Industry and business risks and opportunities

The following section describes in detail the industry and business risks of the Daimler Group. A quantification of these risks and opportunities is shown in table B.55.


Industry and business risks and opportunities      
Risk category Probability
of occurrence
Impact Opportunity category Impact
General market risks Medium High General market opportunities Medium
Risks relating to leasing and sales financing Low Low Opportunities relating to leasing and sales financing Low
Procurement market risks Medium High Procurement market opportunities Low
Risks relating to the legal and political framework Medium High Opportunities relating to the legal and political framework Low

Economic risks and opportunities. Economic risks and opportunities constitute the framework for the risks and opportunities listed in the following categories and are integrated as premises into the quantification of these risks and opportunities. Overall economic conditions have a significant influence on automobile sales markets, and their development is one of the Group’s major risks and opportunities.

With regard to the world economy, Daimler along with the majority of economic research institutes anticipates a slight acceleration of growth in 2015. Economic developments in 2014 are described in detail in the “Economic Conditions and Business Development” section of this Management Report; growth assumptions for 2015 are explained in the “Outlook” section.

Economic risks and opportunities are linked with assumptions and forecasts on the general development of the individual topics. Overall, economic risks for the business environment have tended to increase slightly compared with the prior year and the opportunities for an improvement of the world economy have declined slightly.

The development of the US economy will be decisively impacted by how the planned exit from the expansive monetary policy is further managed and whether — as hoped — investors and consumers boost the rate of growth. After such a long phase of very low interest rates, an increase in interest rates could have a profound effect on economic recovery and slow down the pace of growth. This would also affect the housing market and its recovery, along with other sectors. Although the Federal Reserve could attempt to counteract any negative impact through its monetary policy, it has little room to maneuver here, which means the effectiveness of such possible measures would be limited. Such an event would have significant consequences because the Daimler Group (and especially the Mercedes-Benz Cars and Daimler Trucks divisions) generates a considerable volume of its unit sales in the United States, and diminished growth could also spread to other regions. However, if investment activity in the United States is more dynamic than previously assumed, this could result in substantially stronger growth. The resulting increased employment and income effects would boost the demand for the automotive divisions.

If there is no continuation of the required consolidation of state budgets and reform efforts in the countries of the European Monetary Union (EMU), this could cause renewed turmoil in the financial markets, leading to increasing refinancing costs through rising capital-market interest rates, and thus jeopardizing the already fragile economic recovery. Further effects could be triggered by the debate about a Greek exit, which recently flared up again. This could lead to greater uncertainty and volatility in the financial markets. The extremely low rate of inflation harbors an additional risk in that a long-lasting and broad-based fall in prices would constitute a considerable threat to the economic recovery of the EMU and make it even more difficult for the debt-ridden countries in the euro zone to finance their remaining debt. The European market continues to be very important for Daimler across all divisions; for the Mercedes-Benz Cars and Mercedes-Benz Vans divisions, it is in fact still the biggest sales market. An opportunity that is difficult to assess can be seen in a significantly improved economic development in the euro zone. If countries such as Italy and France implement reform measures more quickly and decisively than has so far been assumed, economic growth could also accelerate. That would benefit the development of investment and demand for motor vehicles in the important European market.

One risk of a significant obstacle to growth in Japan — namely the second stage of the value-added tax hike from 8% to 10%, which had been planned for October 2015 — was eliminated at the end of 2014 with the announcement that the tax increase was to be postponed until 2017. Apart from that, the failure of the country’s expansive monetary and fiscal policy and the lack of structural reforms could trigger a growth slowdown in Japan, although this should be regarded as only a regionally limited risk. A slowdown of growth could lead to lower demand for cars and trucks, which in turn could negatively affect the Mercedes-Benz Cars and Daimler Trucks divisions, for which Japan is an important sales market. A regionally limited opportunity exists in the possibility of a distinct acceleration of economic growth in Japan. This could be caused by a significant increase in investment activity, resulting from the targeted structural reforms and the expansive monetary and fiscal policies that have already been initiated. The Mercedes-Benz Cars and Daimler Trucks divisions could then benefit from this positive development.

Due to the significant growth of the country’s importance in recent years, an economic slump in China would present a considerable risk for the world economy. The extremely high level of debt in the economy as a whole and the high level of investment in the construction industry have considerably increased the risk of an abrupt adjustment in the real estate market or a banking-sector crisis. China is now a key sales market for the Mercedes-Benz Cars and Mercedes-Benz Vans divisions in particular, which means any disruptions caused by the above-mentioned risks could result in lower-than-planned growth in unit sales. On the other hand, we see a further opportunity in an even stronger development of the Chinese economy. This could be triggered by the reform measures taking rapid effect, accompanied by increased consumption. Strong growth in overall economic consumption would create additional opportunities for the divisions mentioned above.

Another risk is to be seen in a renewed weakening of growth in major emerging markets. There were disappointing developments already during 2013 and 2014, especially in major economies such as India, Russia and Brazil, although other countries such as Indonesia and Turkey also developed below their possibilities. A combination of weak growth and high interest rates increases the risk of a rising number of defaults, especially in view of the substantial expansion of credit in some cases over the past few years. As Daimler is already very active in these countries or their markets play a strategic role, such a scenario represents a risk. An opportunity is to be seen in the implementation of reforms occurring in important emerging economies. If structural reforms are quickly and consistently carried out in countries such as India, Russia and Brazil, flows of global capital into these countries would increase again, resulting in new scope for growth.

The conflict between Russia and Ukraine has led to an additional risk for the development of the world economy since 2014. This risk has increased macroeconomic uncertainty and had a negative effect on the business climate and consumer confidence. An escalation of the crisis and the resulting tightening of sanctions and counter-sanctions would have a massive negative impact on the economy in Europe especially, whereby the exact scope of this effect is very difficult to predict. It is conceivable that such an escalation would negatively impact oil prices as well through a higher risk premium, and it would also dampen the mood, and demand, in markets that depend on oil. Furthermore, the consequences of a possible debt default by Russia or of failure to service due debts cannot be predicted.

The conflict in Syria, which has heated up as a result of the offensive of the “Islamic State” (IS), is threatening the stability of the region, especially in neighboring Iraq. Although most Iraqi oil production facilities are located in regions not controlled by IS, concerns still remain that Iraqi oil deliveries could be interrupted or that the armed conflict in Syria could spill over into other areas. An abrupt increase in oil prices brought about by an attack on oil refineries could endanger the recovery in fragile European economies or in the United States, and could also negatively affect emerging markets that depend on oil imports. The effect on the world’s stock markets would also be noticeable, and this could undermine investment and consumer confidence on a broad scale. However, if oil prices remain on such a low level for a long time, this could present a significant growth opportunity for the world economy due to purchasing power.

Moreover, a too-rapid rise in interest rates in the United States would not only negatively affect the US economy but also lead to a renewed sell-off on stock markets in particularly sensitive emerging markets. The tapering of bond purchases by the US Federal Reserve already triggered unrest in the financial markets in 2014. Long-term interest rates increased and there were capital outflows and currency devaluations in the emerging markets. In some countries, this also resulted in additional inflationary pressure, which, in combination with a more restrictive interest policy, reduced the potential for growth. If a possible decrease of liquidity in the US in 2015 leads to more substantial effects, this could significantly reduce GDP growth through the chain of cause and effect described above, especially in the emerging markets. Increased volatility in the financial markets would also dampen investor and consumer confidence, with an impact on the global economy. In addition, tensions resulting from exchange rate volatility and possible manipulations carried out to preserve global competitiveness could lead to an increase in protectionist measures and a type of “devaluation race.” This would put a substantial strain on world trade and threaten future growth.

General market risks and opportunities. The risks and opportunities for the development of automotive markets are strongly affected by the situation of the global economy as described above.

The assessment of market risks and opportunities is connected with assumptions and forecasts about the overall development of markets in the various regions. The potential effects of the risks on the development of the Daimler Group’s unit sales are included in risk scenarios. The danger of worsening market developments or changed market conditions, especially due to the macroeconomic environment and political or economic uncertainties, generally exists for all divisions of the Daimler Group. The only differences between the divisions have to do with their varying regional focus of activities. Markets and competitors are continuously analyzed and monitored; if necessary, specific marketing and sale programs are implemented. Due to the competitive pressure in the automotive markets, Daimler regularly adapts production and cost structures to the changing conditions. Clear strategies have been formulated for all divisions. Each division consistently pursues the goal of growing profitably and increasing its efficiency.

Some dealers and vehicle importers are in a difficult financial situation. As a result, supporting actions may become necessary, whereby such actions would negatively impact the profitability, cash flows and financial position of the automotive segments. For this reason, the financial situations of strategically relevant dealerships are continually monitored.

In addition to these issues affecting all segments, segment-specific risks also exist. In the Mercedes-Benz Cars and Daimler Trucks divisions, these include increasing competitive and price pressure. A change within the framework of a product’s lifecycle bears the risk of a negative volume effect in relation to the anticipated sales volumes. In addition, aggressive pricing policies, the introduction of new products by competitors and price pressure related to the aftersales business could make it impossible to enforce targeted prices. To a lesser extent, the same also applies to sales volumes at the divisions Mercedes-Benz Vans and Daimler Buses. Depending on the magnitude of regional unit sales, various measures are taken to support weaker markets. They include the use of new sales channels, actions designed to strengthen brand awareness and brand loyalty, as well as sales and marketing campaigns. These measures are also applied to safeguard business in the area of aftersales. Daimler also operates various programs to boost sales through the use of financial incentives. Corresponding measures taken to support the segments’ unit sales would adversely affect the projected earnings.

Further risks and opportunities at Mercedes-Benz Cars relate to the development of the used-car market. As part of the established residual-value management process, certain assumptions are made on the local and corporate levels regarding the expected level of prices, on which basis the cars returned in the leasing business are valued. If general market developments lead to a negative or positive deviation from the assumptions, there is a risk of lower residual values or an opportunity of higher residual values of used cars. Depending on the region and the current market situation, the measures taken generally include continuous market monitoring as well as, if required, price-setting strategies or sales promotions designed to regulate vehicle inventories. The quality of market forecasts is verified by periodic comparisons of internal and external sources. If necessary, the set residual values are adjusted and refined with regard to methods, processes and systems for determining such values.

As the target achievement of the Daimler Financial Services division is closely connected with the development of business in the automotive divisions, the existing volume risks and opportunities are also reflected in the Daimler Financial Services segment. In this context, Daimler Financial Services participates in marketing expenses, especially for advertising campaigns.

In general, there is also the possibility that the overall market, or regional conditions, for the automotive industry will develop better than assumed in the internal forecasts upon which the Group’s target planning is based. This includes positive deviations from planning premises — for example, if planned sales support measures do not have to be fully utilized. Other opportunities can be exploited through the creation of additional production capacities at the divisions. The existing market opportunities for the divisions of the Daimler Group can only be utilized if production activities are organized accordingly and the gaps between demand and supply can be recognized and covered in time. This could require increases in production volumes. The Mercedes-Benz Cars division sees a market opportunity for sales of additional vehicles in various model series. The possibility of higher unit sales of vehicles exists in the Daimler Trucks segment as a result of improved market developments or changed conditions in the market. Additional market opportunities have also been identified by Daimler Buses. The measures that could be taken by the Daimler Group to utilize this potential opportunity include a combination of local sales and marketing activities and central strategic product and capacity planning.

The general market-risk situation remains unchanged compared to the prior year in terms of impact and probability of occurrence. The assessment of the impact of opportunities has been slightly lowered as compared to the previous year, because current business activities have already exploited the opportunities identified in the prior year.

Risks and opportunities relating to the leasing and sales financing business. In connection with the sale of vehicles, Daimler also offers its customers a wide range of financing possibilities — primarily leasing and financing the Group’s products. The resulting risks for the Daimler Financial Services segment are mainly due to borrowers’ worsening creditworthiness, so that receivables might not be recoverable in whole or in part due to customers’ insolvency (default risk or credit risk). Daimler counteracts credit risks by means of appropriate market analyses, creditworthiness checks on the basis of standardized scoring and rating methods, and the collateralization of receivables. Other risks connected with the leasing and sales-financing business involve the possibility of increased refinancing costs due to potential changes in interest rates. An adjustment of credit conditions for customers in the leasing and sales-financing business due to higher refinancing costs could reduce the new business and contract volume of Daimler Financial Services, also reducing the unit sales of the automotive divisions. Risks and opportunities could also arise from a lack of matching maturities with the refinancing. The risk of mismatching maturities is minimized by coordinating the refinancing with the periods of financing agreements, from the perspective of interest rates as well as liquidity. Any remaining risks of changes in interest rates are managed with the application of derivative financial instruments. Further information on credit risks and the Group’s risk-minimizing actions is provided in note 32 of the Notes to the Consolidated Financial Statements. With regard to the leasing business, the automotive divisions also have a residual-value risk resulting from the risks associated with the development of used-vehicle prices.

Procurement market risks and opportunities. Procurement market risks arise for the automotive divisions in particular from fluctuations in prices of raw materials. There are also minor risks that result from dependency on certain materials and capacity bottlenecks caused by supplier delivery failures. In general, the possible impact of risks related to the procurement market, especially resulting from increases in raw-material prices, has changed from “medium” to “high.” As was the case in the previous year, only small opportunities are anticipated in the raw-material markets.

During the reporting year, raw material prices developed in a varied manner and were marked by a high level of volatility. Due to almost completely unchanged macroeconomic conditions, we expect to see price fluctuations with uncertain and uneven trends in the near future. On the one hand, raw-material markets are strongly impacted by political crises and uncertainties — combined with possible supply bottlenecks — as well as by a volatile demand for specific raw materials. On the other hand, this is offset by the notably less dynamic growth of the Chinese industry and the renewed slightly below-average growth of the world economy to date. Vehicle manufacturers are generally limited in their ability to pass on the higher costs of commodities and other materials in higher prices for their products because of the strong competitive pressure in the international automotive markets. A drastic increase in raw material prices would at least temporarily result in a considerable reduction in economic growth.

Daimler continues to counteract procurement risks by means of targeted commodity and supplier risk management. The Group attempts to reduce its dependency on individual materials in the context of commodity management by making appropriate technological progress, for example. Daimler protects itself against the volatility of raw material prices by entering into long-term supply agreements, which make short-term risks for material supplies and the effects of price fluctuations more calculable. Furthermore, the Group makes limited and targeted use of derivative price-hedging instruments for certain metals in order to reduce the impact of price fluctuations.

Supplier risk management aims to identify suppliers’ potential financial difficulties at an early stage and to initiate suitable countermeasures. Even though the crisis of recent years is over, the situation of some of the suppliers remains difficult due to the tough competitive pressure. This has necessitated individual or joint support actions by vehicle manufacturers to ensure their production and sales. In the context of supplier risk management, regular reporting dates are set for suppliers for which we have received early warning signals and made a corresponding internal assessment. On these dates, the suppliers report key performance indicators to Daimler and decisions are made concerning any required support actions.

Risks and opportunities related to the legal and political framework. The risks and opportunities from the legal and political framework also have a considerable impact on Daimler’s future business success. Regulations concerning vehicles’ emissions, fuel consumption and safety play a particularly important role. Complying with these varied and often diverging regulations all over the world requires strenuous efforts on the part of the automotive industry. We expect to expend an even larger proportion of the research and development budget in the future to ensure the fulfillment of these regulations. The probability of the occurrence of a risk increased from low in the prior year to medium in the reporting year; the assessment of possible impact remains unchanged at high.

Many countries have already implemented stricter regulations to reduce vehicles’ emissions and fuel consumption, or are now doing so.

The Mercedes-Benz Cars segment faces risks in China in particular, as the Chinese authorities have defined fleet average fuel consumption as of 2015 of 6.9 liters per 100 kilometers (approximately 160 g CO2/km) as the industry’s target for new cars. The legislative process for addressing the period 2016–2020 has not yet been concluded. Failure to meet the fleet target could prevent new vehicles from being registered in the country. For the year 2020, the current five-year plan stipulates a new, very demanding target of 5.0 l/100 km (approximately 117 g CO2/km); discussions on the final version for the target are now being conducted as part of the final phase of the legislative process.

Regulations concerning the CO2 emissions of new cars are also quite demanding in the European Union. For 2015, all new cars in Europe will have to meet a fleet CO2 average of 129 g CO2/km following a transition period. The relevant limit for Daimler depends on the portfolio of cars we sell in the European Union and is derived from vehicle weight. For 2020, new cars in Europe will have to meet a fleet CO2 average of 95 g CO2/km. The new regulation will apply to 100% of the fleet in 2021 following a one-year transition period. Daimler will have to pay penalties if it exceeds its limits. The planned elimination of the NEDC (New European Driving Cycle) and its replacement with the WLTP (Worldwide harmonized Light vehicles Test Procedures) is also creating uncertainty, as there has been no final decision on introduction dates, the conditions associated with the new test cycle, or the continuation of the fleet targets. According to present knowledge, the WLTP will make it difficult to achieve CO2 targets beginning in 2020.

In Germany are considerations to change the taxation of company cars in order to make it dependent on vehicle emissions. This could cause fleet customers to switch over to smaller and more fuel-efficient cars.

Legislation in the United States on greenhouse gases and fuel consumption stipulates that new car fleets in the United States may only emit an average of 163 grams of CO2 per mile as of 2025 (approximately 100 grams CO2 per kilometer). These new regulations will require an average annual reduction in CO2 emissions as of 2017 amounting to 5% for cars and 3.5% in the beginning for SUVs and pickups (this rather lower rate applies until 2022). This will impact the German premium manufacturers and thus also the Mercedes-Benz Cars division harder than the US manufacturers, for example. As a result of strong demand for large, powerful engines in the United States as well as Canada, financial penalties cannot be ruled out.

Similar legislation exists or is being prepared in many other countries, for example in Japan, South Korea, India, Canada, Switzerland, Mexico, Saudi Arabia, Brazil and Australia.

Daimler gives these targets due consideration in its product planning. The increasingly ambitious targets require significant shares of plug-in hybrids or cars with other types of electric drive. The market success of these drive systems is greatly influenced by regional market conditions, for example the battery-charging infrastructure and state support. But as market conditions cannot be predicted with certainty, a residual risk exists.

Pursuant to EU Directive 2006/40/EC, since January 1, 2011, vehicles only receive a type approval if their air-conditioning units are filled with a refrigerant that meets certain criteria with regard to climate friendliness. The directive calls for an introductory period until December 31, 2016 for such refrigerants to be used in all new vehicles. Mercedes-Benz Cars had originally planned to use the refrigerant R1234yf in its new vehicle models as early as possible and therefore did not intend to make use of this transitional period. However, due to the safety risks identified by Mercedes-Benz Cars in the summer of 2012, Daimler is not using the new refrigerant R1234yf in its vehicles at the moment and has started with the development of safe alternatives. At present, the Group does not assume that this will result in any significant effects on its profitability, cash flows or financial position.

Strict regulations for the reduction of vehicles’ emissions and fuel consumption also create potential risks for the Daimler Trucks division. For example, legislation was passed in Japan in 2006 and in the United States in 2011 for the reduction of greenhouse-gas emissions and fuel consumption by heavy-duty commercial vehicles. In China, legislation has been drafted which is likely to affect exports to that country and require additional expenditure as of 2015. The European Commission is currently working on methods for measuring the CO2 emissions of heavy-duty commercial vehicles that will probably have to be applied as of 2017. We have to assume that the statutory limits will be very difficult to meet in some countries. Very demanding regulations for CO2 emissions are also planned, or else have been approved for light commercial vehicles. This will present a long-term challenge for Mercedes-Benz Vans especially, because the division primarily serves the heavy segment of N1 vehicles. The European fleet of N1 vehicles may not emit an average of more than 175 g CO2/km as of 2017 and not more than 147 g CO2/km as of 2020; penalty payments may otherwise be imposed.

Daimler currently does not anticipate any additional risks though worldwide statutory safety regulations due to the Group’s long-standing strong focus on vehicle safety.

In addition to emission, consumption and safety regulations, traffic-policy restrictions for the reduction of traffic jams, noise and pollution are becoming increasingly important in cities and urban areas of the European Union and other regions of the world. Drastic measures are increasingly being taken, such as general vehicle-registration restrictions like those in Beijing, Guangzhou or Shanghai. These can have a dampening effect on the development of unit sales, especially in the growth markets. Pressure to reduce personal transport is also being applied in European cities through increasing measures, such as restrictions on vehicles in inner cities, congestion charges and other types of road-use fees. This stimulates demand for mobility services including car sharing services. In order to utilize the resulting opportunities, Daimler is present in the market with the provision of mobility services (e.g. car2go, moovel).

Daimler continually monitors the development of statutory and political conditions and attempts to anticipate foreseeable requirements and long-term targets at an early stage in the process of product development. The biggest challenge in the coming years will be to offer an appropriate range of drive systems and the right product portfolio in each market, while fulfilling customers’ wishes, internal financial targets and statutory requirements. With an optimal product portfolio and market-launch strategy, competitive advantages may also arise.

The position of the Daimler Group in key foreign markets could also be affected by an increase in bilateral free-trade agreements, at least to the extent to which the European Union fails to reach similar agreements with the markets in question.

Furthermore, the danger exists that individual countries will attempt to defend their competitiveness in the world’s markets by resorting to interventionist and protectionist actions. Particularly in China and the markets of developing countries and emerging economies, we are increasingly faced with tendencies to limit imports or at least reduce the rate of growth of imports, and to attract direct foreign investment by means of appropriate industrial policies. Furthermore, a tendency of tightening the regulatory environment in general and in particular with regard to competition law is to be observed.

Daimler has increased the local value added in order to adapt to the requirements of industrial policy and has thus taken appropriate action in good time. The increasing proximity of the production sites to local markets and consideration of, among other things, logistical and other advantages result in opportunities in terms of utilizing those markets’ potential.

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