Risks and uncertainties

GKN has an extensive risk management framework designed to identify and assess the likelihood and consequences of risk and to manage the actions necessary to mitigate their impact. A detailed description of this framework is given in Corporate Governance. Set out below are the principal risks and uncertainties which could have a material impact on the Group and the corresponding mitigating actions that are in place. Additional risks not currently known or which are currently regarded as immaterial could also adversely affect future performance.
Market risks.
Risk Nature of risk and potential impact Mitigation
Market cycles Changes in macro-economic conditions, consumer demand and preferences. GKN’s financial performance could be impacted by volatility in automotive demand and changing consumer preferences; rescheduling or cancellation of orders for civil aircraft and changes in amount or timing of defence spending; volatility in agricultural, construction, mining and industrial markets.
  • Diverse business portfolio serving different markets
  • Effective management of the cost base
  • Efficient cash management including focus on working capital and investment spending
  • Ongoing review of market indicators
Customers Significant customer concentration in automotive and aerospace industries. Some 67% of Group sales are from 25 major customers, although no customer represented more than 10% of Group sales at 31 December 2010. The insolvency of, damage to relations, or significant worsening of commercial terms with a major customer could result in the loss of future business opportunities, asset write-offs and restructuring actions.
  • GKN is not dependent on contractual or other arrangements with any individual customer
  • Active management of customer relations and credit exposure
  • Strong commercial and engineering focus at customer level
  • Effective programme management
Competition Highly competitive markets with customer decisions based typically on price, quality, technology and service. Customer vertical integration (including OEMs taking production in-house), the entry of new competitors or consolidation of existing competitors could restrict GKN’s ability to grow its business.
  • Continual review of competition and market trends
  • Investment in engineering and lean manufacturing capabilities
  • Strong customer relationships
  • New product technology
Technology Inability to launch new products, new product applications or derivations of existing products to meet customers’ needs. GKN may lose customers to competitors offering new technologies in the event of an inability to adapt to market developments. Changes in legislative, regulatory or industry requirements, competitive technologies or consumer preferences may render GKN’s products obsolete or less attractive.
  • Regular assessment of market and technology trends and drivers
  • Divisional technology plans aligned to emerging and future trends
  • Focused investment in research and development
  • Effective programme delivery
Geo-political Legal, regulatory, political and socio-economic conditions in countries of operation. Given the global footprint of the Group, its operations could be adversely impacted by changes in the political, economic and regulatory environments in countries in which it does business.
  • Ongoing review of market environment including political, fiscal and regulatory developments
  • Group-wide governance framework supported by a strong control environment
Operational risks.
Risk Nature of risk and potential impact Mitigation
Supply chain Lack of availability of equipment, components, services and raw materials that meet specifications. Volatility in production and the need to maintain appropriate inventory levels requires effective supply chain management. Supply chain disruption could impact GKN’s sales to and relationships with its customers and result in additional unrecoverable costs.
  • Ongoing assessment of supplier technology and dependency
  • Dual sourcing to reduce dependence on single supplier
  • Monitoring of financial viability of key suppliers
Input costs Rising cost of raw materials, labour and energy. The cost of raw materials for the Group’s products and other key inputs may fluctuate and could adversely affect the Group’s earnings if it were unable to pass increases on to its customers.
  • Contract negotiations to ensure the ability to pass on charges to customers
  • Secure long term contracts for key inputs with stable pricing
  • Forward purchasing of energy requirements where appropriate
  • Maintaining good labour relations
Product quality Potential liabilities for defects in products, warranty claims or product recalls. Product quality issues could adversely affect profits and damage GKN’s reputation.
  • High levels of quality assurance
  • Robust manufacturing systems
People Inability to attract and retain qualified personnel, particularly engineering professionals. The absence of adequate talent and a lack of continuity in management and leadership could result in an inability to execute the strategic plan and deliver improving financial performance.
  • Annual talent management and performance development process
  • Competitive reward packages and Group-wide training and development programmes
  • A high performance culture and motivating environment
Acquisitions Inability to realise expected benefits of acquisitions. A lack of suitable acquisition targets aligned with the planned growth strategy, a failure to integrate acquired businesses successfully, or an inability to capture value from them could impact operations and prevent successful delivery of GKN’s strategic objectives.
  • Focused reviews to ensure strategic alignment of acquisitions
  • Extensive pre-acquisition due diligence
  • Careful management of integration plans by experienced on-site management
  • Post acquisition reviews
Financial risks.
Risk Nature of risk and potential impact Mitigation
Pensions Pension deficit levels are affected by changes in asset values, discount rates, inflation and mortality assumptions. Accounting valuations of pension obligations can cause volatility in financial results. Additional Company pension contributions may restrict investment in businesses.
  • Active management of pension scheme assets and long term view of liability assumptions
  • Continuing review of the level of benefits provided
  • Alternative funding and deficit reduction plans implemented where appropriate
Exchange rates Currency risks: transactional (subsidiary sales or purchases in currencies other than their functional currency) and translational (exchange rate movements in investments in overseas operations). The Group’s financial statements may fluctuate as a result of movements in exchange rates.
  • Hedging of transaction exposures through forward foreign exchange contracts
  • Balance sheet translational hedging policy (currently suspended due to continuing volatility of foreign currencies against sterling)
  • Borrowings in local currency including access to overseas debt capital markets
Taxation GKN is subject to complex tax laws and audit procedures. Actual tax liabilities could differ from accruals which are based on management judgements.
  • Ongoing monitoring of tax developments in major jurisdictions
  • Group-wide tax compliance programme

The Group insures against the impact of a range of unpredictable losses associated with both its business assets and liabilities. GKN’s risk financing strategy is based on a significant level of capped self-insured retention at the Group level (within GKN’s own captive insurance company, Ipsley Insurance Ltd, which does not insure the risks of any other entity) and a much lower retention at subsidiary level through deductibles. Catastrophe insurance is then purchased in the commercial 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.