Mercedes 2012 Annual Report Download - page 127

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Equity price risks. Daimler predominantly holds investments
in shares of companies such as EADS, Kamaz, Renault and
Nissan, which are classified as long-term investments or which
are included in the consolidated financial statements using
the equity method. Therefore, the Group does not include these
investments in an equity price risk analysis.
Commodity price risks. Associated with Daimler’s business
operations, the Group is exposed to changes in the prices
of consignments and commodities. We address these procure-
ment risks by means of concerted commodity and supplier
risk management. To a minor extent, derivative commodity
instruments are used to reduce some of the Group’s commod-
ity risks, primarily the risks associated with the purchase
of metals.
Liquidity risks. In the normal course of business, we make
use of bonds, commercial papers and securitized transactions
as well as bank credits in various currencies, primarily to
refinance the leasing and sales-financing business. A negative
development of the capital markets could increase the Group’s
financing costs. More expensive refinancing would also
have a negative effect on the competitiveness and profitability
of our financial services business if we were unable to pass
on the higher refinancing costs to our customers; a limitation
of the financial services business would have a negative impact
on the automotive business.
Credit risks. The Group is exposed to credit risks which result
primarily from its financial services activities and from its
operating business. In addition, credit risks also arise from
the Group’s liquid assets. Should defaults occur, this would
negatively affect the Group’s financial position, cash flows and
profitability. In recent years, the limit methodology has been
continually further developed in order to counteract the ever
worsening creditworthiness of the banking sector. In con-
nection with investment decisions, priority is placed on the
borrower’s very high creditworthiness and on balanced
risk diversification. Most liquid assets are held in investments
with an external rating of A or better.
Risks from changes in credit ratings. Daimler’s credit-
worthiness is assessed by the rating agencies Standard & Poor’s
Rating Services, Moody’s Investors Service, Fitch Ratings
and DBRS. Upgrades of the credit ratings issued by the rating
agencies could reduce the Group’s cost of borrowing. There
are risks connected with potential downgrades, which could
have a negative impact on the Group’s financing. Advance
investment expenditures related to the Group’s growth strategy
are also connected with risks for our credit ratings if the
unit sales and earnings anticipated from the growth cannot
be realized. Further information on financial market risks,
risk-minimizing actions and the management of those risks
is provided in E Note 31 of the Notes to the Consolidated
Financial Statements. Information on financial instruments
can be found in E Note 30.
Legal risks
Various legal proceedings, claims and governmental investiga-
tions (legal proceedings) are pending against Daimler AG
and its subsidiaries on a wide range of topics, including vehicle
safety, emissions, fuel economy, financial services, dealer,
supplier and other contractual relationships, intellectual prop-
erty rights, product warranties, environmental matters and
shareholder matters. Some of these proceedings allege defects
in various components in several different vehicle models
or allege design defects relating to vehicle stability, pedal mis-
application, brakes or crashworthiness. Some of the claims
asserted by way of class action suits seek repair or replacement
of the vehicles or compensation for their alleged reduction
in value, while others seek recovery for damage to property,
personal injuries or wrongful death. Adverse decisions in
one or more of these proceedings could require us to pay sub-
stantial compensatory and punitive damages or undertake
service actions, recall campaigns or other costly actions. Some
of these proceedings may have an impact on the Group’s
reputation.
We recognize provisions for these proceedings if the resulting
obligations are probable and can be reasonably estimated.
It is possible, as these proceedings are connected with a large
degree of uncertainty, that after the final resolution of litiga-
tion, some of the provisions we have recognized for legal proceed-
ings could prove to be insufficient. As a result, substantial
additional expenditures may arise. This also applies to legal
proceedings for which the Group has seen no requirement
to recognize a provision. Although the final result of any such
litigation may influence the Group’s earnings and cash flows
in any particular period, Daimler believes that any resulting obli-
gations are unlikely to have a sustained effect on the Group’s
cash flows, financial position or profitability. Further information
on legal proceedings can be found in E Note 28 of the
Notes to the Consolidated Financial Statements.
Overall risk
The Group’s overall risk situation is the sum of all the individual
risks of all risk categories for the divisions and the corporate
functions. There are no discernible risks that either alone
or in combination with other risks could jeopardize the continued
existence of the Group. But since considerable economic
and industry risks still exist, setbacks on the way to regularly
achieving our growth and profitability targets cannot be
completely ruled out.