Mercedes 2008 Annual Report Download - page 81

Management Report |Risk Report|77
Economic risks have also increased in Japan recently. The export-
dependent Japanese economy is suffering in particular from
the global growth slowdown, with stagnating consumption, falling
investment and a sharp appreciation of the yen in the second
half of 2008. The drop in demand from the important US export
market is having a major negative effect. Further reductions in
demand from Japan’s export markets would have a sustained im-
pact on the country’s economic outlook. This would not only
considerably reduce the Group’s exports to Japan, but would also
be a substantial burden on the development of our operating
units’ earnings in Japan.
A sustained reduction in economic growth in China would also
be strategically relevant for the Group, as this is currently the most
dynamic vehicle market in the world and has enormous potential
for the future. Due to the size of the Chinese economy and recent
substantial increases in flows of international investment and
trade with China, such a slump would not only have severe conse-
quences for the whole of Asia, but could also cause significant
growth losses for the world economy, with negative effects on
Daimler’s activities. Furthermore, potential economic crises in
other emerging markets where the Group has important production
facilities could also be of particular relevance. On the other hand,
crises in emerging markets where the Group is solely active in a
sales function would result in more limited risk potential.
We see an additional major risk in the development of raw-
material prices. If, in the present situation of high volatility, prices
were to rise sharply once again, the assumed global economic
outlook would be jeopardized. The consequences would be on the
one hand a reduction in private households’ purchasing power,
and on the other hand rising costs for companies. All of this would
result in a negative impact on growth, especially in those coun-
tries that import large volumes of raw materials. The development
of the oil price is particularly important in this respect. However,
falling raw-material prices imply substantial risks for the economic
growth of raw-material exporting emerging markets.
Risks for market access and the global networking of the Group’s
facilities could arise as a result of a weakening of international
free trade in favor of regional trade blocks or the emergence of
protectionist tendencies. A sharp rise in bilateral free-trade
agreements outside the European Union could affect Daimler’s
position in key foreign markets, particularly in Southeast Asia,
where Japan is increasingly gaining preferred market access.
Finally, the world economy could be negatively affected by a lasting
deterioration in consumer and investor confidence and by
sustained deflationary tendencies. Such developments could be
triggered not only by the current financial market crisis, but also
by geopolitical and military instability, concern about a possible
further sharp drop in share prices, or the battle against terrorism.
Industry and business risks
General market risks. The weakening of the global economy and
the international financial crisis led to significant falls in demand
for automobiles and commercial vehicles in 2008. Competitive
pressure in the automotive markets, which was already a signi-
ficant factor, has therefore now intensified and could necessitate
the increased use of discount financing and sales incentives.
In many markets, customers’ heightened sensitivity to the issue of
vehicles’ environmental friendliness and high fuel prices have
boosted demand for smaller, more fuel-efficient automobiles. In
order to enhance the attractiveness of less fuel-efficient vehic-
les, additional measures could become necessary with an adverse
effect on profitability. All of these actions would not only reduce
revenues in the new-vehicle business, but would also lead to lower
price levels on used-vehicle markets and thus to falling residual
values for leased vehicles. A shift in the model mix towards smaller
vehicles with lower margins would also place an additional bur-
den on the Group’s financial position, cash flows and profitability.