Mercedes 2001 Annual Report Download - page 68

64 Analysis of the Financial Situation
Risks from general economic developments. In 2001,
the world economy deteriorated significantly, and
expectations for the full-year 2002 are still rather
subdued. In view of the unusually high uncertainty
concerning economic developments, risks exist for
DaimlerChrysler’s profit outlook if the upturn we
expect for the second half of 2002 does not materialize
or is substantially weaker.
A possible cause of prolonged economic decline in
the United States would be a renewed loss of confidence
among consumers and investors with a downward spiral
of expectations. This could lead to a stronger drop in
U.S. domestic demand and significant stock-market
losses. Due to trading and capital-market links, with
such a scenario the assumed economic recovery in the
Group’s important markets of Western Europe would
not occur. Significant growth losses would probably
also occur in Asia and South America.
Another potential risk is the possibility of a deeper
and longer recession in Japan than has been forecast.
This would not only affect one of our important export
markets, but would make the restructuring process at
Mitsubishi Motors more difficult. A sustained decline of
the Japanese economy would also worsen the situation
in some of the emerging markets in Asia, which could
have a negative impact on our investment in Hyundai
Motor Company.
Further local risk potentials lie in a sustained
economic decline in certain emerging markets in South
America, Asia and Eastern Europe.
Industry- and company-specific risks. In addition to
general economic developments and weakening sales
markets, a risk factor also arises from increasing
competitive pressures. It is no longer only the traditional
product features that are decisive for the sales success
of a product, but to a greater extent also its price and
sales promotion offers. Particularly in the U.S. automo-
tive markets, after the events of September 11, 2001,
price incentives on new cars were substantially raised
and financing conditions were improved. Because these
activities prevented stronger than originally expected
market shrinkage, the danger of sustained reductions
in margins and lower profitability exists. If the economic
upturn does not come as expected, there is also the risk
that purchases will be merely brought forward with
additional sales incentives, thus increasing the probab-
ility of lower unit sales in future periods. This situation
could also necessitate further reductions in production
capacities in the passenger car and commercial vehicle
businesses.
The future success of DaimlerChrysler is particu-
larly dependent on the extent to which traditional
product and market segments can be extended and
new markets can be penetrated with innovative
products. The growth of the various segments depends
not least on legislation regulating consumption and
emissions, as well as on energy prices. If there is a shift
in demand towards smaller vehicles with lower profit
margins or the need for significantly higher technologi-
cal expenditures, the profitability of DaimlerChrysler
will be affected.
A further risk could arise connected with stronger
international competition due to increasing price
transparency, alternative sales channels such as the
Internet, or the revision of the European Union block-
exemption directive. The directive, which expires at
the end of September 2002, allows automobile manu-
facturers to use selective and exclusive distribution
networks. The approval of a revised block-exemption
directive is expected by the middle of 2002.
Like other automobile manufacturers, Daimler-
Chrysler is combating these risks by, among other
things, efficiency improvements all along the value
chain including changes to the sales organization.
Cost reductions by suppliers, however, could result in
additional quality risks.