Volvo 2010 Annual Report Download - page 57

RISKS AND UNCERTAINTIES
Risk may be due to events in the world and can
affect a given industry or market. Risk can be spe-
cific to a single company. At Volvo work is carried
out daily to identify, measure and manage risk – in
some cases the Group can influence the likelihood
that a risk-related event will occur. In cases in
which such events are beyond the Group’s control,
the Group strives to minimize the consequences.
The risks to which the Volvo Group are exposed
are classified into three main categories:
• External-related risks – such as the cyclical
nature of the commercial vehicles business,
intense competition, changes in prices for
commercial vehicles and government regula-
tions.
• Financial risks – such as currency fluctua-
tions, interest levels fluctuations, valuations of
shares or similar instruments, credit risk and
liquidity risk.
• Operational risks – such as market reception
of new products, reliance on suppliers, protection
and maintenance of intangible assets, com-
plaints and legal actions by customers and other
third parties and risk related to human capital.
External-related risk
The commercial vehicles industry is cyclical
The Volvo Group’s markets undergoes significant
changes in demand as the general economic
environment fluctuates. Investments in infra-
structure, major industrial projects, mining and
housing construction all impact the Group’s oper-
ations as its products are central to these sec-
tors. Adverse changes in the economic condi-
tions for the Volvo Group’s customers may also
impact existing order books through cancella-
tions of previously placed orders. The cyclical
demand for the Group’s products makes the
financial result of the operations dependable on
the Group’s ability to react to changes in demand,
in particular to the ability to adapt production lev-
els and production and operating expenses.
Intense competition
Continued consolidation in the industry is
expected to create fewer but stronger competi-
tors. Our major competitors are Daimler, Paccar,
Navistar, MAN, Scania, Caterpillar, Komatsu,
Cummins and Brunswick. In recent years, new
competitors have emerged in Asia, particularly in
China. These new competitors are mainly active
in their domestic markets, but are expected to
increase their presence in other parts of the
world.
Prices may change
The prices of commercial vehicles have, at times,
changed considerably in certain markets over a
short period. This instability is caused by several
factors, such as short-term variations in demand,
shortages of certain component products, uncer-
tainty regarding underlying economic conditions,
changes in import regulations, excess inventory
and increased competition. Overcapacity within
the industry can occur if there is a lack of demand,
potentially leading to increased price pressure.
Extensive government regulation
Regulations regarding exhaust emission levels,
noise, safety and levels of pollutants from pro-
duction plants are extensive within the industry.
Most of the regulatory challenges regarding
products relate to reduced engine emissions. The
Volvo Group is a significant player in the commer-
cial vehicle industry and one of the world’s largest
producers of heavy-duty diesel engines. The
product development capacity within the Volvo
Group is well consolidated to be able to focus
resources for research and development to meet
tougher emission regulations. Future product
regulations are well known, and the product
development strategy is well tuned to the intro-
duction of new regulations.
Financial risk
In its operations, the Volvo Group is exposed to
various types of financial risks. Group-wide policies,
which are updated and decided upon annually, form
the basis of each Group company’s management of
these risks. The objectives of the Group’s policies
for management of financial risks are to optimize
the Group’s capital costs by utilizing economies of
scale, to minimize negative effects on income as a
result of changes in currency or interest rates, to
optimize risk exposure and to clarify areas of
responsibility. Monitoring and control that estab-
lished policies are adhered to is continuously con-
ducted. Information about key aspects of the
Group’s system for internal constrols and risk man-
agement in conjunction with the financial reporting
is provided in the Corporate Governance Report on
pages 146 –147. Most of the Volvo Group’s financial
transactions are carried out through Volvo’s in-
house bank, Volvo Treasury, that conducts its oper-
ations within established risk mandates and limits.
Credit risks are mainly managed by the different
business areas.
The nature of the various financial risks and
objectives and the policies for the management
of these risks are described in detail in notes 36
and 37. Various aspects of financial risk are
described briefly in the following paragraphs. Vol-
vo’s ac counting policies for financial instruments
are described in note 1. The overall impact on a
company’s competitiveness is also affected however
by how various macro-economic factors interact.
Managed risk-taking
All business operations involve risk – managed risk-taking is a
condition of maintaining a sustained favorable profitability.
53