Other important risks
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|Project Management||Commodity markets||Treasury|
|Intellectual property||Product laibility||Tax|
Adequate project management is essential if new products are to enter the production phase with success, and the risks associated with inadequate project management can exert
a significant effect on the results.
Customers request the company to develop products complying with specific functional requirements that can, on occasion, come close to the limits of the technologically achievable. Project teams and the requisite disciplines assess the feasibility, since an incorrect estimation of the technical feasibility can result in the (potential) customer’s loss of confidence. For this reason the company is also confronted with the risk that Kendrion’s engineers succeed
in developing a technologically acceptable solution, but that the customer nevertheless decides not to proceed with Kendrion. In order to avoid such circumstances, Kendrion
is continually aiming for sole suppliership. In general, the majority of the development costs are borne by the customer, either in instalments during the development phase or as part of the selling price per unit. However, in spite of the compensation for the costs incurred, there is a risk that engineering hours allocated to a customer do not generate new revenue when the customer ultimately decides not to select Kendrion’s product.
Intellectual Property (IP)
The high-grade technological know-how Kendrion has accrued regularly results in inventions that can be utilised to improve existing products or develop new high-quality products which in turn enable the company to obtain an edge on the competition. There is a risk of this know-how leaking out or coming into the hands of the competition, which could ultimately put Kendrion’s leading position in jeopardy.
Kendrion restricts this risk by the further development of the company’s IP policy. Pursuant to one important element of this policy Kendrion applies for a patent for each of the company’s most important technological innovations. Applications for patents of this nature may be submitted in the geographical areas in which the most important direct and indirect customers – and competitors – are located and in which the applicable regulations and administration of justice offer an effective means of contesting patent infringements.
In other instances the know-how acquired from projects for specific customers can be protected by concluding confidentiality agreements with the relevant customers. For this reason confidentiality agreements may also be concluded with Kendrion developers. The development of new products or submission of applications for patents is accompanied by the risk of the infringement of third-party IP rights. Any such infringement can result in the relevant third party claiming damages and filing a petition for an injunction prohibiting the use of the technology in question. Kendrion protects itself from this risk by cooperating with a specialised patent agency. This agency carries out studies of potential infringements of Kendrion’s rights by third parties and vice versa.
Kendrion’s results could suffer from the reduced availability of raw materials and fluctuations in their price. Steel and copper are Kendrion’s most important raw materials, followed by permanent magnets. Raw materials are purchased from reputable suppliers. Steel is Kendrion’s number-one raw material, although a large proportion of it is contained in purchased components such as turning parts. Where feasible, Kendrion concludes fixed-price arrangements with steel suppliers. These prices also govern a large number of Kendrion’s component suppliers. Regarding copper prices, when the copper price risk is not passed on to the customer, Kendrion usually fixes the purchase price for the next quarters on a rolling basis. Kendrion closely monitors developments in prices for permanent magnets. The agreements Kendrion has concluded with the majority of customers who buy components containing permanent magnets provide for automatic price adjustments based on movements in the price of permanent magnets.
As far as is feasible, Kendrion actively endeavours to increase the number of alternative sources for its most important raw materials. Obviously, Kendrion aims to minimise the effects of price fluctuations on the group’s results. Whether or not this objective is feasible depends on contractual clauses and on the market. Raw materials are purchased separately by each business unit on the basis of their individual requirements but in accordance with the group policy reviewed quarterly by the Strategic Purchasing Board. This body was established to coordinate activities and exploit knowledge across business units and economies of scale.
Claims under product liability can be detrimental to Kendrion’s operations and operating results due to the resultant damage to the company’s reputation. In addition to all quality requirements and procedures, Kendrion has taken out liability insurance at group level for its operating companies to reduce the financial risks arising from possible claims under product liability. The amount and scope of the cover are comparable to those of other companies in Kendrion’s sectors: the cover is benchmarked periodically. Kendrion also aims to limit the group’s liability exposure by employing up-to-date general terms and conditions and mandatory reviews of material or long-term contracts by legal advisors.
The nature of Kendrion’s operations and business are such that they give cause to limited environmental risks. Most Kendrion companies have been awarded ISO 14001 certification.
Please refer to pages 125 and following of the financial statements for an outline of Kendrion’s financial market risks and the policy to mitigate these risks or their impact.
Kendrion’s operating companies have been granted a high degree of autonomy. In most countries the responsibility for accurate tax returns has been assigned to the local management, who receive assistance from reputable local tax consultants. Kendrion carries out an annual inventory at corporate level, in close collaboration with renowned international tax consultants, to assess whether fiscal developments could have an effect on the company’s subsidiaries. Corporate reviews of the tax expenses and tax positions of the company’s subsidiaries are carried out once a quarter. Kendrion has developed and implemented a tax compliance audit programme. This programme serves as the basis for reviews and assessments of the operating companies’ compliance with the regulations governing a variety of taxes. The tax compliance audit programme has been incorporated in the internal audit programme.
Kendrion strongly believes that pursuing a transparent and honest tax policy is a part of doing good business. Kendrion’s aim is to manage risks effectively and comply with all applicable rules, regulations and disclosure requirements. Kendrion’s tax position corresponds to the geographical spread of the operations and no aggressive tax structures are employed involving the movement of funds through tax havens.