Opportunity and risk report
In connection with risk management, special attention is paid to opportunities and risks that are not explicit elements of planning.
Important aspects result from TÜV Rheinland’s global orientation and primarily relate to customers and markets and to legal and political framework conditions.
Opportunities are mainly associated with service innovations in individual Business Streams and Business Fields. Prominent examples of this are new approaches in the area of non-destructive testing, online applications, knowledge transfer and test procedures for wireless devices subject to different standards and areas of application. Increased acquisition of major contracts, such as monitoring and infrastructure projects, offers further potential. Opportunities present themselves in this regard through the option of offering customers a comprehensive package of services in a global network. For example, cross-sectoral solutions are offered for data and information security. As a result, this compensates for market-related risks, such as declines in demand due to regulatory changes or a downturn in certain sectors, such as the area of conventional power plants in Germany.
Dynamic development of international markets
Major opportunities also continue to exist in the continued significant growth of international markets. These include, for example, India, the Gulf region and China, where a diversified presence and continued expansion of the range of services offered are helping tap further potential. In addition to the development of current active markets, penetrating new markets remains a key area of focus. Apart from other Asian countries, this includes the Gulf region and South America. The resulting network, which will follow globalized value chains and client demand even more closely, forms one of the most important strategic pillars of TÜV Rheinland. Another essential component in this regard is the increased M&A activity. Systematic acquisitions follow generic goals which were defined in the corporate strategy. Of particular note in this context are the development of risk and security services in Industrial Services, expansion in international presence and expertise in data and information security, and entry to the professional training market in India. The institutionalized, close coordination between business-specific and regional expertise results in additional opportunities – for example, in identifying new fields of activity and the effective and efficient handling of cross-border projects and services.
Furthermore, reducing complexity and increasing standardization in all Business Fields open up areas of potential. In addition to optimizations in sales and administration, this particularly includes pooling operations across national borders and the use of innovative IT applications according to customer wishes. Finally, optimized project management can help reduce risks in implementing internal and external development projects and large projects.
Legal Framework Conditions
Relevant risks initially exist based on the stability of political conditions and international financial systems as well as their possible impact on the economy. In this regard, the Group’s increasing diversification, both geographically and with regard to the range of services offered, has a risk-reducing effect, meaning that instabilities, such as those currently occurring in Eastern Europe, can be compensated for. Changes to the regulatory framework can result in a liberalization of markets. On the one hand, this is associated with opportunities for TÜV Rheinland. In Germany, for instance, the area of mobility demonstrates that a targeted, nationwide presence, including the provision of solutions for corporate customers in saturated markets with cutthroat competition and the risk of declining numbers, is suitable to promoting long-term success. On the other hand, this also entails risks. One example here is Spain for the Industrial Services and Mobility Business Streams. Risks are also involved in sectoral developments, for example as the result of changes in customer requirements and demand in the field of information and telecommunications technology. In addition to this, various markets also pose a challenge in terms of finding skilled workers in numbers sufficient to enable further innovation and growth. Continued consolidation in the TIC industry, combined with price and margin pressure as well as increasingly fierce competition, pose an ongoing challenge.
Risks may arise both from one’s own business activities and from external factors; thus, in the case of breast implants of the French company Poly Implant Prothèse (PIP) TÜV Rheinland is mentioned – in connection with conformity assessment procedures conducted pursuant to the European Medical Devices Directive regarding CE marking – as notified body. PIP continuously deceived the notified body TÜV Rheinland LGA Products GmbH (TRLP) by using a silicone gel for the production of the implants which was not approved for this purpose and was not covered by the certification by TRLP. Immediately after this case of fraud had become known in 2010 TRLP withdrew its certificates, and has furthermore taken legal action against PIP. In December 2013, the accusation of fraud was confirmed by the criminal court of Marseille in the context of the first criminal proceedings against PIP’s former management; those who were primarily responsible at the company PIP were found guilty of aggravated fraud and deceit, and some of them were sentenced to several years of imprisonment. In these proceedings, in which TRLP appeared as injured party and thus as joint plaintiff, the systematic deceit – also of the notified body TRLP – by PIP’s management was established.
Furthermore, damages claims filed against TRLP in connection with PIP breast implants were dismissed in January 2014 by the Palatinate Court of Appeals [Pfälzisches Oberlandesgericht] of Zweibrücken and numerous district courts in 2013 and 2014. The German courts consistently confirmed that TRLP fulfilled the duties of a notified body responsibly and in compliance with all laws and legal norms applicable in Europe. PIP’s fraudulent actions were not noticeable for a notified body, nor could they be detected with the means stipulated by the legislator.
In France, in November 2013 a single commercial court decided differently in the first instance. TÜV Rheinland immediately lodged an appeal against this decision; the claims are unfounded since, according to the legal opinion taken by TÜV Rheinland, there is no conduct giving rise to liability. In September 2014, this legal opinion was confirmed by a decision of the District Court of Paris (Tribunal de Grande Instance de Paris). According to this decision, the District Court of Paris also found that TÜV Rheinland fulfilled its duties as notified body in compliance with the law and norms; this decision is thus consistent with the decisions of the criminal court of Marseille as well as the judgments of German courts.
Systematic risk management
Using systematic risk management, the aforementioned risks can be made more manageable or rather the undesirable effects thereof weakened. Due to the integration of risk management into TÜV Rheinland’s management information system, risk is controlled by appropriate evaluation consistently in all companies and Business Streams as well as at the Group level.
Targeted countermeasures are undertaken comprehensively at an early stage to minimize risks and strengthen opportunities. This applies not only to market, customer and competition issues but also to internal processes in particular, such as systematic integration following M&A transactions. Continuous tracking of measures and updating of opportunity and risk reports in the course of the year are obligatory. The Executive Board has set up a risk unit to which the Controlling, Compliance, Finance, Quality Management, Corporate Audit, Legal, and Insurance Divisions belong. Its task is to analyze and evaluate opportunities and risks.
TÜV Rheinland counteracts liquidity risk by means of active financial management, the overriding objective of which is to ensure that all Group companies are solvent at all times. Specifically, this includes systematic working capital and treasury management. The latter particularly includes implementing cash pooling and in-house banking. Financial derivatives are used to hedge currency and interest rate risks.
As far as possible, risks are hedged by taking out specific insurance coverage to minimize their financial consequences up to a defined deductible.