Risk management

Our risk management process

• 1

  Identification of risks at the corporate/ plant level

• 2

  Description and valuation of the risks by cause and effect

• 3

  Early warning system and mitigation planning

• 4

  Review and follow up of mitigation measures

• 5

  Reporting on a semiannual basis

Our bottom-up approach for assessing and managing risks

The risk management strategy as approved by the Board of Directors is implemented by the Company management. The risk evaluation is performed semi-annually. The management presents the risk management report along with planned mitigation measures to the Board of Directors semi-annually.

Risk matrix

Risk assessment is done using a two-dimensional approach — amount of damage each risk can have on an actual basis and its probability of occurrence

Risk classification

Risks are classified into four categories — strategic, operational, financial and legal.

Key risk categories	Risk description	Risk class	Mitigation measures	Capitals impacted
Strategic risks
Country risks	Changes in the social, political, legal or economic stability within or outside the country could hamper our regular operations or planned future expansion. Changes in the political and regulatory environment of markets in which we operate, could have an impact on our net assets, financial position and earnings.		The social, economic and political risks are mitigated through continuous observation of the developments in relevant business environments. We then take appropriate actions in terms of changes in strategies to protect our interest.
Strategic market and technology risks	There are transformative changes forecasted in the marketplace such as reducing diesel penetration, stricter emission norms, potential electrification of vehicle powertrain and so on. Customers are increasingly looking for bundled offerings of products and services. On the manufacturing side, we currently rely on a certain degree of vertical integration and comprehensive production expertise. This expertise facilitates improvements in the production process and ultimately safeguards our ability to maintain our competitive position in the market. The evolution of our business from being component-driven to more systems-driven could increase the proportion of value added.		We are developing new evolving technologies and offerings. We are strategically enhancing our production system to be more modular and are aiming towards ‘Factory for Tomorrow’. It is our constant endeavour to improve efficiency to safeguard and further expand our market position.
Operational risks
Market developments	As we are a supplier in the automotive and industrial sector, demand for our products is, to a large extent, driven by macroeconomic conditions. Beside these, in the automotive OEM division, demand is also affected by changes in consumption patterns, fuel prices, interest rate levels and so on. Cumulatively, these factors lead to significant volatility in automobile production, which makes exact sales forecasting difficult. Sales in the industrial division is spread across diversified business fields and no significant risks are identified in these markets. A change in forecasted market trends could have an impact on the net assets, financial position, and the earnings of both automotive and industrial markets.		Markets are analysed on an ongoing basis to detect changes in market structure or regulations early on. Through managed cost efficiency programmes, we flexibly and dynamically reduce the amount of damage from unexpected market slowdowns. Should prices deteriorate unexpectedly, the amount of damage arising from the risk is reduced by renegotiating with suppliers as much as possible.
Delivery performance	Our ability to deliver represents a key competitive factor for a long-term relationship of customer trust. This factor is being constantly enhanced by systematic improvements in production and delivery logistics. Inability to meet contractual delivery dates could have an impact on our financial position and earnings.		We have built high-performance distribution centres aimed at improving market supply and delivery performance in strategic locations.
Procurement risks	These risks arise mainly from fluctuations in market prices of raw materials and the ability of our suppliers to deliver. Adverse fluctuations in market prices and/or suppliers’ financial distress could have an impact on our financial position and earnings.		Our purchasing team ensures an optimal supply of goods and services to your Company, with a strong focus on quality, cost and delivery performance. By negotiating prices and utilising economic synergies, we are largely able to obtain competitive prices. We keep a close watch on the operations of our suppliers for early signs of distress and are able to intervene , when necessary, to secure our interests.
Information Technology (IT) risks	The importance of the IT systems utilised across various functions within your Company is growing. The operability of business processes and, therefore, the continuity of operations depend on the availability of IT systems. Three protection targets – confidentiality, integrity and availability – steer your Company's IT security management and protection of data and IT systems. Unauthorised access to IT systems and modification and misappropriation of sensitive business data could have an adverse impact on your Company's net assets, financial position and earnings.		We have adopted the highest standards of IT security systems and constantly upgrade our IT security infrastructure. We educate/train our employees on IT security and inform them about the precautions users must take, to ensure that the IT infrastructure and business data are adequately protected against any possible IT risks.
Information or cyber security risks	Cybercrimes impose significant threat to the information security and trade secrets of your Company. These may lead to theft, loss, unauthorised dissemination, illegal access and misuse of sensitive business information. Given the increasing number and professionality of criminal attacks, cybercrimes cannot be entirely ruled out and could have an impact on our net assets, financial position and earnings.		To mitigate cyber security risk, we have set up various security measures, including internet proxy gateway with seven layers of security. Additionally, Advanced Persistent Threat (APT), which is one of the latest alarming systems for any illegal intrusions, has also been implemented. Apart from these, we have also implemented an Intrusion Prevention System (IPS), which mitigates the risk of cyber-attack through unsecured IT environment, such as software from production machines.
Production risk	Given that our manufacturing facility is capital-intensive, a large proportion of our costs are fixed. As a result, decrease in utilisation of plant capacity leads to under absorption of costs and impacts our earnings adversely. Moreover, influence of force majeure could result in delays or interruptions of production and supply chain, leading to non-fulfillment of market demand. The period between failure at plant and arrangement of alternative source could impact our net assets, financial position and earnings.		We regularly review market conditions and align our production plan accordingly. Where necessary, we realise alternative source from another plant within Schaeffler Group. To minimise the probability of occurrence of unplanned interruptions, we take extensive fire-prevention measures
Loss of market share	We face competition in all business fields we operate in. As a result, we are exposed to the dual risk of either being displaced by existing or new competitors or our products being replaced by product innovations or new technological features. Customer dissatisfaction on price, quality, delivery performance and design could lead to loss of market share.		We ensure close cooperation with our key customers on product development. We have implemented strict product quality controls to reduce the likelihood of substitution. We are also developing products that will help us to step up the value chain from components to systems.
Financial risks
Warranty and liability risks	We are known for our high standard of product quality. We employ a certified quality management system besides continuously striving to improve quality processes. Notwithstanding these, there is a risk of products with poor quality being delivered to our customers. Usage of defective parts can lead to damages, unplanned repairs or recall on the part of customers. This can result in liability claim or reputational damage.		We respond to such risks by adopting strict quality control measures and continually improving our production processes to minimise the probability of warranty and liability risks materialising. All product and recall liability risks are insured.
Product piracy risks	Our product brands INA, LuK and FAG are associated with best-in-class quality, durability and reliability standards, making them increasingly susceptible to product piracy		We protect our intellectual property by engraving special markings on our products, making them anti-counterfeit. We also follow a strict vigilance process to ensure timely detection of counterfeiting instances and initiation of legal actions against the guilty. Additionally, we regularly upgrade our digital anti-counterfeit app to support these initiatives.
Tax risks	Our company is subject to tax audits. Tax authority’s interpretation of the tax law or of relevant facts made in the current or future tax audits may differ from that of your Company. This may lead to adjustments to tax base and increase in tax liabilities. Additional tax payment as a result of an adjustment to the tax base could have an impact on our financial position.		We extensively evaluate existing and new tax laws, both internally and with external tax experts, before implementing them. The implementation strategy is well documented, reviewed periodically and amended as necessary.
Pension risks	We have pension obligations towards our employees. Such obligations are measured using actuarial valuation based on assumptions with respect to the discount rate, increase in personnel payments and statistical life expectancy. Planned assets are invested with external agencies, which are subject to fluctuations in value. A change in these parameters could have an impact on our net assets.		We use government bond rate as discount rate and invest in pension fund with a Government of India enterprise (LIC). Actuarial valuation is carried out on a quarterly basis, adequate provisions are established in books of accounts and funds are appropriately transferred to LIC.
Currency risks	We are exposed to currency risks due to our cross-border transactions. The largest currency risks from operations result from fluctuations in the USD and Euro exchange rates.		We follow a structured hedging strategy to counter currency risks, which is reviewed periodically.
Liquidity risks	The risk that our company will not be able to meet its payment obligations as they come due is referred to as liquidity risk. The risk can arise if financing needs cannot be met by existing funding arrangements, including surplus cash balance. Even though we have surplus cash and do not foresee any liquidity risks, we have put efficient liquidity management measures to mitigate associated risks.		We monitor liquidity risks using a rolling liquidity plan with a forecast period of 12 months. Short-term cash flows are monitored daily as well.
Legal risks
Compliance risks	Given that we operate at different locations, we must comply with laws and regulations across the country. We face a risk of violating any existing law despite careful observance of legal requirements.		We have set up a comprehensive compliance management system where the laws and regulations applicable to your Company are mapped. Each compliance requirement is mapped to the relevant process owner. The system sends alerts and reminders to each such process owner to enable them to comply with the requirements in a timely manner. Our management regularly reviews a comprehensive compliance report. The system is also updated regularly to capture regulatory changes and amendments.

• Financial capital
• Manufactured capital
• Intellectual capital
• Human capital
• Social and relationship capital
• Natural capital

• Risk with high probability and high negative impact on financials

• Risk with medium probability and medium negative impact on financials

• Risk with low probability and medium impact on financials or high probability but negligible impact on financials