Risks and opportunities
In this section, we outline the risks and opportunities that arise in the course of our business activities. We have grouped them into categories. Unless explicitly mentioned, there were no material changes to the specific risks and opportunities compared with the previous year.
The emissions issue gives rise to additional risks for the Volkswagen Group and also has an impact on existing risks. These are described under the respective risk category.
We use competitive and environmental analyses and market studies to identify not only risks but also opportunities with a positive impact on the design of our products, the efficiency with which they are produced, their success in the market and our cost structure. Where they can be assessed, risks and opportunities that we expect to occur are already reflected in our medium-term planning and our forecast. The following therefore reports on internal and external developments as risks and opportunities that may result in a negative or positive deviation from our forecast.
Risks from the emissions issue
In 2015, the Volkswagen Group recognized provisions arising from the emissions issue, in particular for the upcoming service campaigns, recalls and customer-related measures, but also for residual value risks.
Due to existing estimation risks particularly from legal risks, criminal and administrative proceedings, higher expenses for technical solutions, lower market prices, repurchase obligations and customer-related measures, further significant financial liabilities may emerge. Demand may decrease – possibly exacerbated by a loss of reputation or insufficient communication. Other potential consequences include lower margins in the new and used car businesses and a temporary increase in funds tied up in working capital.
The funding needed to cover the risks may lead to assets having to be sold due to the situation and equivalent proceeds for them not being achieved as a result.
Our ability to use refinancing instruments may possibly be restricted in the future or precluded for existing instruments due to the current uncertainties regarding the effects of the emissions issue on the Volkswagen Group. A downgrade of the Company’s rating could also adversely affect the terms associated with the Volkswagen Group’s borrowings.
We are cooperating with all the responsible authorities to clarify these matters completely and transparently.
Macroeconomic risks and opportunities
We believe that the risks to continued global economic growth lie primarily in turbulence in the financial markets and structural deficits, which pose a threat to the performance of some industrialized nations and emerging economies. In the southern part of the eurozone, a sustained economic recovery is being hindered by the situation of some financial institutions whose ability to withstand a crisis is still not assured. Persistently high private- and public-sector debt in many places is also clouding the outlook for growth and may cause markets to respond negatively.
Declines in growth in key countries and regions often have an immediate impact on the state of the global economy and therefore pose a central risk.
The economic development of some emerging economies is being hampered primarily by dependence on energy and commodity prices, capital inflows and socio-political tensions. Corruption, inadequate government structures and a lack of legal certainty also pose risks.
Geopolitical tensions and conflicts are a further major risk to the performance of individual economies and regions. As the global economy becomes increasingly interconnected, it is also vulnerable to local developments. Any increasing escalation of the conflicts in Eastern Europe, the Middle East or Africa, for example, could cause further upheaval on the global energy and commodity markets and exacerbate migration trends. The same goes for armed conflicts, terrorist activities, or the spread of infectious diseases, which may prompt unexpected, short-term responses from the markets.
Overall, we consider the probability of a global recession to be low. Due to the risk factors mentioned, however, the possibility of a decline in global economic growth or a period of below-average growth rates cannot be ruled out.
The macroeconomic environment may also give rise to opportunities for the Volkswagen Group if actual developments differ in a positive way from expected developments.
Sector-specific risk and market opportunities
The growth markets of Asia, South America, and Central and Eastern Europe are particularly important to the Volkswagen Group in terms of the global trend in demand for passenger cars and commercial vehicles. Although these markets harbor considerable potential, the underlying conditions in some of the countries in these regions make it difficult to increase unit sales figures there. Some have high customs barriers or minimum local content requirements for domestic production, for example. The market development in Russia was again inhibited by the political crisis and its economic consequences in fiscal year 2015. In South America, structural deficits continued to have a negative impact. Restrictions on vehicle registrations could enter into force in further Chinese metropolitan areas in the future. Additionally, a global economic slowdown could negatively impact consumer confidence. Furthermore, we cannot entirely rule out the possibility of freight deliveries being shifted from trucks to other means of transport and of demand for the Group’s commercial vehicles falling as a result.
At the same time, if the economic and regulatory situation permits, there are opportunities for faster growth above and beyond current projections in emerging markets where vehicle densities are still low. The demand that built up in some established markets during the crisis could also bring a more marked recovery in these markets if the economic environment eases more quickly than expected.
Price pressure in established automotive markets due to high market saturation is a particular challenge for the Volkswagen Group as a supplier of volume and premium models. As the global economy is still under strain, competitive pressures are likely to remain high in the future. Some manufacturers may respond by offering incentives in order to meet their sales targets, putting the entire sector under additional pressure, particularly in Western Europe, the USA and China.
Western Europe is one of our main sales markets. A drop in prices due to the economic climate triggered by falling demand in this region would have a particularly strong impact on the Company’s earnings. We counter this risk with a clear, customer-oriented and innovative product and pricing policy. Outside Western Europe, delivery volumes are widely spread around the world; the Chinese market accounts for a large share. We either already have a strong presence in numerous existing and developing markets or are working hard to build such a presence. Moreover, strategic partnerships help us to increase our presence in these countries and regions and cater to requirements there.
In fiscal year 2015, economic trends varied considerably from region to region: whereas the situation in Western Europe continued to stabilize, the growth trend in China developed at a weaker pace. The US economy expanded solidly, but market conditions in Eastern Europe and South America remained under strain. The resulting challenges for our trading and sales companies, such as efficient inventory management and a profitable dealer network, are considerable and are being met by appropriate measures on their part. However, financing business activities through bank loans remains difficult. Our financial services companies offer dealers financing on attractive terms with the aim of strengthening their business models and reducing operational risk. We have installed a comprehensive liquidity risk management system so that we can promptly counteract any liquidity bottlenecks at the dealers’ end that could hinder smooth business operations.
We continue to approve loans for vehicle finance on the basis of the same cautious principles applied in the past, taking into account the regulatory requirements of section 25a(1) of the Kreditwesengesetz (KWG – German Banking Act).
Volkswagen may be exposed to increased competition in aftermarkets for two reasons in particular: firstly, because of the provisions of the block exemption regulations, which have been in force for after-sales service since June 2010, and, secondly, because of the amendments included in EU Regulation 566/2011 of June 8, 2011, which expand independent market participants’ access to technical information.
In addition, the European Commission is currently evaluating the market with regard to existing design protection. If design protection for visible genuine parts were to be abolished as a result, this could adversely affect the Volkswagen Group’s genuine parts business.
Below, we outline the market opportunities for the Volkswagen Group. We see the greatest potential for growth in the markets of the Asia-Pacific region and in North America.
Growth in China, the largest market in the Asia-Pacific region, progressed at a slower pace in the reporting period. The demand for vehicles will continue to rise there in the coming years due to the need for individual mobility, but will shift from the large coastal cities to the interior of the country. In order to leverage the considerable opportunities offered by this market – also with regard to e-mobility – and to defend our strong market position in China over the long term, we are continuously expanding our product range to include models that have been specially developed for this market. We are further expanding our production capacity in this growing market through additional production facilities.
The political and economic situation in India further stabilized in 2015. The vehicle markets continued their recovery. We expect this to continue. The Group is currently consolidating its activities in this environment. India remains a strategically important market of the future for the Group.
The automotive markets in the ASEAN economic area are volatile, but offer substantial growth opportunities in the aggregate. The Volkswagen Group is working successively to achieve long-term penetration of these markets. High price sensitivity means that having a local manufacturing operation in the region is a condition for a competitive offering. Together with our partners in Malaysia and Indonesia, we locally assemble models from the Volkswagen Passenger Cars, Audi and Volkswagen Commercial Vehicles brands. We are also examining and assessing such opportunities in additional countries in the region. Independent of such business, we are driving forward improvements to local sales structures.
The US vehicle market saw growth again in 2015 thanks to the encouraging economic trend and favorable financing conditions. The market’s momentum is, however, expected to decrease. North America remains a growth region for the Volkswagen Group. In the United States, Volkswagen Group of America is systematically pursuing our strategy of becoming a full-fledged volume supplier. An engine plant and the development of additional production capacity in the region will allow the Group to better serve the market in the future. The Group is also pressing forward with additional products tailored specifically to the US market, for example a large SUV. Our market success will largely depend on how transparently, thoroughly and quickly we deal with the diesel issue and restore customers’ confidence.
In Brazil, the economic environment weakened again and the vehicle market slumped further. Vehicles became more expensive as inflation and interest rates rose. The anticipated recovery failed to materialize and, instead, the economic outlook continued to worsen. We expect the downturn in the vehicle market to persist in 2016. The growing number of automobile manufacturers with local production has resulted in a sharp increase in price pressure and competition. The Brazilian market plays a key role for the Volkswagen Group. To strengthen our competitive position here, we offer vehicles that have been specially developed for this market and are locally produced, such as the Gol and the Fox.
Russia has the potential to grow into one of the largest automotive markets in the world. However, its heavy reliance on currently lower oil revenues and the weak ruble led to a decline in the market as a whole in 2015. Demand for vehicles also continued to be impacted by the political crisis and the related sanctions imposed by the EU and the USA. The market remains of strategic importance for the Volkswagen Group, which is why we are working intensively there.
The Middle East
Despite economic and political instability, the Middle East region offers growth opportunities. We are leveraging the potential for sustainable growth with a range of vehicles that has been specifically tailored to this market, without operating our own production facilities.
The underlying global economic trends will continue. These include sustained economic growth, a greater international division of labor and a resulting increase in global transport routes and volumes, a growing demand for energy and forces for innovation powered by trends in global climate policy.
We are working systematically to leverage these market opportunities at a global level. In the medium term, significant potential can be leveraged by enhancing the after-sales business by introducing new products and expanding the service network. Going forward, stricter requirements with respect to reliability, availability of the plants that are already in operation, the increase in environmental compatibility and efficient operation, together with the large number of engines and plants, will provide the basis for profitable, long-term growth.
As part of the capital goods industry, the Power Engineering Business Area is subject to fluctuations in the investment climate.
Even minor changes in growth or growth forecasts, resulting from geopolitical uncertainties or volatile commodities and foreign exchange markets, for example, can lead to significant changes in demand or the cancellation of existing orders. We counter the considerable economic risks with, for example, flexible production concepts and cost flexibility, utilizing temporary employment, working time accounts and short-time work as well as potential structural adjustments. The latter may possibly entail substantial one-time expenses.