Mercedes 2012 Annual Report Download - page 126

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3 | Management Report | Risk Report
Risks relating to equity holdings and cooperations
as well as other business risks. Daimler bears in principle
a proportionate share of the risks of its joint ventures and
associated companies in growth markets for example. In order
to utilize additional growth opportunities, and also against
the background of increasing national regulations, particularly
in the emerging markets, cooperation with partners in joint
ventures and associated companies is of increasing importance;
the same applies to the resulting risks. The Group includes
associated companies and joint ventures in the consolidated
financial statements using the equity method of accounting.
Any factors with a negative impact on those companies’ earnings
have a proportionate negative impact on Daimler’s net profit.
In addition, negative business developments at our associated
companies or substantial decreases in the share prices of
listed companies in which we hold an interest can also mean
that impairment losses have to be recognized on the carrying
values of the equity investments. If the development of these
companies in important markets should fail or be delayed,
this could have additionally an impact on the achievement of our
growth targets. The successful implementation of coopera-
tions with other companies is also of key importance to realize
cost advantages and to combat the competitive pressure
in the automotive industry.
The Group is also exposed to a number of risks arising from
guarantees it has issued. For example, Daimler holds an
equity interest in the system for recording and charging tolls
for the use of highways in Germany by commercial vehicles
of more than 12 metric tons gross vehicle weight. The operation
of the electronic toll-collection system is the responsibility
of the operator company, Toll Collect GmbH, in which Daimler
holds a 45% stake and which is included in the consolidated
financial statements using the equity method of accounting.
In addition to Daimler’s membership of the Toll Collect
con sortium and its equity interest in Toll Collect GmbH, risks
also arise from guarantees that Daimler issued supporting
obli gations of Toll Collect GmbH towards the Federal Republic
of Germany concerning the completion and operation of
the toll system. Claims could be made under those guarantees
if toll revenue is lost for technical reasons or if certain con-
tractually defined parameters are not fulfilled, if additional
claims are made by the Federal Republic of Germany, or if
the final operating permit is not granted. Additional information
on contingent obligations from guarantees granted and on
the electronic toll collection system and the related risks can
be found in E Note 28 (Legal proceedings) and E Note 29
(Guarantees and other financial commitments) of the Notes
to the Consolidated Financial Statements.
Risks connected with pension benefit plans. Daimler has
pension benefit obligations, and to a smaller extent obligations
relating to healthcare benefits, which are not completely cov-
ered by plan assets. The balance of obligations less plan assets
constitutes the funded status for these employee benefit
plans. Even small changes in the assumptions used for the valua-
tion of the benefit plans such as a reduction in the discount
rate could lead to an increase in those obligations. The market
value of plan assets is determined to a large degree by devel-
opments in the capital markets. Unfavorable developments,
especially relating to equity prices and fixed-interest secu-
rities, could reduce that market value. Higher or reduced plan
assets or a combination of the two would have a negative
impact on the funded status of our benefit plans. Plan assets
at December 31, 2012 did not include significant investments
in bonds issued by countries which are currently especially
affected by the European sovereign debt crisis. Lower yields
from plan assets could also increase the net expenses relating
to the benefit plans in the coming years. Information on
the Group’s pension benefit plans can be found in E Note 22
of the Notes to the Consolidated Financial Statements.
Financial risks
Daimler is exposed to market risks from changes in foreign
currency exchange rates, interest rates, commodity prices
and share prices. Market risks may adversely affect Daimler’s
financial position, cash flows and profitability. Daimler seeks
to control and manage these risks primarily through its regular
operating and financing activities and, if appropriate, through
the use of derivative financial instruments. In addition, the Group
is exposed to credit and liquidity risks. As part of the risk
management process, Daimler regularly assesses these risks
by considering changes in key economic indicators and market
information. Any market-sensitive instruments held in pension
funds and other postretirement pension plans, including equity
and interest-bearing securities, are not included in the
following analysis.
Exchange rate risks. The Daimler Group’s global reach means
that its business operations and financial transactions are
connected with risks arising from fluctuations of foreign exchange
rates, especially of the US dollar and other important curren-
cies against the euro. An exchange rate risk arises in the operat-
ing business primarily when revenue is generated in a different
currency than the related costs (transaction risk). This applies
in particular to the Mercedes-Benz Cars division, as a major
portion of its revenue is generated in foreign currencies while
most of its production costs are incurred in euros. The Daimler
Trucks division is also exposed to such transaction risks,
but only to a minor degree because of its worldwide production
network. Currency exposures are gradually hedged with suitable
financial instruments (predominantly foreign exchange for-
wards and currency options) in accordance with exchange
rate expectations, which are constantly reviewed. Exchange
rate risks also exist in connection with the translation into euros
of the net assets, revenues and expenses of the companies
of the Group outside the euro zone (translation risk); these risks
are not hedged.
Interest rate risks. Daimler holds a variety of interest rate
sensitive financial instruments to manage the cash require-
ments of its business operations on a day-to-day basis.
Most of these financial instruments are held in connection
with the financial services business of Daimler Financial
Services, whose policy is generally to match funding in terms
of maturities and interest rates. However, to a limited extent,
the funding does not match in terms of maturities and interest
rates, which gives rise to the risk of changes in interest rates.
The funding activities of the industrial business and the financial
services business are coordinated at Group level. Derivative
interest rate instruments such as interest rate swaps and forward
rate agreements are used to achieve the desired interest
rate maturities and asset/liability structures (asset and liability
management).