Industry and business risks and opportunities

The following section describes the industry and business risks and opportunities of the Daimler Group. A quantification of these risks and opportunities is shown in table B.58.

B.58 Industry and business risks and opportunities

Risk category Probability of occurrence Impact Opportunity category Impact
General market risks Low High General market opportunities High
Risks relating to leasing and sales financing Low Low Opportunities relating to leasing and sales financing Low
Procurement market risks Low High Procurement market opportunities Low
Risks relating to the legal and political framework Low 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 vehicle sales markets and thus on the Group’s success.

Like the majority of economic research institutes, Daimler expects the world economy to grow by more than 3 % once again in 2018, following the perceptible acceleration of growth in 2017. Economic developments in 2017 are described in detail in the “Economic Conditions and Business Development” section of this Management Report; growth assumptions for 2018 are explained in the “Outlook” section Economic Conditions and Business Development and Outlook.

Economic risks and opportunities are linked with assumptions and forecasts concerning general developments. The relationship between risks and opportunities at the beginning of the year 2018 is more balanced than in the previous year; however, numerous risks continue to exist for the world economy.

In the United States, the tax reform recently passed and a generally more expansive fiscal policy could result in additional impetus that has not previously been considered. If a significantly more dynamic investment activity ensues there, leading to stronger growth in combination with positive employment and income effects, this could boost demand in all automotive divisions. As the Daimler Group generates a substantial proportion of its revenue in the United States, especially in the Mercedes-Benz Cars, Daimler Trucks and Daimler Financial Services divisions, these developments would have considerable consequences for the Group’s success. Furthermore, stronger growth in the United States would also have spillover effects on the rest of the world. However, the disadvantages of such an expansionary fiscal policy are a worsening of the debt situation in the United States and the risk that the central bank (“Fed”) might feel forced to raise interest rates more significantly than previously assumed in order to counteract strong inflationary pressure. This would increase the existing risks arising from the Fed’s exit from its expansive monetary policy and from the increase in the federal funds rates. As a result, increasing lending rates could dampen the recovery of the real-estate market and companies’ propensity to invest. There is also the risk of sharp falls in share prices triggering a chain reaction on global stock markets, resulting in major market adjustments and phases of exceptional volatility in the global financial markets. Such developments could have a negative impact on the investment climate worldwide, with negative effects on the world economy.

In Europe, political risks regarding the stability of the EU and the monetary union have decreased somewhat since the results of the elections in 2017. Nonetheless, separatist tendencies such as in Catalonia or upcoming parliamentary elections in Italy mean that a resurgence of the euro crisis cannot be ruled out. In addition, there are still significant risks in the banking sector of some member states and the volume of defaulting loans is very high in some countries. Another crucial factor for economic development in Europe is the ongoing progress of the Brexit negotiations. Failure to reach an agreement could have a negative impact on the business climate and thus on the development of the British economy and to a lower extent the euro zone, which would potentially make trading conditions more difficult. The European market continues to be very important for Daimler across all divisions; in fact, it is the biggest sales market for the Mercedes-Benz Cars and Mercedes-Benz Vans division. These risks exist along with opportunities for stronger growth due to even stronger dynamism from consumption and investment in the euro zone, which would also boost demand for motor vehicles in the important European market.

Due to China’s enormous importance as a growth driver for the world economy in recent years, a downturn in China’s economy would represent a considerable risk to the world economy. The enormous growth in debt that has been observed since the global financial crisis, especially in the corporate sector, represents a significant risk. If the government’s efforts to restrict credit growth lead to a more significant growth slowdown than currently expected, this would result in a perceptible cooling-off for the world economy. Within China, a slowdown could result in an excessive increase in credit defaults, which would then lead to turbulence in the banking sector and the financial markets. In particular for the Mercedes-Benz Cars division, for which China is now the biggest individual sales market by a large margin, the aforementioned risks could result in significant negative effects on its unit sales. In addition, a drop in demand in China would trigger another fall in the price of oil and other (industrial) raw materials, with extremely disadvantageous effects for raw-material exporting countries worldwide, especially in Latin America, the Middle East and Sub-Saharan Africa. This would have a negative impact on demand for the automotive divisions in those regions. On the other hand, growth in 2018 could also turn out to be stronger than expected if the Chinese government pursues less tight monetary and fiscal policies than currently anticipated. The resulting stronger growth in overall economic consumption would create additional opportunities, especially for the Mercedes-Benz Cars division.

The prospects of the emerging markets remain stable compared with the previous year, but continue to be connected with some risks, primarily of an external nature. For example, a significant increase in interest rates in the United States could cause difficulties in particular for those emerging markets with high current account deficits and high levels of foreign debt, resulting in significant currency depreciation (e. g. Turkey, South Africa and Brazil). Financial-market turbulences going as far as currency crises would be possible consequences and could have a massive impact on the economies of the affected countries. Lower growth in world trade and lower raw-material prices (e. g. a drop in the oil price) than currently forecast would have a negative impact on growth for exporters of raw materials. As Daimler is already very active in those countries, or their markets play a strategic role, this would have significantly negative effects on the Group’s prospective unit sales. However, import-dependent economies such as India would benefit from lower price levels. Furthermore, stronger growth in world trade and higher raw-material prices would create positive impetus in emerging markets that export raw materials, leading to stronger economic growth and thus increased demand for motor vehicles.

In view of the positive economic situation in many parts of the world, including Europe and some major emerging markets, the opportunity exists that the world economy will grow in 2018 at a higher rate than hitherto assumed. A stronger increase in worldwide demand would support raw-material prices and would have positive effects on raw-material exporters in South America, the Middle East and Africa.

Further risks exist from geopolitical tension, such as between Saudi Arabia and Iran or in North Korea, but countries like Russia and Turkey also continue to represent considerable conflict potential. Should further terrorist attacks or assassinations in Europe or other major economies lead to an additional high degree of uncertainty, investment and consumer confidence could be severely undermined with a resulting impact on the real economy. In addition, an increase in terrorist attacks would accelerate the already growing influx into populist parties, thereby promoting isolationism and adversely affecting world trade, with enormous costs to the world economy.

General market risks and opportunities

The risks and opportunities for the economic development of automotive markets are strongly affected by the cyclical situation of the global economy as described above. The assessment of market risks and opportunities is linked to assumptions and forecasts about the overall development of markets in the regions in which the Daimler Group is active. The possibility of markets developing better or worse than assumed in the planning, or of changing market conditions, generally exists for all divisions of the Daimler Group.

Potential effects of the risks on the development of unit sales are included in risk scenarios. The risks can cause changes in the planned business activities and the related vehicle sales and inventories. In particular, the partially unstable macroeconomic environment as well as political or economic uncertainty could be causes in this context. Differences between the divisions exist due to the partly varying regional focus of their activities. Discussions about the future of diesel technology and the related legal uncertainties are also responsible for changes in customer demand, which can have a negative impact on the sale of diesel vehicles and possibly also on earnings. The development of markets, unit sales and inventories is conti­nually analyzed and monitored by the divisions; if necessary, specific marketing and sales programs are implemented. Clear strategies have been formulated for each division for profitable growth and efficient progress.

Volatilities with regard to market developments can also mean that the overall market or regional conditions for the automotive industry might develop better than assumed in the internal forecasts and premises upon which the Group’s target planning is based. This can lead to market opportunities. Opportunities can also arise from an improvement in the competitive situation or a positive development of demand for the divisions. However, the existing market opportunities of the divisions of the Daimler Group can only be utilized if production can be aligned accordingly, and if this is enabled by regional conditions. In addition, any gaps between demand and supply have to be recognized and covered in good time. The measures that could be initiated by the Daimler Group to utilize potential opportunities include a combination of local sales and mar­keting activities, as well as central strategic product and capacity planning.

As the target achievement of the Daimler Financial Services division is closely connected with the business development in the automotive divisions, the existing volume risks and opportunities are reflected in the Daimler Financial Services segment.

Due to the partly difficult financial situation of some dealerships and vehicle importers, support actions might become necessary to ensure the performance of the business partners. The sources of these risks lie in the respective risk environment. Supporting actions would adversely affect the profitability, cash flows and financial position of the automotive divisions. Further risks may result from the dependency on certain dealerships. In certain circumstances, relationships with new business partners may have to be developed. The financial situation of strategically relevant dealerships and vehicle importers is continually monitored. If required, payment conditions are adjusted and additional guarantees are obtained. Risks of this kind exist for dealerships and vehicle importers of the divisions Mercedes-Benz Cars, Daimler Trucks and Mercedes-Benz Vans.

The successful product portfolio of the Daimler Group contributes to its advantageous positioning compared with the competitors. Possibly rising competitive and price pressure above all affect the segments Mercedes-Benz Cars and Daimler Trucks. Aggressive pricing policies, the introduction of new products by competitors, or pricing pressure in the aftersales business can make it more difficult to achieve expected prices. This might result in lower revenue, the failure to achieve the products’ planned profitability, or lower market share. The extent of such risks is related to the magnitude of a division’s sales volume. Continuous monitoring of competitors is carried out in order to recognize these risks at an early stage. Depending on the situation, product-specific and possibly regionally different 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. Daimler also applies various programs to boost sales, which include financial incentives for customers.

Further risks at Mercedes-Benz Cars, Mercedes-Benz Vans and Daimler Financial Services relate to the development of used vehicle markets and thus to the residual values of the vehicles produced. In particular, the uncertainty existing in connection with diesel vehicles can have a negative impact on residual values. As part of the established residual-value management process, certain assumptions are made at local and corporate levels regarding the expected level of prices, based upon which the cars to be returned in the leasing business are evaluated. If changing market developments lead to a negative deviation from assumptions, there is a risk of lower 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 promotion measures designed to regulate vehicle inventories. The quality of market forecasts is verified by periodic comparisons of internal and external sources, and, if required, the determination of residual values is adjusted and further developed with regard to methods, processes and systems. On the other hand, opportunities can arise from a positive development of residual values caused by a favorable market environment for used vehicles as well as reductions in price reductions granted on new vehicles.

In addition, a residual-value risk from non-Daimler vehicles exists for the Daimler Financial Services companies that operate commercial fleet management and leasing management, because most of those vehicles are not covered by manufacturers’ residual-value guarantees. Residual-value risk is taken into account through a high level of diversification with regard to brands, regions, customers and lease periods. Used-vehicle prices are continually monitored both locally and centrally, so that the residual-value risk from a drop in market prices can be forecast in good time and suitable countermeasures may be initiated.

Despite increasing residual-value risks, the probability of occurrence of general market risks across all segments has decreased compared with the previous year from “medium” to “low” as a result of the improved market positioning of the automotive divisions compared with their competitors.

Risks and opportunities relating to the leasing and sales-financing business

In connection with the sale of vehicles, Daimler offers its customers a wide range of financing possibilities – primarily of leasing and financing the Group’s products. The resulting risks for the Daimler Financial Services segment are mainly due to borrowers’ worsening creditworthiness, so receivables might not be recoverable in whole or in part because of customers’ insolvency (default risk or credit risk). Daimler counteracts credit risks by means of creditworthiness checks on the basis of standardized scoring and rating methods and the collateralization of receivables, as well as an effective risk management with a firm focus on monitoring both internal and macroeconomic leading indicators. Other risks associated with the leasing and sales-financing business involve the possibility of increased refinancing costs due to changes in interest rates (interest rate risk).

An adjustment of credit conditions for customers in the leasing and sales-financing business caused by 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 also arise from a lack of matching maturities with refinancing. The risk of mismatching maturities is minimized by coordinating refinancing with the periods of financing agreements, from the perspective of interest rates as well as liquidity. Any remaining risks from changes in interest rates are managed by the use 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.

Possible regard residual-value risks for the automotive divisions and the companies in the Daimler Financial Services division that operate commercial fleet management and leasing management are described in the section “General Market Risks and Opportunities.”

The extent of the risks and opportunities and the probability of occurrence of the risks relating to the leasing and sales-financing business continue to be assessed as low.

Procurement market risks and opportunities

Procurement market risks arise for the automotive divisions in particular from fluctuations in prices of raw materials and energy. There are also risks of financial bottlenecks of suppliers and of capacity bottlenecks caused by supplier delivery failures or by insufficient utilization of production capacities at suppliers. The risk situation relating to probability of occurrence and impact has not changed compared with the previous year. Opportunities in the raw-material markets continue to exist due to positive price developments for relevant raw materials. Compared with the previous year, however, the extent of those opportunities has decreased from “medium” to “low” as a result of more pessimistic assumptions concerning the future development of raw-material prices.

Raw-material prices continued to feature significant volatility in 2017. Due to almost completely unchanged macroeconomic conditions, price fluctuations are expected with uncertain and uneven trends in the near future. On the one hand, raw-material markets can be impacted by political crises and uncertainties – combined with possible supply bottlenecks – as well as by volatile demand for specific raw materials; this increases the risk from raw-material prices for the individual automotive segments. Generally, the ability to pass on the higher costs of commodities and other materials in the form of higher prices for the manufactured vehicles is limited because of strong competitive pressure in the international automotive markets.

Supplier risk management aims to identify potential financial bottlenecks for suppliers at an early stage and to initiate suitable countermeasures. Although the crisis of recent years is over, the situation of some of suppliers remains difficult due to a high degree of competitive pressure. This has necessitated individual or joint support actions by vehicle manufacturers to safeguard 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 corresponding internal assessments. On those dates, the suppliers report their key performance indicators to Daimler and decisions are made concerning any required support actions.

Due to the planned electrification of new model series and a shift in customer demand from diesel to gasoline engines, the Mercedes-Benz Cars segment in particular is faced with the risk that Daimler will require changed volumes of components from suppliers. This could result in over- or under-utilization of production capacities for certain suppliers. If supplier cannot cover their fixed costs, there is the risk that suppliers could demand compensation payments. Necessary capacity expansion at suppliers’ plants could also require cost-effective participation.

Risks and opportunities related to the legal and political framework

The automotive industry is subject to extensive governmental regulation worldwide. Risks and opportunities from the legal and political framework have a considerable impact on Daimler’s future business success. Regulations concerning vehicles’ emissions, fuel consumption and certification 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. In the future, Daimler expects to spend an even larger portion of its research and development budget to ensure compliance with these regulations. Nonetheless, it has been possible to reduce the assessment of risks and opportunities related to the legal and political framework to “low” for the probability of occurrence. This is mainly because issues for the year 2018 have been taken into consideration in the planning. The potential impact of the risks and opportunities remains unchanged at “high.”

Many countries and regions have already implemented stricter regulations to reduce vehicles’ emissions and fuel consumption or are currently preparing such laws. They relate for example to the environmental impact of vehicles, including emission levels, fuel economy and noise, as well as pollutants from the emissions caused by the production facilities. Noncompliance with regulations applicable in the various regions might result in significant penalties and reputational harm and in the case of violations of regulations concerning vehicles’ environmental compatibility, might even mean that vehicles could not be or could no longer be registered in the relevant markets. The cost of compliance with these regulations is significant, especially for conventional engines, and Daimler expects a significant increase in costs in this context.

The Mercedes-Benz Cars segment faces risks with respect to regulations on average fleet fuel consumption in the Chinese market. In the European Union, the EU Commission made an ambitious proposal in November 2017 on future regulations concerning the CO2 emissions of new vehicles (period of 2021 to 2030). Legislation in the United States on greenhouse gases and fuel consumption impacts German premium manufacturers and thus also the Mercedes-Benz Cars division harder than US manufacturers, for example. Similar legislation exists or is being prepared in many other countries, as 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 proportions 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.

If the negative headlines on diesel engines and the threat of driving bans on diesel vehicles were to unsettle customers, resulting in lasting shifts in the drive-system portfolio (fewer diesel and more gasoline engines), additional development and production measures would have to be taken to meet the CO2 fleet limits applicable as of 2020. On the other hand, differentiating bans in cities that privilege diesel vehicles with good emission levels could result in competitive advantages for our new 4 and 6-cylinder engines (OM 654 and OM 656) with their very good exhaust emissions.

Pursuant to EU Directive 2006/40/EC, since January 1, 2011, vehicles only receive type approval if their air-conditioning units are filled with a refrigerant that meets certain criteria with regard to climate friendliness. For vehicles produced on the basis of type approvals granted previously, the directive allowed a period of transition until December 31, 2016. Mercedes-Benz vehicles fully comply with these legal requirements as of January 1, 2017 through the application of CO2 air-conditioning and the refrigerant R1234yf in combination with a specially developed safety device that will be used depending on each vehicle’s configuration. In December 2016, the EU Commission initiated infringement proceedings against the Federal Republic of Germany in the European Court of Justice (ECJ). The Commission sees a contravention of the European type-approval directive and of the Directive on emissions from air-conditioning systems in motor vehicles by the German authorities. In March 2017, Germany’s Federal Motor Vehicle Transport Authority issued Daimler AG with an injunction requiring the changeover of those vehicles from the first half of 2013 in which the previously used refrigerant R134a was used for reasons of safety. Daimler considers the claim to be unfounded and has filed an objection to the order. At present, the Group does not assume that these issues will result in material effects on its profitability, cash flows or financial position.

Strict regulations for the reduction of vehicles’ emissions and fuel consumption create potential risks also for the Daimler Trucks and Daimler Buses divisions, because it will be hard to fulfill the statutory requirements in some countries. For example, legislation has been in effect in Japan since 2006 and in the United States since 2011 on the reduction of greenhouse-gas emissions and fuel consumption by heavy-duty commercial vehicles. In China, fuel-consumption legislation was drafted in 2017 which affects our exports of heavy-duty trucks to that country with strict requirements as of 2019/2020. The European Commission is currently working on methods for measuring the CO2 emissions of heavy-duty commercial vehicles that will have to be applied as of 2019. It has also decided to present a standard for limiting heavy-duty commercial vehicles’ CO2 emissions in the first half of 2018. We expect that the limits to be confirmed by the EU Parliament and Council will have to be met as of approximately 2025. Other countries such as India, South Korea and Brazil are also working on draft proposals for reducing the fuel consumption of heavy-duty commercial vehicles.

Furthermore, many countries such as China, India and Brazil are working on the regulation of emissions, which will raise their standards at least to the level of Euro VI limits. Daimler Trucks and Daimler Buses will therefore have to apply the latest technologies in order to fulfill these requirements.

Very demanding regulations for CO2 emissions are also planned or have been approved for light commercial vehicles. This will present a challenge for Mercedes-Benz Vans, especially in the long term. In the United States, Mercedes-Benz Vans is affected to varying degrees by fuel-consumption and greenhouse-gas regulations for both light-duty and heavy-duty vehicles. The stricter limits planned for the years 2021 to 2027 will also affect Mercedes-Benz Vans. The proposals presented by the EU Commission in November 2017 for limiting the CO2 emissions of light commercial vehicles, if confirmed by the EU Parliament and Council, are very ambitious.

In addition to the described emission and fuel-consumption regulations, traffic-policy restrictions for the reduction of traffic jams, noise and emissions are becoming increasingly important in cities and urban areas worldwide. In China for example, limited access to vehicle registration is continuing, and now also imported plug-in hybrid vehicles are being specifically excluded from access to registration (e. g. in Beijing, Guangzhou and Shenzhen). This development can have a dampening effect on the development of unit sales, especially in growth markets. Pressure to reduce personal transport is increasingly being applied in European cities through discussions of bans on vehicles entering or driving in inner cities, especially those with diesel engines.

These discussions or bans on vehicles with conventional drive systems can increase demand for vehicles with alternative drive systems, especially for electric vehicles, as well as for mobility services including car-sharing services. In order to utilize the resulting opportunities, Daimler is present in the market with the provision of innovative mobility services (including car2go, moovel, mytaxi and Via).

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. If bilateral agreements are concluded without the involvement of the European Union or without the conclusion of equivalent agreements by the EU, the position of the Daimler Group could be significantly impacted. At the same time, EU free-trade agreements could also result in opportunities for the Daimler Group vis-à-vis competitors in countries which are not parties to such agreements.

Furthermore, the danger exists that individual countries will attempt to defend and improve their competitiveness in the world’s markets by resorting to interventionist and protectionist actions. This applies to the markets of developing countries and emerging economies, but also to Europe, the United States and China, and is manifested above all in the form of local-content rules affecting the entire value chain. In addition, attempts are being made to limit growth in imports through barriers to market access such as by making certification processes more difficult, delaying certification and imposing other complicated customers procedures, while attracting direct foreign investment by means of appropriate industrial policies. Changes in tax subsidies or the like have the potential to significantly influence the overall market development and increase uncertainty in the planning process.

In order to adapt to these requirements, Daimler has already increased its local value added in major markets, and has thus taken appropriate action in good time. However, on the basis of our production locations’ increasing proximity to the various markets, further opportunities also exist for the Daimler Group, relating for example to the utilization of market potential or logistical advantages.

Company-specific risks and opportunities
Risks and opportunities