In the following section we explain the specific risks arising from our business activities.
The main risk for global economic development over the medium term is the risk that the recessionary tendencies caused by the global financial crisis could last for a longer period. The macroeconomic risk situation again deteriorated significantly in 2008 compared with the prior year. The main risks continue to be high energy and commodity prices, lasting liquidity bottlenecks, growing protectionism and ongoing imbalances in foreign trade. Changes in legislation, taxes, or customs duties and a lasting increase in state intervention may also have a substantial adverse effect on the Volkswagen Group’s international business.
Even if growth rates in the markets in Asia, South America, and Central and Eastern Europe fell sharply towards the end of 2008, these markets were still the main drivers of growth in global demand for passenger cars. However, in some of the countries in these regions, there are high customs barriers or minimum local content requirements for domestic production. These factors make it difficult to achieve a larger increase in sales volumes. Our substantial market coverage in the most important markets entails risks that relate mainly to price levels. Massive discounts, used mainly to promote sales in the US automotive market, but also in Western Europe and China, continue to put the entire sector under pressure. As a supplier of volume models, we would be particularly affected if competing manufacturers were to further step up their sales incentives. We continue to approve loans for vehicle finance on the basis of the same cautious principles applied in the past, taking into account the regulatory requirements of section 25a(1) of the Kreditwesengesetz (KWG – German Banking Act).
We sell most of our vehicles in Western Europe. Consequently, a sustained drop in demand or in prices in this region would have a particularly strong impact on us. We counter this risk with a clear, customer-oriented and innovative product and pricing policy. Outside Western Europe, however, our overall delivery volume is widely diversified across the markets of North America, South America/South Africa, Asia Pacific, and Central and Eastern Europe. In addition, we enjoy, or are aiming to attain, a leading position in a number of established and emerging markets. Moreover, strategic partnerships give us the opportunity to cater to regional requirements.
Current developments on the financial markets have substantially increased the cost to our dealerships and sales companies of financing their business through bank loans. We minimize the risk of their insolvency by offering automotive dealers and outlets financing on attractive terms via our financial services companies, as part of a dedicated Group support system.
The European Commission plans to end design protection for visible vehicle parts. If this plan is actually implemented, it could adversely affect the Volkswagen Group’s genuine parts business.