This section explains the specific risks arising from our business activities in the coming years.
We believe the biggest risks to continued global economic expansion consist primarily of unanswered questions surrounding the resolution of the European and US debt crises and the future institutional structures in the eurozone. Imbalances in foreign trade and volatile financial markets are also contributing to a high level of uncertainty. Added to this are geopolitical risks resulting from tensions in the Middle East and North Africa, which could impact negatively on the trend in energy and commodity prices.
Due to the persistent structural challenges in the industrialized nations, a climate of uncertainty remains in evidence in the international markets. This is indicated by a lack of investment by businesses and hesitant lending on the part of commercial banks. This has a considerable impact on the Volkswagen Group’s risk position.
We see further risks in protectionist tendencies in the economic policies adopted by certain countries, which could lead to the implementation of trade restrictions and hence hinder the international exchange of goods.
We consider the risk of renewed global recession to be relatively low, but see the possibility of a prolonged period of below-average growth due to the factors mentioned.
The growth markets of Asia, South America, and Central and Eastern Europe are particularly important in terms of the global trend in demand for passenger cars. Although these markets harbor the greatest potential, the overall environment in some of the countries in these regions makes it difficult to increase unit sales figures there. Some have high customs barriers or minimum local content requirements for domestic production, for example. Following the reduction in the number of new vehicles allowed to be registered in places such as Beijing, further restrictions on registrations could enter into force in other Chinese metropolitan areas as well. Furthermore, the global economic slowdown could impact negatively on consumer confidence in some of these countries. Likewise, we cannot entirely rule out the risk of freight deliveries being shifted from commercial vehicles to other means of transport and of demand for the Group’s commercial vehicles falling as a result.
Price pressure in established automotive markets is a particular challenge for the Volkswagen Group as a supplier of volume and premium models due to its high level of market coverage. If global economic conditions deteriorate, competitive pressures are likely to increase further. Manufacturers will respond by offering price discounts in order to meet their sales targets, thereby putting the entire sector under pressure, particularly in Western Europe, the USA and China.
Western Europe is one of the Volkswagen Group’s main sales markets. A combination of a drop in prices due to the economic climate and a fall in demand in this region would therefore have a particularly strong impact on the Company’s earnings. Volkswagen counters this risk with a clear, customer-oriented and innovative product and pricing policy. Outside Western Europe, its overall delivery volume is broadly diversified throughout the world. The Chinese market accounts for an increasing share of the volume. In addition, we are already market leader in numerous existing and developing markets or are working resolutely to take pole position. Moreover, strategic partnerships help us to increase our presence in the relevant countries and regions and cater to requirements there.
The global economic climate deteriorated noticeably during the reporting period. The resulting challenges for our trading and sales companies, for example efficient warehouse management and the profitability of the dealer network, are considerable. They meet them by taking appropriate measures. Although it remains difficult to finance business activities through bank loans, our financial services companies offer dealers financing on attractive terms with the aim of bolstering their business model and reducing operational risk. We have also developed and installed a comprehensive liquidity risk management system so that we can promptly counteract any liquidity bottlenecks at the dealers’ end that could hinder smooth business operations.
We continue to approve loans for vehicle finance on the basis of the same cautious principles applied in the past, taking into account the regulatory requirements of section 25a(1) of the KWG.
Volkswagen may be exposed to increased competition in aftermarkets for two reasons: firstly, because of the provisions of the new Block Exemption Regulation, which have been in force for after-sales service since June 2010, and, secondly, because of the amendments included in EU Regulation 566/2011 dated June 8, 2011 expanding independent market participants’ access to technical information.
The European Commission is planning to end design protection for visible vehicle parts. If this plan is actually implemented, it could adversely affect the Volkswagen Group’s genuine parts business.