General risks and opportunities
Economic and market risks can arise due to general economic, political and social trends. The specific development of the construction sector and the sanitary industry in the respective countries and regions is considered particularly important in terms of industries. The Wilo Group is dependent on these developments to a significant extent. However, the broad international presence of the Wilo Group also helps to balance risk between activities in individual regions.
The Wilo Group carefully monitors and constantly analyses developments and expectations for the economy as a whole, politics and customers’ industry developments on account of uncertainty and risks. If necessary, appropriate countermeasures can thus be taken early in order to safeguard the current and planned economic situation of the Wilo Group as well as possible. Special attention is paid in this context to individual country risks, and targeted countermeasures have been defined to minimise them. Although the conditions on the global markets remain extremely uncertain and expectations for the future are therefore risky, selected Asian, Latin American and African markets offer very good growth opportunities, though these markets also have elevated risks. The Wilo Group reduces its risk potential considerably by adopting targeted organisational changes, expanding and optimising the utilisation of local production capacity and leveraging synergies.
In 2016, the global economy saw moderate growth similar to that of the previous years. Growth remained modest in the industrialised nations, and major emerging economies were curbed by still relatively low energy and commodity prices as well as structural deficits. The prospects for 2017 are only a little more positive. The expected continuation of the growth slowdown in China and a foreseeable rise in US interest rates could further curb economic development in the emerging and developing nations. In contrast, a return to an upward tendency in oil and commodity prices will relieve some of the pressure on oil-producing nations. Geopolitical risks remain. In addition, the uncertainty connected with factors that could slow down economic performance remains high. These include potential policy changes in the USA and in the EU after the elections coming in 2017. Moreover, protectionist tendencies are increasing worldwide. Similarly, the lengthy Brexit negotiations and the risk of burgeoning new government financing and banking problems in the euro area are adding to the uncertainty. The Wilo Group is closely monitoring these developments and, if necessary, will selectively adjust business policy decisions in a timely manner in order to limit the financial risks to the Group and reassess the opportunities. All in all, the Wilo Group considers the potential negative impact of the economic environment on the company’s results of operations to be moderate (medium earnings impact according to risk classification).
Extraordinary external disruptions
As a globally operating group of companies, Wilo is exposed to various external risks. Natural disasters, terror attacks, fire or political unrest can potentially impair business activity at the location in question. The Wilo Group classifies the probability of occurrence of extraordinary disruptions as unlikely, though political unrest is considered possible. Targeted measures have been taken to minimise the potential impact of the current geopolitical crises in individual countries and regions and the relevant forecast risks for the Wilo Group’s business. In the event of a further escalation, additional steps will be taken to limit the risk to which the Group is exposed. To the extent possible and reasonable, the Wilo Group is also adequately insured against operational shutdowns and property damage. In addition, and appropriate emergency plans and preventive measures have been developed and implemented to minimise the potential negative effects. The Wilo Group classes the earnings effect of extraordinary external disruptions as moderate (medium earnings impact according to risk classification).
Legal and regulatory environment
Material changes in legal conditions and the regulatory environment (e.g. restrictions on trade, tax legislation, product quality and safety standards) can have a negative or positive effect on the business activities of the Wilo Group.
On the one hand, restrictions on trade could make commodity procurement more difficult or more expensive and the sale of products in certain markets or regions may be restricted. Recently, there has been a global rise in protectionist tendencies and the rejection of free trade and globalisation. It is currently uncertain whether these movements will gain the upper hand and actually translate into restrictive measures.
Heightened requirements as a result of product quality or safety standards may lead to increased production or research and development costs. At the same time, changes in legal conditions and the regulatory environment can also give rise to opportunities. For example, the introduction or tightening of energy efficiency directives could lead to increased demand for energy-efficient products (further information can be found in the “Energy shortage and the Ecodesign Directive” section of this report on risks and opportunities).
With its broad range of high efficiency pumps, the Wilo Group is in an ideal position to serve the respective markets quickly and comprehensively. The legal conditions and the regulatory environment in all of its key markets are continuously observed in order to ensure that it can identify potential problem areas or opportunities at an early stage and quickly adapt its business activities accordingly. The occurrence of risks arising from the legal or regulatory environment is possible. The impact on the Wilo Group’s results of operations is considered to be moderate (medium earnings impact according to risk classification).
The rapid growth of the world’s population is unabated; population explosions are being seen in Asia and Africa in particular. The United Nations (UN) expects the Earth will be home to nearly ten billion people in 2050. At the same time, the proportion of the population living in urban conurbations is increasingly rapidly worldwide. Over half of all people currently live in cities. The UN estimates that it will be 66 percent in 2050. In addition to the existing, constantly growing cities and metropolitan regions, other entirely new cities will be built. According to analyses by Strategy&, more than USD 350 trillion will be invested in urban and infrastructure development worldwide over the next 30 years. The emerging economies, particularly in the Asia Pacific region, will account for much of this. This megatrend is the source of considerable long-term growth potential for the Building Services and Water Management market segments. The Wilo Group is taking advantage of these long-term opportunities with targeted investments.
Water is a scarce resource. According to estimates from the World Health Organisation (WHO) and UNICEF, around 660 million people around the world currently have no access to clean drinking water. Around 2.4 billion people live without basic sanitation. In future, it will therefore be all the more important to use the available resources efficiently and to utilise intelligent technologies for water extraction and purification. Wilo has responded to this megatrend with its products and system solutions in the Water Management market segment and provides professional solutions for the complex requirements in drinking water extraction, water pumping and wastewater transportation and processing, giving rise to substantial growth opportunities in the EMEA and Asia Pacific regions in particular.
Man-made climate change is becoming increasingly visible and tangible thanks to global warming and the growing incidence of extreme weather conditions. The continued melting of the polar ice caps, rising sea levels and the clustering of droughts and storms are just a few of the expected and already relevant effects of climate change. Drastic action is required worldwide to stop, or at least limit, climate change and its consequences. One important measure is the reduction of greenhouse gases. The Climate Change Conference in Paris in 2015 could be the trigger for the future intensification of protective measures at a government level around the world. In addition to the increased use of renewable energies, the focus is on developing and using more energy-efficient processes and technologies.
The megatrend of climate change gives rise to substantial growth opportunities for all three of the Wilo Group’s market segments in all of the regions in which the company has a presence. Demand for forward-looking, resource-conserving products and system solutions will also increase as a result of the tightening of minimum legal standards. Wilo products already offer customers greater energy efficiency throughout the entire operation phase. High-efficiency pumps reduce power consumption by up to 90 percent compared with older, unregulated pumps. The stated aims of the Wilo Group are to shape the future as an innovation and technology leader and to promote innovations in order to reduce energy consumption and hence lessen the impact of CO2 on the environment.
The digital transformation of society, trade and industry is ever-present. The fundamental changes driven by the establishment of new technologies are affecting almost everything. Modern information and communication technologies are finding their way into all areas of life and commerce. New digital technologies are changing traditional production methods and business processes. Companies’ complete value chains are being affected by the digital transformation. Established business models are being called into question and new, innovative business models are emerging. The process of digitalisation presents significant opportunities for the Wilo Group. In addition to efficiency and productivity improvements and the corresponding optimisation of existing business processes, it also opens up the possibility of new and innovative business models for the pump industry. Digitalising the company and taking advantage of the resulting opportunities requires a fundamental and sustainable reorganisation of the value chain and business processes. To this end, Wilo has developed a digitalisation strategy that is a fixed component of the wider corporate strategy. An interdisciplinary internal group of experts has also been formed and tasked with pressing ahead with the Wilo Group’s digital transformation.
Wilo expects the implementation of digitalisation in the company to have a positive impact on its business activities in the medium to long term. However, the effects on the Group’s earnings and liquidity are difficult to estimate at present. Accordingly, they are not yet included in the Wilo Group’s specific earnings and financial planning