Annual Report 2008 in PDF - GKN

Competitive markets and competition
The Group’s markets are very competitive and our ability
to compete for contracts depends on the effectiveness
of our products and our ability to manage costs and
maintain customer relationships.
Customer concentration and relationships
The Group portfolio is built around a broad-based,
diversified business across a wide range of geographic,
customer and product offerings. The nature of the
automotive and aerospace industries does mean,
however, that a significant degree of customer
concentration exists. Approximately 60% of our sales
revenue is from 25 major global customers. The loss of,
or damage to, certain of these relationships, particularly
in the light of the rapid decline in automotive volumes
seen in the latter part of 2008, or a significant worsening
of commercial terms with these customers could have a
material impact on the Group’s results. The Group is not
dependent on contractual or other arrangements with any
individual customer.
Technological change
The markets for our products and services are
characterised by evolutionary change driven by consumer
preference for increased safety and environmentally
friendly vehicles and aircraft. Many of the Group’s
products are technologically advanced or use leading
edge processes in their manufacture. In order to maintain
the competitiveness of our products, we make focused
investment in research and development to achieve
technological leadership in our key businesses and retain
the competitive advantage which this leadership provides.
Acquisitions
The Group has grown both organically and through
acquisition. Capturing the value and integrating the
operations and people of acquired businesses is a
complex process. The Group manages the associated
risks by carrying out extensive pre-acquisition due
diligence, carefully managing the integration process and
carrying out post-acquisition audits.
Manufacturing and operational risk
Manufacturing strategy
Strategies are developed with the objective of
manufacturing in the most competitive locations for
our customers’ requirements. Failure to meet customer
requirements upon relocation of production could impact
upon both short and longer term customer relationships.
We have considerable experience of implementing
operational change and a wealth of experience to draw
on to minimise this risk. In the current economic climate,
the Group is undertaking strenuous efforts to align its
cost base through the flexing of variable costs (labour
and material) as well as fixed cost reductions to lower our
breakeven point.
Product quality and liability
The nature of our products means that we face an inherent
risk of product liability claims if failure results in any claim
for injury or consequential loss. However, our customers
require high levels of quality assurance and manufacturing
systems in place to ensure that our quality record is world
class in both Automotive and Aerospace. Appropriate
levels of insurance are in place covering product liability,
although the Group does not generally insure against the
cost of product warranty or recall.
Supply chain
The Group’s manufacturing processes may have
dependencies on the availability of specific equipment
and raw materials. An inability to supply because of their
non-availability would affect sales and relationships with
customers. Active monitoring of the financial viability of
our suppliers is undertaken and contingency plans exist,
including second sourcing of key materials, to ensure
continuity of supply. In most cases this would result in
additional costs which may or may not be recoverable.
Furthermore, close relationships with our supply base
and clear communication of movements in demand help
to support continuity of supply. GKN’s sales to original
equipment manufacturers could also be adversely
affected by the failure of other tier one suppliers.
Commodities
The Group has ongoing exposure to the price of a number
of commodities, in particular steel, titanium, aluminium,
copper, nickel and molybdenum. This exposure is managed
by entering into supply contracts to reduce short term
volatility of price and supply. In addition, where commodity
costs increase, agreements are in place to surcharge
customers in order to protect the Group’s profitability.
IT systems reliability, security and change
Our IT systems and networks are secured by back-up
systems, hardware, virus protection and other measures
but any interruption could lead to disruption in service. A
breakdown of security or damage arising from any cause
could affect our operational performance or revenue.
Management resources
Active management of our people around the world
is critical to the success of our business. Training and
development initiatives and reward systems are in place
to support the recruitment and retention of appropriately
qualified and skilled personnel. It is also essential that
key technical staff remain in place to support the Group’s
engineering skill base. Furthermore, as restructuring
takes place, we ensure that we do not diminish the overall
capability of the Group.
Environmental risk
The environmental laws of various countries and our
customers’ requirements impose obligations on our
businesses to operate in an environmentally friendly
way. Failure to do so could result not only in financial
consequences but also in damage to our reputation and
may impact shareholder value as well as our employees
and communities in which we operate. In environmental
terms, our manufacturing processes are not inherently
high risk, nevertheless, great care is taken to prevent
any adverse impact arising. Further details of how this is
managed are given on pages 46 and 48.
Insurance
The Group insures against the impact of a range of
unpredicted losses associated with business assets such
as buildings, plant, machinery and ensuing financial
impact arising from interruption to the business, as well
as its liabilities (whether statutory or not) arising from
employees, products and services supplied or the public
at large. For non aviation products, insurance takes the
form of a significant level of capped self-insured retention
at the Group level (within GKN’s own captive insurance
company, Ipsley Insurance Ltd (Ipsley), which does not
insure the risks of any other entity) and a much lower
level of self-insurance or deductible at the subsidiary
level. Catastrophe insurance is then purchased in the
commercial insurance market over and above these
levels of retention. Ipsley’s current participation in
GKN’s principal insurance programme is £10 million per
incident capped at £20 million in any one year. Due to the
nature of the risk, the Group’s aviation products liability
insurance is placed solely in the commercial market.
Business Review
Financing and Risk
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