Annual Report 2016

Financial risks and opportunities

The following section deals with the financial risks and opportunities of the Daimler Group. Risks and opportunities can have a negative or positive effect on the profitability, cash flows and financial position of the Daimler Group. The probability of occurrence and possible impact of these risks and opportunities is presented in table B.61.

B.61 Financial risks and opportunities

Risk category Probability of
ccurrence
Impact Opportunity category Impact
         
Exchange rate risks Low High Exchange rate opportunities High
Interest rate risks Low Low Interest rate opportunities Low
Commodity price risks Low Low Commodity price opportunities Low
Credit risks Low Low Credit opportunities
Country risks Low Low Country opportunities
Risks of restricted capital-market access Low Medium Opportunities of restricted capital-market access
Risks relating to pension plans Low High Opportunities relating to pension plans High
Risks from changes in credit ratings Low Low Opportunities from changes in credit ratings Low

In principle, the Group’s operating and financial risk exposures underlying its financial risks and opportunities can be divided into symmetrical and asymmetrical risk and opportunity profiles. With the symmetrical risk and opportunity profiles (e.g. currency exposures), risks and opportunities exist equally, while with the asymmetrical risk and opportunity profiles (e.g. credit and country exposures), the risks outweigh the opportunities.

Daimler is generally exposed to risks and opportunities from changes in market prices such as currency exchange rates, interest rates, commodity prices and share prices. Market-price changes can have a negative or positive influence on the Group’s profitability, cash flows and financial position. Daimler manages and monitors market-price risks and opportunities primarily in the context of its operational business and financing activities, and applies derivative financial instruments for hedging purposes where needed, thus limiting both market-price risks and opportunities.

In addition, the Group is exposed to credit and country-related risks and risks of restricted access to capital markets. As part of the risk management process, Daimler regularly assesses these risks by considering changes in key economic indicators and market information. Pension plan assets to cover retirement and healthcare benefits (market sensitive investments including equities and interest-bearing securities) are not included in the following analysis.

Exchange rate risks and opportunities

The Daimler Group’s global orientation means that its business operations and financial transactions are connected with risks and opportunities related to fluctuations in currency exchange rates. This applies in particular to fluctuations against the euro of the US dollar, Chinese renminbi, British pound and other currencies such as currencies of growth markets. An exchange rate risk or opportunity arises in business operations primarily when revenue is generated in a currency different from that of the related costs (transaction risk). This applies in particular to the Mercedes-Benz Cars division, as a major portion of its revenue is generated in foreign currencies while most of its production costs are denominated in euros. The Daimler Trucks division is also exposed to such transaction risks, but to a lesser degree because of its worldwide production network. Regularly updated currency risk exposures are successively hedged with suitable financial instruments (predominantly currency forwards and options) in accordance with exchange rate expectations, which are continually reviewed, whereby both risks and opportunities are limited. Any overcollateralization caused by changes in exposure is generally reversed by suitable measures without delay. Exchange rate risks and opportunities also exist in connection with the translation into euros of the net assets, revenues and expenses of the companies of the Group outside the euro zone (translation risk); these risks are not generally hedged.

Interest rate risks and opportunities

Changes in interest rates can create risks and opportunities for business operations as well as for financial transactions. Daimler employs a variety of interest-rate sensitive financial instruments to manage the cash requirements of its business operations on a day-to-day basis. Most of these financial instruments are held in connection with the financial services business of Daimler Financial Services, whose policy is generally to perform term-congruent refinancing. However, to a limited extent, the funding does not match in terms of maturities and interest rates, which gives rise to the risk of changes in interest rates. The funding activities of the industrial business and the financial services business are coordinated at Group level. Derivative interest rate instruments such as interest rate swaps are used to achieve the desired interest rate maturities and asset/liability structures (asset and liability management).

Equity price risks and opportunities

The Group is subject to equity price risks in connection with its listed associated companies and joint ventures. As of December 31, 2016, the only shares that Daimler holds are shares that are included in the consolidated financial statements using the equity method (primarily BAIC Motor). The Group does not include these investments in a market-price risk analysis. The section “Risks and opportunities related to associated companies, joint ventures and joint operations” provides more information on equity risks and opportunities.

Commodity price risks and opportunities

As already described in the section “Procurement market risks and opportunities”, the Group’s business operations are exposed to changes in the marketprices of consignments and raw materials. The Group addresses these procurement risks by means of concerted commodity and supplier risk management. To a minor degree, derivative financial instruments are used to reduce the Group’s market-price risks related to the purchase of certain metals.

Credit risks

The Group is exposed to credit risks which result primarily from its financial services activities and from the operations of its vehicle business. Credit risks also arise from the Group’s liquid assets. The following statements pertain to risks arising from the Group’s liquid assets; risks related to leasing and sales financing are addressed on Industry and business risks and opportunities. Should defaults occur, this would negatively affect the Group’s financial position, cash flows and profitability. In recent years, the limit methodology for exposures with financial institutions has been continually further developed in order to counteract the diminished creditworthiness of the banking sector since the financial crisis. In connection with investment decisions, priority is placed on the borrower’s very high creditworthiness and on balanced risk diversification. Most liquid assets are held in investments with an external rating of A or better.

Country risks

Daimler is exposed to country risks that primarily result from cross-border financing or collateralization for Group companies or customers (for example Turkey), from investments in subsidiaries and joint ventures, and from cross-border trade receivables (for example China). Country risks also arise from cross-border cash deposits at financial institutions. The Group addresses these risks by setting country limits (e.g. for cross-border financing of customers and for hard-currency portfolios from financial services companies) and through investment-protection insurance against political risks in high-risk countries. Daimler also has an internal rating system that divides all countries in which it operates into risk categories.

Risks of restricted access to capital markets

Daimler covers its refinancing needs, among other things, by means of borrowing in the capital markets. Access to capital markets in individual countries may be limited by government regulations or by a temporary lack of absorption capacity. In addition, pending legal proceedings as well as its own business policy considerations, may temporarily prevent the company from covering any liquidity requirements by means of borrowing in the capital markets.

Further information on financial risks, risk-limiting measures and the management of these risks is provided in Note 32 of the Notes to the Consolidated Financial Statements. Information on the Group’s financial instruments is provided in Note 31 of the Notes to the Consolidated Financial Statements.

Risks and opportunities relating to pension plans

Daimler has pension benefit obligations and to a lesser degree obligations relating to healthcare benefits, which are largely covered by plan assets. The balance of pension obligations less plan assets constitutes the carrying amount or funded status of those employee benefit plans. The measurement of pension obligations and the calculation of net pension expense are based on certain assumptions. Even small changes in those assumptions such as a change in the discount rate could have a negative or positive effect on the funded status and the group equity in the current financial year or could lead to changes in the periodic net pension expense in the following financial year. The fair value of plan assets is determined to a large degree by devel­opments in the capital markets. Unfavorable or favorable developments, especially relating to equity prices and fixed-interest securities, can reduce or increase the carrying value of plan assets. The currently increased volatility of financial markets raises the risks and opportunities relating to the measurement of both pension obligations and plan assets. The structure of pension obligations is taken into consideration with the determination of the investment strategy for the plan assets in order to reduce fluctuations of the funded status. A change in the composition of pension assets can have an additional positive or negative impact on the fair value of the plan assets. The legal situation in connection with pension plans can in some countries lead to payment obligations if underfunding of the plans in those countries has to be offset. Further information on the pension plans and their risks is provided in Note 22 of the Notes to the Consolidated Financial Statements.

Risks and opportunities from changes in credit ratings

Daimler’s creditworthiness is assessed by the rating agencies S&P Global Ratings, Moody’s Investors Service, Fitch Ratings and DBRS. Risks and opportunities exist in connection with potential downgrades or upgrades to credit ratings by these rating agencies. Downgrades could have a negative impact on the Group’s financing if such a downgrade leads to an increase in the costs for external financing or restricts the Group’s ability to obtain financing. A credit rating downgrade could also damage the company’s reputation or discourage investors from investments in Daimler AG. A risk to the credit rating of the Daimler Group could also arise if the earnings and cash flows anticipated from the Group’s growth could not be realized. Credit rating upgrades could lead to lower borrowing costs for the Group and also facilitate its access to financing sources in the money and capital markets. If the positive development of the Group continues and its cash flow and profitability also develop positively, opportunities could arise for an upgrade of the credit rating on the part of the rating agencies.

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Company-specific risks and opportunities