17 1,206 17 10 Power Management & Multimarket 2,318 31 2,148 31 8 Digital Security Solutions 664 9 708 10 (6) Other Operating Segments 10 0 9 0 11 Corporate and Eliminations – 0 3 0 ––– Gross profit/Gross margin 2,885 38.0 2,621 37.1 10 Research and development expenses (836) 11.0 (776) 11.0 8 Selling, general and administrative expenses (850) 11.2 (819) 11.6 4 Operating income 1,469 983 49 Income from continuing operations 1,218 791 54 Gain (loss) from discontinued operations, net of income taxes (143) (1) ––– Net income 1,075 790 36 Segment Result/Segment Result Margin 1,353 17.8 1,208 17.1 12 Property, plant and equipment 3,038 2,659 14 Total assets 10,879 9,945 9 Total equity 6,446 5,636 14 Net cash provided by operating activities from continuing operations 1,571 1,728 (9) Net cash used in investing activities from continuing operations (1,163) (1,131) (3) Net cash used in financing activities from continuing operations (542) (340) (59) Free cash flow 2 618 594 4 Depreciation and amortization 861 812 6 Capital expenditure 1,254 1,022 23 Gross cash position 2 2,543 2,452 4 Net cash position 2 1,011 618 64 Basic earnings per share in € 0.95 0.70 36 Diluted earnings per share in € 0.95 0.70 36 Adjusted earnings per share in € – diluted 0.98 0.85 15 Dividend per share in € ³ 0.27 0.25 8 Equity ratio 59.3 % 56.7 % Return on equity ⁴ 16.7 % 14.0 % Return on assets ⁴ 9.9 % 7.9 % Inventory intensity ⁴ 13.6 % 12.5 % Debt-to-equity ratio ⁴ 23.8 % 32.5 % Debt-to-total-capital ratio ⁵ 14.1 % 18.4 % Return on Capital Employed (RoCE) 2 20.5 % 14.9 % Infineon employees as of 30 September 40,098 37,479 7 1 Columns may not add due to rounding. 2 See the chapter “Internal management system” for definition, P page 58 f. 3 A dividend per share of €0.27 for the 2018 fiscal year will be proposed to the Annual General Meeting on 21 February 2019. 4 See the chapter “Review of financial condition” for definition, P page 67. 5 Debt-to-total-capital ratio = long-term and short-term debt divided by total assets.


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    Our year 2018 at a glance Infineon continued to grow during the 2018 fiscal year. Revenue increased by 8 percent to €7.599 billion. Segment Result increased to €1.353 billion, corresponding to a margin of 17.8 percent. The revenue and profitability target, which we defined at the beginning Revenue of the fiscal year, has been adjusted due to currency effects and achieved in the course €7.599 billion of the 2018 fiscal year. + 8 percent We make our customers more successful with leading technology and system under- standing. Here we benefit from long-term, Segment Result and Margin global megatrends and develop solutions that make life easier, safer and greener. €1.353 billion Today, our traditional core competencies = 17.8 percent ˆ are in greater demand than ever. At the same time, we continue to refine our growth Rated credit-worthiness strategy to prepare for the success of “S&P Global Ratings” tomorrow. During the past fiscal year we have once again made strong progress “BBB” in strategic projects. (outlook “stable”) At Infineon, success is not only defined by the targets that we achieve but also by the Listing in the way that brought us there: Sustainability is at the core of our thinking. Listings in the Dow Jones Dow Jones Sustainability™ Europe Index and in the Dow Jones Sustainability™ World Sustainability™ Index are both our reward and motivation. Index


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    Our year at a glance Infineon continued to grow during the 2018 fiscal year. Revenue increased by 8 percent to €7.599 billion. Segment Result increased to €1.353 billion, corresponding to a margin of 17.8 percent. The revenue and profitability target, which we defined at the beginning Revenue of the fiscal year, has been adjusted due to currency effects and achieved in the course €7.599 billion of the 2018 fiscal year. + 8 percent We make our customers more successful with leading technology and system under- standing. Here we benefit from long-term, Segment Result and Margin global megatrends and develop solutions that make life easier, safer and greener. €1.353 billion Today, our traditional core competencies = 17.8 percent ˆ are in greater demand than ever. At the same time, we continue to refine our growth Rated credit-worthiness strategy to prepare for the success of “S&P Global Ratings” tomorrow. During the past fiscal year we have once again made strong progress “BBB” in strategic projects. (outlook “stable”) At Infineon, success is not only defined by the targets that we achieve but also by the Listing in the way that brought us there: Sustainability is at the core of our thinking. Listings in the Dow Jones Dow Jones Sustainability™ Europe Index and in the Dow Jones Sustainability™ World Sustainability™ Index are both our reward and motivation. Index


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    Content Management Board and Supervisory Board 2 Letter to shareholders 6 The Management Board 8 Report of the Supervisory Board to the Annual General Meeting Combined Management Report Our Group 16 Finances and strategy 40 The segments 50 Research and development 54 Operations 56 Internal management system 59 Sustainability at Infineon 60 The Infineon share Our 2018 fiscal year 62 Group performance 73 Report on expected developments, together with associated material risks and opportunities 87 Overall statement of the Management Board with respect to Infineon’s financial condition as of the date of this report 88 Infineon Technologies AG 91 Corporate Governance Consolidated Financial Statements 108 Consolidated Statement of Operations 109 Consolidated Statement of Comprehensive Income 110 Consolidated Statement of Financial Position 111 Consolidated Statement of Cash Flows 112 Consolidated Statement of Changes in Equity 114 Notes to the Consolidated Financial Statements Further Information 171 Responsibility Statement by the Management Board 172 Independent Auditor’s Report 178 List of Abbreviations 179 Financial calendar 179 Imprint


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    2 Management Board and Supervisory Board Letter to shareholders Letter to shareholders Dr. Reinhard Ploss Chief Executive Officer Neubiberg, November 2018 Infineon has added a new chapter to its success story: The 2018 fiscal year was very strong in economic terms and has given us a glimpse of the future. We have set the course for long-term, profitable growth of Infineon. First, to the figures for the fiscal year under report. Compared to the previous year, revenue increased by 8 percent to €7,599 million. The unfavorable development of the US dollar exchange rate partly masked the underlying dynamic of our business. The annual average exchange rate was 1.19. If it had remained at the previous year’s level of 1.11, our revenue growth in the previous fiscal year would have been 12 percent and as such clearly above the original forecast of 9 percent. Not only did we grow strongly, we also became more profitable. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    3 Management Board and Supervisory Board Letter to shareholders The Segment Result increased to €1,353 million, the Segment Result margin was 17.8 percent. This makes 2018 another one in a long series of successful fiscal years: For the fifth time in a row we were able to significantly increase revenue and Segment Result. Our strategy is paying off, the orientation of the company promises long-term success. We want our shareholders to adequately participate in this success. Therefore, for the fifth consecutive year, the Management Board and Supervisory Board will propose an increase in the dividend to the Annual General Meeting on 21 February 2019, this time to 27 cents per share. Our world is facing serious challenges: demographic and social change, climate change and scarcity of resources, urbanization and the digital transformation. Our solutions are the key to a better future because they make it possible to achieve more while using less resources. Infineon’s current business has organically grown at an average rate of approximately 9 percent per year since the Company was established as an independent corporation in the 1999 fiscal year, faster than the semiconductor market as a whole. This success is due both to the fact that we have grown in scale by gaining market shares in our core business, as well as the fact that we have grown in scope, i.e. we have continuously expanded our range of activities into adjacent markets with new products and solutions. Our strategic approach “Product to System” helps us continue to rigorously develop our core business. Starting with a comprehensive understanding of customer requirements, we develop solutions that take the overall system into consideration, thus providing the customer with important competitive advantages. Software is playing an P see page 20 ff. increasingly important role here. You can read more on this topic in the chapter “Group Strategy”. Our strategic orientation towards topics with a high relevance for society and our technological strength both point to a future with outstanding growth opportunities. For this reason we updated our target operating model and presented it to investors and analysts at our Capital Markets Day in London on 12 June 2018. For the most part, the structural growth drivers have horizons of several years, in some cases even of a decade or more. The same applies to the lifecycles of many platforms in which our products are used. This allows us to define robust, long-term targets. We are committed to the following targets: › Revenue growth of 9 percent: In the automotive sector, the increasing trend towards electro-mobility and the development towards the automation of more and more driving functions are the primary drivers of our growth. We thus expect the highest growth rate for the segment Automotive at 10 percent annually. The segments Industrial Power Control (8 percent expected average growth rate) and Power Management & Multimarket (9 percent expected average growth rate) also benefit from a large number of structural growth drivers such as energy storage for renewable energies, dynamically controlled electric motors in large and small devices and battery-powered applications. Information security is an essential success factor in many solutions. Under the leadership of our division Digital Security Solutions (previously Chip Card & Security) we will play a central role in driving market development for hardware-based security solutions. Because of the ongoing transition from card-based to embedded products, we expect a growth rate in the mid single-digit percent range. › Investment-to-sales ratio of 15 percent: During the previous fiscal year and also currently, our ability to ship is limited in several areas by the amount of available manufacturing capacities. This limits our customers’ and our potential. We are therefore investing in order to take advantage of the current market opportunities. Accelerated revenue growth and ambitious investments go hand in hand. In the future, our investment-to-sales ratio will be 15 percent of revenue at the target growth rate of 9 percent. The ratio of 15 percent does not include investments in cleanrooms and large office buildings as well as in measures to increase manufacturing flexibility, which we will use in the coming years to lay the foundation for participating in a possibly even larger demand dynamic in our target markets. By making significant investments in the expansion of our manufacturing capacities, we fulfill the prerequisite for working together with our customers to supply growing demands in existing and new markets. We continue to rely on in-house manufacturing, especially in the area of power semiconductors, since our know-how of the manufacturing processes represents an important competitive advantage. With the 300-millimeter thin-wafer technology, we can manufacture cost-effectively at the highest quality levels and can take advantage of the lower capital intensity. In approximately three years we expect to reach the capacity limit of our 300-millimeter fab in Dresden (Germany), which is why we have begun construction of a similar second factory in Villach (Austria), paving the way for long-term growth. The highly visible investment of about €1.6 billion will create around 400 highly qualified jobs and will allow for an annual revenue volume of approximately €1.8 billion when operating at full capacity. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    4 Management Board and Supervisory Board Letter to shareholders › Segment Result margin of at least 17 percent: In the 2018 fiscal year, in spite of the effects of the weak US dollar mentioned above, we achieved a Segment Result margin of 17.8 percent. In doing so we were able to compensate for the continued sharp increase in prices for raw wafers and for other materials such as copper. This result is thus proof of our high performance capabilities – and we continue on this path. Currently we are not expecting a reversal of the trend in material costs. Furthermore, increased investments will result in higher depreciation and amortization. These two factors thus represent additional burdens for now, but we are working on compensating them by progress in productivity and higher-quality product and system solutions, and will therefore be able to keep our gross margin stable. We see opportunities to increase the Segment Result margin through the scaling of certain operating expenses more slowly than revenues: Infineon’s lifeblood is technological innovation. Research and development activities thus ensure the future viability of the company. Expenses are therefore expected to develop in in line with revenue growth. On the other hand, for selling, general and administrative expenses we leverage economies of scale and plan efficiency improvements. This allows us to gradually increase our Segment Result margin in spite of increased burdens in terms of cost of goods sold. In the short term we are even expecting an elevated growth-level. Due to the well-filled order books, we expect revenue growth for the Group of 11 percent plus or minus 2 percentage points for the 2019 fiscal year. At the mid-point of the forecast revenue range, we expect a Segment Result Margin of around 18 percent and investments of €1.6 billion to €1.7 billion. In all of our business areas we want to take on a leading position or be able to do so within the foreseeable future, which means growing faster than the market. In this way we can see evidence that we are on the right path and can be the preferred partner for our customers. Our increased business targets show that we took the right decisions in the past. In the 2018 fiscal year we took additional steps to make sure we can continue our growth trajectory in the years to come as well. I would like to point out some of them. Technology leadership and a broad technology portfolio are important factors for our success. We have developed new technologies based on silicon carbide (SiC) and gallium nitride (GaN) in our core power semiconductor business. These materials have properties superior to those of silicon; however, technical hurdles remain before we can manufacture them in high volumes and at a reasonable cost. In the still nascent SiC market we have in the meantime established ourselves with our CoolSiC™ MOSFET and our module manufacturing competence. We have secured our supply of SiC wafers under a long-term supply agreement with Cree, Inc. (USA). This means we are excellently positioned to drive the market penetration of silicon carbide forward: Infineon is the company that can offer the right power semiconductor solution for every application. Furthermore, we have taken a variety of steps to strengthen our position through portfolio expansion. For example, with the acquisition of the Danish startup company Merus Audio we complemented our portfolio of integrated Class D audio amplifiers. Moreover, we signed Memoranda of Understanding with the Chinese internet conglomer- ates Alibaba Cloud and JD providing for collaboration on Internet of Things (IoT) applications. Here, expertise from Dresden (Germany) will also come into play: We have built a new development center at our Dresden site that concentrates on solutions for automotive and power electronics as well as for Artificial Intelligence (AI). Algorithms, AI and the IoT today already play a central role in the context of the constantly increasing interconnection of traffic systems. We will use this know-how to provide AI solutions for other target markets as well on a long-term basis under the excellent conditions offered by the eco-system in Dresden. Another milestone is the joint venture established in February with SAIC Motor Corporation Ltd., China’s largest automobile manufacturer. This joint venture gives us even better access to the world’s largest and fastest-growing market for electro-mobility. Volume manufacturing of the power semiconductor modules began in August at the Infineon Wuxi (China) site. The objective is to supply customers who produce in China. Customers outside of China will still be supplied directly by Infineon. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    5 Management Board and Supervisory Board Letter to shareholders After not closing the acquisition of Wolfspeed in 2017, we reassessed our options for radio-frequency power compo- nents and sold the largest part of the business to Cree, Inc. for approximately €345 million, a logical consequence. Without the acquisition of Wolfspeed and under the present conditions it appeared impossible to achieve a strong position in this market for radio-frequency power components with reasonable effort. On the other hand Cree, with its excellent reputation, is the ideal owner for this part of our portfolio. Since 1 October 2018 our security technology business bears the new name Digital Security Solutions. In addition to continuing established solutions for banking cards and electronic identity documents, our embedded security solutions have for years addressed entirely new customers with a significantly larger number of applications. As of the new 2019 fiscal year, we renamed the segment Digital Security Solutions, a name that describes much better what we already do today. We want to further develop the company with large and small measures like the ones mentioned here and we want to continue our success story. There are, however, things outside our control. We benefit from a good macro- economic environment and the growth of the world economy; we also benefit from open markets and low trade barriers. Accordingly, we observe the present protectionist tendencies with great concern. We are monitoring the situation closely in order to adapt our strategies quickly if and when signs of economic slow-down occur. You can rest assured that we will lead Infineon into the future with a great sense of responsibility and attention to detail. We sincerely regret that Wolfgang Mayrhuber will no longer be actively accompanying us with his wisdom and sup- port. He left the Supervisory Board on his own wish after the Annual General Meeting in February 2018. As chairman of the Supervisory Board, he has had a decisive and constructive influence on the recent history of Infineon with his personality and his experience. I would like to take this opportunity to thank him once again personally – and in your name – and to wish him all the best. The Annual General Meeting elected Dr. Wolfgang Eder to the Supervisory Board, therewith selecting a highly respected corporate personality. The Chairman of the Supervisory Board is now Dr. Eckart Sünner, who knows Infineon very well after his many years as Chairman of the Investment, Finance and Audit Committee. We achieved a lot in the 2018 fiscal year. We turned our eyes to tomorrow, without neglecting the world of today. We seeded, we harvested. A company can only master this challenge when it can count on qualified and dedicated employees. I therefore thank you, our employees, most sincerely in the name of the entire Management Board for the passion and commitment with which you make Infineon successful. The future offers many opportunities – we grasp them together. Dr. Reinhard Ploss Chief Executive Officer INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    6 Management Board and Supervisory Board The Management Board The Management Board Dominik Asam Dr. Reinhard Ploss Chief Financial Officer Chief Executive Officer Dominik Asam has been the Chief Financial Reinhard Ploss has been a member of the Officer of Infineon Technologies AG since Management Board of Infineon Technologies AG 2011, responsible for Accounting & Reporting, since 2007. He has been Chief Executive Officer Financial Controlling, Financial Planning, since 1 October 2012, responsible for Segments, Investor Relations, Tax, Treasury, Audit, Group Strategy, Communications & Government Compliance, Export Control, Risk Manage- Relations, Human Resources (Labor Director), ment, Business Continuity and Information Legal, Research and Development. Technology. Reinhard Ploss was born on 8 December 1955 Dominik Asam was born on 6 March 1969 in Bamberg. He studied process engineering in Munich. He studied at the Technical at the Technical University of Munich and in University of Munich and the École Centrale 1986 received his doctorate. He began his in Paris. He is a graduate mechanical career at Infineon (Siemens AG until 1999) in engineer and an “Ingénieur des Arts et the same year. Manufactures”. In addition, he completed an MBA at INSEAD in Fontainebleau, France. Dominik Asam joined Infineon in 2003. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    7 Management Board and Supervisory Board The Management Board Dr. Helmut Gassel Jochen Hanebeck Chief Marketing Officer Chief Operations Officer Helmut Gassel has been a member of the Jochen Hanebeck has been a member of Management Board and Chief Marketing Officer the Management Board and Chief Operations of Infineon Technologies AG since 2016. He is Officer of Infineon Technologies AG since 2016. responsible for Sales & Marketing, Regions, He is responsible for Operations, including Strategy Development, Mergers & Acquisitions Manufacturing, Logistics, Quality, Customs and Intellectual Property. and Purchasing. Helmut Gassel was born on 13 March 1964 Jochen Hanebeck was born on 2 February in Dortmund. He holds a Diploma in physics 1968 in Dortmund. He received a degree from the Ruhr-University in Bochum. He in electrical engineering from RWTH Aachen received his PhD in electrical engineering University. He has been with Infineon since from the University of Duisburg. He joined 1994 (Siemens AG until 1999). Infineon (Siemens AG until 1999) in 1995. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    8 Management Board and Supervisory Board Report of the Supervisory Board to the Annual General Meeting Report of the Supervisory Board to the Annual General Meeting Infineon remains firmly on course for profitable growth. Our success story is epitomized in particular by two public announcements made during the previous fiscal year. The first of these gave notice of Infineonʼs intention to build a new 300-millimeter facility for manufacturing power semiconductors at its site in Villach, Austria, involving a total investment of some €1.6 billion over a period of six years. The second announcement provided information on the Management Boardʼs decision to modify Infineonʼs target operating model, which reflects targets set for revenue, segment result margin and investment ratio, and is now geared to achieving stronger long-term growth. Following extensive discussions, the Supervisory Board concurred with both of the deci- sions taken by the Management Board. Our support is based on the fact that global developments such as climate change, demographic structures and the trend towards digitalization will continue to drive Infineonʼs growth in the coming years. Electric vehicles, interconnected battery-powered devices, Dr. Eckart Sünner data centers, and the generation of electricity from renewable sources all Chairman of the Supervisory Board require efficient, reliable power semiconductors. With its leading technologies and intelligent manufacturing strategies, Infineon has carved out an excellent position in its various core markets. Infineon will continue to exploit opportunities to achieve future sustainable growth. As in previous years, it is particularly important to us that you, as shareholders, participate in Infineonʼs profitable growth, not least through the payment of a commensurate dividend. Accordingly, the Management Board and the Supervisory Board recommend a further increase in the dividend, this year to €0.27 per share. Main activities of the Supervisory Board During the 2018 fiscal year, the Supervisory Board again performed its duties with great diligence in accordance with the law, the Companyʼs statutes and its own terms of reference. We both advised and supervised the Management Board in a constructive manner. Our input was mainly based on in-depth reports presented by the Management Board at Supervisory Board and committee meetings, dealing with current business developments, significant transac- tions, the quarterly financial reports and corporate planning. The Management Board discussed and coordinated corporate strategy as well as key operational issues in collaboration with us. The Supervisory Board was given ample opportunity to thoroughly examine any reports and resolutions proposed by the Management Board at all times. In this context, we undertook various measures to assure ourselves that the governance of Infineonʼs corpo- rate affairs was lawful, compliant and appropriate. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    9 Management Board and Supervisory Board Report of the Supervisory Board to the Annual General Meeting The Supervisory Board was provided with written quarterly reports on Infineonʼs business performance, key financial data, risks and opportunities, major areas of litigation and other important topics. Between quarterly reports, the Management Board also kept us informed of current developments in the form of monthly reports. In our capacity as Chairmen of the Supervisory Board, at first Mr. Wolfgang Mayrhuber and – following his resignation from the Supervisory Board on 22 February 2018 – me thereafter maintained regular contact with the Companyʼs Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The same applies to Mr. Peter Bauer and myself in our capacity as Chairmen of the Strategy and Technology Committee respectively the Investment, Finance and Audit Committee. I was promptly informed by the CEO of all events of significance to Infineon, when necessary outside of the regular Supervisory Board meetings. In the 2018 fiscal year, the full Supervisory Board met seven times (five ordinary and two extraordinary meetings) and passed one written resolution. Attendance measured in relation to these various proceedings averaged nearly 92 percent. Dr. Diess, Ms. Engelfried and Dr. Puffer were each unable to attend two meetings and Mr. Holdenried, Ms. Picaud and Prof. Köcher were each unable to attend one meeting. Attendance at Supervisory Board committee meetings was a good 96 percent. Dr. Eder was excused from attending one meeting of the Strategy and Technology Committee and Mr. Holdenried from one meeting of the Executive Committee. Accordingly, all members of the Supervisory Board attended more than half of the meetings of the Supervisory Board and of the committees to which they belonged during the 2018 fiscal year. Financial and investment planning At its meeting held on 21 November 2017 and at the recommendation of the Investment, Finance and Audit Committee, the Supervisory Board approved the financial and investment budget (including the total investment budget) for the 2018 fiscal year, as presented by the Management Board. At its meeting held on 16 May 2018, again at the recommendation of the Investment, Finance and Audit Committee, the Supervisory Board approved an increase in the previously approved total investment budget. Business strategy; growth prospects As in the previous year, a separate meeting of the full Supervisory Board was again held for the sole purpose of dealing with strategic topics. In the course of the strategy meeting, the Management Board provided information on global mega-trends as well as specific market and product trends, explained the external influences on the semiconductor industry, such as the risks arising from global trade conflicts, described Infineonʼs positioning in terms of international competition, and explained the corporate strategy it had developed, taking the framework parameters referred to above into account. Against this background, Infineonʼs strategic direction, including measures to expand expertise in core markets, broaden the product portfolio and optimize manufacturing strategy, was extensively discussed. Furthermore, the meeting dealt with the question of how far Infineon should go down the route of developing software for use in the hardware components it produces. Sustainable growth is an integral part of Infineonʼs corporate strategy. The corresponding growth prospects were also discussed at the strategy meeting and, additionally, the subject of further Supervisory Board meetings, at which specific decisions were put forward by the Management Board for approval. As mentioned earlier, the Supervisory Board deliberated in detail on the planned large-scale investment in Villach (Austria) to build a new power semi- conductor facility and on the modification of Infineonʼs target operating model to bring it in line with the expected rate of growth and, in both cases, approved the proposed decisions. Furthermore, the Supervisory Board discussed potential opportunities for mergers and acquisitions. These discus- sions also included a disinvestment decision, namely the sale of the RF Power product line to the US semiconductor company Cree, Inc. for a consideration of approximately €345 million. As technology leaders, collaboration between Infineon and Cree goes back a long way. The Supervisory Board agrees with the Management Board that it makes good commercial sense to sell this product line to Cree and that it also offers good professional prospects for the employees concerned. After thoroughly deliberating on these points, the Supervisory Board gave the transaction its approval. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    10 Management Board and Supervisory Board Report of the Supervisory Board to the Annual General Meeting Personnel matters relating to the Management Board Extension of Management Board mandates In view of the successful work of the Management Board, the Supervisory Board decided to extend Mr. Asamʼs mandate, which would otherwise run until 31 December 2018, by a further five years to 31 December 2023. Further- more, the mandates of Dr. Gassel and Mr. Hanebeck, which run until 30 June 2019, were also extended by a further five years to 30 June 2024. By extending these mandates, the Supervisory Board acknowledges the excellent contri- butions these members of the Management Board have made to Infineonʼs sustainable and profitable growth and thanks them for their outstanding contributions. Diversity concept for the composition of the Management Board The European Corporate Social Responsibility (CSR) Directive and the German CSR Directive Implementation Act provide for large-sized listed companies such as Infineon to report on the diversity concepts developed in connection with the composition of their management and supervisory boards. A concept of this nature has been in place for Infineonʼs Supervisory Board for several years. The competency profile and catalog of objectives adopted by the Supervisory Board for its own composition (last updated in August 2017) deals not only with the general criteria for making appointments but also with diversity aspects. By contrast, the composition of the Management Board has not yet been subject to any specific diversity concept. The Supervisory Board therefore considered this matter at length and adopted a comprehensive diversity concept during the fiscal year under report. The Supervisory Board considers it important that any decision to appoint a person to a specific role on the Management Board must always be made in Infineonʼs best interests, taking all the circumstances of each individual case into account. The primary focus must be on the professional and personal suitability of the person concerned. Consideration must be given to ensuring that the members of the Management Board as a whole possess – to the fullest possible extent – the knowledge, skills and experience required to run a technology company. Within the framework of these requirements, the Supervisory Board also considers diversity aspects, particularly age, gender, education and professional background as well as internationality. In addition to ensuring the greatest possible personal suitability of each individual member, it is equally important that different perspectives on managing the corporationʼs business are encouraged by having a Management Board with a diverse composition. The various aspects of diversity are therefore an integral component of the decision-making process, but not an exclusive criterion. The target quota for women on the Management Board remains unchanged at 20 per cent. Details of the diversity concepts (for the composition of both the Management Board and the Supervisory Board), their objectives, the way they are implemented, and the results achieved during the year under report are provided in the Corporate Governance Statement, which is available on the Infineon website. @ www.infineon.com/declaration-on-corporate-governance Management Board compensation In accordance with section 4.2.2 of the German Corporate Governance Code (DCGK), the Supervisory Board regularly engages an external, independent compensation expert to review Infineonʼs Management Board compensation system and to conclude on its compliance with applicable legislation as well as its overall appropriateness. The most recent system review was conducted in 2016. During the fiscal year under report, the Supervisory Board again engaged an external independent compensation expert to review the system and the target annual incomes of the members of the Management Board. The expert concluded that the compensation system complies with legal requirements and with the recommendations contained in the DCGK. In particular, the expert concluded that the compensation of Infineonʼs Management Board is commensurate with market conditions and that the variable compensation component is oriented towards the sustainable growth of the company. In addition, the target annual incomes of the members of the Management Board were found to be appropriate in all material respects. The expert pointed out, however, that there was scope for raising the level of compensation, particularly for the Chairman of the Management Board. The results of the compensation expertʼs review were discussed in detail at the Executive Committee meeting held on 25 October 2018 and by the full Supervisory Board on 20 November 2018. The Super- visory Board concurs with the opinion of the compensation expert. Already during the 2017 fiscal year, the Supervisory Board resolved to change the allocation date for granting perfor- mance shares to members of the Management Board for the purposes of the long-term incentive (LTI) from 1 October to 1 March of a fiscal year. The amendment was applied for the first time for the allocation in the 2018 fiscal year. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    11 Management Board and Supervisory Board Report of the Supervisory Board to the Annual General Meeting After extensive discussions held by the full Supervisory Board and prepared by the Executive Committee, a new, simplified rule was adopted for the treatment of current LTI tranches in the event of a member leaving the Manage- P see page 95 ff. ment Board. The rule came into force on 1 October 2018. Details on this are outlined in the Compensation Report. For the second time, a tranche of performance shares fell due for settlement at the end of the 2018 fiscal year. As the stipulated performance hurdle was surpassed, the tranche allocated in 2014 is required to be settled in full following the expiry of the four-year holding period. As in the previous fiscal year, the Supervisory Board resolved to settle the entitlement of members of the Management Board resulting from this tranche in cash rather than in shares. Equality of treatment was therefore achieved with Infineon employees, for whom the Management Board also decided upon cash settlement of the current tranche. Details of Management Board compensation – in particular the amounts paid to individual members in the 2018 P see page 95 ff. fiscal year – are available in the comprehensive Compensation Report in the Annual Report. Litigation The Supervisory Board was regularly provided with detailed information regarding major legal disputes during the 2018 fiscal year, which were then thoroughly discussed with the Management Board. These included in particular the Company’s appeal, brought before European courts, against the antitrust fine imposed by the EU Commission in 2014 and the dispute with the insolvency administrator of Qimonda AG pertaining to alleged residual liability claims. Corporate Governance Declaration of Compliance 2018 The Declaration of Compliance issued in November 2017 was updated in February 2018 in view of the fact that I was elected Chairman of the Supervisory Board at the meeting of the Supervisory Board on 22 February 2018 in parallel to my function as Chairman of the Investment, Finance and Audit Committee. The Management Board and Supervisory Board declared a deviation from section 5.3.2, paragraph 3, sentence 3, DCGK, according to which the Chairman of the Supervisory Board should not additionally chair the Audit Committee. The reason given for the deviation was that it is in the Companyʼs interest that I continue to contribute my financial expertise and wealth of experience in Audit committee matters in my capacity as Chairman of the Infineon Audit Committee. In the current Declaration of Compliance dated November 2018, the Management Board and the Supervisory Board declared that, with the exception of a deviation from section 5.3.2, paragraph 3, sentence 3, DCGK, as described above, Infineon complies with all other recommendations contained in the DCGK and will continue to do so in future. The original versions of the Declarations of Compliance are available on Infineonʼs website. @ www.infineon.com/cms/en/about-infineon/investor/corporate-governance/declaration-of-compliance/ Efficiency examination for Supervisory Board activities The Supervisory Board examines the efficiency of its activities on an annual basis. In the previous fiscal year, the examination was performed with the assistance of an external, independent consultant. The examination for the 2018 fiscal year was based on a structured questionnaire. The examination provided a positive picture of the work of the Supervisory Board and its collaboration with the Management Board. No noteworthy shortcomings were identified. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    12 Management Board and Supervisory Board Report of the Supervisory Board to the Annual General Meeting Examination of potential conflicts of interest The members of the Management Board and the Supervisory Board are required to disclose any conflicts of interest to the Supervisory Board without delay. No conflicts of interest in connection with the members of the Management Board and the Supervisory Board have been disclosed in the 2018 fiscal year. Prior to members of the Management Board assuming sideline activities, particularly supervisory board mandates outside the Company, the DCGK requires that permission be given by the Supervisory Board. During the 2018 fiscal year, the Supervisory Board and the Executive Committee gave their permission for Dr. Ploss and Dr. Gassel to assume mandates, given that no conflicts of interest were discernible. Further information on corporate governance at Infineon can be found in the joint Corporate Governance Report of the Management Board and the Supervisory Board and in the Corporate Governance Statement. Both of these documents as well as all terms of reference of the Companyʼs boards and its committees are publicly available on the Infineon website. @ www.infineon.com/corporate-governance-report @ www.infineon.com/declaration-on-corporate-governance Composition of the Supervisory Board; committee work Composition of the Supervisory Board With effect from the end of the Annual General Meeting held on 22 February 2018, Mr. Mayrhuber resigned his mandate as member and Chairman of the Supervisory Board. On behalf of the Supervisory Board, the Management Board and the entire workforce, I sincerely wish to thank Mr. Mayrhuber for seven extraordinarily commendable and successful years at the helm of our Supervisory Board. Due to his competence and vision, combined with his constructive and engaging manner, Mr. Mayrhuber made a significant contribution to Infineonʼs success. I am delighted that Mr. Mayrhuber will remain closely linked to Infineon as Honorary Chairman of the Supervisory Board going forward. For this reason, it was necessary to elect a new member of the Supervisory Board to fill the vacancy. Based on the Nomination Committeeʼs recommendation and the Supervisory Boardʼs proposal, the Annual General Meeting elected Dr. Wolfgang Eder to the Supervisory Board on 22 February 2018. At the Supervisory Board meeting held immediately after the Annual General Meeting, I was elected to succeed Mr. Mayrhuber as the new Chairman of the Supervisory Board. In this function, I also chair the Mediation Committee and the Executive Committee. Dr. Eder was elected to the Investment, Finance and Audit Committee, the Strategy and Technology Committee as well as the Nomination Committee. Dr. Eder chairs the Nomination Committee. Committee work The committees are responsible for drawing up resolutions and preparing topics that need to be dealt with by the full Supervisory Board. Certain decision-making powers have been delegated to the committees, to the extent permitted under German law. The chairpersons of each committee routinely report on committee meetings at the next relevant full Supervisory Board meeting. Nomination and Mediation Committee The Nomination Committee convened once during the fiscal year under report and made a recommendation to the Supervisory Board that Dr. Wolfgang Eder be proposed for election to the Supervisory Board at the Annual General Meeting. The decision was preceded by several meetings of the Nomination Committee during the 2017 fiscal year, at which succession matters on the shareholder side as a whole were also discussed. The Mediation Committee did not need to convene. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    13 Management Board and Supervisory Board Report of the Supervisory Board to the Annual General Meeting Executive Committee The Executive Committee held one ordinary and two extraordinary meetings during the fiscal year under report. The ordinary meeting focused on preparing the Supervisory Boardʼs resolutions with respect to determining the level of the Management Boardʼs variable compensation. The main aspects of this work were to determine the degree to which targets for the 2017 fiscal year were achieved and to set new targets for the 2018 fiscal year. Other matters arising were the adjustment of rules for LTI purposes when a member leaves the Management Board as well as decisions relating to mandate extensions. At the two extraordinary meetings, the LTI topic was deliberated upon in greater depth and a diversity concept for the composition of the Management Board was discussed. The Executive Committee also approved new business travel rules for the Management Board. Investment, Finance and Audit Committee The Investment, Finance and Audit Committee convened four times during the fiscal year under report. Its activities centered on monitoring the financial reporting process, reviewing the half-year and quarterly financial statements, conducting the preliminary audit of the Separate Financial Statements, Consolidated Financial State- ments and Combined Management Report for Infineon Technologies AG and Infineon, and discussing the audit reports with the auditor. In addition, the committee examined the financial and investment budget. Furthermore, the committee considered the effectiveness of the internal control, internal audit, risk management and compliance management systems. The committeeʼs members also received reports from the Compliance Officer on a regular basis as well as timely updates on significant legal disputes. Before the committee recommended to the full Supervisory Board that KPMG AG Wirtschaftsprüfungsgesellschaft Munich (KPMG) be proposed for election as Company and Group auditor at the Annual General Meeting 2018, a Declaration of Independence was obtained from KPMG. In addition, the committee carefully considered the non- audit services provided by KPMG. There were no indications of conflicts of interest, grounds for exclusion, or lack of independence on the part of the auditor. The recommendation was also based on the committeeʼs confirmation that its recommendation was free from undue influence by third parties and that it had not been subject to any restriction regarding the selection of auditors within the meaning of section 16, paragraph 6 of the EU Statutory Audit Regulation. The committee also considered the fee arrangements and issued the contracts for the corres- ponding audit engagements. In addition, supplementary areas for audit emphasis were defined. The committee also dealt in detail with the CSR Directive and the CSR Directive Implementation Act as well as the implications for non-financial reporting. It prepared the resolution of the full Supervisory Board to engage KPMG to perform the non-mandatory, limited assurance review of the separate report on non-financial information. The auditor attended the meetings of the Investment, Finance and Audit Committee and reported in detail on its audit activities. Strategy and Technology Committee The Supervisory Boardʼs Strategy and Technology Committee convened three times during the fiscal year under report. It was provided with in-depth reports on growth prospects, electro-mobility scenarios and Infineonʼs posi- tioning compared to that of its major competitors. Manufacturing strategies were also discussed and individual fields of business presented in greater detail. The committee also deliberated at great length on the topic of digitali- zation at Infineon. Separate and Consolidated Financial Statements KPMG audited the Separate Financial Statements of Infineon Technologies AG and the Consolidated Financial Statements as of 30 September 2018 as well as the Combined Management Report for Infineon Technologies AG and the Group, and issued unqualified audit opinions thereon. The Half-Year Financial Report was also subject to a review. No issues were identified that might indicate that the abridged Interim Group Financial Statements and Interim Group Management Report had not been prepared, in all material respects, in accordance with the applicable provisions. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    14 Management Board and Supervisory Board Report of the Supervisory Board to the Annual General Meeting KPMG has audited the Separate Financial Statements of Infineon Technologies AG and the Consolidated Financial Statements of the Group and reviewed the Interim Financial Statements of the Group since the 1999 fiscal year (short fiscal year from 1 April 1999 to 30 September 1999). Mr. Karl Braun signed the auditorsʼ report for the first time for the 2012 fiscal year (1 October 2011 to 30 September 2012) and Mr. Michael Pritzer for the first time for the 2017 fiscal year (1 October 2016 to 30 September 2017). At the meeting of the Investment, Finance and Audit Committee on 9 November 2018, continued in a telephone conference on 19 November 2018, intensive discussions were held with the auditor regarding the Separate Financial Statements, the Consolidated Financial Statements, the Combined Management Report, the proposed profit appropriation, and the auditorʼs findings. The committee deliberated at length on the key audit matters and on the related audit procedures performed by the auditor. The Investment, Finance and Audit Committee resolved to propose to the Supervisory Board that the financial statements drawn up by the Management Board be approved and the proposed profit appropriation agreed to. The Separate Financial Statements, the Consolidated Financial Statements, the Combined Management Report, the Management Boardʼs proposal for the appropriation of unappropriated profit (all prepared by the Management Board) and KPMGʼs long-form audit reports were all made available to the Supervisory Board at the meeting held on 20 November 2018. At this meeting, the Chairman of the Investment, Finance and Audit Committee reported in depth on the corresponding recommendations of the Committee. In addition, all material issues relevant to the financial statements and the audit, including key audit matters, were discussed in detail with the auditor and examined by the Supervisory Board. The examination also covered the proposal to pay a dividend of €0.27 per entitled share. The Supervisory Board concluded that it has no objections to the financial statements and the audits performed by the auditor. In its opinion, the Combined Management Report complies with legal requirements. Likewise, the Supervisory Board concurs with the assertions regarding Infineonʼs future development made therein. The Super- visory Board therefore concurred with the results of the audit and approved the Separate Financial Statements of Infineon Technologies AG and the Consolidated Financial Statements of Infineon. The Separate Financial Statements were accordingly adopted. The Supervisory Board also approved the Management Boardʼs proposal for the appro- priation of unappropriated profit. In conjunction with the presentation of the sustainability report, the Investment, Finance and Audit Committee and the full Supervisory Board also deliberated on the separate non-financial report of Infineon Technologies AG (Company and Group) from 30 September 2018, which was drawn up for the first time by the Management Board. KPMG performed a “limited assurance” review and issued an unqualified statement thereon. The documents were carefully examined by the Investment, Finance and Audit Committee at its meeting held on 9 November 2018, con- tinued in a telephone conference on 19 November 2018, and by the Supervisory Board at its meeting on 20 November 2018. The Supervisory Board acknowledged and approved the separate non-financial report (Company and Group) drawn up by the Management Board. The Supervisory Board wishes to thank the Management Board and the entire staff of Infineon once again for their great commitment and outstanding achievements during the 2018 fiscal year. Neubiberg, November 2018 On behalf of the Supervisory Board Dr. Eckart Sünner Chairman of the Supervisory Board INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    15 Content Combined Management Report Our Group This report combines the Group Management Report of Infineon (“Infineon” or “Group”) – comprising Infineon Technologies AG (hereafter also referred to as “the Company”) and its 16 Finances and strategy consolidated subsidiaries – and the Management 16 2018 fiscal year Report of Infineon Technologies AG. 20 Business focus The Combined Management Report contains forward-looking statements about the business, 20 Group strategy financial condition and earnings performance 31 Growth drivers of Infineon. These statements are based on assumptions and projections based on currently 39 Human Resources strategy available information and present estimates. They are subject to a multitude of uncertainties and 40 The segments risks. Actual business development may therefore differ materially from what has been expected. 40 Automotive Beyond disclosure requirements stipulated by law, 42 Industrial Power Control Infineon does not undertake any obligation to update forward-looking statements. 45 Power Management & Multimarket Effective 1 October 2018, the “Chip Card & Security” 47 Digital Security Solutions segment changed its name to “Digital Security Solutions”. The change in name has no impact on 50 Research and development Infineon’s organizational structure, strategy or scope of business. 54 Operations 56 Internal management system 59 Sustainability at Infineon 60 The Infineon share Our 2018 fiscal year 62 Group performance 62 Review of results of operations 67 Review of financial condition 70 Review of liquidity 73 Report on expected developments, together with associated material risks and opportunities 73 Outlook 76 Risk and opportunity report 87 Overall statement of the Management Board with respect to Infineon’s financial condition as of the date of this report 88 Infineon Technologies AG 91 Corporate Governance 91 Information pursuant to section 289a, paragraph 1, and section 315a, paragraph 1, of the German Commercial Code (HGB) 94 Corporate Governance Report 94 Declaration concerning the management of the company 95 Compensation report INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    16 Combined Management Report | Our Group Finances and strategy 2018 fiscal year Finances and strategy 2018 fiscal year Revenue and earnings significantly improved for the fifth year in succession Strong performance enables further dividend increase Revenue up by 8 percent; Segment Result Margin of 17.8 percent achieved In the 2018 fiscal year, Infineon generated revenue of €7,599 million, an increase of 8 percent over the previous year’s figure of €7,063 million, and within the 9 percent plus or minus 2 percentage points forecast at the beginning P see page 73 of the fiscal year (see the chapter “Outlook”). With this performance, Infineon recorded significant revenue growth for the fifth fiscal year in succession. Revenue growth was driven above all by strong demand for semiconductors used in automotive, industrial, power supply, RF and sensor technology applications. Our segment with the highest volume, Automotive, contributed 55 percent or more than half of total revenue growth of €536 million. In contrast, the Digital Security Solutions segment recorded a 6 percent drop in revenue, mainly due to lower revenue from P see page 47 SIM cards for mobile communications (see the chapter “The Segments”). The underlying pace at which our business is growing was partly masked by the unfavorable development of the US dollar exchange rate, which averaged 1.19 for the year. Had it remained at the previous year’s level of 1.11, revenue growth in the 2018 fiscal year would have been 12 percent. Revenue growth of the individual segments in the 2018 fiscal year compared to the previous year Automotive 10 % Industrial Power Control 10 % Power Management & Multimarket 8% Digital Security Solutions (6 %) Revenue by segment in the 2018 fiscal year Digital Security Solutions: €664 million 9 % 43 % Automotive: €3,284 million Power Management & Multimarket: €2,318 million 31 % Industrial Power Control: €1,323 million 17 % 0 % Other Operating Segments, Corporate and Eliminations: €10 million INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    17 Combined Management Report | Our Group Finances and strategy 2018 fiscal year China has been Infineon’s most important sales market for several years now and, with €1,921 million, accounted for 25 percent (2017: 25 percent) of Infineon’s revenue during the fiscal year under report. This is followed as largest single market by Germany with revenue of €1,171 million and a 15 percent share (2017: 15 percent), the USA with €719 million and a 9 percent share (2017: 10 percent) and Japan with €534 million and a 7 percent share (2017: 7 percent). Infineon revenue by region in the 2018 fiscal year 17 % Europe (excluding Germany), Americas 12 % Middle East, Africa Japan 7 % 15 % Germany Greater China1 34 % 15 % Asia-Pacific (excluding Japan, Greater China) 1 Greater China includes China and Taiwan. Infineon has not only grown strongly, it has also become more profitable. The Segment Result for the 2018 fiscal year totaled €1,353 million, 12 percent up on the €1,208 million reported one year earlier. The Segment Result margin of 17.8 percent (2017: 17.1 percent) therefore exceeded the 17 percent forecast at the beginning of the fiscal year for P see page 29 f. the mid-point of the revenue forecast and was in line with our business targets, as revised during the course of the and page 73 f. 2018 fiscal year (see the chapters “Group strategy” and “Outlook”). Improvement in key performance indicators Net income rose to €1,075 million due to the positive Segment Result contribution and the gain of €270 million from the sale of the major part of Infineon’s RF power components business to Cree, Inc. on the one hand and higher P see page 62 ff. expenses from discontinued operations and for income taxes on the other (see the section “Review of results of operations”). Compared to the previous year’s figure of €790 million, net income improved by 36 percent. Earnings per share for the 2018 fiscal year amounted to €0.95 (basic and diluted), 36 percent up on €0.70 (basic and diluted) reported in the previous fiscal year. Adjusted earnings per share (diluted) improved from €0.85 to €0.98 P see page 66 year-on-year (see the chapter “Review of results of operations” for details of the calculation of adjusted earnings per share). P see page 58 Free cash flow from continuing operations (see the chapter “Internal management system” for definition) totaled €618 million in the 2018 fiscal year, an increase of €24 million or 4 percent over the previous fiscal year’s figure of €594 million. Investments in property, plant and equipment and intangible assets of €1,254 million (2017: €1,022 million) were lower than net cash provided by operating activities of €1,571 million (2017: €1,728 million). The Return on Capital Employed (RoCE) in the 2018 fiscal year amounted to 20.5 percent and therefore improved compared to previous year’s 14.9 percent. The increase was mainly attributable to the year-on-year increase in operating income from continuing operations from €847 million to €1,263 million (for a definition of, and details P see page 58 relating to, the calculation of RoCE, see the chapters “Internal management system” and “Review of financial P see page 69 condition”). INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    18 Combined Management Report | Our Group Finances and strategy 2018 fiscal year P see page 59 The gross cash position (see the chapter “Internal management system” for definition) totaled €2,543 million as of 30 September 2018, an increase of 4 percent compared to the previous year’s figure of €2,452 million. The free cash flow from continuing operations of €618 million described above exceeded the combined total of the dividend payment for the 2017 fiscal year (€283 million) and long-term debt repayments (€321 million including the repay- ment of a €300 million bond relating to the financing of the acquisition of International Rectifier). P see page 59 The net cash position (see the chapter “Internal management system” for definition) increased by 64 percent to stand at €1,011 million at the end of the 2018 fiscal year (30 September 2017: €618 million). Planned dividend increase of 8 percent Our dividend policy is aimed firstly at enabling our shareholders to participate appropriately in the success of the business and secondly to at least keep the dividend at a constant level in times of flat or declining earnings. Based on the strong performance in the 2018 fiscal year, a proposal will be made to the Annual General Meeting (to be held on 21 February 2019) to pay a dividend of €0.27 per share, an increase of 2 cents or 8 percent. Dividend per share for the 2010 to 2018 fiscal years in € cents 27 1 25 22 20 18 12 12 12 10 2010 2011 2012 2013 2014 2015 2016 2017 2018 1 Proposal to the Annual General Meeting to be held on 21 February 2019. Developments in the semiconductor industry Evaluation of the 2018 fiscal year (in Euro) Worldwide semiconductor revenues totaled €392.020 billion in the 2018 fiscal year (Source: World Semiconductor Trade Statistics (WSTS)). This represents an increase of 10.8 percent compared to the previous year’s value of €353.966 billion. As in the previous year, this increase is attributable to the increase in prices in the memory product category. This product category, which essentially includes DRAM and flash memory products, increased by 34 percent to €133 billion accounting for approximately 34 percent of the entire semiconductor market. The semi- conductor market excluding memory products increased by 1.7 percent. During the same period Infineon increased its revenues by 7.6 percent. Evaluation of the 2017 calendar year (in US dollars) In the 2017 calendar year, worldwide semiconductor revenues reached US$429.674 billion, an increase of 21.9 percent compared to US$352.597 billion in the previous year (Source: IHS Markit). Only the four largest competitors had a market share of more than 5 percent. Samsung had revenue of US$62.031 billion representing 14.4 percent market share, and Intel had revenue of US$61.406 billion representing 14.3 percent market share. Far behind them were the two memory manufacturers SK Hynix (revenue of US$26.638 billion; market share of 6.2 percent) and Micron (revenue of US$22.843 billion; market share of 5.3 percent). With revenue amounting to US$8.148 billion and a market share of 1.9 percent, Infineon was ranked number 13. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    19 Combined Management Report | Our Group Finances and strategy 2018 fiscal year Top 20 semiconductor manufacturers for 2017 calendar year Revenue in billion US$ 62.0 61.4 10 % market share 26.6 22.8 5 % market share 17.8 16.9 14.5 11.9 8.9 8.6 8.3 8.2 8.1 7.9 6.9 6.5 6.1 5.8 5.2 5.1 g l x on om m ts a P ia cs l n k as r e s r D te ta to to ice ni ib Te pl n eo NX AM en id m ni es su In gi icr uc uc Hy sh Ap dc nV fin ev co ia ro m Di en m M nd nd To oa ed ct SK D tru al In Sa R rn ico ico le og Br Qu M te ns oe al m m es sI icr An Se Se W xa M ny ON Te ST So Source: Based on or includes content supplied by IHS Markit, Technology Group, “Competitive Landscaping Tool – 2018 (Q2 Update),” August 2018. Foundries and subcontractors are not included in this market research. Samsung, SK Hynix and Micron are the leaders in memory. Because of the boom in memory, the three companies also had the highest revenue growth rates of 53.6 percent, 81.2 percent and 79.7 percent, respectively. Intel is the leader in processors. Infineon is neither active in memory nor in processors, which means Infineon does not directly compete with these four companies in these product categories. Among the 20 largest semiconductor vendors, the following companies compete with Infineon: Samsung (only in security ICs; this revenue accounts for less than 1 percent of Samsung revenue), Texas Instruments, Toshiba, NXP, STMicroelectronics, Renesas and ON Semiconductor. The 20 largest vendors represented 74.4 percent (previous year: 70.5 percent) of global revenue. The remaining 25.6 percent (previous year: 29.5 percent) are spread over more than 1,500 other semiconductor companies. The semiconductor industry is thus highly fragmented. The consolidation process has reached different levels, depending on the product category. In July 2018, the acquisition of NXP by Qualcomm, announced in October 2016, was cancelled. The planned acquisition of Qualcomm by Broadcom was also unsuccessful; it had been announced in November 2017 and was cancelled in March 2018. Looking at the regional distribution of semiconductor sales, China has been the dominant factor for many years. In the 2017 calendar year, 47 percent (previous year: 45 percent) of all semiconductors were absorbed by that market. In China, contract manufacturers – so called EMS (Electronic Manufacturing Services) – play a special role. These companies assemble electronic products predominantly for Western customers. The business model plays a significant role for durable consumer goods on the one hand and information and telecommunications sector- related products such as servers, PCs, notebooks and cellular phones on the other hand. A large portion of the semiconductors mounted in China are subsequently re-exported as part of a finished product. Global semiconductor sales 2017 by region (total market size US$430 billion) Americas 11 % 12 % Europe, Middle East, Africa Japan 8 % 22 % Asia-Pacific China 47 % (excluding China, excluding Japan) Source: Based on or includes content supplied by IHS Markit, Technology Group, “Application Market Forecast Tool – Q3 2018,” September 2018. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    20 Combined Management Report | Our Group Finances and strategy 2018 fiscal year | Business focus | Group strategy The 20 largest semiconductor buyers account for 44.3 percent of the entire purchasing volume, or US$191 billion. As with the semiconductor manufacturers, a small number of companies clearly leads the ranking list. Here, Apple and Samsung are by far the largest purchasers of semiconductors. Top 20 semiconductor consumer in 2017 calendar year Purchasing volume in billion US$ 40.9 27.1 17.5 13.0 10.2 9.0 8.1 7.2 7.1 5.9 5.9 5.5 5.1 4.9 4.7 4.1 4.0 3.7 3.4 3.3 e ng vo ei ll LG HP o c ny po i l h l vo a E hi L m ta ta i TC ib pl De sc ZT sc on aw c no Vi So su ao gi en Op ta sh Ap Ci Bo as Di Hu m Hi Le Xi in To n Sa rn nt Pa te Co es W Source: Based on or includes content supplied by IHS Markit, Technology Group, “OEM Semiconductor Spend Tracker – H1 2018,” July 2018. As a result of the major success of Chinese manufacturers in recent years, especially in the area of smartphones, the number of Chinese semiconductor purchasers increased from two in 2013 to seven in 2017: Lenovo, Huawei, Oppo, Xiaomi, Vivo, ZTE and TCL. With Bosch and Continental, there are two European companies represented in the top 20. The above-average growth rate of the automotive semiconductor market is evident in the development of Bosch. After a purchasing volume of US$2.7 billion and being ranked 19th in 2013, in 2017, Bosch moved up to position 14 with a purchasing volume of US$4.9 billion. Business focus Group strategy We want to continue to grow and to create value for our customers and our shareholders as well as for our employ- ees and for society. Therefore, our strategy follows global megatrends which are fundamentally shaping the world today: demographic and social change, climate change and scarce resources, urbanization and digital trans- formation. Our focus on energy efficiency, mobility, security, the Internet of Things (IoT) and Big Data opens up extraordinary growth opportunities for us that we want to leverage with innovative approaches. Our products and solutions contribute directly to mastering the major challenges of our time, which also makes us particularly attractive as an employer. According to the United Nations, a total of 8.6 billion people will be living on earth by 2030 – 1 billion more than today. Thanks to better healthcare and advances in medicine, people are living ever longer lives. At the same time, fossil fuels are becoming scarcer and current concepts – for example, for traffic, industry and communications infrastructure – are reaching their limits. Microelectronics plays a key role in providing a constantly growing popula- tion with energy and a higher standard of living while minimizing the impact on the environment. The key is making “more from less”. Semiconductors are essential in tapping renewable energy sources. They reduce the power consumed by electric devices; thanks to the developments described above, the number of these devices is constantly increasing. Furthermore, semiconductors enable systems that make transportation cleaner, safer and smarter, and they are the technological backbone of modern communication and data technologies. Answers to the challenges of our time would be unthinkable without the use of semiconductors. And this becomes even more true as the real and digital worlds converge. Digitalization and networks increase the productivity of industrial manufacturing processes. This development, also referred to as the Industry 4.0, reaches far beyond automation. Thanks to digitalization, INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    21 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy agriculture, for example, can achieve higher yields with more environmentally friendly methods. At the same time the digital transformation opens up new possibilities for consumers. The prerequisite for this is the protection of data exchange from abuse in order to ensure the acceptance of the ever-increasing degree of networking in our society. Strategic guideline: Strengthening the core business and unlocking new growth markets Our Group strategy is focusing on the megatrends mentioned above and thus ensures Infineon’s long-term struc- tural growth. Our course of action in the individual markets depends on our competitive position, which we analyze in terms of technologies, products and application understanding. This results in three possible categories to start with: Core business, adjacent business and new applications. The core business includes all those areas in which we have a comprehensive understanding of applications or master the base technologies, and in which we can therefore offer a differentiating product portfolio. Here, we want to at least grow with the market and, in doing so, to maintain or strengthen our leading positions (grow in scale). One example: Power semiconductors are instrumental in the generation, transmission and use of electric power. We understand the systems that are used for electric power conversion and we supply particularly compact and energy-efficient MOSFETs and IGBTs for this purpose. As the clear world market leader in this area, our broad tech- nology and product portfolio lets us actively shape the transition of certain applications to new semiconductor materials such as silicon carbide (SiC) and gallium nitride (GaN), offering our customers the ideal solutions for their needs. Our high-volume manufacturing offers economies of scale and makes it possible for us to provide manufac- turing capacities and to grow with our customers. World discrete power semiconductor and modules market share 2017 Infineon 18.6 % ON Semiconductor 9.0 % STMicroelectronics 5.1 % Mitsubishi 4.9 % Toshiba 4.7 % Source: Based on or includes content supplied by IHS Markit, Technology Group, “Power Semiconductor Annual Market Share Report,” September 2018. The greatest growth potential is to be found in markets that are adjacent to our core business, which we have however as of yet not addressed at all or only partly. For example, here we can adapt existing technologies and products for additional applications with reasonable effort and can thus increase sales potentials. And in the appli- cation fields we have already addressed we can use our system understanding to grow the scope of our business with a broader portfolio of products and solutions to generate higher revenue. Thus, the core mentioned at the beginning is not to be regarded as a static portfolio of activities; much more the adjacent areas will in the mid-term become part of our core business. The core is growing and the boundaries are shifting, because when we make progress in particular markets in terms of technology, products and application understanding, the classification of these markets changes accordingly. To return to the example of power semiconductors: We are proud to cite “Power” as one of our original core competencies. But we are nevertheless continuously developing here, too. We are expanding our portfolio in order to offer our customers an increasing degree of intelligence in addition to “Power”. This means for some time now we have been complementing our range of efficient power transistors with additional solutions in order to integrate them in a digital control loop. The products required for intelligent control of these switches tend to be more complex and higher-end because they integrate more functionalities. In the context of constantly more complex systems and shorter development times, many customers appreciate solutions in which we combine “Power” and intelligence. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    22 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy Technological progress also enables completely new application areas in which broad commercialization is still pending. Sometimes the impulse for new applications comes from innovations in semiconductor technology (for example Time-of-Flight technology for 3D sensing technologies), sometimes groundbreaking concepts on the customer side require the development of suitable semiconductor solutions (such as the combination of various sensor technologies for easier Human Machine Interaction). We actively address these new business areas in order to secure a good starting position in highly promising future markets early on. We supplement our organic growth with targeted acquisitions. These acquisitions have to meet three criteria: They must be strategically viable as described above, financially reasonable and culturally fitting. An acquisition thus has to strengthen Infineon’s market position according to our strategic orientation and has to be a viable addition to our range of expertise. The business acquired has to increase our profit, contribute to our margin target of an average of at least 17 percent throughout the cycle and must earn a return at least equal to the capital costs. And finally the corporate culture of a potential acquisition candidate must be a good fit with Infineon’s culture, ideally contributing valuable elements to it. Strategic fields of action: Factors for successful implementation We have established a stable foundation in recent years in order to be successful in our target markets. We have focused on core competencies that are in higher demand today than ever in the face of global megatrends. Over the years, we have built and systematically expanded the technical expertise needed to do so. And since good ideas do not become innovations until they have been successful in the market, we have also developed the appropriate concepts for turning our strategy into entrepreneurial success and value creation. At the center of all this is our strategic approach “Product to System”, which we apply along our entire value chain and is oriented towards the success of our customers. This approach is supported by additional elements: a strong innovation culture, con- tinuous pursuit of technology leadership, well-developed quality consciousness, differentiated manufacturing and tailor-made go-to-market strategies fitting the various individual markets. This puts us in a position to offer our customers leading products as well as the highest possible quality and supply reliability. In doing so, we achieve the objective of growing profitably and faster than the market. The strategic approach “Product to System” defines our actions Our strategic approach “Product to System” goes well beyond thinking in terms of technologies and products. We want to understand what markets demand and how they are changing. Only then will we be able to understand how we can change the markets ourselves. Thus, we consider more than just the direct sales opportunities for our products: We also look at our customers’ success factors and the development of end-markets. By doing so, we recognize at an early stage when the foundation of our business is changing. This is a prerequisite to act in time, guaranteeing sustainable differentiation in growth applications and increasing profit. In order for this to succeed, we have to understand the environment in which our customers’ products are used, how they are embedded in larger systems, what other devices they interact with, what requirements they have to fulfill and what tasks they are intended to perform. And we also have to take into consideration which active and passive components they use, which algorithms they use and what capabilities our customers contribute to the value creation process. Equipped with this knowledge, we can leverage our competencies even better: We can translate what is technologically possible into a commercially viable product, thus providing the greatest possible benefit to our customers. Sensor systems not only capture information about the surrounding environment, but also interpret and process the data they gather in order to initiate a particular action; digital control loops in power supplies enable higher energy efficiency at both high and low load levels; and security controllers are capable of distinguishing authorized access from unauthorized access. In addition to the hardware components involved, this also requires varying degrees of software support. Thus, to a certain degree, system understanding also means: software understanding. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    23 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy System know-how is bridging the gap between core technology and target application Customer system Full system Algorithms Software functionality Partial system Firmware functionality w Integration of analog Building block - ho now and digital functionality mk Hardware e Syst Single function Discrete components Base technology Competencies evolve over time Technology know-how has always been the foundation of our business model, whether in the form of discrete components, integrated solutions or mixed-signal components. Our broad portfolio ranges from single compo- nents all the way to solutions with hardware-related software. This enables us to provide targeted support to our customers while choosing from a variety of approaches. Some customers want to differentiate themselves from their competitors by means of their own software and just purchase the necessary hardware from us. We go one step further with automotive microcontrollers and security controllers, which we supply with special firmware that supports the basic functionality of the hardware and cannot be modified. More extensive functions can then be implemented using additional program code. For example, the second generation of our digital motor control platform iMOTION™ was developed for use in major home appliances and comes with a development kit that meets the priorities of our customers in this market: lower system costs, compact design, reduced development effort, shorter development times and high reliability. iMOTION™ already comes with all algorithms required to control the electric motor. Only a small number of application-specific parameters need to be defined in order to complete programming. Since we think in terms of systems, we can support all of these different approaches. It is not always the most sophisticated solution that provides the biggest value added to the customer: Standard components may also be just the right fit. Nevertheless, system understanding creates a competitive advantage because it gives us the ability to develop better products in cooperation with our customers. In recent years we have intensified our activities in the area of software, both in strategic partnerships and with our own development activities. The progress we have made is becoming increasingly visible, benefitting our customers. For example, the second generation of our successful automotive microcontroller family AURIX™ can be used for radar signal pre-processing in combination with our radar chips. We have implemented this feature in hardware, but we were only able to do so because we understood the underlying algorithms. Technology leadership means added value for customers Customers choose Infineon because we stand for competitive cutting edge technology in terms of the highest possible quality and reliability. Our engineers anticipate many challenges even before our customers are affected by them. We meet the highest quality requirements of the automotive industry, achieve the highest efficiency in power switching and deliver solutions for the most challenging security projects in the world. We are also capable of applying this specific expertise throughout the entire corporate network. One example: Since 31 March 2018, all new passenger car and light utility vehicle models in the EU have been required to feature an automatic emergency call function (eCall). This applies to approximately 20 million new cars annually. In case of an accident, eCall can autonomously send an emergency call via the cellular network to central emergency responders, providing for example location data, the exact time of the accident, the number of occupants in the vehicle and the type of fuel the vehicle uses. Normally, a SIM card would be needed in order to identify the vehicle in the cellular network. Now a permanently installed eSIM chip from Infineon does the job. In addition to the eCall, the eSIM also supports many additional functions that will make driving safer and more comfortable in the future – for example updating soft- ware over-the-air (SOTA), vehicle-to-infrastructure communication and on-board multimedia. In developing eSIMs, Infineon consolidates expertise from the areas security, telecommunications and automotive. Infineon already developed eSIM chips ten years ago and is today the leader in their automotive implementation. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    24 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy Furthermore, we make use of our technology leadership to systematically expand our abilities, strengthen our core business and grow in scope – for example, whenever the requirements of our markets change or when we see long-term growth potential in an adjacent business segment. Thus, as the market leader, we began researching new materials for power semiconductors at an early stage. SiC and GaN are particularly well-suited for use in the field of power electronics. These components are typically more expensive than silicon-based products, but thanks to new system architectures they also open the door to many new types of customer benefit, such as a smaller form factor, higher efficiency and lower system costs. The realization of these benefits implies higher research and devel- opment efforts on the part of our customers. Therefore, we support the introduction of these new technologies in two ways: On the one hand, we work together closely with our highly innovative customers, while on the other hand we provide less technology-oriented customers with solutions that are easy to implement. In the context of the increasing importance of SiC to certain power semiconductor applications, we concluded a long-term strategic wafer supply agreement with Cree, Inc. (USA) in February 2018. This ensures our supply of the most advanced 150-millimeter diameter SiC wafers and prepares us for further structural growth in power semiconductors for automotive and industrial electronics. Now, we have established all the prerequisites for future success in the growing SiC market: access to high-quality wafers, leading technologies at the product level (Trench MOSFET) and module expertise. Based on our technology leadership in transistors, we also want to strengthen our position in solutions for power control and to expand our product portfolio. As the number one in MOSFETs and IGBTs, we see interesting opportu- nities for growing more strongly than before in this area. This approach is exemplary of the strategy outlined above for moving from a strong core business to penetrate adjacent markets. Many years ago we intentionally blazed new trails in the field of sensor technologies, anticipating the drastically increasing importance of environmental data in our target markets. Today we have a comprehensive portfolio of sensors for a wide variety of systems in the car, for mobile devices, consumer electronics and the Internet of Things. The example of the silicon microphone shows that we act flexibly and adapt to market demands: Today we offer our leading MEMS technology (Micro-Electro-Mechanical Systems) in our own package and we are working together with our partner XMOS to optimize hardware and software for reliable voice control. Innovation drives differentiation Innovation is one of the most fundamental success factors in the semiconductor industry and is for us an important basis for differentiating Infineon from competition. Infineon has shown time and again that our technological and product innovation lets us grow faster than the market and increase profitability. But challenges are growing as well: Competition is intensifying and competitive coverage of the application areas in our markets calls for a wider and wider technology portfolio. And development efforts are increasing disproportionally as technologies gradually approach physical barriers. This fact underlines the significance of economies of scale and the connection between technology leadership and size. Previous concepts for success are too shortsighted under these conditions and have to be either expanded or rethought. This is why innovation and system thinking ideally complement one another. We think about what the key factors are and how we can combine several innovative, sometimes at first sight minimal steps to form a larger whole that will in turn provide an additional and substantial benefit for the customer. Thus, today our claim to innovation covers all areas of our company: logistics, operations, technology, products, system solutions and partnership with the customer. Depending on particular market demands, we focus on different aspects. Several units within the Company act like start-ups, while others use a comprehensive approach to leverage new areas of differentiation. Of course, in doing so we implement the entire spectrum of possibilities and expertise that Infineon has to offer. This is all driven by a well-developed culture of collaboration, which is one of our permanent differentiating features. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    25 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy Here, the digital transformation plays a crucial role, a development from which we benefit in two ways as a globally active semiconductor manufacturer: As both a user and provider of digital solutions. We are achieving excellent results in our well over one hundred digitalization projects. Thus for example we are connecting our sites and orga- nizing our global supply chain to form a virtual factory. In sales and marketing we are using new methods for ana- lyzing Big Data to improve our cross-selling and as a result we can provide more targeted solutions for our customers’ needs. With initiatives like this we are building our digital expertise and are becoming even more competitive. We are following an exploratory approach in order to best utilize the potential of the digital transformation. This way we gather experience based on specific application cases and work towards solutions in an iterative process. Digitalization thus on the one hand provides the opportunity to optimize the value added. On the other hand we can see that digitalization creates a significant revenue potential in our markets, for example in the area of auto- mated driving and in voice and gesture control for devices and machines. Manufacturers are competing to address emerging markets as early as possible and with the most innovative solutions. This generates demand for the corresponding semiconductor solutions; we serve this demand with our portfolio of sensors, microcontrollers, power semiconductors and security controllers as well as with specific software, differentiating ourselves from our competitors. At our new development center in Dresden (Germany) we will continue to make our portfolio more attractive in the future. Here, the primary focus is on the development of solutions for automotive and power electronics as well as for Artificial Intelligence (AI). In light of the increasing degree of connectivity found in traffic systems, algorithms, AI and the Internet of Things already play a central role today. In the long-term we will use this know-how to offer AI solutions in other target markets as well. Dresden combines development, design and manufacturing. Here we are leveraging synergies and are in a position to develop new products and bring them to market faster. Digitalization is also changing the way we work together. In this context we have established successful new concepts that do not follow a hierarchical principle, but rather are based on the initiative of the individual employee. In the long-term, this calls for new processes and methods that can accommodate new working and management styles. Strategic advantages through in-house manufacturing All our actions are aimed at creating value for the customer and at opening up opportunities for differentiation to us. This also applies to manufacturing. We manufacture in-house, provided we can thereby differentiate ourselves from the competition in the market through lower cost or higher performance. On the other hand, when it comes to standard technologies, usually in the case of highly-integrated products such as microcontrollers and chip card ICs, we primarily work with contract manufacturers. We thereby utilize our invested capital in the most efficient way possible and optimize our investments in research and development. In many application areas, for example, in power electronics and sensor technologies, our manufacturing methods and our process expertise give us a strategic advantage because we can offer components that can only be pro- duced using leading-edge manufacturing technologies. Several years ago we were the first company in the world to develop highly-integrated circuits for the 77 gigahertz frequency range based on innovative silicon germanium technology. This cuts the cost of radar systems, which as a result are used more widely in vehicles outside of the premium segment, making street traffic safer. In the frontend our 300-millimeter thin-wafer manufacturing for power semiconductors is a sustainable competitive advantage. We are successively equipping the available cleanroom space in Dresden (Germany) with additional tools, and benefit from the resulting higher productivity and lower capital intensity compared to manufacturing on 200-millimeter wafers. Furthermore, on 18 May 2018 we announced the construction of a second, fully automated 300-millimeter factory at the Villach (Austria) site. As the market leader in power semiconductors, we thereby lay the foundation for long-term, profitable growth. We will invest approximately €1.6 billion over a six-year period. Construction work began in November 2018, manufacturing is planned to start at the beginning of 2021. We expect the 300-millimeter manufacturing cleanroom space in Dresden to be fully used by then. The estimated additional potential revenue from the new factory is approximately €1.8 billion annually. In Villach we will rely on the auto- mation and digitalization concepts from Dresden and will develop them further in parallel in order to increase productivity and ensure system and process synergies at both sites. By significantly expanding our manufacturing capacities we are also sending a clear signal to our customers: Infineon is the ideal partner for future growth. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    26 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy Construction of a new 300-millimeter factory at the Villach site is underway. It will offer an annual potential revenue of approximately €1.8 billion. In addition to innovation, delivery reliability, quality and cost reduction are essential factors in the orientation of our manufacturing landscape. Innovation activities with regard to manufacturing processes are centered in Europe. Our Asian sites focus on efficiency and will support further growth. We have increased capacity in our second pro- duction module in Kulim (Malaysia) as planned. This helps us ensure our delivery reliability, particularly important to our customers in the automotive industry. The strong expansion in the area of electro-mobility results in increased demand for power semiconductors. During the previous fiscal year we founded a joint venture with SAIC Motor Corporation Limited for the backend manufacturing of power semiconductor modules. The joint venture SIAPM (SAIC Infineon Automotive Power Modules (Shanghai) Co, Ltd.) provides power semiconductor solutions for electric vehicles in China, the world’s largest and fastest-growing market for electro-mobility. Volume production has ramped at the Infineon Wuxi site since August 2018. As the largest automobile manufacturer in China, SAIC Motor is a very good partner when it comes to further strengthening and expanding Infineon’s position. Consolidating our strengths lets us significantly increase our manufacturing capacities and supply the growing demands of the overall Chinese market. Together we want to expand and strengthen our businesses, with products that are tailored to the needs of the Chinese electric vehicle industry. Flexible go-to-market strategies accommodate rapidly changing markets Going forward we will address more customers with more flexibility and innovative go-to-market strategies. Histori- cally, Infineon has grown through close collaboration with key customers, with whom we have successfully defined products that enabled us to penetrate the broad market thereafter. We reach many of our smaller customers through distributors. We will increase our leverage of the enormous potential of the distribution channel with standardized but configurable standard products for the mass market. Here we have made good progress by emphasizing short- term delivery reliability, continuous and tailored adjustment of the product portfolio and close partnership with distributors. Digitalization and the Internet of Things will create new business models. From the thermostat all the way to the car, today more and more devices are connected with the internet and as a result offer new functionality. The manufac- turers usually concentrate on making these devices “smart” with the best possible sensing and data processing capability. They are neither able nor interested in dealing with the underlying semiconductor technologies. We want to make our products and solutions more easily available to these vendors, for example, through optimized product bundles and support in the form of reference designs. Here in particular, our system understanding makes the difference. At the same time, we are engaging in networks consisting of distributors, development service providers and manufacturing service providers. These networks enable smaller companies and start-ups to jointly develop and manufacture electronics for new functions and new devices and thus make the Internet of Things a reality. This broad sales strategy lets us maximize revenues with existing technologies while at the same time increasing the yield of our investments in research and development. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    27 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy Strategic deployment of the segments Infineon is today organized in four segments with their strategic orientation being derived from the Group strategy described above. This structure has proven effective over many years. All activities are primarily allocated to one of four overarching topics. Automotive is responsible for business with semiconductors for automotive electronics. Industrial Power Control concentrates on power semiconductors for industrial applications, while Power Manage- ment & Multimarket addresses the more consumer-oriented applications and power supplies in general. Activities relating to traditional and new security applications are consolidated in the Digital Security Solutions segment. These assignments are not to be understood as rigid organizational boundaries. Since our markets continuously converge, we adapt our procedures accordingly and collaborate on an increasingly topic-oriented basis. Further- more, the digital transformation also calls for new approaches. Teams from different organizational units work together beyond their usual roles of authority by taking on or delegating responsibilities themselves. This also P see page 31 ff. means that the trends and growth drivers we describe in this Annual Report (see the chapter “Growth Drivers”) often affect multiple segments. In such cases, one segment retains global ownership of the overall application, while responsibility for the necessary technologies and products remains with the organizational units they originate from. For example, electro-mobility affects Automotive the most; thus Automotive also has system responsibility. Nevertheless Industrial Power Control and Power Management & Multimarket also benefit from the implementation of the necessary charging infrastructure. Automotive The segment Automotive has more than 40 years of experience in the field of automotive electronics. We focus on the core of the car: drivetrain, safety, comfort. We benefit more than other semiconductor manufacturers both from the trend towards electro-mobility and the development towards automated driving. Both trends are greatly increasing the average semiconductor content per vehicle and are expected to account for approximately half of our growth in the Automotive segment over the next five years. In addition, we also continue to benefit from new functions in the areas of lighting, comfort and safety as well as from the further electrification of conventional car functions. Our industry-wide leading portfolio of power semiconductors, sensors and microcontrollers puts us in an excellent position on the one hand to address the systems of today and on the other hand to actively shape the transformation of the automotive industry. We are the undisputed market leader in silicon-based IGBTs and IGBT modules; our expertise pushes the development of silicon carbide-based power semiconductors forward. As the number two in the area of sensors, today we already benefit greatly from the continuously increasing number of driver assistance systems. As the degree of automation increases, so does the number of sensors per vehicle. In the long-term radar systems will be enhanced by including additional sensor technologies, a development we are anticipating for example with the development of a Lidar (light detection and ranging) solution. And with the microcontrollers of the AURIX™ family we benefit from the trend towards higher levels of automation. These devices control electronic systems (for example steering and braking systems) and work as a host controller that ensures the functional safety of central computing platforms. Industrial Power Control The segment Industrial Power Control specializes in the efficient conversion of electric energy along the entire supply chain (generation, transmission and consumption) with a focus on electric drives. The applications range from the wind power turbine to high voltage direct current transmission (HVDC), energy storage systems and all the way to the refrigerator. Strategically speaking, discrete IGBTs, IGBT bare dies, which the customer develops further himself, IGBT modules and the associated drivers form the core business of Industrial Power Control. Infineon is the world market leader for IGBT-based power semiconductors (discretes and modules). We want to further expand this position and to take advantage of economies of scale in both research and development and in manufacturing. We are strengthening this core by pursuing technology leadership in silicon carbide as well and leveraging this to create an attractive product portfolio for our customers. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    28 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy Industrial Power Control uses know-how relating to the application of IGBTs to realize additional growth potentials in adjacent product areas. This applies on the one hand to products for digital power control, including the devel- opment of driver algorithms, and on the other hand to what are called Intelligent Power Modules (IPM), i.e. the combination of controller, driver and switch. Based on this portfolio, Industrial Power Control addresses especially high-growth application fields such as industrial automation, renewable energies and home appliances. At the same time, the portfolio serves emerging applications for power semiconductors such as the charging infrastructure for electric vehicles and electrified commercial and agricultural vehicles. Power Management & Multimarket The Power Management & Multimarket segment covers business with power semiconductors for power supplies, components for cellular infrastructure and mobile devices as well as with high-reliability components for application in harsh environments. In power semiconductors, Power Management & Multimarket has leading technologies for low (up to 40 volts), medium (from 40 volts to 500 volts) and higher voltages (over 500 volts). Together with the corresponding drivers, the MOSFETs of the CoolMOS™ and OptiMOS™ families form the primary focus of the Power Management & Multimarket power semiconductor business. Applications with the highest growth for these products include battery-powered devices (usually in combination with brushless DC motors). In the worldwide MOSFET market, Infineon is the clear number one and benefits from economies of scale both in terms of research and development and in manufacturing. The portfolio of silicon-based power semiconductors is supplemented by switches based on gallium nitride. In addition, Power Management & Multimarket continuously expands its product portfolio for (digital) power control and places its focus on technologically adjacent markets, for example Point-of-Load controllers for data centers and Class D audio amplifiers. We expanded our Class D audio amplifier portfolio in the previous fiscal year with the acquisition of the Danish start-up company Merus Audio. In radio-frequency and sensor business – the second mainstay of Power Management & Multimarket besides power semiconductors – Infineon has a strong technological basis with MEMS (in particular silicon microphones), Time-of-Flight for 3D camera applications as well as radar and is today already very successful in the respective markets. At the same, time this expertise can be used in an increasing number of application fields that are expected to take off in the coming years, for example Human Machine Interaction (HMI) and facial recognition. Furthermore, Power Management & Multimarket offers radio-frequency components that can be used for example for low noise amplification in mobile telephones and for communication between mobile devices and base stations. Digital Security Solutions The segment Digital Security Solutions has 30 years of experience in the world’s most demanding and largest digital security projects. The foundation of our activities is comprehensive expertise in traditional smartcard applications. We leverage the core competence for payment cards and government IDs in the high-growth area of embedded security applications. This is because digitalization is penetrating more and more areas of everyday life – and secu- rity is becoming a crucial aspect for many applications, for example in the areas of computing, automotive security, Industry 4.0 and the Smart Home. Unlike in the business with card-based security solutions, our customers here tend to have lower security expertise. This makes it particularly important to understand the customers’ systems and to offer security solutions which are easy to integrate. In addition to its role as an independent business unit, the Digital Security Solutions segment has a second important function within the Group: Supporting the three other segments – as a kind of competence center – with the integra- tion of security as a function in their system solutions and in doing so creating additional potential for differentiation. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    29 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy Financial targets underline our growth ambition We assume that, in the upcoming years, several structural trends will continue to drive our growth, in particular electro-mobility, renewable energies, manufacturing automation, data centers and an increasing number of P see page 31 ff. battery-powered, connected devices (the description of the most important growth drivers follows in the next chapter) – in some cases even more so than in the past. Thanks to our leading technologies, our understanding of applications and systems and our differentiating expertise in manufacturing, we have achieved an outstanding position in these markets. We want to take advantage of the resulting opportunities and to continue to outgrow the respective markets. We are making targeted investments for this purpose. In this context we have adapted our target operating model during the previous fiscal year. Target 1: 9 percent average annual growth in revenue (previously 8 percent) We hold leading positions in our core markets and have systematically entered adjacent markets in the past. Our four segments are positioned to capitalize on the megatrends mentioned earlier, which are driving a steady and in some cases even an accelerating demand momentum for our products. Our strategic approach “Product to System” helps us develop better solutions with our broad technology and product expertise and thus to create significant added value for our customers who are willing to pay more for solutions that are worth more. Furthermore, we are using tailor-made go-to-market strategies to broaden our customer base and generate more business. In the 2018 fiscal year, revenue increased by 8 percent compared to the previous year. Assuming a constant exchange rate for the US dollar, this would have been 12 percent. In the context of the high level of customer demand, we expect revenue to increase by 11 percent plus or minus 2 percentage points in the upcoming 2019 fiscal year. Following a period of such elevated growth, we expect an average annual revenue growth of 9 percent. Infineon is thus continuing its growth path of almost two decades: Since being established as an independent corporation in 1999, our business in its current perimeter has grown organically, i.e. without taking the revenue boost resulting from the acquisition of International Rectifier into account, with an average annual rate of approximately 9 percent. Target 2: 17 percent Segment Result Margin through the cycle gradually improving (previously 17 percent) Growth is only one prerequisite for sustainable success. Another criterion is profitability. When we work profitably on a sustainable basis, it means that we steer our developments to the point where they provide the highest benefit to our customers who are then willing to pay for them. In addition, we want to continue our development activities at unabated speed even in difficult market phases. We want to achieve an average Segment Result Margin of 17 percent of sales through the cycle and plan to gradually improve it. Here, we are relying among other things on economies of scale and on cost advantages from the increasing share of 300-millimeter in our total manufacturing volume as well as on a disproportionately lower increase in operational costs. Research and development expenses will increase in line with revenue. Selling expenses will increase by 90 percent of revenue growth and general and administrative expenses by 60 percent thereof. Also, technology leadership and the strategic approach “Product to System” enable us to maintain a higher degree of differentiation. In the 2018 fiscal year we achieved a Segment Result Margin of 17.8 percent. Target 3: Investments amounting to 15 percent of revenue (previously 13 percent) Our planning is oriented towards providing the necessary manufacturing capacities for the expected growth. The accelerated growth is in particular driven by strong demand for power semiconductors, a field in which Infineon’s in-house manufacturing provides competitive differentiation. As a result, we have adjusted the targeted investment-to-sales ratio. Annual investments should be an average of 15 percent (previously 13 percent) of revenue. This continues to include approximately 2 percentage points for the capitalization of development expenses in accordance with IFRS; the bulk of the remainder is for the most part accounted for by investments in manufacturing facilities and IT equipment. The targets for growth and investment are closely intertwined. A revenue growth rate increase/reduction from the 9 percent level would entail a slightly less than proportionate change in the investment-to-sales ratio. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    30 Combined Management Report | Our Group Finances and strategy Business focus | Group strategy In coming years, we also plan to invest a low triple-digit million amount in order to take advantage of possible addi- tional business opportunities and follow structural changes. These investments are not included in the 15 percent ratio described above. In addition, we have already announced investments in front-end cleanrooms and large office buildings, including the 300-millimeter cleanroom and the research and development building at the Villach site (Austria). In the 2019 fiscal year, around €200 million of this will accrue. If these measures are implemented, the investment rate will temporarily be significantly higher than the rate provided in the target operating model. The investment-to-sales ratio in the previous fiscal year was 16.5 percent. Capital structure targets demonstrate our reliability It is important to our customers that Infineon remains a dependable partner that will also be able to supply reliably for many years to come, thus enabling their growth. Our debt providers rely on our ability to securely service our debt over a long period of time. As an employer, we also want to give this kind of long-term reliability to our employees, even well beyond their active working lives in the form of retirement benefits. As a result we give a high priority to solid creditworthiness. This is reflected by our conservative capital structure targets. Our gross cash target is €1 billion plus 10 to 20 percent of revenue. The fixed basic amount of €1 billion provides a solid liquidity reserve for contingent liabilities and retirement fund liabilities, which are independent of revenue. Furthermore, 10 to 20 percent of revenue means we always have access to enough cash to be able to finance the operating business and development activities for the future during all phases of the business cycle. The upper limit on our gross financial debt is twice Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). Our moderate debt level and the well-balanced maturity profile reaching until 2028 allow us to reliably service our debt, independent of the respective capital markets environment. The rating agency S&P Global Ratings (S&P) continues to evaluate Infineon’s creditworthiness as “BBB” (outlook “stable”). At present this gives Infineon the best S&P rating of any European semiconductor manufacturer. Sustainable value creation for our shareholders Our strategy has paid off: Infineon continues its path of sustainable, profitable growth. Our operating profitability and our sound capital structure give us the financial flexibility to invest in future growth. This continuous value creation has been manifested in past years in constantly increasing earnings per share as well as dividends. We also pursue a dividend policy aimed at letting shareholders adequately participate in Infineon’s economic development and at paying out at least a constant dividend even in periods of slower growth. Development of the Infineon Technologies AG share compared to Germany’s DAX Index, the Philadelphia Semiconductor Index (SOX) and the Dow Jones US Semiconductor Index for the 2018 fiscal year (daily closing prices) Infineon share price in € 30 September 2017 = 100 27.65 130 25.52 120 23.40 110 21.27 100 19.14 90 17.02 80 10 | 2017 11 | 2017 12 | 2017 01 | 2018 02 | 2018 03 | 2018 04 | 2018 05 | 2018 06 | 2018 07 | 2018 08 | 2018 09 | 2018 Infineon DAX SOX Dow Jones US Semiconductor Index INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    31 Combined Management Report | Our Group Finances and strategy Business focus | Growth drivers Growth drivers There are numerous application areas with strong growth dynamics in each of the four main trends addressed by Infineon – Energy Efficiency, Mobility, Security and the Internet of Things together with Big Data. We achieve sustainable growth by addressing these applications with our solutions. Energy Efficiency Renewable energies The use of renewable sources is the key to a sustainable energy supply. Infineon benefits from the fact that wind power turbines and solar power plants require a multiple of power semiconductors per gigawatt of power gener- ated as compared to conventional power plants. In contrast to coal, natural gas or nuclear power plants there is no synchronized turbine generating constant 50 hertz alternating current. This means that the generated electricity cannot be fed directly into the grid and power-electronic conversion systems are required. Infineon supplies all the major manufacturers of wind power turbines and solar inverters. Wind Here, two trends in particular drive the demand for semiconductors: First of all older, lower performing wind power turbines are being replaced by modern, high-performance ones, a process referred to as “repowering”. Secondly, ever stronger generators are being used in new installations. While in the past primarily turbines generating up to 1.5 megawatts were installed, today an increasing majority of turbine generators producing 2 to 3 megawatts is being used. Future projects will include turbines with an output of 5 megawatts. Solar power Infineon enjoys a very broad international presence and has been partnering for years with the world’s leading manufacturers of solar inverters. Among other things, we benefit from the growth of Chinese inverter manufacturers, both with regard to the domestic expansion of solar power in China and to the export to other regions. Further- more, we work together closely with leading European manufacturers who are also very successful in the USA. Efficient conversion and low system costs contribute to reducing electricity generation costs in solar power plants and to achieving grid parity with conventionally generated electricity. This enables continued expansion of solar power, even without subsidies. Energy storage The use of renewable energies entails specific requirements along the entire energy supply chain. Generating electricity by wind and sun no longer takes place centrally in a small number of sites, but rather decentrally at many different locations. In addition, fluctuations in power generation cannot always be aligned with current power demand patterns, making temporary storage necessary. This also makes it possible to reduce costs associated with conventional power plants which have in the past been maintained as replacements or reserve capacity to supple- ment sustainable energy sources. For the period between 2017 and 2025, market researchers forecast average annual growth in storage capacity of 22 percent, to approximately 9,200 megawatts. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    32 Combined Management Report | Our Group Finances and strategy Business focus | Growth drivers Power supplies AC-DC conversion Growth in the area of power supplies depends on the performance and even more on the unit growth of devices. We see the highest unit growth in the case of servers; because of the high performance level, a correspondingly high number of power semiconductors is required for power supplies. Demand for computing power and storage capacity is currently driven by social networks and increasingly by machine learning. The Internet of Things and Industry 4.0 will accelerate this trend even more in the future. In addition, we see growth opportunities in business with compact chargers and solutions for wireless charging of smartphones, tablets and lightweight notebooks (or “portables”). DC-DC conversion Intelligent Point-of-Load power management is becoming increasingly important in DC-DC conversion. Servers, PCs and communication devices are supplied with higher voltages which are then precisely stepped down to the required low voltages directly at the processor. Another growth driver is the digitalization of the control loop. The requirements for dynamics, efficiency and standby consumption continue to increase. Analog control loops are increasingly reaching their limits and are being replaced by digital systems. (Smart) Motor control and drives Automation Electric drives are at the heart of a large number of systems, for example cranes, conveyor belts and robots. They are used wherever something has to be moved or transported. Electric motors account for approximately 28 percent of worldwide electric power consumption. The savings potential is correspondingly large when efficiency is increased. One possibility for reducing the power consumption of an electric motor is the use of an electronic control unit for speed control, adapting the power supplied to the actual performance required. The market penetration of variable speed drive motor control units will increase. Their implementation requires a large number of the power semicon- ductors. Their quantity and value depend on the motor’s performance class. The next level of automation will be achieved with Industry 4.0. This will in turn trigger a new investment cycle, including collaborative robots; see below P see page 37 ff. in the section “Internet of Things & Big Data”. Electric drives are at the heart of a large number of systems, such as cranes, conveyor belts and robots. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    33 Combined Management Report | Our Group Finances and strategy Business focus | Growth drivers Major home appliances The manufacturers of home appliances are also increasingly relying on variable speed drive motors using inverters. These motors are significantly more energy-efficient, emit less noise and have a longer service life than motors without speed-control. And: The value of the semiconductors they contain is increasing more than ten-fold. Examples are the motors in washing machines and dishwashers, the compressors in refrigerators and the fans in air condi- tioning systems. Only about one third of all major home appliances sold in 2017 had a speed-controlled motor. Market researchers predict that this ratio will double by 2022: By that time, approximately 65 percent of the machines sold will feature a variable speed drive. Battery-powered devices One important type of electric motor is referred to as brushless direct current (BLDC) motor. In BLDC motors the commutation is electronic, depending on rotor position, rotor rotation speed and torque. This calls for the appro- priate power semiconductors and, depending on the configuration, also for components for diagnostic and security functions. Because of their high level of energy efficiency and their low power-to-weight ratio, BLDC motors are particularly well-suited for use in battery-powered systems. Examples here are cordless home appliances such as robot vacuum cleaners, cordless drills and electric lawn mowers. In addition to the motors, the storage batteries are also becoming lighter and lighter, enabling longer operating times. This makes battery-powered devices increas- ingly interesting for professional craftsmen as well. The same applies to drones. The popularity of these remote-controlled aircraft has long gone beyond the ranks of amateur pilots: Drones are now being used more and more frequently for commercial purposes. Drones require a large number of semiconductors to control the direct current motors, from microcontrollers to sensors, drivers and MOSFET power transistors, all the way to radio-frequency components for navigation, collision avoidance and communication. In addition, all the examples cited above also require power semiconductor components for their charging stations. Mobility Global population growth and increasing industrialization are driving the demand for all types of transportation. From forms of mass transportation such as aircraft and trains to privately used vehicles like cars and pedelecs (pedal electric cycles). Cars are considered status symbols and are the key to individual mobility. An annual average growth rate of 2 percent is forecast for worldwide automobile production for the years 2017 to 2022. Infineon benefits from this trend in two ways: From the increased number of vehicles and, even more so, from the corresponding growth in the number of electronic systems per vehicle. Today, approximately 90 percent of innova- tions in vehicles are based on electronics. In the opinion of market experts, this share should stay at this level in the years to come. Electro-mobility The automotive industry is continuously working to reduce emissions. A European Commission regulation requires the reduction of average fleet emissions to 95 grams of CO2 per kilometer by 2021. More realistic exhaust gas testing procedures such as the WLTP cycle (Worldwide Harmonized Light-Duty Vehicles Test Procedure), in effect since 2017, mean further, implicit tightening of CO2 abatement rules. This will in turn increase demand for semiconductors. The optimization of the combustion engine alone will not be sufficient to fulfill legal requirements and satisfy customer demands for sustainable mobility. Instead, systems consuming energy in the vehicle will increasingly have to be made more efficient, and hydraulic or mechanical solutions will have to be replaced by more efficient electromechanical and thus semiconductor-based systems. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    34 Combined Management Report | Our Group Finances and strategy Business focus | Growth drivers In order to reduce the fleet average to the mandated target CO2 value, many car manufacturers add hybrid or electric vehicles to their product portfolio. These vehicles have a significantly higher semiconductor content than conventional cars. Infineon offers a wide range of corresponding power semiconductor components. While the current average semiconductor content of a car with a conventional combustion engine is US$375, the amount in full or plug-in hybrid vehicles is US$740, and for pure electric vehicles as much as US$750. Here, power semicon- ductors make up approximately three quarters of the additional semiconductor content. Transition from internal combustion engine vehicles to hybrid electric vehicles increases demand for power semicon- ductors in the drivetrain by a factor of ~19 in US$ 740 Increase by a factor of ~19 317 375 Drivetrain power semiconductors 17 109 44 Drivetrain non-power semiconductors Other features (power and 314 314 non-power semiconductors) Semiconductor value in internal Semiconductor value combustion engine vehicles in FHEV/PHEV Source: Strategy Analytics, “Automotive Semiconductor Demand Forecast 2016 – 2025,” May 2018; Infineon There are also what are referred to as mild-hybrid vehicles, based on 48 volt technology. These vehicles can recuperate a certain amount of braking energy, while at the same time emissions can be reduced by more efficient systems. Mechanical functions are being increasingly replaced by electric ones. The 48 volt onboard system handles the power supply for higher-performance systems such as the electric turbocharger, electric power-steering and electronic stability control and enables better braking energy recuperation. Market researchers calculate approxi- mately US$75 in additional power semiconductors will be necessary to power these systems as well as for the coupling of the two on-board power networks. Vehicles with electric drivetrain have a significantly larger semiconductor content than vehicles with combustion engines. In addition to CO2, hazardous substances such as nitrogen oxides (or NOx) are catching more and more attention. They are produced when fossil fuels are burned and result in a higher level of particulate matter pollution, in addition to a number of other factors. In metropolitan areas, diesel engines account for the largest share of NOx emissions, which is why some cities have already banned older diesel vehicles. The prospect of not being able to drive at all in such diesel-free urban zones or only with restrictions will influence the customer’s purchase decision and represents a medium to long-term competitive disadvantage for the diesel compared to other propulsion types. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    35 Combined Management Report | Our Group Finances and strategy Business focus | Growth drivers Charging infrastructure for electro-mobility The steadily increasing number of electric vehicles also requires a corresponding charging infrastructure. A well-developed network of charging stations increases the incentive to buy an electric vehicle. In order to promote the acceptance level of electro-mobility, China has begun operating charging stations along the country’s eight most important highways. This also includes the important connection between Beijing and Shanghai. By 2020, 10,000 charging stations with 120,000 charging points are to be implemented, with an investment volume of approximately US$770 million. Also other countries will most likely constantly expand their networks of publicly accessible charging stations in the coming years. Depending on the system topology, the charging stations use different types of power semiconductors, as offered by our Industrial Power Control and Power Management & Multimarket segments. Automated driving “Vision Zero” describes one of the largest objectives of the automotive industry: Vehicles are to be made so safe that no serious or fatal accidents occur anymore; today approximately 90 percent of such accidents are attributable to human error. Active safety systems can either completely prevent an accident or at least significantly reduce its consequences by directly intervening in the driving process. Examples here are pedestrian detection, adaptive cruise control and blind spot detection. These functions are no longer reserved for luxury vehicles, as they are becoming commonplace in the mid-range. Step by step active safety systems are being enhanced to become driver assistance systems. By supporting the driver, they increase both driving comfort and road safety. Among other things they assist in critical situations or help correct a driver error when necessary, for example with automatic emergency braking maneuvers. Systems for partially and fully automated driving essentially consist of the sensors (for example radar, cameras in the vehicle’s interior or exterior), together with a central high-performance computer for the evaluation of sensor data as well as calculation of the driving strategy (the system’s intelligence). The third element is the actuators (steering, brakes, engine control and transmission). As a leading provider of system solutions Infineon has a comprehensive product portfolio for assistance systems and for automated driving. Traction systems Sustainable and fast mobility within metropolitan areas as well as between big cities is one of the key topics of the 21st century. Today reliable and rapid public transportation determines more than ever the quality of life and competitiveness in many regions and cities worldwide. Our components are used both in local public transportation trains, subway trains and trams as well as in high-speed trains. China is one of the largest rail vehicle markets in the world. We also see the reinvigoration of the market for traction systems in the rest of Asia, where, as a result of industrialization and urbanization, urban rail systems and regional trains are in high demand. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    36 Combined Management Report | Our Group Finances and strategy Business focus | Growth drivers Security Government IDs Government IDs refer to passports, identity cards, driving licenses and in the broader sense also to health care cards. These documents are increasingly being equipped with a security chip. The market penetration of chip-based government IDs is constantly increasing. More and more countries are making the transition to chip-based docu- ments or increasing the range of such documents in use. Infineon is the leading provider of security solutions for ID projects in Europe. Furthermore, according to the US Government Printing Office (US GPO), Infineon is one of the main vendors of security technologies in the electronic passports of the USA. Infineon has been supplying the US GPO since the project was launched in 2005. Security for mobile devices Today payment services can be integrated into mobile devices thanks to the development of smartphones and wearables, the mobile internet and Near Field Communication (NFC) technologies. However, cash-free payment is only one of the many mobile device functions involving the storage and processing of sensitive information. For example, people are experiencing new forms of comfort when travelling on public transportation with mobile tickets instead of using coins and physical tickets. Infineon supplies the security chip, known as the Secure Element (SE), for all these applications. The SE can either be built into the smartphone (referred to as “embedded SE” (eSE)), inte- grated in a SIM card or located on a microSD card. Infineon offers the necessary solutions for all three alternatives. Secure authentication for the Internet of Things The Internet of Things refers to devices and machines connected to the internet, thus enabling data exchange and device control (for example, home appliances, electricity meters, sensors, webcams). The trend towards increased levels of networking primarily affects the areas automotive, Industry 4.0, Smart Home and information and com- munication infrastructures. Here, security plays a decisive role. The rising number of hacking attacks underlines the importance of appropriate precautions. In order to secure electronic systems, it is important to only connect autho- rized and authenticated devices with one another in order to protect them against cyber-attacks and manipulation of data. This means security has to be integrated into as many critical end-points as possible, often referred to in this context as the topic of embedded security. With the OPTIGA™ product series Infineon supplies various security chips and security solutions for the authentication of electronic systems: From complex IT infrastructure with numerous servers and routers all the way down to computers and tablets. Security for industrial applications (Smart Factories) The fourth Industrial Revolution is in full swing. In the era of Industry 4.0 companies are using modern technologies to design their manufacturing to be faster and more cost-effective, to reduce scrap rates and to minimize incidents and downtimes through predictive maintenance. Networking and digitalization of factories however create points of attack for hackers. To protect themselves, companies must therefore take security into account from the very beginning of Industry 4.0 projects. A combination of software and hardware-based security solutions can protect networked machines and communication nodes. Examples are the OPTIGA™ TPM chips from Infineon, which can be integrated in routers, industrial PCs and complex control units and which serve to identify devices to communica- tion partners in the network. They thus authenticate themselves in the network and secure data transmission. Security for connected vehicles The continuously rising degree of interconnection between vehicles opens up opportunities for many new services, but also increases the danger of unauthorized access to systems by a third party. This means data exchange among the various on-board systems as well as with other vehicles and the infrastructure has to be kept secure. Vehicle and personal safety on the one hand and data and IT security on the other hand can no longer be considered in isolation from one another. The vehicle is becoming a networked computer on four wheels and is also becoming a part of the Internet of Things. The demand for data and IT security in the vehicle is rising. We see our opportunity here with hardware-based security in the form offered by our security controllers – either as a separate component or integrated in our automotive microcontrollers. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    37 Combined Management Report | Our Group Finances and strategy Business focus | Growth drivers Since March 2018, all new passenger cars and light utility vehicle models in the EU have been required to feature an automatic emergency call function (eCall). This requires an embedded SIM card (eSIM). In addition to the eCall, the chip also supports several other functions which make driving safer and more comfortable, for example software over-the-air updates (SOTA) and vehicle-to-infrastructure communication. Embedded SIM cards meet the special quality requirements of the automotive sector: They are robust, durable and highly resistant to high temperature fluctuations. Internet of Things & Big Data Collaborative robots The field of robotics has been attracting special attention for several years now. In addition to the continuing devel- opment of conventional industrial robots, more and more industry sectors are implementing collaborative robots, known as “cobots”. Cobots work together with humans in the manufacturing process and are no longer separated from their human colleagues by protective equipment, as the typical industrial robot is; the requirements regarding their reliability and safety are therefore very high. Cobots will relieve and support humans in difficult and dangerous tasks. Their further development continues the trend towards intuitive robot programming and self-learning robots. Infineon offers not only the necessary sensors, microcontrollers and power semiconductors, but also provides numerous start-ups in this market with know-how in the area of motor control, sensor systems, communications connections and security. Human Machine Interaction Human Machine Interaction is concerned with how humans and automated systems interact and communicate with one another. The focus has long moved past classic industrial machines and now affects computers, digital systems and devices for the Internet of Things, i.e. the link between the real and digital world. More and more devices are networked and perform their tasks automatically. Operation of all these machines, systems and devices has to be as intuitive as possible and must not overwhelm the user. Smooth communication between humans and machines requires the right interfaces. A system can for example be controlled using text entry on the keyboard or mouse, but touchscreens, voice and gesture control are more natural. Voice Voice control systems such as Amazon Alexa, Google Assistant, Apple Siri, Samsung Bixby and Microsoft Cortana offer a convenient and intuitive way of control to the user. Providing users with even more comfort will mean reducing the error rate in voice command processing. We are working on this together with our partner XMOS Ltd. in England. Infineon supplies highly sophisticated silicon microphones and XMOS speech processing modules for devices in the Internet of Things. As it matures, voice control will become relevant for more and more device classes and will become one of the most important control types. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    38 Combined Management Report | Our Group Finances and strategy Business focus | Growth drivers Gesture Gesture control has several advantages over touchscreens: For example, the user doesn’t have to touch the device and can thus issue commands from a distance. At the same time, gesture control opens up the third dimension, enhancing the traditional two-dimensional user interface. Google and Infineon have developed a new type of gesture control called “Soli”, using radar technology: The radar chip from Infineon can transmit and receive waves reflected from the user’s finger. When someone makes a hand gesture, the result is a different reflection pattern. Google algorithms recognize the hand or finger gesture based on the change of these reflection patterns over time and thus recognize the gesture. This even works in the dark and with dirty fingers in the kitchen, workshop or laboratory. Virtual Reality/Augmented Reality Virtual and Augmented Reality are not only used for games, they are also important in Industry 4.0. For example apps for Microsoft’s Hololens enable virtual training for technicians. The Fraunhofer Institute for Factory Operation and Automation (IFF) rents its mixed-reality laboratory Elbedome out to companies. This laboratory can represent machines, factories and complete cities on a 360 degree projection surface using six laser projectors. This gives developers and customers the impression of standing in the middle of the planned factory. Our 3D image sensor chip REAL3™ enables a three-dimensional depiction of the environment at high image quality and is used in both smartphones and in driver assistance systems. Virtual and Augmented Reality are also used in industry, for example for simulation and training purposes. Smart Home “Smartification” is finding its way into the home as well. While in the industrial context the primary issue is increasing productivity, applications in the private environment are usually focused on comfort. A Smart Home is capable of telling all the machines in it what to do and activating every device at just the right time. In addition to increased comfort, the Smart Home’s better energy efficiency and higher security are additional important aspects. The Infineon portfolio of sensors, power semiconductors and security controllers offers the right solutions for a networked home. Mobile communications Mobile data traffic is constantly increasing in volume: While 15 Exabyte (i.e. 15 billion gigabytes) per month were transferred via cellular communications in 2017, experts expect a volume of 107 Exabyte per month for the 2023 year. In order to be prepared for the exponentially increasing data volumes, to achieve higher data transmission rates and to improve network coverage, network providers are turning to a high-performance infrastructure. The migration of network architecture to smaller cells enables among other things the use of higher frequency ranges and better exploitation of the available frequency spectrum. Radio-frequency (RF) components are required for both the communication between mobile devices and the base station and for wireless backhaul from local networks to the main network. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    39 Combined Management Report | Our Group Finances and strategy Business focus | Growth drivers | Human Resources strategy Radio-frequency technologies are also used in mobile devices. Every new smartphone generation requires support for more frequency bands. The transition from one cellular communications standard to the next means an increase in the requirements on signal quality. Our components help to separate closely adjacent frequency bands and amplify weak signals with low noise levels. The transition to the 5G standard will mean a further increase in com- plexity, which presents additional potential for our high-performance components. Human Resources strategy Our Human Resources strategy makes an important contribution to ensuring that Infineon can achieve its growth and profitability targets. This includes competitive talent management, an attractive working environment and high-performance HR processes. In order to remain innovative, competitive and successful in the future, Infineon constantly searches for the most talented individuals. And the further increasing scarcity of experts facing a steadily growing number of vacancies makes this no easy task. This is particularly the case in the area of the STEM subjects, Science, Technology, Engineer- ing and Mathematics: exactly those fields which are of particular importance to Infineon. We are therefore review- ing our recruiting measures on a regular basis and are working on an integrated system for talent management. One of our great advantages is Infineon’s positive employer image, which helps win over and retain talents. The fact that we make future-oriented products and create value for society makes our company very attractive to potential employees. We also define ourselves by the way we work together: with a well-developed culture of feedback, “Leadership Excellence” applied every day and an international working environment with colleagues from over 100 nations. We are proud of this diversity. The most recent Great Place to Work® survey confirmed the satisfaction of the workforce – not only in Germany, but also worldwide. More than 80 percent of Infineon employees gave their employer an excellent evaluation: “Taking everything into account, I would say this is a great place to work.” At the same time, we are preparing the company for the working environment of the future – also in order to remain attractive to new generations of employees. This entails the flexible design of working conditions (for example work hours, mobile working, sabbatical) as well as the ongoing development of workstations in manufacturing (“industry 4.0”). Here we highly value constructive dialog and trust-based collaboration with Workers’ Councils. We also orient our learning formats to future working environments, offering for example mobile learning with apps as well as virtual learning groups. Our objective in doing so is to continuously support our employees and to encourage them to try out new methods, while making use of the opportunities of digitalization. Furthermore, we are working on an HR infrastructure that allows the organization to react flexibly to growth and changing requirements, without costs increasing as fast as revenue. In order to achieve this, we constantly improve core processes in HR, for example performance management, the process of succession planning and organizational development. We use the new processes and tools to strengthen the employees in the self-directed performance of their responsibilities for their personal development. People are the focus of our actions: The highest level of long- term entrepreneurial performance can only be achieved by happy, healthy and successful employees. You will find further information including detailed statistics in the 2018 sustainability report and in the 2018 Human Resources report. @ www.infineon.com/csr_reporting @ www.infineon.com/hrreport INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    40 Combined Management Report | Our Group The segments Automotive The segments REVENUE €3,284 million SEGMENT RESULT Automotive €466 million The Automotive segment in the 2018 fiscal year Revenue development In the Automotive segment, Infineon recorded revenue of €3,284 million in the 2018 fiscal year, an increase of 10 percent compared to the €2,989 million revenue of the previous year. The segment contributed 43 percent of the Group revenue. Revenue and Segment Result of the Automotive segment € in millions 3,284 2,989 Revenue 474 466 Segment Result 2017 2018 As in previous years, the major growth drivers were the megatrends electro-mobility and automated driving. Both developments resulted in a particularly strong increase in the semiconductor content per vehicle and are expected to ensure over half of our growth in the Automotive segment over the next five years. They are among the structural growth factors which fundamentally support Infineon’s above-average growth. In addition, we continue to benefit from new functions in the areas of lighting, comfort and safety as well as from the continuing electrification of previously hydraulic and electro-mechanical subsystems. We supply powertrain solutions for all types of electric vehicles: pure electric vehicles as well as hybrid and plug-in hybrid vehicles including 48 volt technology. In China, the world’s largest market for electro-mobility, the number of vehicles manufactured and registered with plug-in hybrid or pure electric drives continued to increase sharply. Here the number of units manufactured increased from 517,000 in the 2016 calendar year by 53.6 percent to 794,000 units in the 2017 calendar year. Sales of electric vehicles increased in the other regions as well, especially due to a wider variety of models, making it possible to address a new group of buyers. In addition to the increase in units, this year we also saw innovative drive configurations which will further increase demand for power modules. For example, in order to increase performance one electric motor is used on each axle. Furthermore, the motors are configured for higher performance, which often requires two IGBT modules per motor. As a result of these two trends, each vehicle has four IGBT modules instead of one IGBT module. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    41 Combined Management Report | Our Group The segments Automotive The spread of driver assistance systems associated with automated driving led to an increase in the demand for our radar sensor ICs as well as for our 32-bit multi-core microcontrollers of the AURIX™ family. In particular the AURIX™ microcontrollers benefitted from the design-wins in the previous years in the area of safety systems, for example in electric power steering. Infineon traditionally holds a strong position for 32-bit microcontrollers in the area of powertrain. Infineon is now specifically addressing the areas of safety systems and driver assistance systems by developing corresponding 32-bit microcontroller derivatives, in particular the new, second generation of the AURIX™ family. For example, we are adding new functions for radar signal preprocessing to our radar sensor ICs. Our customers benefit from components which ideally fit together. We are thus expanding our range of applications from the powertrain to the area of safety and in doing so are entering new growth markets. The increasing demand for radar sensor ICs came on the one hand from the increasing market penetration of radar-based driver assistance systems and on the other hand from the higher number of radar sensors per vehicle. In particular our 77 gigahertz radar solutions for driver assistance systems remained in high demand. Infineon is one of the leading suppliers to the most important manufacturers of radar systems in all regions. The demand for luxury and upper mid-range vehicles – especially for SUVs (Sport Utility Vehicles) – remained on a high level worldwide. This vehicle type is typically equipped with significantly more safety and comfort functions. Development of the Segment Result Segment Result was €466 million and thus slightly lower than the previous year’s Segment Result of €474 million. As a percent of revenue, the Segment Result margin was 14.2 percent (previous year: 15.9 percent). Segment Result was positively impacted by the increased result contribution from the higher revenue as well as by advances in productivity. The decline in the Segment Result margin is essentially the result of very strong revenue growth of products for electro-mobility. Compared to a share of approximately 7 percent in the previous year, their share of segment revenue is in the meantime approximately 10 percent; however, due to the large investments in development and manufacturing, the profitability of these products is still not at the average margin level of the Automotive segment. In order to be able to drive further growth, during the previous fiscal year we already began ramping-up additional backend manufacturing lines for products in the area of electro-mobility, continuing to incur temporary ramp-up costs, on the one hand in Warstein (Germany) and on the other hand in the first manufacturing building in Wuxi (China). In addition, the positive effects were compensated by higher research and development costs, primarily in the area of driver assistance systems. Applications Assistance systems and Comfort electronics Powertrain Security safety systems › Air conditioning › Alternator control › Communication (car-to-car, › Airbag › Door electronics › Battery charging control car-to-infrastructure) › Anti-blocking system › Electronic control units › Battery management › Digital tachograph › Automatic parking › Electronic seat adjustment › Combustion engine control › Original spare parts › Autonomous emergency › Hatch door › Electric motor control authentication braking system › Lighting › Generator control › Protection against › Blind spot detection › Power window › Start-stop system manipulation (e.g. odometer) › Cruise control › Steering › Transmission control › Protection against › Distance warning systems › Sunroof software manipulation › Electronic chassis control › Suspension › Electronic power steering › Windshield wipers › Electronic stability control › Lane departure warning system › Tire pressure monitoring system INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    42 Combined Management Report | Our Group The segments Automotive | Industrial Power Control Market position The world market for automotive semiconductors grew by 14.1 percent from US$30.214 billion in the 2016 calendar year to US$34.469 billion in the 2017 calendar year (Source: Strategy Analytics). All regions contributed to growth. Europe remained by far the largest region. For the first time, China displaced North America as the second largest region. In China during the 2017 calendar year, Infineon was able to increase its revenue with automotive semi- conductors by 23.6 percent and its market share by 1.1 percentage points to 12.0 percent. Our strong increase of 18.5 percent in revenue in Japan is positive as well. In this region Infineon is increasingly perceived as a competent system partner who can deliver the desired quality and who is winning larger and larger orders. As a result, our market share in Japan has almost doubled, from 3.1 percent in 2010 to 6.1 percent in 2017. World automotive semiconductor market share 2017 NXP 12.5 % Infineon 10.8 % Renesas 10.0 % Texas Instruments 8.0 % STMicroelectronics 7.1 % Source: Strategy Analytics, “Automotive Semiconductor Vendor Market Shares,” April 2018 While market share only changed by some tenths of a percentage point for the second to fifth largest players, the market leader lost 1.5 percentage points, primarily through the sales of essential parts of its power semiconductor portfolio. Infineon increased its revenue by 15.8 percent and thus gained 0.1 percentage points of market share to 10.8 percent. The five largest market players together accounted for a market share of 48.4 percent. REVENUE €1,323 million SEGMENT RESULT Industrial Power Control €256 million The Industrial Power Control segment in the 2018 fiscal year Revenue development In the Industrial Power Control segment Infineon recorded revenue of €1,323 million in the 2018 fiscal year, an increase of 10 percent compared to the €1,206 million revenue of the previous year. The segment contributed 17 percent of the Group revenue. Revenue and Segment Result of the Industrial Power Control segment € in millions 1,323 1,206 Revenue 183 256 Segment Result 2017 2018 INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    43 Combined Management Report | Our Group The segments Industrial Power Control In the previous fiscal year, almost all areas contributed to the revenue increase. The growth rates of the businesses electric drives, traction systems, industrial power supplies and home appliances were significantly above the segment average. The largest absolute revenue increase came from the electric drives business. Electric drives is also the largest business in absolute terms accounting for approximately one third of segment revenue. Here, the revenue increased in each individual quarter and reached a new all-time high. The reason was essentially an increase in demand in the area of factory automation. Demand here came from all power classes. Home appliances, accounting for approximately 20 percent of revenue and in the meantime the second-largest business, also achieved revenue growth significantly above the segment average. Revenue in this business has more than doubled in the last three years. Primarily responsible for this success are both our IPMs (Intelligent Power Modules) of the CIPOS™ family and the motion control components of our iMOTION™ family. We supply reference designs and ready-to-use solutions for these compact modules. They are used in home appliances of all types, from hair dryers to washing machines all the way to air conditioning systems. The market acceptance for our products is also evidenced by the increase of our market share for IPMs. With almost 40 percent growth compared to 2016, this product category increased in the 2017 calendar year twice as fast as compared to the P see page 44 market (see the section “Market position”). Renewable energy declined slightly. In China, by far the largest country for photovoltaics and responsible for approximately half of worldwide new installations, a stagnation resulted from the announcement by the Chinese government at the beginning of June that the new installations would be limited to approximately 50 gigawatts in the 2018 calendar year and that the feed-in tariff would be reduced. The impact of this effect was mitigated by the fact that other regions increased their expansion goals. These include Europe, the Middle East, Africa and Southeast Asia. In the area of wind turbines there was a noticeable drop in revenue for us in spite of the stable development. Lower demand for power stacks could not be compensated by the significantly higher demand for power modules. In energy distribution we are now benefitting from the expansion of our product portfolio over the last years, especially in the voltage class of 4,500 volt. The acceptance of our IGBT modules for high-voltage direct current transmission (HVDC), in particular for connecting offshore windparks to the power grid on land brought us very high growth in this area. As in the previous year, traction once again showed approximately 20 percent growth. Demand was at high levels in all quarters. Once again, the most important region was China, where there was demand for all types of traction: high-speed trains, urban rail systems and electric or half-electric locomotives for freight trains. The other business areas, among others industrial vehicles, only marginally contributed to revenue increase. Development of the Segment Result Segment Result was €256 million, representing an increase of 40 percent compared to the previous year’s Segment Result of €183 million. Based on revenue, the Segment Result margin was 19.3 percent (previous year: 15.2 percent). Segment Result was positively impacted mainly by the increased result contribution from revenue growth. Further- more productivity improvements, among other things higher capacity utilization levels in the 300-millimeter manufacturing line in Dresden and a higher-margin product mix in the individual product categories had a positive effect on profitability. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018


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    44 Combined Management Report | Our Group The segments Industrial Power Control Applications Energy generation Energy transmission Energy consumption › Energy storage › FACTS (Flexible AC Home appliances Industrial drives 1 Charging stations › Photovoltaic systems Transmission Systems) › Air conditioners › Air conditioning for electric vehicles › Wind power turbines › Offshore wind farm › Dishwashers technology HVDC lines › Induction cooktops › Automation technology Industrial › Microwave ovens › Drives power supplies › Refrigerators › Elevator systems › Vacuum cleaners › Escalators Robotics › Washing machines › Materials handling › Rolling mills Industrial vehicles › Agricultural vehicles Traction › Construction vehicles › High-speed trains › Electric delivery vehicles › Locomotives › Forklifts › Metro trains 1 Including motors, compressors, pumps and fans. › Hybrid busses › Trams Market position The world market for IGBT-based power semiconductors – discrete IGBT power transistors and IGBT modules – reached US$5.255 billion in the 2017 calendar year, an increase of 16.5 percent compared to the previous year value of US$4.510 billion (Source: IHS Markit). Infineon was able to further improve its leadership position with a market share of 27.1 percent (an increase of 1.2 percentage points). The five largest market players together accounted for a market share of 67.5 percent. World IGBT-based power semiconductor market share 2017 Infineon 27.1 % Mitsubishi 16.4 % Fuji Electric 10.7 % ON Semiconductor 7.7 % Semikron 5.6 % Source: Based on or includes content supplied by IHS Markit, Technology Group, “Power Semiconductor Annual Market Share Database 2017,” September 2018. An important sub-market of IGBT-based power semiconductors covers IPMs (Intelligent Power Modules). In the 2017 calendar year we were able to increase our revenue in this area by 39.2 percent, approximately twice as much as the market growth of 19.9 percent. As a result, we added 1.4 percentage points of market share to reach 10.3 percent. For the first time we achieved a double-digit market share and thus entered the top 3 in this area. World IPM market share 2017 Mitsubishi 36.4 % ON Semiconductor 18.7 % Infineon 10.3 % Fuji 9.9 % Semikron 4.9 % Source: Based on or includes content supplied by IHS Markit, Technology Group, “Power Semiconductor Annual Market Share Database 2017,” September 2018. In the category of discrete IGBTs we were able to grow our market share by 2.0 percentage points to reach 38.5 percent. INFINEON TECHNOLOGIES | ANNUAL REPORT 2018

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