Mercedes 2010 Annual Report Download - page 112

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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. The latter could occur in particular
due to competitive devaluation resulting from insufficient adjust-
ment of exchange rates and an increase in speculative capital
movements. A rise in bilateral free-trade agreements outside
the European Union could also affect Daimler’s position in key
foreign markets.
Finally, the world economy could be negatively affected by a last-
ing deterioration in consumer and investor confidence and
by sustained deflationary tendencies, but also by inflationary
tendencies. Such developments could be triggered not only
by financial market problems, but also by geopolitical and military
instability. That also includes the recent events in northern
Africa, which certainly have the potential to have implications
far beyond the region. In addition to possible effects on raw-
material prices, the transfer of political instability to other coun-
tries respectively regions would depress not only the regional
outlook, but also the outlook for the global economy.
Industry and business risks
General market risks. Although the world economy enjoyed
a strong recovery in 2010, there are still considerable economic
risks for the development of the automotive markets. And com-
petitive pressure in the automotive markets is as high
as ever. Customers have meanwhile become used to a certain
level of sales-supporting actions. If competitive pressure
in the automotive markets becomes even tougher, possibly due
to a renewed worsening of global economic developments,
this could lead to the increased application of sales-promoting
financing offers and other incentives once again. This would
not only reduce revenues in the new-vehicle business, but would
also lead to lower price levels in used-vehicle markets and thus
to falling residual values. In many markets, a shift in demand
towards smaller, more fuel efficient vehicles is apparent; this
is the result of customers’ significantly increased sensitivity
to vehicles’ environmental friendliness and the development of
fuel prices. In order to enhance the attractiveness of less fuel-
efficient vehicles, additional actions might become necessary
with a negative impact on earnings. This, together with the shift
in the model mix towards smaller vehicles with lower margins,
would place an additional burden on the Group’s financial posi-
tion, cash flows and profitability.
Due to the competitive pressure on the automotive markets,
it is essential for us to continually and successfully adapt our
production and cost structures to changing conditions. If we
fail to do so, this would affect the Group’s competitiveness and
could once again require cost-intensive restructuring actions.
The recent crisis years have also led to a worsening of the
financial situation of some suppliers, dealers and vehicle
importers. For this reason, it is still not possible to rule out
individual or joint supporting actions by the vehicle manufactur-
ers, which would have a negative impact on Daimler’s financial
position, cash flows and profitability.
Risks relating 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
realizable 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 business are the possibilities of increased refinancing
costs and of potential changes in interest rates. An adjustment
of credit conditions for customers in the leasing and sales-
financ ing business due to higher refinancing costs could reduce
the new business and contract volume of Daimler Financial
Services, thus also reducing the unit sales of the automotive
divisions. Daimler counteracts residual-value and credit 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 pro-
vided in Note 31 of the Notes to the Consolidated Financial
Statements.