Volvo 2011 Annual Report Download - page 73

Risk may be due to events in the world and can
affect a given industry or market. Risk can be
specific to a single company. At Volvo work is
carried out daily to identify, measure and man-
age risk – in some cases the Group can influ-
ence 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 mini-
mize the consequences.
The risks to which the Volvo Group are exposed
are classified into three main categories:
• External-related risks – such as the cycli-
cal nature of the commercial vehicles busi-
ness, intense competition, changes in prices
for commercial vehicles and government reg-
ulations
• 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 recep-
tion of new products, reliance on suppliers,
protection and maintenance of intangible
assets, complaints and legal actions by cus-
tomers 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 signifi-
cant changes in demand as the general eco-
nomic environment fluctuates. Investments in
infrastructure, major industrial projects, mining
and housing construction all impact the Group’s
operations as its products are central to these
sectors. Adverse changes in the economic con-
ditions 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 prod-
ucts, uncertainty regarding underlying eco-
nomic 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
commercial 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 devel-
opment to meet tougher emission regulations.
Future product regulations are well known, and
the product development strategy is well tuned
to the introduction 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 manage-
ment 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 established policies are adhered
to is continuously conducted. Information about
key aspects of the Group’s system for internal
controls and risk management in conjunction
with the financial reporting is provided in the
Corporate Governance Report on page 150–159.
Most of the Volvo Group’s financial transactions
are carried out through Volvo’s in-house bank,
Volvo Treasury, that conducts its operations
within established risk mandates and limits.
Credit risks are mainly managed by the different
business areas.
All business operations involve risk – managed risk-taking is a condition
of maintaining a sustained favorable profitability.
RISKS AND UNCERTAINTIES
MANAGED RISK-TAKING
Currencies Interest rates in Sweden, Europe and the U.S.
09
7.2
10.4
04
7.3
9.1
05
7.5
9.2
06
7.4
9.3
07
6.8
9.3
08
7.8
10.9
03
8.0
9.1
02
9.7
9.1
01
10.3
9.2
SEK/USD
SEK/EUR
SEK/100 JPY
7.76.5 6.7 5.8 5.8 8.66.77.37.9
Source: Reuters
10
6.7
9.0
8.3
11
6.9
8.9
9.0
Sweden
Europe
The U.S.
07
4.3
4.3
4.0
08
2.4
2.9
2.2
09
3.4
3.4
3.8
02
5.3
4.8
4.5
03
4.6
4.1
4.0
04
4.4
4.0
4.2
05
3.4
3.4
4.3
06
3.7
3.8
4.8
01
5.1
4.8
5.0
Source: Reuters
Government bonds, 10 year benchmarks
10
3.3
3.0
3.3
%
%
%
11
1.6
1.8
1.9
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