Industry and business risks and opportunities

The following section describes industry and business risks and opportunities of the Daimler Group. A quantification of these risks and opportunities is shown in table B.64.

B.64 Industry and business risks and opportunities

Risk category Probability of occurrence Impact Opportunity category Impact
General market risks Low High General market opportunities Low
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 Medium
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 vehicle sales markets and thus on the Group’s success.

Like the majority of economic research institutes, Daimler expects the upswing of the world economy to continue in 2019, although with less dynamism than in the two previous years. Economic developments in 2018 are described in detail in the Economic Conditions and Business section of this Management Report; growth assumptions for 2019 are explained in the Outlook section.

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 2019 seems to be somewhat less favorable than in the previous year.

The escalation of the trade conflict between the United States and China continues to be one of the main risks. But the threat of US tariffs on vehicles and parts imported from other markets, including the European Union, could also affect existing global value chains and have a negative impact on sales opportunities and economic developments. Furthermore, there is a danger that countries will implement increasingly protectionist measures such as specific market-access barriers or industrial policy instruments. Should these trade tensions spread and massively affect global trade, there would be significant impacts on inflation, business climate, consumer confidence and ultimately also on global economic growth. On the other hand, unforeseen trade facilitations could provide positive impulses and lead to more trade and higher growth. In that case, the Daimler Group could also benefit from preferential trade conditions.

In the United States, economic and fiscal policy could turn out to be more expansive than previously assumed. 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. The disadvantages of such an expansionary fiscal policy are the further worsening of the debt situation in the United States and the risk that inflation will rise more significantly than currently expected, due not least to rising wages and a labor market close to full employment. This would force the Federal Reserve to raise federal funds rates more sharply than expected by the market, which would directly weaken domestic demand. As a further consequence, increasing volatility in the financial markets could adversely affect investor confidence, leading to widespread sales of equities and thus triggering a chain reaction on stock markets, with major market adjustments and phases of exceptional volatility in global financial markets.

In Europe, the further development of relations between the European Union and the United Kingdom represents a significant risk. If the negotiated exit agreement is not approved by the British parliament and as a result, there are neither further negotiations nor a complete cancellation of Brexit, a disorderly withdrawal in spring 2019 is at least possible. This would have a massive impact on the UK economy and, probably to a lesser extent, on the remaining EU member states, and would make trading conditions more difficult. Furthermore, if financial-market participants are not sufficiently prepared, noticeable market distortions cannot be ruled out, which would have significant negative effects on the real economy. Besides that, increased political uncertainty in the euro zone, for example as a result of developments in Italy, could adversely affect consumption and investment decisions by households and companies. The European market continues to be very important for Daimler across all divisions.

Due to China’s enormous importance as a growth driver for the world economy in recent years, a downturn in the Chinese economy would represent a considerable risk to the global economy. The enormous rise 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 in combination with the negative impact of US tariffs on imports from China 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 a major increase in non-performing loans, which would then lead to turbulences in the banking sector and financial markets. The aforementioned risks could result in significant negative effects on units sales, particularly for the Mercedes-Benz Cars division, for which China is now the biggest individual sales market by a large margin. On the other hand, triggered by the stimulus measures announced by the Chinese government, growth in 2019 could also turn out stronger than expected. The resulting higher growth in overall economic consumption would offer additional opportunities, especially for the Mercedes-Benz Cars division.

Pressure on the emerging markets could increase if more countries were affected by massive capital outflows and exchange-rate losses, or if the currency crises in Argentina and Turkey turn into significant banking crises. In such cases, global investors would withdraw capital from emerging markets on a large scale, which would probably force those countries with large foreign-trade imbalances to make painful adjustments. Renewed financial-market turbulences and currency crises are possible consequences and could have a massive impact on the economies of affected countries. Lower growth in world trade and lower raw-material prices (e.g. a drop in the oil price) than currently forecast would also 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 negative effects on the Group’s prospective unit sales. However, import-dependent economies such as India would benefit from lower raw-material prices. An excessive and sudden rise in oil prices, for example as a result of geopolitical tension, would increase inflationary pressure and cause central banks to raise interest rates more rapidly, with negative effects on sentiment indicators and consumer behavior.

In view of the ongoing positive economic situation in many parts of the world, the opportunity exists that the world eco­nomy will actually grow at a higher rate than hitherto assumed in 2019. A stronger increase in global demand would also support raw-material prices and would have positive effects on raw-material exporters in South America, the Middle East and Africa.

Further risks are related to geopolitical tensions, terrorist attacks or assassinations in Europe or other major economies, which could adversely affect global trade and international capital markets for a prolonged period.

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, the related vehicle sales and inventories, and the aftersales business. In particular, the partially unstable macroeconomic environment as well as political or economic uncertainty could be causes in this context. A rising oil price and volatile exchange rates can also lead to market uncertainty and thus to falling demand. 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 uncertainties may result in a change in customer demand which could negative affect on sales of diesel vehicles and can lead to a possibly drop in 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.

Volatilities with regard to market developments can also lead to the overall market or regional conditions for the automotive industry developing better than assumed in the internal forecasts and premises, and to business opportunities in the market. 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 as well as in the necessary infrastructure investments that have been made for sales of new products. Supporting actions can 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 can be adjusted. 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 shares. 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 discounts 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.

Across all segments, the assessment of general market risks is unchanged compared with the previous year. However, due to increasing political and economic uncertainty, the impact of market opportunities has decreased from “High” to “Low”.

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 33 of the Notes to the Consolidated Financial Statements.

Possible 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 possible impact 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. Disagreements with suppliers regarding the agreed pricing of supplies and the supplied quality can also lead to procurement market risks. The risk situation relating to the possible impact has not changed compared with the previous year. However, the probability of occurrence has risen from “Low” to “Medium” due to the threat of tariff increases on certain raw materials. Opportunities in the raw-material markets continue to exist due to positive price developments for relevant raw materials. Compared with the previous year, the impact of those opportunities has increased from “Low” to “Medium” as a result of more optimistic assumptions concerning the future development of raw-material prices.

Raw-material prices continued to feature significant volatility in 2018. 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. Potential tariff increases for certain raw materials as a result of increasing protectionist tendencies worldwide can also have a negative impact on price developments. Generally, the ability to pass on the higher costs of commodities and other materials in the form of higher prices for 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 can be 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 underutilization 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 relating to the legal and political framework

The automotive industry is subject to extensive governmental regulation worldwide. Legal and political framework have a considerable impact on Daimler’s future business success. Regulations concerning vehicles’ emissions, fuel consumption and certification as well as tariff aspects 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 proportion of its research and development budget to ensure compliance with these regulations. The probability of occurrence of risks from the legal and political framework has increased from “Low” to “Medium”. This is mainly due to risks from more difficult certification processes and delays in certification, as well as the threat of increased tariffs. The potential impact of these risks remains unchanged at “High”. The assessment of the possible impact of the opportunities is also unchanged at “Low”.

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 risks and 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 further increase in costs in this context.

The Mercedes-Benz Cars segment faces risks with respect to regulations concerning the average fleet fuel consumption and CO2 emissions of new vehicles, especially in the markets of China, Europe and the United States. Daimler gives these targets due consideration in its product planning. The increasingly ambitious targets require significant proportions of actual unit sales of plug-in hybrids or cars with other types of electric drive. The ambitious statutory requirements will be difficult to fulfill in some countries. The market success of these drive systems is greatly influenced not only by customer acceptance but also by regional market conditions, for example the charg­ing infrastructure and state support.

As the negative headlines on diesel engines and the implementation of driving bans on diesel vehicles unsettle customers, this can result in lasting shifts in the drive-system portfolio (fewer diesel and more gasoline engines). This would require additional development and production measures in order to meet the CO2 fleet limits applicable as of 2020.

The EU Commission is currently revising, amending or supplementing the framework conditions for the WLTP measurement method, which was only introduced in September 2018. Some of these changes are to come into force as early as 2019. This will result in increased and additional WLTP testing and documentation costs. In the worst case, recertification could also become necessary, which in turn could cause supply bottlenecks.

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 difficult to fulfill the statutory requirements in some countries. This applies above all to the markets of Japan, the United States, China and Europe. The European Commission has developed a method for determining the CO2 emissions of heavy commercial vehicles, named VECTO, the application of which will be mandatory for the most important vehicle categories as of 2019. The prescribed level of ambition cannot be achieved with conventional technology alone. 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, which will present a challenge for Mercedes-Benz Vans, especially in the long term. This applies in particular to the markets of the United States and Europe.

The position of the Daimler Group in key foreign markets could also be affected by an increase in or changes to free-trade agreements. If free-trade agreements are concluded without the involvement of countries where Daimler produces or if free-trade agreements are amended to make them substantially stricter, the position of the Daimler Group could be significantly impacted. At the same time, new free-trade agreements could also result in opportunities for the Daimler Group towards competitors in countries which are not parties to such agreements or which do not produce in those countries.

The danger exists that individual countries will attempt to defend or improve their competitiveness in the world’s markets by resorting to interventionist and protectionist actions. Industrial policy measures are intended to attract investment into a country and increase local value creation along 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 customs procedures. These measures generally exacerbate uncertainties in the planning process.

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 is actually worsening. 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, especially those with diesel engines.

Cities are becoming connected and are increasingly seeking partnerships with industry in order to cooperate on new mobility solutions. This can create a demand for vehicles with alternative drive systems, as well as for new 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.

In April 2018, the US Department of the Treasury’s Office of Foreign Assets Control announced sanctions against various individuals and companies. This may affect business activities of the Daimler Group, in particular with sanctioned business partners in Russia.

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 great challenge of the coming years will be to offer an appropriate range of drive systems and the right product portfolio in each market.

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Risks and opportunities specific to the Group
Risks and opportunities