Siemens 2007 Annual Report Download - page 175

Management’s discussion and analysis 175
Management’s discussion and analysis
Our operating results depend to a signifi cant 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 fi nancial condition or results of operations.
The markets in which our businesses operate experience rapid and signifi cant
changes due to the introduction of innovative technologies. To meet our custom-
ers’ 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 Group Med. Introducing new offerings and technologies
requires a signifi cant commitment to research and development, which may not
always result in success. Our sales and profi ts may suffer if we invest in technolo-
gies that do not function as expected or are not accepted in the marketplace as
anticipated, if our products or systems are not brought to market in a timely man-
ner, or as they become obsolete.
A majority of our operating Groups, including Siemens IT Solutions and Ser-
vices (SIS), Industrial Solutions and Services (I&S), Siemens Building Technolo-
gies (SBT), PG, PTD and Transportation Systems (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 profi t margins realized on such
fi xed-priced contracts 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 techno-
logical problems, unforeseen developments at the project sites, performance prob-
lems with our subcontractors or other logistical diffi culties. 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 satis-
fi ed, could subject us to substantial contractual penalties, damages, non-payment
and contract termination. There can be no assurance that all of our fi xed-priced
contracts can be completed profi tably. For additional information, see “Critical
Accounting Estimates.”
Planning & Resources
Our strategy includes strengthening our business interests through joint ven-
tures and associate companies, as well as strategic alliances. Certain of our strate-
gic investments accounted for using the equity method are included in our Strate-
gic Equity Investments (SEI), which consist of Nokia Siemens Networks (NSN), BSH
Bosch und Siemens Hausgeräte GmbH (BSH) and Fujitsu Siemens Computers
(Holding) BV (FSC). Any factors negatively infl uencing the profi tability of our
equity investments could have a negative impact on our own results, and may also
negatively affect our cash fl ow and our ability to recover the full amount of our
investments. In addition, such portfolio transactions are inherently risky because
of the diffi culties of integrating 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.