Risks and uncertainties, economic and political conditions including U.S.-Chinese trade conflict, Brexit, Italy, protectionism, US monetary policy

Siemens AG – Annual report – 30 September 2018

Industry: manufacturing

A.8.3 Risks (extract)

A.8.3.1 STRATEGIC RISKS (extract)

Economic, political and geopolitical conditions (macroeconomic environment): We see increasing uncertainty regarding the global economic outlook. The key risk for the global economic cycle is a further escalation of the U.S.-Chinese trade conflict to a full-fledged global trade war, with a significant deterioration of global growth. Adverse effects on confidence and investment activity would severely hit Siemens business. Increasing trade barriers would negatively impact production costs and productivity along the value chain. The risk of a “No-Deal” Brexit could heighten business and consumer uncertainty, particularly in the European Union (EU) and the U. K., reduce investment activity, and pose risks to financial markets. A further and massive loss of economic confidence and a prolonged period of reluctance in investment decisions and awarding of new orders would negatively impact our businesses. We have established a task force continuously monitoring the exit process and coordinating our local and global mitigation measures. Heightened political risk within the EU, in particular fiscal stability in Italy, further independence debates or sustained success of protectionist, anti EU and anti-business parties and policies may reignite the euro crisis or even increase uncertainty about the future of the EU in general. The tightening of monetary policy by the U. S. Federal Reserve triggered depreciation of several emerging market currencies (e. g. of the Argentine peso and Turkish lira) and raised fears of a renewed emerging market crises, as debt levels of emerging market enterprises have risen making them dependent on favourable global financial conditions to service debts denominated in foreign currencies. A further escalation could severely weigh on asset prices, foreign exchange markets and potential hyperinflation. Emerging market operations involve further various risks, including civil unrest, health concerns, cultural differences such as employment and business practices, volatility in gross domestic product, economic and governmental instability, the potential for nationalization of private assets and the imposition of exchange controls. Additional business risk results from an abrupt weakening of Chinese economic growth. A terrorist mega-attack or a significant cybercrime incident, or a series of such attacks or incidents in major economies, could depress economic activity globally and undermine consumer and business confidence. Further risks stem from geopolitical tensions, political upheavals, and from an increasing vulnerability of the connected global economy to natural disasters. In addition, we are depending on the economic momentum of specific industries, especially on continued confidence in the automotive sector.

In general, due to the significant proportion of long-cycle businesses in our Industrial Business and the importance of long-term contracts for Siemens, there is usually a time lag between changes in macroeconomic conditions and their impact on our financial results. In contrast, short-cycle business activities of the Digital Factory Division and parts of Process Industries and Drives, Building Technologies and Energy Management Divisions react quickly to volatility in market demand. If the moderate growth of certain markets (e. g. oil & gas) stalls again and if we are not successful in adapting our production and cost structure to subsequent changes in conditions in the markets in which we operate, there can be no assurance that we will not experience adverse effects. For example, our customers may modify, delay or cancel plans to purchase our products, solutions and services, or fail to follow through on purchases or contracts already executed. Furthermore, the prices for our products, solutions and services may decline, to a greater extent than we currently anticipate. In addition, it may become more difficult for our customers to obtain financing. Contracted payment terms, especially regarding the level of advance payments by our customers relating to long-term projects, may become less favorable, which could negatively impact our financial condition. Siemens’ global setup with operations in almost all relevant economies, our wide range of offerings with varied exposures to business cycles, and our balanced mix of business models (e. g. equipment, components, systems, software, services and solutions) help us to absorb impacts from adverse developments in any single market.