Annual Report 2016

Report of the Supervisory Board

Dear Shareholders, in a volatile market environment marked by growing political and economic challenges, Daimler AG concluded financial year 2016 with excellent earnings once again. The transformation process initiated in the context of digitization in all of the divisions and in Daimler’s corporate culture is fully supported by the Supervisory Board.

Supervisory and advisory activities of the Supervisory Board

The Supervisory Board of Daimler AG fully performed its tasks as defined by the law, the Company’s Articles of Incorporation and rules of procedure. The Supervisory Board continually advised and supervised the Board of Management and provided support with strategically important issues relating to the Group’s further development. The Supervisory Board examined whether the annual company and consolidated financial statements, the combined management report and the other financial reporting were in conformance with the applicable requirements. In addition, it approved numerous business matters for which its consent was required following careful reviews and consultations. Those matters included finance and investment planning, major capital changes at companies of the Group, key individual investments and the conclusion of contracts with particular importance for the Group, the further development of strategic programs in the various divisions and various cooperation projects around the world.

During the reporting period, the Board of Management regularly informed the Supervisory Board about all significant developments of the Group and the divisions. In addition, it continually provided information to it on all fundamental questions of corporate planning, including finance, investment, sales and personnel planning, current developments at the companies of the Group, the development of revenue and the situation of the Company and the divisions. Furthermore, the Board of Management reported to the Supervisory Board continually - and whenever appropriate also in comparison with competitors - on return on equity and the Group’s liquidity situation, the development of sales and procurement markets, the overall economic situation and developments in the capital markets and the area of financial services. Additional topics included the further development of the product portfolio, securing the Group’s long-term competitiveness, and the ongoing implementation of measures for safeguarding future-oriented and sustainable mobility. The Supervisory Board also dealt in detail with the development of the share price and the related background, as well as the expected impact of strategic projects on the share price.

Daimler works systematically on the implementation of its strategy and made further progress along its growth path also in the year 2016. Our divisions have extremely attractive and competitive products and services. The Group was very successful with them last year, also in sometimes difficult market situations. The Group’s financial strength and sound balance sheet allow this growth strategy to be continued while paying out an attractive dividend to our shareholders. The automotive industry is faced with fundamental changes in the coming years. The future issues of digitization and electrification, as well as new services, will redefine mobility. Daimler intends to meet these challenges from a position of strength. For that purpose, large volumes of advance expenditure will be made also in the coming years. The transition from combustion engine to electric mobility must take place gradually and over the long term. With the presentation of important new products and concept vehicles, Daimler demonstrated in 2016 that it has great expertise in both of those technologies. At the same time, Daimler is working hard at all levels to further develop its corporate culture and to make it fit for the challenges of the future. The Supervisory Board fully supports all of these steps.

Working culture and areas of Supervisory Board activity

In the year 2016, the Supervisory Board convened for eight meetings and dealt intensively and comprehensively with the strategic and operating development of Daimler AG. Participation in the meetings by the members of the Supervisory Board was at a high level in the year 2016. All members of the Supervisory Board participated in significantly more than half of the meetings of the Supervisory Board and of its committees of which they are members in the year under review. The work of the Supervisory Board featured open and intensive exchanges of information and opinions. In each meeting, an executive session was arranged so that topics could be discussed also in the absence of the Board of Management. The members of the Supervisory Board and of the Board of Management came together for the bilateral exchange of opinions also outside the regular meetings. The members representing the employees and the members representing the shareholders regularly prepared the Supervisory Board meetings in separate discussions, which were attended by members of the Board of Management. The Board of Management informed the Supervisory Board with written reports about the most important indicators of business development and existing risks, and submitted the interim financial reports to the Supervisory Board. The members of the Supervisory Board independently attended such courses of training and further training regarded as necessary for the performance of their tasks, relating for example to questions of corporate governance and changes in the legal framework, or to new products and future-oriented technologies. In a special onboarding program, new members of the Daimler Supervisory Board have the opportunity to meet the members of the Board of Management and other senior executives for a bilateral exchange of opinions and information on the current topics of the various Board of Management areas. The objective of this program is to provide the new members - outside of the regular meetings of the Supervisory Board - with an overview of the topics relevant to the Daimler Group.

In the meeting of the Supervisory Board in early February 2016, which was attended by the external auditors, the preliminary key figures of the annual company and consolidated financial statements for 2015 and the dividend proposal to be made at the 2016 Annual Shareholders’ Meeting were discussed, taken note of and approved. The Supervisory Board determined that no objections were to be raised to their publication. The preliminary key figures for the year 2015 and the proposal on the appropriation of profit were announced at the Annual Press Conference on February 4, 2016.

In the Supervisory Board meeting held on February 16, 2016, the Supervisory Board first decided on the personnel changes in the Board of Management described on "The work of committees". Subsequently, it dealt with the annual company financial statements, the annual consolidated financial statements and the combined management report for Daimler AG and the Daimler Group for the year 2015, each of which had been issued with an unqualified audit opinion by the external auditors, as well as with the reports of the Audit Committee and the Supervisory Board, the corporate governance report, the remuneration report and the proposal on the appropriation of profit. In preparation, the members of the Supervisory Board were provided with comprehensive documentation.

The Audit Committee and the Supervisory Board dealt with those documents in detail and discussed them intensively in the presence of the external auditors, who reported on the results of their audit and were available to answer questions and to provide further information. Following the final results of the review by the Audit Committee and its own review, the Supervisory Board declared its agreement with the results of the audit carried out by the external auditors. It determined that no objections were to be raised, approved the financial statements and the combined management report as presented by the Board of Management, and thus adopted the financial statements for the year 2015. On this basis, the

Supervisory Board consented to the proposal made by the Board of Management on the appropriation of distributable profit. In addition, the Supervisory Board approved the report of the Supervisory Board, the corporate government statement, the corporate governance report and the remuneration report, as well as its proposed decisions on the items of the agenda for the 2016 Annual Shareholders’ Meeting.

Also in the meeting on February 16, 2016, the Supervisory Board received detailed information on the development of a local production facility of Mercedes-Benz Cars in Russia and granted its approval to the project. The Supervisory Board also approved a capital increase at the Group company Mercedes-Benz do Brasil Ltda. and a capital increase at the Chinese joint-venture company Beijing Benz Automotive Co., Ltd. for the expansion of engine production. Furthermore, the Supervisory Board consented to the submission of a binding offer by Toll Collect GmbH and other partners to the Federal Republic of Germany in the tendering procedure “Tolls on all Federal Highways.” In addition, the Supervisory Board dealt with the impact of digitization on the automotive industry and with the Group’s strategic initiatives until 2020, with which the increasing personnel requirement in the field of digitization is to be covered. Finally, the Supervisory Board dealt with questions of corporate governance and with matters pertaining to Board of Management remuneration. In addition, approval was granted for the other board memberships and sideline activities of the members of the Board of Management that were presented in the meeting.

One of the items on the agenda of the Annual Shareholders’ Meeting held on April 6, 2016 was the reelection of Petraea Heynike and Dr. Manfred Bischoff as members of the Supervisory Board representing the shareholders. After he was elected by the Annual Shareholders’ Meeting, the Supervisory Board reelected Dr. Manfred Bischoff as the Chairman of the Supervisory Board of Daimler AG. In accordance with applicable regulations, the Chairman of the Supervisory Board is also a member of and Chairman of the Mediation Committee, the Presidential Committee and the Nomination Committee.

In another meeting held on April 22, 2016, the Supervisory Board dealt with the acquisition of the internationally active and manufacturer-independent fleet-management company Athlon Car Lease International B.V., and granted its approval for the project. Subsequently, the Supervisory Board received information on changes to insider laws resulting from the European Market Abuse Directive, which has been in force since July 3, 2016, and discussed the resulting specific effects and duties for the members of the Supervisory Board. The Supervisory Board also discussed the strategic background of the planned establishment of an engine and component plant for Mercedes-Benz Cars in Poland, which is intended to secure the division’s projected unit sales in the medium and long term.

On June 17, 2016, the Supervisory Board held an extraordinary meeting to deal with the agreement to a settlement involving the payment of a fine in antitrust proceedings taken by the European Commission against European truck manufacturers, including Daimler. Following detailed discussion of the advantages and disadvantages and under consideration of detailed legal expertise, the Supervisory Board consented to a settlement agreement under the conditions negotiated with the European Commission. Furthermore, the Supervisory Board approved in this meeting the contribution of Daimler’s shares in Renault and Nissan into the German pension plan assets, in order to improve the funded status of the company’s retirement provision.

Supervisory Board meeting outside Germany

On July 20 and 21, 2016,the Supervisory Board had the opportunity to deal in detail with the strategy of Daimler Trucks North America (DTNA) in Portland, Oregon, USA. In view of the importance of the North American market, the Supervisory Board convened at the new headquarters of DTNA for an intensive two-day program in order to discuss current developments and strategic perspectives with the members of the Board of Management and local employees. The focus points included the sales markets of North America, the product portfolio of Daimler Trucks and the technological transformation that is opening up new business models also with commercial vehicles.

Another regular meeting of the Supervisory Board was also held in Portland. In that meeting, the Supervisory Board first decided on the appointment of Britta Seeger as a member of the Board of Management responsible for Mercedes-Benz Cars Sales and succeeding to Ola Källenius, effective January 1, 2017. After discussing the course of business and the results of the first half of the year, the Supervisory Board received information on the planned expansion of the global production network of Mercedes-Benz. The Supervisory Board approved the investment in a new plant with highly flexible production at the Group’s site in Kecskemét, Hungary. An ultramodern and efficient facility is to be established there with flexible production of various vehicle models. The Supervisory Board was also informed about the business model of the Group company Mercedes-Benz Grand Prix Ltd. Finally, the Supervisory Board dealt with the latest developments in the diesel issue.

Strategy meeting of the Supervisory Board

During a two-day strategy workshop at several locations in the Stuttgart region in September 2016, the Supervisory Board was informed about the enormous changes facing the automotive industry: from combustion engines to electric motors, from owning to sharing, from human-controlled vehicles to autonomous driving. One of the points focused on in the discussion with the Board of Management was the changing competitive environment, in which traditional automobile competitors are being joined by new competitors that offer mobility services through digital channels, and which could therefore challenge the existing business model. In a constructive and open dialog, the members of the Supervisory Board and of the Board of Management discussed how Daimler will approach these new challenges.

Another important point of discussion was Initiative Leadership 2020, and thus the question of how the leadership model and leadership culture at Daimler can be developed further in a sustainable way, namely, by the employees themselves. The Supervisory Board also dealt with the further development of the global logistics network for the supply of spare parts, and approved the expansion of warehouse space at the European locations.

The Supervisory Board also discussed in detail and with the involvement of external legal experts the consequences of the antitrust proceedings taken against truck manufacturers by the European Commission. These proceedings were concluded in July 2016 with the imposition of a fine by the European Commission. Like Daimler, other manufacturers have also decided to cooperate fully with the authorities and their proceedings have meanwhile also been concluded. The Supervisory Board and the Board of Management are of the opinion that cooperation with the authorities and the settlement of the proceedings by mutual agreement were in Daimler’s interest, in order to avoid lengthy litigation and ultimately a possibly higher fine. Nonetheless, immediately after the announcement of the accusations of the European Commission in 2011, the Supervisory Board commissioned an independent law firm to clarify, in accordance with its statutory responsibilities, whether claims for compensation were to be made against former or current members of the Board of Management. On the basis of the so far commissioned and repeatedly updated reviews and investigations, as well as detailed discussions in the Supervisory Board taking into account the welfare of the Company, the Supervisory Board did not so far see sufficient basis to claim compensation from former or current members of the Board of Management, in each case based on the information available.

Meeting on operational planning 2017/2018

On the day before the meeting in December 2016, the members of the Supervisory Board were occupied with new vehicle models, design studies and forward-oriented technologies. In the context of the actual meeting on December 8, 2016, the Supervisory Board first decided on the proposal described on "The work of comittees" to be made at the Annual Shareholders’ Meeting in 2017 for the election of a member of the Supervisory Board. During the further course of the meeting and on the basis of comprehensive documentation, the Supervisory Board discussed in detail and approved the operational planning for the years 2017 and 2018. This included discussion of existing opportunities and risks as well as the Group’s risk management.

The Supervisory Board also discussed in detail - against the background of the increasing electrification of automotive drivetrains - the international production strategy for high-voltage batteries and approved the sites proposed for future battery production. Subsequently, the Supervisory Board dealt with the question of allowing additional partner companies to acquire shares in the digital mapping company HERE, with the goal of positioning an independent, globally leading and neutral platform for location-based mobility services based on networked vehicles. To this effect, the Supervisory Board approved the sale of shares to two additional international cooperation partners. Furthermore, the Supervisory Board once again received information on the status of litigation, investigations and consultations with the authorities in connection with the diesel issue. Other topics discussed at the December meeting were corporate governance, also with regard to the recommendations of the German Corporate Governance Code, and Board of Management remuneration. Finally, the Supervisory Board dealt with the probable main topics of the year 2017.

Corporate governance and declaration of compliance

During the year 2016, the Supervisory Board was continually occupied with the standards of good corporate governance. The members of the Supervisory Board of Daimler AG are obliged to disclose conflicts of interest – especially those that might arise due to an advisory or board function for a customer, supplier or creditor of Daimler or for other third parties – to the entire Supervisory Board. There were no indications of any actual conflicts of interest in 2016. Dr. Bernd Bohr was a member of and chairman of the supervisory board of Knorr Bremse AG from March 11 until July 4, 2016. During that period, the Supervisory Board did not deal with any matters that could have given rise to a conflict of interest. In order to avoid individual conflicts of interest, some members of the Supervisory Board did not participate in discussions of certain items of the agendas in the year 2016. As a precautionary measure and in view of his position as chairman of the supervisory board of Siemens AG, Joe Kaeser did not participate in the consultations and decision on the involvement of Toll Collect in the new tender for toll collection on highways in the Federal Republic of Germany on February 16, 2016. Furthermore, on April 21, 2016, Dr. Bernd Bohr, Dr. Jürgen Hambrecht and Dr. Bernd Pischetsrieder did not participate in the joint preliminary discussions of the members representing the employees and the shareholders concerning the “status update on the diesel issue” and left the meeting room on July 21 and on December 8, 2016 during the discussion of the related items of the agenda. As a result, for at least half of the members representing the shareholders, there were no potential conflicts of interest during the year under review.

The Supervisory Board is convinced that effective work in the Supervisory Board in terms of good corporate governance requires two things: On the one hand, its members must have high levels of specialist expertise. On the other hand, diversity amongst the members in terms of internationality, gender, experience and cultural background must reflect the Group’s size and internationality. Both of these requirements are fulfilled at Daimler.

Also in December, the Supervisory Board approved the 2016 declaration of compliance with the German Corporate Governance Code pursuant to Section 161 of the German Stock Corporation Act (AktG). With the exceptions explained in the declaration, all the recommendations of the Code have been complied with and continue to be complied with.

In the year 2016, the Supervisory Board once again arranged for an externally moderated efficiency review to be carried out, thus fulfilling the requirement to carry out a regular efficiency review as called for by the Articles of Incorporation and the German Corporate Governance Code. The results of the efficiency review, which the Supervisory Board dealt with intensively in its meeting on February 10, 2017, indicate very good and constructive cooperation within the Supervisory Board and with the Board of Management. No fundamental need for action or change was apparent but some individual suggestions were made, which were implemented.

Law on the equal participation of women and men in management positions

For supervisory boards of listed companies subject to parity codetermination, like that of Daimler AG, the German Stock Corporation Act prescribes a binding gender ratio of at least 30 % women. The ratio is to apply to the entire supervisory board. If the side of the supervisory board representing the shareholders or the side representing the employees objects to the chairman of the supervisory board before the election about the application of the ratio to the entire supervisory board, the minimum ratio is to apply separately to the shareholders’ side and to the employees’ side for that election.

In the Supervisory Board of Daimler AG, the proportion of 30 % women is fulfilled on the shareholder side as of December 31, 2016 by the members Sari Baldauf, Andrea Jung and Petraea Heynike. On the employee side, the proportion of women as of that date is 20 % with the members Elke Tönjes-Werner and Sibylle Wankel. In its meetings on December 8, 2016, and February 10, 2017, the Supervisory Board dealt with the specific proposals for candidates for election to be made at the Annual Shareholders’ Meeting in 2017, and, against this backdrop, stated that the shareholder side and the employee side should separately achieve the legally prescribed proportion of women. The members representing the shareholders stated in both meetings that they object to the overall fulfilment of the statutory gender quota. Subsequently, the Supervisory Board decided to propose the reelection to the Supervisory Board of Dr. Clemens Börsig and Bader Mohammad Al Saad at the Annual Shareholders’ Meeting in 2017. The next election to the Supervisory Board of members representing the employees will take place in 2018.

In its meeting in December, the Supervisory Board updated the rules of procedure of the Supervisory Board and its committees. As before, the Supervisory Board specified the goal for the composition of the Board of Management of at least 12.5 % female members, applicable until December 31, 2020.

Corporate governance at Daimler is described in detail in the corporate governance report on the Corporate Governance Report and in the remuneration report of this Annual Report.

The work of the committees

The Presidential Committee convened six times last year. It dealt primarily with corporate governance topics and questions of remuneration, as well as with personnel matters of the Board of Management. As in previous years, compliance targets constituted part of the individual target agreements of the members of the Board of Management. Once again, additional non-financial targets were also included as criteria in the target agreements. For the past financial year, they were the further development and permanent establishment of the corporate value integrity, diversity, the maintenance and enhancement of a high level of employee satisfaction, and high product quality.

The Audit Committee met six times in 2016. Details of those meetings are provided in a separate report of that committee.

The Nomination Committee prepared recommendations for the Supervisory Board’s proposals to the Annual Shareholders’ Meeting in 2017 on the candidates for election to the Supervisory Board. The proposals on the election of Dr. Clemens Börsig and Bader Mohammad Al Saad take into consideration, apart from the qualifications defined for each position, the recommendations of the German Corporate Governance Code.

There was no occasion to convene the Mediation Committee in 2016.

Personnel changes in the Supervisory Board and the Board of Management

On April 6, 2016, the Annual Shareholders’ Meeting elected Petraea Heynike and Dr. Manfred Bischoff as members of the Supervisory Board representing the shareholders until the end of the Annual Shareholders’ Meeting that decides on ratification of actions for the year 2020. The election proposal made by the Supervisory Board to the Annual Shareholders’ Meeting was based on a recommendation made by the Nomination Committee. Effective August 25, 2016, Sibylle Wankel was appointed by the court to the Supervisory Board as a member representing the employees, after Dr. Sabine Maaßen had stepped down from the Supervisory Board as of June 30, 2016.

In the Supervisory Board meeting on February 16, 2016, Dr. Dieter Zetsche was reappointed as the Chairman of the Board of Management and Head of Mercedes-Benz Cars for a further three years as of January 1, 2017. In addition, the Supervisory Board decided in this meeting to assign Board of Management responsibility for Group Research & Mercedes-Benz Cars Development to Ola Källenius as of January 1, 2017. He will thus succeed to Prof. Dr. Thomas Weber, who stepped down from his position as a member of the Board of Management of Daimler AG after 14 years on December 31, 2016.

In the Supervisory Board meeting on July 21, 2016, the Supervisory Board appointed Britta Seeger as a member of the Board of Management for a period of three years starting on January 1, 2017. Britta Seeger took over responsibility for Mercedes-Benz Cars Sales from Ola Källenius. In addition, the appointment of Wilfried Porth as a member of the Board of Management with responsibility for Human Resources and Director of Labor Relations, IT & Mercedes-Benz Vans was extended by five years until April 30, 2022.

In the meeting on December 8, 2016, the members of the Supervisory Board representing the shareholders decided on the basis of a recommendation by the Nomination Committee to propose the reelection to the Supervisory Board of Dr. Clemens Börsig at the Annual Shareholders’ Meeting in 2017.

In the Supervisory Board meeting on February 10, 2017, Ola Källenius was reappointed to the Board of Management of Daimler AG as the member responsible for Group Research & Mercedes-Benz Cars Development for a further fi ve years as of January 1, 2018.

In advance of this meeting, Dr. Wolfgang Bernhard, Board of Management Member responsible for Daimler Trucks and Buses appointed until February 2018, stated that he would not be available for an extension of his contract beyond that date. The Supervisory Board regretted this decision, thanked Dr. Wolfgang Bernhard for his committed work, and respected his personal decision. The appointment of Dr. Wolfgang Bernhard was terminated with effect as of midnight on February 10, 2017. Board of Management Chairman Dr. Dieter Zetsche has taken over as Head of Daimler Trucks and Buses until a successor is appointed.

Also in the meeting on February 10, 2017, the members of the Supervisory Board representing the shareholders decided on the basis of a recommendation by the Nomination Committee to propose to the shaerholders at the 2017 Annual Shareholders’ Meeting that Bader Mohammad Al Saad be elected as a member of the Supervisory Board. In the interests of the Company, Dr. Bernd Bohr has announced that he will step down from the Supervisory Board at the end of the 2017 Annual Shareholders’ Meeting. The Supervisory Board has declared its intention to reelect Dr. Bernd Bohr to the Supervisory Board within the next two years.

Audit of the company and consolidated financial statements

The financial statements of Daimler AG and the combined management report for the Company and the Group for 2016 were duly audited by KPMG AG, Wirtschaftsprüfungsgesellschaft, Berlin, and were given an unqualified audit opinion. The same applies to the consolidated financial statements for 2016 prepared according to IFRS.

In a meeting in early February 2017 attended by the external auditors, the Supervisory Board discussed, took note of and approved the preliminary key figures of the annual company and consolidated financial statements for 2016 and the dividend proposal to be made at the 2017 Annual Shareholders’ Meeting. The Supervisory Board determined that no objections were to be made to their publication. The preliminary key figures for the year 2016 were announced at the Annual Press Conference on February 2, 2017.

In the meeting on February 10, 2017, the Supervisory Board dealt with the annual company financial statements, the annual consolidated financial statements and the combined management report for Daimler AG and the Daimler Group, each of which had been issued with an unqualified audit opinion by the external auditors, as well as with the reports of the Audit Committee and the Supervisory Board, the corporate government statement, corporate governance report, remuneration report and the proposal on the appropriation of profit. In preparation, the members of the Supervisory Board had been provided with comprehensive documentation including the Annual Report with the consolidated financial statements according to IFRS, the combined management report for Daimler AG and the Daimler Group, the corporate governance statement, the corporate governance report and the remuneration report, the annual company financial statements of Daimler AG, the proposal of the Board of Management on the appropriation of profit, the audit reports of KPMG on the annual company financial statements of Daimler AG and the consolidated financial statements, each including the combined management report, as well as drafts of the reports of the Supervisory Board and of the Audit Committee.

The Audit Committee and the Supervisory Board dealt with those documents in detail and discussed them intensively in the presence of the responsible external auditors, who reported on the results of their audit and were available to answer supplementary questions and to provide additional information. Following the final results of the review by the Audit Committee and its own review, the Supervisory Board declared its agreement with the results of the audit by the external auditors; it determined that no objections were to be raised and approved the financial statements and the combined management report as presented by the Board of Management. The company financial statements of Daimler AG for the year 2016 were thereby adopted. On this basis, the Supervisory Board consented to the proposal made by the Board of Management on the appropriation of distributable profit. Furthermore, it approved the report of the Supervisory Board, the corporate governance report and the remuneration report, as well as its own proposed decisions on the items of the agenda for the 2017 Annual Shareholders’ Meeting.

Appreciation

The Supervisory Board warmly thanks all of the employees and the management of the Daimler Group for their committed contributions to the very successful year 2016.

Special thanks are due to Prof. Dr. Thomas Weber, who served with great passion for many years as the member of the Board of Management for Group Research and Mercedes-Benz Cars Development. He had a lasting impact on Daimler AG and contributed significantly to the Group’s current success. His membership of the Board of Management ended as planned on December 31, 2016. We also thank Dr. Sabine Maaßen, who closely accompanied the company through her committed work in the Supervisory Board and Audit Committee, and who stepped down on June 30, 2016.

Stuttgart, February 2017

The Supervisory Board

Dr. Manfred Bischoff
Chairman

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