Siemens 2006 Annual Report Download - page 141

Management’s discussion and analysis 137
In fiscal year 2006, we continued our strategic reorientation and cost-cutting initiatives
across our business Groups but particularly at Communications (Com) and Siemens Business
Services (SBS). These include reducing headcount, adjusting existing capacities through con-
solidation of business activities and manufacturing facilities, as well as streamlining product
portfolios. These measures impact our earnings results and any future contribution of these
measures to our profitability will be influenced by the actual savings achieved and by our
ability to sustain these ongoing efforts.
The worldwide markets for our products are highly competitive in terms of pricing, product
and service quality, development and introduction time, customer service and financing
terms. We face strong competitors, some of which are larger and may have greater resources
in a given business area. Siemens faces downward price pressure and is exposed to market
downturns or slower growth. Some industries in which we operate are undergoing consolida-
tion, which may result in stronger competitors and a change in our relative market position.
In some of our markets, new products must be developed and introduced rapidly in order to
capture available opportunities and this can lead to quality problems. Our operating results
depend to a significant extent on our abilities to adapt to changes in markets and to reduce
the costs of producing high-quality new and existing products. Any inability to do so could
have a material adverse effect on our financial condition or results of operations.
The markets in which our businesses operate experience rapid and significant changes
due to the introduction of innovative technologies. To meet our customers’ needs in these
businesses, we must continuously design new, and update existing, products and services
and invest in and develop new technologies. This is especially true for our Groups Med and SV.
Introducing new offerings and technologies requires a significant commitment to research
and development, which may not always result in success. Our sales and profits may suffer if
we invest in technologies that do not function as expected or are not accepted in the market-
place as anticipated, if our products or systems are not brought to market in a timely manner,
or as they become obsolete.
Our strategy includes divesting our interests in some business areas and strengthening
others through portfolio measures, including acquisitions, strategic alliances, joint ventures
and mergers. Transactions such as these are inherently risky because of the difficulties of inte-
grating people, operations, technologies and products that may arise. Strategic alliances may
also pose risks for us because we compete in some business areas with companies with which
we have strategic alliances. Our divesting activities could have a negative impact on our
results of operations and cash flow at closing, as well as in the future. In addition, we may
incur significant acquisition, administrative and other costs in connection with these transac-
tions, including costs related to integration of acquired or restructured businesses. There can
be no assurance that any of the businesses we acquire can be successfully integrated or that
they will perform well once integrated. Acquisitions may also lead to substantial increases in
long-lived assets, including goodwill. Write-downs of these assets due to unforeseen business
developments may materially and adversely affect our earnings. Particularly Med, SV, PG, I&S
and A&D have significant amounts of goodwill. In addition, portfolio activities may result in
additional financing needs and adversely affect our financial leverage and our debt-to-equity
ratio.
Our financial condition, results of operations and cash flows are influenced significantly by
the performance of the operating Groups, as well as the Company’s portfolio measures. A neg-
ative development may result in the deterioration of our credit rating. Downgrades by rating
agencies may increase our cost of capital and could negatively affect our businesses.
Management’s discussion and analysis