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STRATEGIC RISKS
Risks associated with the competitive environment
Many of the products offered by the Prysmian Group,
primarily in the Trade & Installers and Power Distribution
businesses, are made in conformity with specific industrial
standards and so are interchangeable with those offered
by major competitors. Price is therefore a key factor in
customer choice of supplier. The entry into mature markets
(eg. Europe) of non-traditional competitors, meaning small
to medium manufacturing companies with low production
costs and the need to saturate production capacity, together
with a possible contraction in demand translate into strong
competitive pressure on prices with possible consequences
for the Group's expected margins.
In addition, although barriers to entry, linked to diffi-
cult-to-replicate ownership of technology, know-how and
track record, limit the number of operators able to compete
effectively on a global scale in high value-added segments
like High Voltage underground cables, Optical Cables, and,
albeit to a much lesser extent, Submarine cables, it is not
possible to rule out potential new entrants in these market
segments or an escalation in competition from operators
already on the market, with potentially negative impacts on
both sales volumes and sales prices.
The strategy of rationalising production facilities currently in
progress, the consequent optimisation of the cost structure,
the policy of geographical diversification and, last but
not least, the ongoing search for innovative technological
solutions, all help the Group to address the potential effects
arising from the competitive environment.
Risks associated with changes in the macroeconomic
environment and in demand
Factors such as changes in GDP and interest rates, the ease
of getting credit, the cost of raw materials, and the overall
level of energy consumption, significantly affect the energy
demand of countries which in turn, faced with continuing
economic difficulties, reduce their investments in market de-
velopment. Similarly, government incentives for alternative
energy sources are also reduced. Within the Prysmian Group,
the submarine cable business (and to a lesser extent that of
high voltage cables) is being affected by the contraction of
demand in the European market, in which it is highly concen-
trated, due to the ongoing local economic downturn.
To counter this risk, the Group is pursuing, on the one hand,
a policy of geographical diversification in non-European
countries (eg. Vietnam, Philippines, etc.) and, on the other,
a strategy to reduce costs by rationalising its production
structure globally in order to mitigate possible negative
effects on the Group's performance from reduced sales and
shrinking margins.
Risks associated with dependence on key customers
In the SURF business, the Prysmian Group has a significant
business relationship with Petrobras, a Brazilian oil company,
for the supply of umbilical cables and flexible pipes,
developed and manufactured at the factory in Vila Velha,
Brazil. A possible decline in demand for umbilical cables
and/or a change in technological demand for flexible pipes by
Petrobras could in the short to medium term have an impact
on the partial or other sustainability of the business in Brazil.
While committed to maintaining and strengthening its
business relationship with this customer over time, the
Group has initiated progressive diversification of its customer
portfolio by evaluating the possibility of opening up to the
export market.
Risk of instability in emerging countries where
the Group operates
The Prysmian Group operates and has production facilities
and/or companies in Asia, Latin America, the Middle East
and Eastern Europe. The Group's activities in these countries
are exposed to different risks linked to local regulatory and
legal systems, the imposition of tariffs or taxes, political and
economic instability, and exchange rate risks.
Significant changes in the macroeconomic, political, tax
or legislative environment of such countries could have an
adverse impact on the Group's business, results of opera-
tions and financial condition.
Risks in relation to acquisitions
The Group reviews acquisition targets on an ongoing basis
and may from time to time incur additional indebtedness to
finance such acquisitions. If the Group completes new acqui-
sitions in the near future, it could also face risks associated
with the integration process.