Siemens 2008 Annual Report Download - page 197

Management’s discussion and analysis 101
which may have a better cost structure. Siemens faces downward price pressure and is exposed to market down-
turns or slower growth. Some industries in which we operate are undergoing consolidation, 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 signi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 nancial condition or results of operations.
The markets in which our businesses operate experience rapid and signicant 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 Healthcare Sector. Introducing new offerings and technologies requires a signicant commitment
to research and development, which may not always result in success. Our sales and prots may suffer if we
invest in technologies 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 manner or as they become obsolete.
Our Energy and Industry Sectors as well as our Cross-Sector Business Siemens IT Solutions and Services per-
form a signicant portion of their business, especially large projects, under long-term contracts that are
awarded on a competitive bidding basis. The prot margins realized on such 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 technological problems,
unforeseen developments at the project sites, performance problems with our subcontractors or other logistical
dif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ed, could subject us to substantial contractual penalties, damages,
non-payment and contract termination. There can be no assurance that all of our xed-priced contracts can be
completed protably. For additional information, see “Notes to Consolidated Financial Statements.”
Equity interests and strategic alliances
Our strategy includes strengthening our business interests through joint ventures, associated companies and
strategic alliances. Certain of our investments are accounted for using the equity method, including, among oth-
ers, Nokia Siemens Networks (NSN), BSH Bosch und Siemens Hausgeräte GmbH (BSH) and Areva NP. Any factors
negatively inuencing the protability of our equity investments could have a negative impact on our own
results and may negatively affect our cash ow and our ability to recover the full amount of our investments.
In addition, such portfolio transactions are inherently risky because of the dif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.
Merger, acquisition & divestiture
Our strategy includes divesting our interests in some business areas and strengthening others through portfolio
measures, including mergers and acquisitions.
With respect to dispositions, we may not be able to divest some of our activities as planned, and our divesting
activities could have a negative impact on our results of operations, our cash ow at closing, as well as in the
future, and on our reputation.