Siemens 2005 Annual Report Download - page 125

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Operational risks
A majority of our operating Groups, including Com, SBS, I&S, L&A, PG, PTD and TS, perform a
significant portion of their business, especially large projects, under long-term contracts that are
awarded on a competitive bidding basis. The profit margins realized on such fixed-priced con-
tracts may vary from original estimates as a result of changes in costs and productivity over their
term. We sometimes bear the risk of quality problems, cost overruns or contractual penalties
caused by unexpected technological problems, unforeseen developments at the project sites, per-
formance problems with our subcontractors or other logistic difficulties. Certain of our multi-
year contracts also contain demanding installation and maintenance requirements, in addition
to other performance criteria relating to timing, unit cost requirements and compliance with
government regulations, which, if not satisfied, could subject us to substantial contractual penal-
ties, damages, non-payment or contract termination. There can be no assurance that all of our
fixed-priced contracts can be completed profitably. For additional information, see Critical
Accounting Estimates above.
Our value chain comprises all the steps in our operations, from R&D, to production, marketing
and sales. Operational failures in our value chain processes could result in quality problems or
potential product, labor safety, regulatory or environmental risks. Such risks are particularly
present in relation to our production facilities, which are located all over the world and have a
high degree of organizational and technological complexity. From time to time, some of the prod-
ucts we sell have quality issues resulting from the design or manufacture of such products, or
from the software integrated into them. Such operational failures or quality issues could have a
material adverse effect on our financial condition or results of operations.
Our operating Groups are exposed to fluctuations in energy and raw material prices. In the
recent past, oil, steel and copper prices in particular have increased on a worldwide basis. If we
are not able to compensate for or pass on our increased costs to customers, such price increases
could have a material adverse impact on our financial results.
Supplier risks
We rely on third parties to supply us with parts, components and services. Using third parties to
manufacture, assemble and test our products reduces our control over manufacturing yields,
quality assurance, product delivery schedules and costs. The third parties that supply us with
parts and components also have other customers and may not have sufficient capacity to meet all
of their customers’ needs, including ours, during periods of excess demand. Component supply
delays can affect the performance of certain of our operating Groups. Although we work closely
with our suppliers to avoid supply-related problems, there can be no assurance that we will not
encounter supply problems in the future or that we will be able to replace a supplier that is not
able to meet our demand. These shortages and delays could materially harm our business. Un-
anticipated increases in the price of components due to market shortages or other reasons could
also adversely affect the performance of certain of our business Groups.
Management’s discussion and analysis
Consolidated Financial Statements Notes to Consolidated Financial Statements