Siemens 2006 Annual Report Download - page 142

Management’s discussion and analysis
138
Operational risks
A majority of our operating Groups, including SBS, I&S, SBT, PG, PTD and TS perform a signifi-
cant 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 pro-
ject sites, performance problems with our subcontractors or other logistic difficulties. Certain
of our multi-year contracts also contain demanding installation and maintenance require-
ments, 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 sub-
stantial contractual penalties, damages, non-payment and contract termination. There can be
no assurance that all of our fixed-priced contracts can be completed profitably.
Our value chain comprises all steps, from research and development, to production, mar-
keting and sales up to services. 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 products we sell have quality issues resulting from the design or manu-
facture 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. Com-
ponent 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. This risk is particularly evident in businesses
with a very limited number of suppliers. Shortages and delays could materially harm our busi-
ness. Unanticipated 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.