annual report - Kendrion

Strategic and business risks
Kendrion’s strategic and business risks
identified are reviewed below.
This review extends to a selection of the
major risk factors, and is not exhaustive.
The four most important risks, designated
by ’top 4 risk’ in the heading of the
relevant paragraph, are:
z adaptation to economic downturn;
z project management;
z commodity markets;
z Information Systems.
>> Strategic risks
External
Adaptation to economic downturn
(top 4 risk)
A lack of adaptation to deteriorating economic
conditions could be detrimental to Kendrion’s
financial results and the company’s ability to
achieve its strategic goals
Kendrion expects greater volatility in future
economic development. In addition, the
situation in the eurozone remains unstable
at present. An economic decline could be
detrimental to Kendrion’s profitability.
Kendrion has prioritised the maintenance
of a flexible organisation to enable the
company to ’breathe’ with the economic
tides. Flexibility not only relates to working
with temporary personnel or with personnel
with contracts of employment for a definite
period and a focus on the reduction of
variable operating expenses. It also
includes the ability to communicate up-todate
finance information efficiently to
decision-makers throughout the
organisation, the development of plans
to enable personnel to switch between
business units, make justifiable insourcing
and outsourcing decisions, adjust supplier
contracts, implement performancedependent
employee benefits, work with
flexible hour contracts and make use of
opportunities for the reduction of working
hours in specific countries.
Kendrion has implemented a flexibility
measurement system for each operating
company and, consequently, for each
business unit.
The flexibility measurement focuses
primarily on variable staff costs and
variable or semi-variable other operating
expenses. Specifically, it is a cost block
Kendrion can use to reduce costs when
revenue decreases. Variable staff costs
include temporary employees, overtime
and fixed-term contracts; while variable
other operating expenses include transport
and packaging costs, sales costs, etc.
Additionally, working-time reduction in
certain jurisdictions, such as Germany offer
cost compensations.
Kendrion will retain its focus on flexibility.
Steps have been taken to further improve
the quality of the periodic measurements.
Flexibility came under pressure during the
year under review due to the scarcity on the
German labour market which resulted in a
lack of available highly-qualified temporary
staff and new employees’ non-acceptance
of fixed-term contracts. Nevertheless,
throughout 2011 Kendrion’s flexibility rate
fluctuated between approximately 20 and
30%. This latter percentage takes account
of government working-hours reduction
schemes.
Kendrion carried out a sensitivity analysis
to review the relationship between the
decrease in revenue and the operating result.
Kendrion strives to keep pace with the
volatility of market demand and ultimately
to mitigate a 35% decline in revenue before
incurring an operating loss and without
redundancy expenses. However, as this is
not feasible for a longer period, structurally
lower revenues result in the need for
fundamental changes to the organisation.
In addition to the increased focus on
flexibility, Kendrion’s objective is to
decrease the company’s dependency on the
European and, more specifically, German
market. Kendrion is of the opinion that
a broader geographical spread in
combination with a spread between
customers and markets will reduce
the company’s vulnerability to regional
economic or market downturns.
Sustainable market developments/
competition
Kendrion could become more dependent on
one of its markets in which it operates
Kendrion is a technically-driven company
with a leading position in the European
market. The barriers to entry to specific
markets are substantial due to the high
levels of technological knowledge and
investments that are required. Kendrion’s
competitors are often smaller family-owned
companies focused on a specific segment.
In 2011 42% of the revenue from
electromagnetic components and systems
was generated by the automotive market,
a market characterised by competition and,
consequently, pressure on prices. As a
result, and notwithstanding the companies’
good market positions, customers
endeavour to pass this pricing pressure
back up the supply chain. Kendrion has
adopted a strategy stipulating that the
company shall not become excessively
dependent on a specific market or customer
and has adjusted its investment and
acquisition policy accordingly. Kendrion has
a broad spread of customers in a wide
range of market segments. Just one
customer, supplied indirectly via several
product categories and group companies,
accounts for more than 5% of the
company’s total revenue (12%).
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annual report 2011