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 include new services in connection with non-destructive testing, data security for online applications, sustainable management, as well as testing procedures for wireless devices with a wide variety of different areas of application. Increased acquisition of major contracts, such as monitoring power plant 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. As a result, this compensates for market-related risks, such as declines in demand due to regulatory changes or a downturn in certain sectors, like emissions certification.
Dynamic development of international markets
Major opportunities also continue to exist in the ongoing dynamic development of international markets. The company can tap further potential through a diversified presence in other markets with strong growth – such as India, China, and Brazil – and the continuous expansion of the Group’s range of services in BRICS countries. 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 Persian Gulf. The resulting network, which will follow globalized value chains even more closely, also forms one of the most important pillars of »Strategy 2017«. Increased M&A activities are also a key component of the strategy. Systematic acquisitions follow generic goals which were defined in the »Strategy 2017«. This also includes the recent acquisitions in the field of IT and information security. These will be implemented within the established matrix structure. 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 the Middle East, can be compensated for. Changes to the regulatory framework can result in a liberalization of markets. On the one hand, this is associated with risks for TÜV Rheinland: One example here is Spain for the Industrial Services and Mobility Business Streams. On the other hand, this also opens up additional opportunities for international operations. For example, the Industrial Services Business Stream in Germany demonstrates that a systematic market and service offensive in saturated markets is a suitable means of ensuring sustainable success despite strong competition. In addition to the aforementioned, risks also result from developments specific to individual sectors. A slower recovery in the photovoltaic industry is one example in this regard, which TÜV Rheinland would be affected by as TIC market leader. In Germany, a lower number of vehicle inspections can have a negative impact on the Mobility Business Stream. The potential resulting from the ability to serve major clients thanks to wider coverage has a risk-reducing effect in this regard. The continued consolidation in the TIC industry, combined with price and margin pressure as well as competition becoming more fierce, 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 for 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 Germany in 2013 by several district courts [Landgerichte] and in January 2014 by a court of appeals [Oberlandesgericht]. 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; due to special procedural provisions applicable in France, € 5.8 million were paid in advance to the plaintiffs. 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.
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 on the Group level.
Targeted countermeasures are undertaken comprehensively at an early stage to minimize risks and strengthen opportunities. In addition to market, customer, and competition issues, this particularly relates to internal processes (such as the systematic integration after completed M&A transactions) and to human resources, such as with regard to a lack of qualified staff, for example. Continuous action tracking 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, Finance, Corporate Audit, Legal, Quality Management, Compliance, 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 systemic 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.