Strategic and business risks
Kendrion’s strategic and business risks identified are reviewed below. The most important risks selected based on the financial outcome of the risk management survey are:
1. Pressure from large customers and customer dependency;
2. Increased competition;
3. Non-performing Information Systems and cyber security;
4. Technological substitution;
5. Attraction and retention of qualified staff;
6. Future product portfolio, including impact of megatrends;
7. Volatile economic conditions.
These risks are associated with Kendrion’s strategic objectives and could impact these objectives as follows:
|Expected organic growth 5%||EBITA margin 10% as from end 2018||Dividend 35-50% of net profit||Accelerate growth after 2018|
|Pressure from large customers and customer dependency||X||X||X|
|Information Systems and cyber security||X||X|
|Atrtraction and retention of qualified staff||X||X|
|Future product portfolio||X||X||X|
|Volatile economic conditions||X||X||X||X|
Pressure from large customers and customer dependency
Kendrion has a wide range of customers in various markets and, consequently, the company’s dependency on a small number of large customers is relatively low. Customer concentration in Automotive is higher than in Industrial; however, in the past two years, these risks have also been ranked higher by the industrial business units. Losing one of the large customers in Automotive would have a high impact and, in the absence of compensatory measures, would be detrimental to Kendrion's growth objective and profitability. The likelihood of this happening is assessed as low to moderate as Kendrion is a technologically advanced player which offers tailor-made customer solutions whose development times and costs are usually high. Kendrion endeavours to minimise its vulnerability by ensuring that single customers do not normally generate more than 5% of Kendrion’s total revenues. Three customers (Volkswagen Group, Thyssenkrupp Bilstein and Daimler) each generate more than 5% of the consolidated revenues. Apart from the risks related to large customer accounts, large customers provide opportunities for accelerating (international) growth. It is also easier to justify R&D efforts and investments for larger projects.
Kendrion’s main response to this risk is to actively pursue the reduction of single customer dependency by securing projects from other large customers. Kendrion has been successful in this respect during recent years which is evidenced by the changes in the company’s large customers’ share in consolidated revenue.
Increased competition and technological substitution
Kendrion faces competition from peers, in some cases from competing technologies and on some occasions also from (potential) customers. If Kendrion were to lose its competitive edge in relation to these parties and competing technologies, it would lessen Kendrion’s ability to achieve its profitability and growth targets. Furthermore, Kendrion could become unable to offer its markets or customers the solutions they need, due to the company’s inability to meet customer requirements. This is particularly important for Automotive. The impact on organic growth and profitability could be significant, the likelihood and vulnerability are moderate. In view of the pressure imposed on prices in this competitive market, especially high technological solutions are essential to realise opportunities for profitability.
The company carries out innovative projects in close consultation with its customers, an approach which Kendrion also perceives as contributing to the company’s provision of added value. However, new technologies and innovations in the market environment could result in the imposition of changed requirements on Kendrion’s products and operations. Although this would offer the company opportunities it could also result in the risk of being unable to meet the requirements or lagging in developing new solutions. Kendrion uses a number of tools to strengthen innovative development in its operations.
Kendrion’s strategy to localise production as much as is feasible reduces its vulnerability to risks from competitive shifts resulting from exchange rate movements and changes in export or import restrictions. Although Kendrion's main focus is on technological leadership, it also actively manages the cost price by exploiting low-cost production opportunities within the group as well as exploring alternative use of materials and sources.
Non-performing Information Systems (IS) and cyber security
Inadequate IS (including the infrastructure) could have a significant impact on the company’s business processes and, consequently, the results. The likelihood and vulnerability are low to moderate as a range of mitigating actions have been taken.
The major IS risks include the risk of faults in IS operations, interruptions, loss of data, unauthorised system access and other events as a result of insufficient cyber security. Information Systems are of importance to Kendrion, both in terms of the risks and business support. Kendrion’s Executive Board, in particular, the CFO bears the overall IS responsibility. Kendrion has implemented a corporate IS policy and strategy that governs:
- The arrangements for IS decision-making including which decisions can be made at which level (central or local);
- IT governance for system and data responsibility (master data management);
- The arrangements for sourcing IS products and services for operating companies;
- The requirements to be met by the IS organisation in serving its internal customers;
- Periodical external information security audits;
- The measures to mitigate risks, such as access security programmes, equipment backup and recovery, change management procedures, etc.;
- The development of solutions for customer requirements (such as EDI) and the integration of suppliers in the supply chain for Kendrion’s processes (supplier portals).
- An adequate governance structure throughout the entire project;
- Thorough preparation;
- Balanced selection of financially strong suppliers;
- Milestones and extensive cutover planning and reviews;
- Audits for important go/no-go decisions;
- Business case analysis – internal and external (benchmark against other companies);
- End user acceptance and training.
Infrastructure – Operating companies are supported by the group’s central IT department in Villingen, Germany. This department sets and coordinates the service level agreements with suppliers such as application and network providers, security providers, maintenance companies and suppliers of hardware and networks for the entire group. Kendrion works with highly skilled IT staff and reputable external and international IT suppliers. The servers are well protected against outsiders, with firewall and unauthorised-access control. Appropriate procedures have also been implemented for regular backups and disaster recovery of the data.
Software application portfolio – Operating companies use a standardised ERP system, Microsoft Operating Systems (OS) and applications and software for specific applications such as project management. The software is stable and Kendrion has sufficient knowledge required for user support.
ERP implementations and upgrades always introduce risk of business interruption. Kendrion has implemented measures to minimise these risks by strict and high-level governance that also extends to project management. In 2016, Kendrion’s Executive Board decided to implement a global upgrade of the standardised ERP system. The migration to this upgrade was successfully completed as scheduled in the first quarter of 2017.
Attraction and retention of qualified staff
People are Kendrion’s most important resource. A lack of skilled staff could impact most of the Kendrion’s strategic objectives. The likelihood and vulnerability are moderate to high and, consequently, this is an important area for attention. Kendrion’s required know-how is highly specific and requires on-the-job-training.
Mitigating actions include:
- The Kendrion Leadership & Performance Programme for senior management at the Rotterdam School of Management, which provides high-quality management training;
- The HIPO programme for high potentials;
- Apprentice programmes at several companies;
- Regular contact with relevant education institutes;
- Various in house training programmes;
- Health & safety programmes, good labour conditions and staff satisfaction surveys, which are also part of the CSR Programme 'Taking Responsibility'.
Kendrion also initiated the implementation of a new Succession Planning tool for Kendrion’s top management. The implementation of this tool was finalised in the course of 2017.
Future product portfolio, including impacts of megatrends
A focus on products that ultimately prove to be unsuccessful and a failure to respond adequately to market disruptions and to the impact of megatrends may in the longer term lead to stagnation and even a decline of market share and financial performance.
The mitigating measures relating to the risks ‘Increased competition’ and ‘Technical substitution’ also apply to this risk. In addition to Kendrion’s innovation activities, M&A can provide further support in ensuring an adequate future product portfolio and technology base.
Volatile economic conditions
Deteriorating economic conditions could be detrimental to Kendrion’s financial results and the company’s ability to achieve its strategic goals. The likelihood is significant and vulnerability is moderate to low. Kendrion has a flexible organisation to enable the company to ‘breathe’ with the economic tides. Flexibility not only relates to working with temporary staff and focusing on the reduction of variable operating expenses, it also includes the ability to communicate up-to-date financial information efficiently to decision-makers throughout the organisation, make justifiable insourcing and outsourcing decisions, adjust supplier contracts, implement performance-dependent employee benefits, work with flexible hour contracts and make use of opportunities for the reduction of working hours in specific countries. Kendrion periodically carries out sensitivity analyses to review the relationship between the decrease in revenue and the operating result. These analyses are performed on the basis of a ‘top-down’ approach with input from the business units.
Furthermore, Kendrion has a solid financial position and sufficient financial resources to continue its investment in growth, both in terms of competent staff and appropriate production equipment. All accounts receivable departments and purchasing departments devote specific attention to the financial position of the company’s customers and suppliers.