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The demand for KONE’s products and services and the competitive environment are impacted by the general economic cycles and especially the level of activity within the construction industry. As China accounts for approximately 35% of KONE’s sales, a sustained market decline in the Chinese construction industry would have an adverse effect on KONE’s growth and profitability. Liquidity constraints in the Chinese property markets started to raise market concerns during 2021 and the financing environment remains tight. KONE’s customer portfolio is well diversified, limiting individual customer risks. However, a worsening liquidity situation among Chinese property developers could impact construction activity and customers’ payment discipline in China and, consequently, the demand and commercial terms for KONE’s solutions.
The war in Ukraine has increased geopolitical risks and added to the disruption of global supply chains during the first quarter. The resulting shortage of materials and services and rising costs may expose KONE to business disruptions and profitability risks. Global supply chains have also suffered from the governmental lockdowns in China due to rising COVID-19 infections in a number of provinces. A deterioration of the COVID-19 situation would have an adverse impact on the Chinese economy, construction activity, availability of workforce and the demand for KONE’s services and solutions. It could also result in prolonged site closures which would be a risk to KONE’s supply operations.
In addition to the level of market demand, the competitiveness of KONE’s offering is a key driver for growth and profitability. A failure to anticipate or address changes in customer requirements and in competitors’ offerings, ecosystems and business models or in the regulatory environment could result in a deterioration of the competitiveness of KONE’s offering. Furthermore, structural changes in the competitive landscape of the elevator and escalator industry, such as increased competition and customer consolidation in China, could affect market dynamics and KONE’s market share.
Empowered employees with relevant competencies and skills are key to the successful execution of our strategy. With business models and ways of working changing in the elevator and escalator industry, KONE needs new organizational capabilities, as well as new competencies and talent on the individual employee level in the field of, for example, digitalization. At the same time, the competition over talent, such as skilled field workforce, is increasing. Securing the needed resources and their competence management is critical. A failure to develop and retain the required capabilities or obtain them through recruitment could have an adverse impact on KONE’s growth and profitability.
The majority of components used in KONE’s supply chain are sourced from external suppliers, a significant number of which are located in China. KONE also subcontracts a significant amount of installation activity, outsources certain business support processes and works with partners in e.g. digital services and logistics. This exposes KONE to component and subcontracted labor availability and cost risk as well as to continuity risk in partnerships. A failure to secure the needed materials, components or resources, or quality issues within these, could cause business disruptions and cost increases. Labor availability constraints may also impact progress at construction sites. The pressure on global supply chains continued during the first quarter, resulting in, for example, increased material prices and constraints in global logistics capacity and component availability, in particular semiconductors.
As one of the leading companies in the industry, KONE has a strong brand and reputation. Issues that impact the company’s reputation or brand could have an effect on KONE’s business and financial performance. Such reputational risks could materialize in the case of e.g. safety, cybersecurity or non-compliance incidents, major delivery issues or product or service quality issues.
Hazard, security and incidental risks
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. The operations of KONE, its suppliers and customers also utilize information technology extensively and KONE’s business is dependent on the quality, integrity, availability and confidentiality of information. Thus, KONE is exposed to IT disruption and cybersecurity risks, as operational information systems and products may be vulnerable to interruption, loss or manipulation of data, or malfunctions which can result in disruptions in processes and equipment availability. Geopolitical tensions may lead to extreme data protectionism, the use of cyber, hybrid and even conventional warfare, causing local and global digital disturbances that may impact KONE, our customers and our suppliers.
A breach of sensitive employee or customer data may result in significant penalties as well as reputational damage. Such incidents could be caused by, including but not limited to, cyber-crime, cyber-attacks, ransomware, information theft, fraud, or inadvertent actions from our employees and vendors.
Physical damage caused by fire, extreme weather conditions, natural catastrophes or terrorism, among other things, could also cause business interruption for KONE or its suppliers.
The majority of KONE’s sales and result are denominated in currencies other than the Euro, which exposes KONE to risks arising from foreign exchange rate fluctuations. KONE is also exposed to counterparty risks related to financial institutions, through the significant amounts of liquid funds deposited with financial institutions, in the form of financial investments and in derivatives. Additionally, KONE is exposed to risks related to liquidity and payment discipline of its customers, which may impact cash flow or lead to credit losses. Significant changes in local financial or taxation regulation could also have an impact on KONE’s financial performance, liquidity and cash flow.