Siemens 2015 Annual Report Download - page 31

Combined Management Report 
Cost overruns or additional payment obligations related to
the management of our long-term, fixed-price or turnkey
projects: Particularly our Divisions Power and Gas, Wind Power
and Renewables, Mobility as well as parts of Energy Manage-
ment and Process Industries and Drives perform business, es-
pecially 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 a project and
meeting 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 mar-
gins realized on fixed-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 unanticipated project
modifications, shortage of key personnel, quality problems,
financial difficulties of our customers, cost overruns or contrac-
tual penalties caused by unexpected technological problems,
unforeseen developments at the project sites, unforeseen
changes or difficulties in the regulatory or political environ-
ment, performance problems with our suppliers, subcontrac-
tors and consortium partners or other logistical difficulties.
Some of our multi-year contracts also contain demanding in-
stallation and maintenance requirements in addition to other
performance criteria relating to timing, unit cost and compli-
ance with government regulations requirements, which, if not
satisfied, could subject us to substantial contractual penalties,
damages, non-payment and contract termination. There can be
no assurance that contracts and projects, in particular those
with long-term duration and fixed-price calculation, can be
completed profitably. To tackle those risks we implemented a
global project management organization to systematically im-
prove the know-how of the project management personnel. For
very complex technical projects we conduct dedicated techni-
cal risk assessments in very early stages of the sales phase be-
fore we decide to hand over a binding offer to our customer.
Interruption of the supply chain: The financial performance
of our Industrial Business depends on reliable and effective
supply chain management for components, sub-assemblies
and other materials. Capacity constraints and supply shortages
resulting from ineffective supply chain management may lead
to delays and additional cost. 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 con-
trol over manufacturing yields, quality assurance, product de-
livery schedules and costs. 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. Shortages and delays could materially harm our busi-
ness. Unanticipated increases in the price of components or
raw materials due to market shortages or other reasons could
also adversely affect the performance. Furthermore, we may be
exposed to the risk of delays and interruptions of the supply
chain as a consequence of catastrophic events in case we are
unable to identify alternative sources of supply or ways of
transportation in a timely manner or at all. Besides other mea-
s ures, we mitigate fluctuation in the global raw material mar-
kets with various hedging instruments.
Skilled personnel: Competition for highly qualified personnel
remains intense in the industries and regions in which our
businesses operate. We have an ongoing demand in highly
skilled employees. Our future success depends in part on our
continued ability to hire, integrate, develop and retain engi-
neers and other qualified personnel. We address this risk for
example with structured succession planning, employer brand-
ing, retention and career management.
A.8.3.3 FINANCIAL RISKS
Market price risks: We are exposed to fluctuations in exchange
rates, especially between the U. S. dollar and the euro, because
a high percentage of our business volume is conducted in the
U. S. and as exports from Europe. In addition, we are exposed to
currency effects involving the currencies of emerging markets,
in particular the Chinese yuan. A strengthening of the euro
(particularly against the U. S. dollar) may change our competi-
tive position, as many of our competitors may benefit from hav-
ing a substantial portion of their costs based in weaker curren-
cies, enabling them to offer their products at lower prices. As a
result, a strong euro in relation to the U. S. dollar and other cur-
rencies could have an adverse impact on our results of opera-
tions. We are also exposed to fluctuations in interest rates. Neg-
ative developments in the financial markets and changes in the
central bank policies may negatively impact our results. Certain
currency risks as well as interest rate risks are hedged using
derivative financial instruments. Depending on the develop-
ment of foreign currency exchange and interest rates, hedging
activities could have significant effects on our business, finan-
cial condition and results of operations.
Liquidity and financing risks: The ongoing euro zone sover-
eign debt crisis continues to have an impact on global capital
markets. Regarding our treasury and financing activities, nega-
tive developments related to financial markets such as () lim-
ited availability of funds (particularly U. S. dollar funds) and
hedging instruments, () an updated evaluation of our sol-
vency, particularly from rating agencies and () impacts from
enhanced regulations of the financial sector / central bank pol-
icy or financial instruments, could result in adverse deposit
and / or financing conditions. Widening credit spreads due to
uncertainty and risk aversion in the financial markets might
lead to adverse changes of fair market values of our financial