Most significant risks

KONE is exposed to risks that may arise from its operations or changes in the operating environment. The risk factors described below can potentially have an adverse effect on KONE’s business operations and financial position and, as a result, on the value of the company. Other risks, which are currently either unknown or considered immaterial to KONE may, however, become material in the future.

Strategic risks

A weakening of the global economic environment could result in a deterioration of the market environment and the competitive situation in the industry. In particular, a stronger than anticipated decline or a prolonged weakness of the construction market could result in a significant decline in the new equipment market and a more challenging market environment for services. In particular, a sustained market decline in China, which accounts for approximately 30% of KONE’s sales, could have an adverse effect on KONE’s growth and profitability. Digitalization, and the resulting new customer requirements as well as potential new competition, ecosystems and business models, could have a significant impact on the elevator and escalator industry. A failure to anticipate or address changes in the external market environment could result in a deterioration of KONE’s growth, competitiveness, market share or profitability. KONE operates in an industry with various local regulatory requirements. Sudden or unanticipated changes in regulations, equipment codes or standards may result in a need for process or technology adjustments, which could adversely impact KONE’s profit development in affected countries. In addition, an increase in geopolitical tensions or a rise in regulatory protectionism could result in more challenging market conditions in affected countries. Such developments could have an adverse impact on KONE’s operations. A significant part of KONE’s component suppliers and global supply capacity is located in China, both in the elevator and in the escalator business. Therefore KONE’s operations may be adversely impacted by changes in trade agreements or introduction of restrictions to trade.

Operational risks

As one of the leading companies in the industry, KONE has a strong brand and reputation, meaning that reputation or brand issues could have an impact on KONE’s business and financial performance. Such reputation risks could materialize e.g. in the case of an incident or a product quality issue. Issues with product integrity or quality could also have an impact on KONE’s financial performance. KONE operates in certain high growth markets, where focused management of rapid business growth is required. This applies in particular to the availability of skilled personnel, the adequate supply of components and materials, and the ability to ensure the quality of delivered products and services. Failure to adequately manage resourcing, quality of delivery, or other critical aspects in projects, could have an adverse impact on KONE’s profitability. KONE’s business activities are dependent on the uninterrupted operation, quality and reliability of its manufacturing facilities, sourcing channels, operational service solutions and logistics processes. KONE’s operations also utilize information technology extensively and its business is dependent on the quality and availability of information. Thus, in addition to physical risks, KONE is exposed to cyber security risks as operational information systems and products may be vulnerable to interruption, loss of data or malfunctions which can result in disruptions in processes and equipment availability and therefore impact KONE’s business. Such cyber incidents could be caused by, including but not limited to, cyber attacks, computer malware, denial of service attacks, fraudulent attempts and data breaches. The majority of components used in KONE’s supply chain are sourced from external suppliers, which exposes KONE to component price risk as well as raw material price risk. Therefore stronger than anticipated increases in raw material and component prices may have a significant impact on KONE’s profitability.

Financial risks

The majority of KONE’s sales is denominated in other currencies than the euro, which exposes KONE to risks arising from foreign exchange rate fluctuations. KONE is also exposed to counter party risks related to financial institutions through the significant amounts of liquid funds that are deposited with financial institutions in the form of financial investments and in derivatives. Additionally, KONE is exposed to risks related to the liquidity and payment schedules of its customers, which may lead to credit losses. Significant changes in local financial or taxation regulation could also have an impact on KONE’s financial performance. For further information on financial risks, please refer to notes 2.4 and 5.3 in the Financial Statements for 2016.

Risk management

RiskMitigation actions
Weakening of the economic environment, in China in particular, and its impact on the global market environmentKONE strives to continuously develop its competitiveness in all regions and businesses. KONE has a wide geographic presence and a balanced business portfolio.
Failure to anticipate changes in the market environment, including new customer requirements, competition, ecosystems and business models enabled by digitalization.KONE aims to be the industry leader by investing into research and development and having an open innovation approach. KONE also closely follows emerging market and industry trends.
Sudden changes in regulation, codes and standards, including a rise in regulatory protectionism.In order to mitigate the risk of unanticipated changes in the regulatory environment, KONE is actively involved in the development of regulations, codes and standards.
Disruption in the global supply chain, in China in particular.KONE actively develops business continuity management capabilities in order to reduce the impact and likelihood of disruptions within its supply chain. Furthermore, KONE monitors the operations and financial strength of its key suppliers. The aim is also to secure the availability of alternative sourcing channels for critical components and services. KONE also has a global property damage and business interruption insurance program in place.
Product integrity and quality issues as well as issues with reputation.To mitigate product risks, KONE has processes in place for product design, supply, manufacturing, installation and maintenance involving strict quality control. In addition, KONE aims at transparent and reliable communication to prevent reputational risks. In addition, KONE has stringent corporate governance principles.
Availability of adequate operational resourcesKONE manages these risks through proactive project and resource planning and strict quality control processes.
Quality and reliability of IT systems and cybersecurity risksKONE’s security policies define controls to safeguard information and information systems in development and operation, to detect cybersecurity incidents and to respond and recover in a timely manner. KONE works with third-party security service providers, and trusted and well-known technology partners to manage the risks through the control framework.
Changes in raw material pricesIn order to reduce the impact of material and sourcing price fluctuations, KONE aims to enter into fixed-price contracts with its major suppliers for a significant part of its raw material and component purchases.
Financial risksCentralized risk management in accordance with the KONE Treasury Policy. More information in notes 2.4 and 5.3 of KONE’s Financial Statements 2016.

(Updated on February 1, 2017)