APC 2012 Annual Report Download - page 36

2012 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC34
OVERVIEW OF THEGROUP’S STRATEGY, MARKETS AND BUSINESSES
1RISK FACTORS
The growth and success of theGroup’sproducts
depend on our ability todevelop new products
and solutions andadapt to market and
customerneeds
The sectors in which Schneider Electric operates have experienced
rapid and signifi cant changes due to the introduction of innovative
technologies. Introducing new products, systems and services,
which Schneider Electric must do on an ongoing basis to meet
customers’ needs, requires a signifi cant commitment to research
and development, which may not always lead to successful
results. The Group’s revenue and margins may suffer if we invest in
technologies that do not function as expected or are not accepted
in the marketplace or if our products, systems or service offers are
not brought to market in a timely manner, become obsolete or are
not responsive to our customers’ requirements.
To meet these challenges, the Group has an R&D budget which,
at 4 to 5% of revenue, is among the highest in the industry. R&D
and forward-looking engineering involves some 11,000employees
around the world, a number of them in development centers
located in over 26countries. This ongoing commitment has allowed
Schneider Electric to accelerate time to market and leverage the
technology of strategic partners with whom we have also forged
alliances to expand our line up and geographic coverage. The
Group has brought together all of its electrotechnical, electronic,
electromechanical, software and other technical competencies by
creating technology parks in China, the US, France and Japan.
Support centers have also been established in Mexico, India and
China to provide the technology parks with additional skills and
development capacity at a very competitive cost.
The Group’s business growth depends on its ability to develop,
deepen and enhance customer relationships. The Group must
constantly offer customers innovative solutions built around
high-quality products and solutions incorporating leading-edge
technologies that are closely tailored to customer needs and
expectations. However, the Group does not have any exposure to a
particular customer. Our ten largest customers represent less than
25% of total revenue.
Increasing customer satisfaction rates represents an important
source of competitive advantage for Schneider Electric. We closely
track the results of the quarterly surveys conducted in more than
80countries among all types of customers. Improvement targets
are set for each country , backed by specifi c action plans and
progress monitoring procedures.
Schneider Electric’s strategy involves growth
through acquisitions and mergers that
arepotentially difficult to execute
The Group’s strategy involves strengthening its positions through
acquisitions, strategic alliances, joint ventures and mergers.
Changes in the scope of consolidation during2012 are described
in note2 to the consolidated fi nancial statements (Chapter5).
External growth projects are examined in detail by the businesses
and corporate functions (strategy, fi nance, legal affairs, tax and
human resources) concerned, under a rigorous internal process
developed and led at Group level. A launch committee is
responsible for initiating the review process to identify the risks and
opportunities associated with each external growth project, while a
number of validation committees review the results on an ongoing
basis. Projects that successfully come through the review process
are submitted for approval to the Group Acquisitions Committee
made up of the main members of senior management. The largest
projects require the prior approval of the Management Board and,
in some cases, the Supervisory Board.
External growth transactions are inherently risky because of
the diffi culties that may arise in integrating people, operations,
technologies and products, and the related acquisition,
administrative and other costs.
This is why an integration procedure for new acquisitions has been
drawn up. The integration of acquisitions is a process that extends
over a period of six to 24months depending on the type and size
of the newly acquired company. The integration scenario for each
acquisition varies depending on whether the business was acquired
to strengthen or extend the Group’s existing line-up or enter a new
segment. There are a number of different integration scenarios,
ranging from total integration to separate organization. An
integration plan is drawn up for each acquisition and submitted to
the Acquisitions Committee for approval. The plan is implemented
by an integration manager who reports to a Steering Committee
that initially meets at monthly intervals and then on a quarterly basis.
The unit that presents the acquisition project is accountable to the
Group’s senior management for meeting clearly defi ned business
plan targets covering future performance and expected synergies.
Actual performance is measured against business plan targets
during quarterly business reviews and, for the largest acquisitions,
by the Management Board and Supervisory Board.
Value in use is determined by discounting estimated future cash
fl ows that will be generated by the tested assets, generally over a
period of not more than fi ve years. These future cash fl ows are based
on Group management’s economic assumptions and operating
forecasts. The discount rate corresponds to Schneider Electric’s
weighted average cost of capital (WACC) at the valuation date plus
a risk premium depending on the region in question (local risk-free
rate), the nature of the target’s business (appropriate beta), and the
structure of the fi nancing (taking into account the debt to equity
ratio and risk premium on the debt). The Group’s WACC stood at
7.7% at December31, 2012, slightly down compared to the 2011
fi nancial year. The perpetuity growth rate was 2%, unchanged on
the previous fi nancial year.
Goodwill is allocated to a Cash Generating Unit (CGU) when initially
recognized. The CGU allocation is done on the same basis as used
by Group management to monitor operations and assess synergies
deriving from acquisitions. Impairment tests are performed at the
level of the cash generating unit in 2012 (CGU), i.e. the Power,
Infrastructure, Industry, IT, Buildings and CST businesses. Details
on asset impairment are provided in note1.11 to the consolidated
fi nancial statements (Chapter5).
Where the recoverable amount of an asset or CGU is lower than
its book value, an impairment loss is recognized. Where the
tested CGU comprises goodwill, any impairment losses are fi rstly
deducted therefrom.