sain t-gobain annu al report 2008 annual report

Risk factors
Macroeconomic and industry risks
Since 2008, global economic conditions have deteriorated
considerably, due to the subprime crisis and subsequent
credit crunch, which affected the entire banking and financial
sector, volatile exchange rates and energy prices,
economic slowdowns and even recessions, a loss of consumer
confidence, and lower corporate earnings and capital
expenditure. Financial markets throughout the world were
very badly hit, leading to an unprecedented lack of liquidity
in the global financial system.
Most of the Group’s markets are cyclical in nature.
Some of the Group’s main markets bore the brunt
of the current environment, particularly the building
and automobile industries, which experienced falling volumes
and heavy pricing pressure. To make matters worse,
these markets were also affected by highly volatile feedstock
and energy prices, and erratic exchange rates. The Group
derives a significant portion of revenues from the building
market, which is highly sensitive to national, regional and local
economic trends. The building and real estate markets
in the United States are among the leading victims
of the current crisis.
A further deterioration in the global economic environment
and in financial market conditions could have a material
adverse effect on the Group’s sales, results, cash flow
and outlook.
Operational risks
Risks associated
with the Group’s international operations
With over two-thirds of revenues generated outside France,
the Group is exposed to the inherent risks of doing business
internationally, including economic, political and operational
risks. These risks could have a negative effect on the Group’s
business, results and financial position. Future changes
in the political, legal or regulatory environment could have
an adverse effect on the Group’s assets, its ability to do
business and its profitability in the countries concerned.
The Group’s businesses are exposed to various operational
risks that could lead to operations being interrupted,
or to the loss of customers or to financial losses.
In 2008, 17% of consolidated sales were realized in emerging
markets and Asia, where risks arising from falling GDP,
exchange controls, changes in exchange rates, inflation
and political instability may be greater than in developed
countries.
Innovation risks
The emergence of new technologies is driving rapid change
in some Group markets.
The Group has to keep pace with these changes and integrate
the new technologies in its product offer, in order to respond
effectively to customers’ needs. This requires spending on
Research and Development, with no guaranteed return on
investment. The Group’s sales and operating margin may be
affected if it fails to invest in appropriate technologies
or to rapidly bring new products to market, or if competing
products are introduced or the Group’s new products do
not adequately respond to customers’ needs.
Intellectual property risks
The Group uses manufacturing secrets, patents, trademarks
and models and relies on applicable laws and regulations
to protect its intellectual property rights. If the Group failed
or was unable to protect, preserve and use its intellectual
property rights, this could result in the loss of its exclusive
right to use technologies and processes, with a material
adverse effect on earnings. In addition, the laws in some
of the Group’s host countries may not protect intellectual
property rights to the same degree as in other countries such
as France and the United States. The Group may take legal
action against third parties suspected of breaching its rights.
Any such lawsuits may give rise to significant costs
and hamper growth in sales of the products manufactured
using the rights concerned.
Risk of being unable to raise prices
to reflect higher costs
The Group’s businesses may be affected by fluctuations
in the prices and availability of feedstocks and/or energy
(such as natural gas). Its ability to pass on these cost increases
or decreases to customers depends to a large extent on market
conditions and practices. If the Group’s ability to pass
on increases in feedstock and/or energy costs were limited,
this could have a material adverse effect on its financial
position and results.
Risks associated
with the integration of acquisitions
Historically, the Group has grown through acquisitions.
The benefits of acquisitions depend in part on the realization
of cost synergies and the seamless integration of the acquired
businesses. There is no guarantee that these objectives
will be met.
MANAGEMENT REPORT
119
Saint-Gobain - 2008 Annual Report