Mercedes 2006 Annual Report Download - page 85

Industry and business risks
Weak economic developments, overcapacity in the automotive
industry and sluggish consumer demand could have an impact
on vehicle manufacturers. This would primarily affect Daimler-
Chrysler’s major markets in Western Europe and the NAFTA region.
In the United States, intense competitive pressure in recent
years has led to the ongoing proliferation of special financing offers
and price incentives. As a result of intensifying competition
in Western Europe, the practice of offering discount financing and
price incentives is spreading also in this region. Weaker economic
growth and ever tougher competition could make such discount
financing and price incentives necessary in the future, at similar
or even higher levels. This would not only reduce our earnings from
the sale of new vehicles, but would also lead to lower prices for
used vehicles and thus to falling residual values. Another factor is
that in some markets, the United States in particular,
higher
fuel prices have caused many consumers to prefer smaller,
more
fuel-efficient vehicles. This tendency could necessitate additional
measures to enhance the attractiveness of less fuel-efficient
vehicles, especially at the Chrysler Group, which would have
adverse effects on our profitability. A further shift in the model
mix towards smaller vehicles with lower margins would also place
an additional burden on the Group’s financial position, cash flows
and profitability.
In order to achieve the targeted level of prices, factors such as
brand image and product quality are becoming increasingly
important, as well as additional technical features resulting from
innovative research and development. Furthermore, it is essential
for the Group’s future profitability to realize efficiency improve-
ments while simultaneously fulfilling DaimlerChrysler’s own high
quality standards. This applies especially to the implementation of
the recovery and transformation plan which Chrysler Group
announced on February 14, 2007.
And another important condition
for increasing the profitability of the entire DaimlerChrysler
Group is the successful implementation of the new management
model and its related activities.
Product quality has a major influence on a customer’s decision
to buy a particular brand of passenger car or commercial vehicle.
At the same time, technical complexity continues to grow as
a result of additional features, for example for the fulfillment of
various emission and fuel-economy regulations, which increases
the danger of vehicle malfunctions. Technical problems could lead
to further recall and repair campaigns, or could even necessitate
new developments. Furthermore, deteriorating product quality can
also lead to higher warranty and goodwill costs.
Legal and political frameworks also have a considerable impact
on DaimlerChrysler’s future business success. Regulations
concerning exhaust emissions and fuel consumption and the
development of energy prices play a particularly important role.
The Group monitors these factors and attempts to anticipate
foreseeable requirements during the phase of product
development.
DaimlerChrysler counteracts procurement risks through
targeted commodity and supplier risk management. But in view
of developments in international supply markets, the effects
of these measures are limited. If prices remained at their current
high level for a longer period of time, or actually continue to rise,
this would result in a negative impact on the Group’s profitability.
Increasing pressure in procurement and sales markets could
also seriously jeopardize the financial situation and continued
operations of suppliers and dealers. To an increasing extent,
individual or joint support actions have been required by automobile
manufacturers such as DaimlerChrysler in order to safeguard
production and
sales (see also Note 31 to the Notes to the Con-
solidated Financial
Statements). If the situation of important
suppliers should continue to deteriorate, this could require further
support actions to be taken with a negative effect on earnings.
If suppliers experience delivery difficulties, this could have a
negative impact on the DaimlerChrysler Group’s production and
sales of vehicles and thus also on our profitability.
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