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.71.

B.71 Industry and business risks and opportunities

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

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 growth of the world economy to continue in 2020 at about the rate of the previous year. At the beginning of 2020, the relationship of risks and opportunities also seems similar to that in 2019. Economic developments in 2019 are described in detail in the »Economic Conditions and Business« section of this Management Report; growth assumptions and forecasts for general developments in 2020 are explained in the »Outlook« section.

Although the renewed escalation of the trade conflict between the United States and China has become less likely with the conclusion of the “Phase One” partial trade deal, it continues to be a significant risk for the further development of the world economy. Furthermore, the threat by the United States to impose additional tariffs on imported vehicles and parts, including from the European Union, still exists. These two factors could significantly affect the development of unit sales and earnings, especially at Mercedes-Benz Cars & Vans. In addition, there is a danger that countries will implement increasingly protectionist measures such as specific market-access barriers or industry-political concepts. This would have significant impacts on the global value chains at Mercedes-Benz Cars & Vans and Daimler Trucks and Buses, leading to higher costs and adversely affecting business developments and sales possibilities. 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.

Even without a further escalation of the various trade conflicts, the ongoing uncertainty could ensure that the global investment cycle weakens even more than previously assumed. A further slowdown in investment activity – particularly in North America and Europe – would adversely affect the unit sales of heavy-duty commercial vehicles in particular and would therefore have a particularly negative impact on the unit sales and profitability of Daimler Trucks & Buses.

If the recession, which has so far been limited to the industrial sector, spreads more to the service sector and spreads even more than before to the United States, in addition to the euro zone and China, this would have noticeable effects on employment and wages in those regions. This would have a significant impact on consumer confidence and consumption, one of the most important drivers of the current economic expansion. The resulting lower growth or even decline in overall economic consumption would have a correspondingly negative impact on the sales prospects of Mercedes-Benz Cars & Vans in particular. Opportunities would arise, however, if the cyclical downturn in the industry ended earlier than expected.

The European market will continue to be of great importance for all segments of the Daimler Group in the future, so changes in investment and consumer behavior will affect the development of unit sales in all segments. The risk of a disorderly withdrawal of the United Kingdom from the European Union due to the Brexit of January 31, 2020 and the related exit agreement no longer exists. However, uncertainty is now likely to shift to the negotiations on a future agreement between the UK and the EU, which according to the transitional agreement would have to be concluded by the end of 2020 in order to prevent customs duties as of January 2021. These negotiations are likely to be very difficult and connected with a high degree of political uncertainty. In extreme cases, renewed distortions in the European financial markets and corresponding decreases in economic growth are to be expected. This would significantly impact growth above all in the United Kingdom, with an adverse effect on the development of the Group’s unit sales across all segments. In the euro zone, the risk of political conflicts also remains increased. Phases of political uncertainty could have a negative impact on consumption and investment decisions by households and companies. On the other hand, if there is concerted fiscal stimulus in the euro zone or if the ECB’s expansionary measures have a greater impact than currently assumed, this could lead to a stronger recovery in growth, with positive effects on companies and households.

In the United States, political uncertainty in the run-up to the presidential elections and ongoing trade tensions could lead to a more pronounced reduction in corporate investment than previously assumed. This would have a particularly negative effect on the unit sales of the Daimler Trucks & Buses segment. If, as already mentioned, the overall economic growth slowdown were to be more pronounced than previously expected, consumption by private households would also suffer significantly due to negative employment and income effects. This in turn could have a negative impact on the unit sales of Mercedes-Benz Cars & Vans. On the opportunities side, economic and fiscal policy in the run-up to the presidential election could turn out to be more expansive than previously assumed. In addition, the US central bank could further reduce key interest rates, contrary to current expectations. If investment activity should subsequently become significantly more dynamic, resulting in stronger growth combined with positive employment and income effects, demand could benefit in all automotive segments. As Mercedes-Benz Cars & Vans, Daimler Trucks & Buses and Daimler Mobility generate substantial proportions of their revenues in the United States, these developments would have considerable consequences for the Group’s success. Furthermore, stronger economic growth in the United States would also have spillover effects on the rest of the world.

In general, public and private debt remains high in many economies. In the event of a more pronounced economic downturn, this could limit the scope for governments to take fiscal countermeasures or lead to increased defaults by companies and households. This would lead to increased instability in the financial markets and also adversely affect overall economic demand, with negative effects on the unit sales of the Daimler Group’s segments.

From an economic perspective, the high indebtedness of Chinese companies, especially state-owned enterprises, also represents a considerable 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 could result in an excessive increase in credit defaults, which would then lead to turbulences in the banking sector and the financial markets. In particular at the Mercedes-Benz Cars & Vans segment, for which China is now one of the biggest sales markets, the aforementioned risks could result in significant negative effects on unit sales. On the other hand, growth in 2020 triggered by further stimulus measures by the Chinese government could turn out to be stronger than expected. The resulting stronger growth in overall economic consumption would offer additional opportunities, especially for Mercedes-Benz Cars & Vans.

The outbreak of the coronavirus may result in macroeconomic risks that could lead to significant reductions in economic growth in China, other Asian economies and also worldwide. Risks for the Daimler Group may not only affect the development of unit sales, but may also lead to significant adverse effects on production, the procurement market and the supply chain.

Another risk is that the pressure on the emerging markets could intensify further if underlying sentiment in the financial markets deteriorates significantly. In such a case, even more capital would flow out of the emerging markets. Growth in the emerging markets would then be significantly weaker and put pressure on global growth. Furthermore, changes in central-bank policy in the developed and emerging markets to support economic development (such as currency devaluation) entail a high risk. Although the risk of a debt crisis in the emerging markets – triggered by US interest-rate rises and the resulting higher interest burden due to the predominance of US dollar debt – has recently been reduced by the US Federal Reserve’s shift to a looser monetary policy, it has not been fully resolved. Possible crises in individual countries would have a noticeable impact on sales prospects in those markets and possible also on conditions for the Group’s local operations.

Although oil prices fell significantly last year, if political crises – especially in the Middle East – and ensuing temporary supply bottlenecks lead to a significant rise in oil prices that OPEC countries are unable to offset in the short term, inflation could rise significantly and adversely affect global growth. Moreover, an escalation of geopolitical conflicts in other regions of the world could also significantly slow down global economic growth.

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 segments of the Daimler Group.

Potential effects of the risks on the development of unit sales are included in risk scenarios. Increasing customer demand for model series with lower profit margins can have a negative impact on the earnings of the segments concerned. Causes of declining vehicle sales may result in particular from the partially unstable economic environment and in the context of political or economic uncertainties. A rising oil price and volatile exchange rates can also lead to market uncertainty and thus to falling demand. Differences between the segments exist due to the partly varying regional focus of their activities. The development of markets, unit sales and inventories is continually analyzed and monitored by the segments; 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 business opportunities in the market. Opportunities may also arise from an improvement in the competitive situation or a positive development of demand for the segments, utilization of which is supported by sales and marketing campaigns.

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 financial situation of strategically relevant dealerships and vehicle importers is continuously monitored; if necessary, alternative sales channels are created. Further risks result from the dependency on certain dealerships, so in certain circumstances, relationships with new business partners may have to be developed. The loss of important dealerships and vehicle importers can lead to customer demand not being fully served and lower unit sales. Risks of this kind exist for dealerships and vehicle importers of Mercedes-Benz Cars & Vans and Daimler Trucks & Buses.

The launch of new products by competitors, more aggressive pricing policies and poorer price enforcement in the aftersales business can lead to increasing competitive and price pressure in the automotive segments. 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. Daimler also applies various programs to boost sales, which include financial incentives for customers.

In connection with the sale of vehicles, Daimler offers its customers a wide range of financing and leasing options. The resulting risks for the Daimler Mobility segment are mainly due to borrowers’ worsening creditworthiness, so receivables might not be recoverable in whole or in part because of customers’ insolvency (default or credit risk). Daimler counteracts credit risks by means of creditworthiness checks on the basis of standardized scoring and rating methods, the collateralization of receivables, as well as an effective risk management with a firm focus on monitoring both internal and macroeconomic leading indicators.

In connection with leasing agreements, risks and opportunities arise if the market value of a leased vehicle at the end of the agreement term differs from the residual value originally calculated and forecasted at the time the agreement was concluded and used as a basis for the leasing installments. A residual-value risk arises if the expected market value of a vehicle at the end of the contract term is lower than the residual value calculated and forecasted when the contract was concluded. Particularly at Mercedes-Benz Cars & Vans and Daimler Mobility, risks therefore result from the development of the used car markets and thus from the residual values of the vehicles produced. Above all, the existing uncertainties 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. This can adversely affect the proceeds from the sale of used cars. Appropriate measures are defined to counteract these risks. 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 lower price reductions granted on new vehicles.

In addition, a residual-value risk from non-Daimler vehicles exists for the Daimler Mobility companies that operate commercial fleet management and leasing management, because most of those vehicles are not covered by manufacturers’ residual-value guarantees. The negative development of sale prices for used cars on stock can adversely affect earnings. 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 forecasted in good time and suitable countermeasures may be initiated.

Across all segments, the assessment of general market risks is unchanged compared to the previous year. However, due to increasing political and economic uncertainty, the impact of market opportunities has increased from “Low” to “Medium” due to a potential increase in demand in the automotive segments. The risks and opportunities shown in the previous year under “Risks and opportunities relating to the leasing and sales-financing business” have been integrated into the section “General market risks and opportunities” for the current financial year.

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, safety 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 possible impact and probability of occurrence of risks from the legal and political framework is unchanged compared to the previous year. However, the assessment of the possible impact of the opportunities has increased from “Low” to “Medium”.

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

Mercedes-Benz Cars & Vans faces risks with respect to regulations on mandatory targets for 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, like for example the battery-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 cost-intensive development and production measures in order to meet the CO2 fleet limits applicable as of 2020.

The EU Commission is still revising, and amending or supplementing, the framework conditions for the WLTP measurement method, which has been applicable since September 2018. This may result in increased and additional WLTP testing and documentation costs.

Due to a procedural error in the legislation, the Court of the European Union has at first instance annulled parts of the Real Driving Emissions (RDE) legislation and has given the legislators 12 months from the date of the decision on the appeal to amend the contested parts of the regulation. If the appeal against the ruling is unsuccessful, the new regulation could pose significant risks to the eligibility of vehicles for registration, also of the Daimler Group. In the worst case, the new vehicles concerned, also of the Daimler Group, would no longer be allowed to be registered and operated throughout the EU. In parallel with these proceedings, a solution acceptable to all sides is being sought in the political process (trilogue).

Strict regulations for the reduction of vehicles’ emissions and fuel consumption also create potential risks for Daimler Trucks & Buses, because it will be difficult to fulfill the statutory requirements in some countries. Above all this applies 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 has been mandatory for the most important vehicle categories since January 1, 2019. The prescribed level of CO2 reduction in Europe of 15 % by 2025 and 30 % by 2030, in each case compared to the new-vehicle fleet in the period of July 2019 to June 2020, cannot be achieved with conventional technology alone. Daimler Trucks & Buses will therefore have to apply the latest technologies in order to fulfill these requirements. Achieving the 2025 target will require significant shares of battery-electric trucks or other electrified drive systems in the actual market, which may only be achievable at higher costs.

The position of the Daimler Group in key foreign markets could also be affected by an increase in or changes in freetrade agreements. If free-trade agreements are concluded without the participation of countries in which Daimler has production facilities, this could result in a competitive disadvantage for Daimler compared with competitors that produce in those countries that participate in the free-trade agreements. In addition, if the content of the freetrade agreements currently used by Daimler is made significantly stricter, this could also significantly impair the position of the Daimler Group, as the Group could no longer benefit from those free trade agreements. At the same time, however, the conclusion of new free trade agreements could also result in opportunities for the Daimler Group vis-à-vis its competitors, if the competitors do not produce in the countries concerned, but Daimler does.

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 measures. Furthermore, interruptions in the supply chain due to potential trade conflicts cannot be ruled out. Industrial policy measures are intended to attract investment into a country and increase local value added along the entire value chain. This can lead to increased costs if production facilities have to be established or expanded or local purchasing has to be increased. 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; they can also lead to lower unit sales if importing is made more difficult.

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. 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 developments may dampen the development of unit sales, especially in the growth markets. In European cities, discussions about driving bans are increasingly intensifying the pressure to reduce individual transport, especially for vehicles with diesel engines. This may in turn lead to more demand for vehicles with alternative drive systems.

Daimler continuously 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.

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. Potential claims from suppliers due to the premature termination of development and production agreements by the Daimler Group may also lead to decreased earnings. This risk situation has not changed in terms of probability of occurrence and possible impact compared to the previous year. The impact of the opportunities is also unchanged.

The automotive segments of the Daimler Group require certain raw materials for the manufacture of vehicle components and vehicles, which are purchased on the world market. The level of costs depends on the price development of raw materials. Due to largely unchanged macroeconomic conditions, price fluctuations are expected with uncertain and inconsistent trends also for the year 2020. For example, raw-material markets can be impacted by political crises and uncertainties – combined with possible supply bottlenecks – as well volatile demand for specific raw materials. Potential tariff increases for certain raw materials as a result of increasing protectionist tendencies worldwide can have a negative impact on price developments. In general, the ability to pass on the higher costs of commodities and other materials in form of higher prices for manufactured vehicles is limited because of strong competitive pressure in the international automotive markets. Rising raw-material prices may therefore have a negative impact on the margins on the vehicles sold and thus lead to lower earnings in the respective segment.

The financial situation of some suppliers remains tense due to the gloomy market environment. The resulting possible production losses at suppliers may cause an interruption in the supply chain of the Daimler Group’s automotive segments and prevent vehicles from being completed and delivered to customers on time. In order to counteract such interruptions in the supply chain, support measures may be necessary to ensure production and sales by suppliers. Supplier risk management aims to identify potential financial bottlenecks for suppliers at an early stage and to initiate suitable countermeasures. Specifically, depending on the warning signals recorded and the internal classification, regular reporting dates are agreed upon for suppliers at which key performance indicators are reported to Daimler and any support measures can be determined if necessary.

Due to the planned electrification of new model series and a shift in customer demand from diesel to gasoline engines, Mercedes-Benz Cars & Vans 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 suppliers cannot cover their fixed costs, there is the risk that they may demand compensation payments. Necessary capacity expansion at suppliers’ plants could also require cost-effective participation.

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Risks and opportunities specific to the Group
Risks and opportunities