Siemens 2009 Annual Report Download - page 190

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 Reports Supervisory Board /
Managing Board  Corporate Governance  Management’s discussion and analysis  Consolidated Financial Statements
44 Business and operating environment 63 Fiscal 2009 – Financial summary 66 Results of operations 84 Financial position
addition, joint ventures bear the risk of difficulties that may
arise when integrating people, operations, technologies and
products. Strategic alliances may also pose risks for us because
we compete in some business areas with companies with
which we have strategic alliances.
OPERATIONS RISKS
Our financial results and cash flows may be adversely af-
fected by cost overruns or additional payment obligations
related to the management of our long-term, fixed price or
turn-key projects: We perform a portion of our business, espe-
cially large projects, under long-term contracts that are
awarded on a competitive bidding basis. Some of these con-
tracts are inherently risky because we may assume substan-
tially all of the risks associated with completing the project
and the post-completion warranty obligations. For example,
we face the risk that we must satisfy technical requirements of
a project even though we may not have gained experience
with those requirements before we win the project. The profit
margins realized on such fixed-priced contracts may vary from
original estimates as a result of changes in costs and produc-
tivity over their term. We sometimes bear the risk of unantici-
pated project modifications, shortage of key personnel, quality
problems, financial difficulties of our customers, cost overruns
or contractual penalties caused by unexpected technological
problems, unforeseen developments at the project sites, per-
formance problems with our suppliers, subcontractors and
consortium partners or other logistical difficulties. Certain of
our multi-year contracts also contain demanding installation
and maintenance requirements, in addition to other perfor-
mance criteria relating to timing, unit cost requirements and
compliance with government regulations, which, if not satis-
fied, could subject us to substantial contractual penalties,
damages, non-payment and contract termination. There can
be no assurance that all of our fixed-priced contracts can be
completed profitably. For additional information, see “Notes to
Consolidated Financial Statements.”
We may face interruption of our supply chain, including the
inability of third parties to deliver parts, components and
services on time, and could be subject to rising raw mate-
rial prices: Our financial performance depends in part on a
reliable and effective supply chain management for compo-
nents, sub-assembles and other materials. Capacity con-
straints and market shortage resulting from an ineffective
supply chain management may lead to delays and additional
cost. We rely on third parties to supply us with parts, compo-
nents and services. Using third parties to manufacture, as-
semble and test our products reduces our control over manu-
facturing yields, quality assurance, product delivery schedules
and costs. The third parties that supply us with parts and com-
ponents also have other customers and may not have suffi-
cient capacity to meet all of their customers’ needs, including
ours, during periods of excess demand. Component supply
delays can affect the performance of our Sectors. Although we
work closely with our suppliers to avoid supply-related prob-
lems, 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 par-
ticularly evident in businesses with a very limited number of
suppliers. Shortages and delays could materially harm our
business. Unanticipated increases in the price of components
due to market shortages or other reasons could also adversely
affect the performance of our Sectors.
Our Sectors purchase raw materials, including copper, steel,
aluminum and oil, which exposes them to fluctuations in en-
ergy and raw material prices. In recent times, commodities
have been subject to volatile markets, and such volatility is ex-
pected to continue. If we are not able to compensate for or pass
on our increased costs to customers, price increases could
have a material adverse impact on our financial results. In con-
trast, in times of falling commodity prices, we may not fully
profit from such price decreases as we attempt to reduce the
risk of rising commodity prices by several means, such as
long-term contracting or physical and financial hedging. In ad-
dition to price pressure that we may face from our customers
expecting to benefit from falling commodity prices, this could
also adversely affect our financial results.