Mercedes 2008 Annual Report Download - page 82

78
The financial position of dealerships and importers is in-
creasingly jeopardizing by falling demand for vehicles combined
with higher refinancing costs and significantly more difficult
access to credit due to the financial market crisis. Any supportive
measures taken by the Group would worsen our own financial
position, cash flows and profitability.
As a reaction to the significant drop in demand during the second
half of 2008, Daimler initiated comprehensive measures to
reduce its production of cars and commercial vehicles. However,
should the crisis of the automotive markets last longer than
expected or actually worsen, additional steps might have to be
taken to adjust production volumes and improve our efficiency,
with negative effects on profitability and liquidity. Should the Group
not succeed in quickly adapting its production and cost struc-
tures to changing conditions, this might also result in negative
effects on the Group’s profitability and cash flows. The success-
ful implementation of the repositioning of our subsidiary Daimler
Trucks North America, which was decided upon in 2008, is anot-
her important step to secure the profitability of Daimler Trucks.
Risks related to the leasing and sales-financing business.
Daimler’s financial services business primarily comprises the
provision of financing and leasing for the Group’s products. In
particular, this business involves the risk that the prices reali-
zable for used vehicles at the end of leasing contracts are below
their book values (residual-value risk). Another inherent risk is
that some of the receivables due in the financial services business
might not be recoverable due to customer default (credit risk).
Other risks connected with the leasing and sales-financing busi-
ness are the possibilities of increased refinancing costs and
changes in interest rates. Daimler counteracts these risks by
means of appropriate market analyses and creditworthiness
checks. Derivative financial instruments are used to hedge against
the risk of changes in interest rates. Further information on
credit risks and the Group’s risk-minimizing actions is provided in
Note 30 of the Notes to the Consolidated Financial Statements.
Production and technology risks. In order to achieve the targeted
levels of prices, factors such as brand image and product
quality are becoming increasingly important, as well as additional
technical features resulting from our innovative research and
development, especially in relation to fuel efficiency. Furthermore,
it is essential for the Group’s profitability to realize efficiency
improvements while simultaneously fulfilling Daimler’s own high
quality standards.
Product quality has a major influence on a customer’s decision
to buy a 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, increasing the danger of vehicle
malfunctions. Technical problems could lead to recall and repair
campaigns, or could even necessitate new development work.
Furthermore, deteriorating product quality can lead to higher war-
ranty and goodwill costs.
Risks related to the legal and political framework. The legal and
political framework has a considerable impact on Daimler’s
future business success. Regulations concerning vehicles’ exhaust
emissions, fuel consumption and safety play a particularly
important role. Complying with these varied and often diverging
regulations all over the world requires strenuous efforts on the
part of the automotive industry. We expect to have to significantly
increase our spending aimed at fulfilling these requirements in
the future. Many countries have already implemented stricter regu-
lations to reduce vehicles’ emissions and fuel consumption, or
are about to do so, one example being the European regulations
on exhaust emissions and fuel consumption. The key elements
of the European Union’s regulation on carbon dioxide, which was
passed by the EU parliament on December 17, 2008, call for a
significant reduction in new vehicles’ CO2emissions already as
of 2012, and for phased improvements whereby the average
emissions of manufacturers’ entire fleets of new cars have to meet
new limits by 2015. Non-compliance with those limits will lead
to penalty payments for manufacturers. We assume that we will
meet the targets, but that to do so we will have to significantly
increase our research and development spending. In the United
States, in addition to existing regulations for fleet consumption
at the national level, there are also proposals from federal states
such as California calling for penalty payments if various fleet
targets are not met. The Group monitors these developments and
attempts to anticipate foreseeable requirements and long-term
targets during the phase of product development.