Financial risks and opportunities

The following section deals with financial risks and opportunities of the Daimler Group. Risks and opportunities can have a negative or positive effect on the profitability, cash flows and financial position of the Daimler Group. The probability of occurrence and possible impact of these risks and opportunities is presented in table B.66. The probability of occurrence and impact of the financial risks and opportunities are essentially unchanged from the previous year. Only the impact of risks of limited access to the capital market have increased from “Medium” to “High”.

B.66 Financial risks and opportunities

Risk category Probability of occurrence Impact Opportunity category Impact
Exchange rate risks Low High Exchange rate opportunities High
Interest rate risks Low Low Interest rate opportunities Low
Commodity price risks Low Low Commodity price opportunities Low
Credit risks Low Low Credit opportunities
Country risks Low Low Country opportunities
Risks of restricted access
to capital-market
Low High Opportunities of restricted access
to capital-market
Risks of early credit
repayment obligations
Low Low Opportunities of early credit
repayment obligations
Risks relating to pension plans Low High Opportunities relating to pension plans High
Risks from changes in credit ratings Low Low Opportunities from changes in credit ratings Low

In principle, the Group’s operating and financial risk exposures underlying its financial risks and opportunities can be divided into symmetrical and asymmetrical risk and opportunity profiles. With the symmetrical risk and opportunity profiles (e.g. currency exposures), risks and opportunities exist equally, while with the asymmetrical risk and opportunity profiles (e.g. credit and country exposures), the risks outweigh the opportunities.

Daimler is generally exposed to risks and opportunities from changes in market prices such as currency exchange rates, interest rates, commodity prices and share prices. Market price changes can have a negative or positive influence on the Group’s profitability, cash flows and financial position. Daimler manages and monitors market price risks and opportunities primarily in the context of its operational business and financing activities, and applies derivative financial instruments for hedging purposes where needed, thus limiting both market price risks and opportunities.

In addition, the Group is exposed to credit and country-related risks, risks of restricted access to capital markets and risks of early credit repayment requirements. As part of the risk management process, Daimler regularly assesses these risks by considering changes in key economic indicators and market information. Pension plan assets to cover retirement and healthcare benefits (market-sensitive investments including equities and interest-bearing securities) are not included in the following analysis.

Exchange rate risks and opportunities

The Daimler Group’s global orientation means that its business operations and financial transactions are connected with risks and opportunities related to fluctuations in currency exchange rates. This applies in particular to fluctuations against the euro of the US dollar, Chinese renminbi, British pound and other currencies such as those of growth markets. An exchange rate risk or opportunity arises in business operations primarily when revenue is generated in a currency different from that of 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 denominated in euros. The Daimler Trucks division is also exposed to such transaction risks, but to a lesser degree because of its worldwide production network. Regularly updated currency risk exposures are successively hedged with suitable financial instruments (predominantly currency forwards and options) in accordance with exchange rate expectations, which are continually reviewed, whereby both risks and opportunities are limited. Any overcollateralization caused by changes in exposure is generally reversed by suitable measures without delay. Exchange rate risks and opportunities 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 generally not hedged.

Interest rate risks and opportunities

Changes in interest rates can create risks and opportunities for business operations as well as for financial transactions. Daimler employs a variety of interest-rate sensitive financial instruments to manage the cash requirements 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. Term-congruent refinancing is generally undertaken for the financial services business. However, to a certain 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 centrally at Group level. Derivative interest rate instruments such as interest rate swaps are used to achieve the desired interest rate maturities and asset/liability structures (asset and liability management).

Equity price risks and opportunities

The Group is subject to equity price risks in connection with its listed associated companies and joint ventures. At December 31, 2018, the shares in listed companies that Daimler AG directly holds are shares that are classified as long-term investments, some of which are accounted for in the consolidated financial statements using the equity method. The Group does not include these investments in a market price risk analysis. The section “Risks and opportunities related to associated companies, joint ventures and joint operations” provides more information on equity risks and opportunities.

Commodity price risks and opportunities

As already described in the section “Procurement market risks and opportunities”, the Group’s business operations are exposed to changes in the market prices of purchased parts and raw materials. The Group addresses these procurement risks by means of concerted commodity and supplier risk management. Some of the derivative financial instruments are used to reduce the Group’s market price risks related to the purchase of certain metals.

Credit risks

The Group is exposed to credit risks which result primarily from its financial services activities and from the operations of its vehicle business. Credit risks also arise from the Group’s liquid assets. The following statements pertain to risks arising from the Group’s liquid assets; risks related to leasing and sales financing are addressed on the Risk and Opportunity Report. Should defaults occur, this would adversely affect the Group’s financial position, cash flows and profitability. The limit methodology for liquid funds deposited with financial institutions has been continually further developed in recent years. In connection with investment decisions, priority is placed on the borrowers’ very high creditworthiness and on balanced risk diversification. Most liquid assets are held in investments with an external rating of “A” or better.

Country risks

Daimler is exposed to country risks that primarily result from cross-border financing or collateralization for Group companies or customers, from investments in subsidiaries, joint ventures, and from cross-border trade receivables. Country risks also arise from cross-border cash deposits with financial institutions. The Group addresses these risks by setting country limits (e.g. for cross-border financing of customers and for hard-currency portfolios from financial services companies) and through investment-protection insurance against political risks in high-risk countries. Daimler also has an internal rating system that divides all countries in which it operates into risk categories.

Risks of restricted access to capital markets

Daimler covers its refinancing needs, among other things, by means of borrowing in the capital markets. Access to capital markets in individual countries may be limited by government regulations or by a temporary lack of absorption capacity. In addition, pending legal proceedings as well as Daimler’s own business policy considerations may temporarily prevent the company from covering any liquidity requirements by means of borrowing in the capital markets. The increased planned refinancing volume compared with 2018 has also increased the possible impact of the risk of limited access to the capital market in 2019.

Risks of early credit repayment obligations

Daimler may be required to make premature repayment of special-purpose loans in the case of adverse results of ongoing legal proceedings. It is to be expected that the resulting refinancing requirement will have to be concluded at a higher cost.

Further information on financial risks, risk-limiting measures and the management of these risks is provided in Note 33 of the Notes to the Consolidated Financial Statements. Information on the Group’s financial instruments is provided in Note 32 of the Notes to the Consolidated Financial Statements.

Risks and opportunities relating to pension plans

Daimler has pension benefit obligations and to a lesser degree obligations relating to healthcare benefits, which are largely covered by plan assets. The balance of pension obligations less plan assets constitutes the carrying amount or funded status of those employee benefit plans. The measurement of pension obligations and the calculation of net pension expense are based on certain assumptions. Even small changes in those assumptions particularly change in the discount rate have a negative or positive effect on the funded status and Group equity in the current financial year, and lead to changes in the periodic net pension expense in the following financial year. The fair value of plan assets is determined to a large degree by developments in the capital markets. Unfavorable or favorable developments, especially relating to equity prices and fixed-interest securities, reduce or increase the carrying value of plan assets. A change in the composition of plan assets can also have a positive or negative impact on the fair value of plan assets. The broad diversification of investments, the selection of asset managers on the basis of quantitative and qualitative analyses, and the ongoing monitoring of returns and risks contribute to a reduction in the investment risk. The structure of pension obligations is taken into consideration with the determination of the investment strategy for the plan assets in order to reduce fluctuations of the funded status. Further information on the pension plans and their risks is provided in Note 22 of the Notes to the Consolidated Financial Statements.

Risks and opportunities from changes in credit ratings

Risks and opportunities exist in connection with potential downgrades or upgrades to credit ratings by the rating agencies, and thus to Daimler’s creditworthiness. Downgrades could have a negative impact on the Group’s financing if such a downgrade leads to an increase in the costs for external financing or restricts the Group’s ability to obtain financing. A credit rating downgrade could also discourage investors from investing in Daimler AG. A risk to the credit rating of the Daimler Group can also arise if the earnings and cash flows from the anticipated Group’s growth cannot be realized.

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Risks from guarantees and legal risks
Risks and opportunities specific to the Group