Strategic risks

Sensitivity to cyclical trends
In normal conditions Kendrion is slightly sensible to cyclical trends affecting sales of electromagnetic components to industrial customers, and more sensitive to fluctuations in the conditions in the car and bus segment. Kendrion feels the effects of cyclical movements after a time lag dependent on the market that is served. Kendrion’s strategy of operating in niche markets limits the effects of cyclical downturn, but cannot eliminate them entirely. Cyclical downturns result in lower volumes, however, Kendrion has concluded long-term contracts with major customers.

Market developments/competition
Kendrion is a technically-driven company with a leading position in the European market. The barriers to entry to specific markets are substantial due to the high levels of technological knowledge and investments that are required. Kendrion’s competitors are often smaller family companies focused on a specific segment. In 2008 approximately 30% of the revenue from electromagnetic components and systems was generated by the automotive market, a market characterised by competition and, consequently, pressure on prices. As a result, and notwithstanding the companies’ good market positions, customers endeavour to pass this pricing pressure back up the supply chain.

Acquisitions
Kendrion’s strategy is focused on organic growth and growth by means of acquisitions. The risks associated with acquisitions are greater than those associated with organic growth. Kendrion endeavours to obviate these risks by performing comprehensive due diligence processes (encompassing operational, financial, fiscal and legal issues), obtaining guarantees and, where relevant, arranging for external market analyses and carrying out a meticulous assessment of the management and personnel of the acquisition candidate. In addition, Kendrion prepares and implements post-acquisition programmes.

Commodity markets
Kendrion’s results can be detrimentally influenced by the reduced availability of raw materials and fluctuations in the price of raw materials due, for example, to the increasing or decreasing price of fossil fuels. Self-evidently, Kendrion endeavours to minimise the effects of price fluctuations on the company’s results. The degree to which this is feasible depends on the contractual clauses and the market. In addition, a time lag is usual. Kendrion’s main raw material in this respect is copper. During the extreme price increases that could not be passed on to customers at the same tempo Kendrion either fixed purchase prices for a specific period or entered into hedging transactions to limit the risk of price increases. Consequently the current low prices of raw materials do not have a one-to-one effect on the results.