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KONE is exposed to risks that may arise from its operations or changes in the operating environment. The most significant 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

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. The resulting shortage of materials and services, as well as rising costs, may expose KONE to business disruptions, rescheduling of orders and profitability risks. Global supply chains have also suffered from governmental lockdowns in China due to COVID-19 outbreaks. In April, lockdowns in the Shanghai area led to the closure of KONE’s factories in Kunshan and Nanxun, but efficient recovery actions in May-June helped to mitigate the impacts. A deterioration of the COVID-19 situation in China would have an adverse impact on the Chinese economy, construction activity, availability of workforce and the demand for KONE’s services and solutions.

High inflation, rising interest rates and supply chain disruptions have weakened the global economic outlook, which represents a risk to KONE’s business and profitability. KONE aims to mitigate these risks with more dynamic pricing strategies and contract models as well as ongoing actions to improve productivity and lower product costs.

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.

Operational risks

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, rescheduling of orders and cost increases. Labor availability constraints may also impact progress at construction sites. The pressure on global supply chains continued during the second quarter, resulting in, for example, increased material prices, logistics costs and constraints in 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.

Financial risks

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. For further information on financial risks, please refer to notes 2.4, 3.2 and 5.3 in the Financial Statements for 2021.

KONE - Investors

  • KONE operates internationally and is thus exposed to risks arising from foreign exchange rate fluctuations related to currency flows of revenues and expenses (transaction risk) and from the translation of statement of income and statement of financial position of the foreign subsidiaries from respective functional currencies into euros (translation risk).

    Transaction risks

    A substantial part of KONE’s operations are denominated in local functional currencies of the subsidiaries and do not therefore give rise to transaction risk. The sales of new equipment and modernizations, including installation, typically take place in the local currency of the customer. Component and material expenses may occur in other currencies than the sales currency, which exposes KONE to transaction risks. KONE policy is to substantially hedge the foreign exchange exposure of firm commitments and other highly probable future sales and purchases with foreign exchange forward contracts. The business units are responsible for evaluating and hedging the transaction risks in their operations according to the foreign exchange policy. The most significant transaction risk exposures arising from business operations are in the Chinese yuan, Canadian dollar, British pound, Singapore dollar and Saudi-Arabian rial. The majority of the currency forward contracts expire within one year.

    Hedge accounting is applied in business units, where there are significant revenues or expenses in foreign currency. When hedge accounting is applied, the gains and losses from the hedges are recognized in the statement of income at the same time as the exchange rate gains and losses for the hedged items are recognized.

    The financial assets and liabilities of KONE subsidiaries are in the local currencies of the subsidiaries whenever possible. In case a subsidiary company has a financial asset or liability in other than its local currency, these assets and liabilities are hedged with foreign exchange forward contracts whenever possible and required by the KONE Treasury Policy.

    KONE’s internal loans and deposits are primarily initiated in the local currencies of the subsidiaries in which case the possible foreign exchange risks are hedged, by the parent company, using foreign exchange swap contracts.

    Translation risks

    Changes in consolidation exchange rates affect KONE’s statement of income, statement of cash flows and statement of financial position, which are presented in euros. As approximately 77% of KONE’s revenues occur in functional currencies other than euro, the translation risk is significant for KONE. A change of 10% in the annual average foreign exchange rates would have caused a 7.7% (7.6%) change in 2021 consolidated sales in euros. Such a change would have had a higher impact on KONE’s operating income and therefore also some impact on KONE’s relative operating income. The translation of the subsidiaries’ balance sheets into euros caused translation differences of EUR 205.6 (-173.2) million in 2021. The translation risk is not hedged as a rule as KONE’s business consists of continuous operations in various currency areas. However, in individual cases, KONE can also hedge translation risk related to net assets of subsidiaries. The most significant translation risk exposures arising from operations of foreign subsidiaries are in the Chinese yuan, Hong Kong dollar and US dollar.

  • KONE’s cash and short-term investments were EUR 2,884.1 (2,628.3) million at the statement of financial position date. At the same time, KONE’s interest-bearing debt was EUR 746.5 (695.8) million and consisted of EUR 547.1 (504.3) million of financial debt including lease liabilities, EUR 5.1 (4.2) million of option liabilities from acquisitions, and EUR 194.3 (187.2) million of employee benefit liabilities. Additionally, KONE had an asset on employee benefits of EUR 22.9 (19.2) million.

    As KONE’s financial investments are mainly invested in tenors of less than one year, changes in the interest rates do not have any significant impact on their market values. Changes in the interest rates may however impact future interest income.

    When calculating the interest rate sensitivity analysis, the interest-bearing net financial debt, excluding foreign exchange forward contracts, is assumed to remain on the level of the closing balance of 2021 during the following financial period. The sensitivity analysis presents the impact of a 1 percentage point change in the interest rate level on the net interest income for the financial period by taking into account the net financial debt tied to interest periods of less than one year, EUR -2,768.5 (-2,364.8) million. For 2021 a 1 percentage point change in the interest rate level would mean a change of EUR -27.7 (-23.6) million in net interest income. The interest rate sensitivity is calculated before taxes.

    A change in interest rates does not have a material impact on the net interest on employee benefits, on financial debt or option liabilities from acquisition.

  • KONE’s cash and cash equivalents was EUR 490.4 (457.9) million and financial investments EUR 2,393.7 (2,170.4) million on December 31, 2021.

    Cash and financial investments are managed centrally by KONE Treasury. Due to local regulations, part of the funds reside in local investments and on decentralized bank accounts in a number of KONE countries. A substantial part of the funds is nevertheless accessible to KONE Treasury. Changes in the local regulations can also in the future have an impact on the location of the cash and financial investments.

    KONE has a credit facility from the European Investment Bank (EIB) of EUR 200 million. The credit facility is a 5-year fixed interest rate loan which will be used for R&D purposes. The loan will mature in 2026. The fair value of the loan is estimated based on discounted cash flow method using a current borrowing rate (level 2 fair value hierarchy) as the discount rate. KONE has also an uncommitted commercial paper program of EUR 500 million and a sustainability-linked revolving credit facility of EUR 850 million to ensure sufficient liquidity. The sustainability targets included in the facility relate to KONE’s decarbonization and gender diversity commitments.

    Maturity analysis of financial liabilities and Interest payments

    Dec 31, 2021Dec 31, 2020
    MEUR<1 year1-5 years>5 yearsTotal<1 year1-5 years>5 yearsTotal
    Interest-bearing debt

    Long-term loans--200.0--200.0----
    Lease liabilities-108.3-199.6-35.8-343.6-98.9-199.8-44.2-342.9
    Short-term loans-----160.0---160.0
    Used bank overdraft limits-3.4---3.4-1.4---1.4
    Option liabilities from acquisitions-3.8-1.3--5.1-4.2---4.2
    Employee benefits---194.3-194.3---187.2-187.2
    Non-interest bearing debt

    Accounts payables-1,310.2---1,310.2-890.9---890.9

    Capital inflow3,515.190.3-3,605.33,676.9113.4-3,790.3
    Capital outflow-3,455.7-88.6--3,544.2-3,667.7-113.8--3,781.5
    Interest payments
    Net outflow-1,372.9-408.0-232.5-2,013.5-1,154.0-208.6-236.0-1,598.6
  • KONE has substantial amounts of cash and financial investments. In order to diversify the financial credit risk and manage liquidity risk, funds are invested into highly liquid interest rate funds and deposits with several banks. Global counterparty limits are approved by the Board of Directors. All open exposures such as cash on bank accounts, investments, deposits and other financial assets, for example derivatives contracts, are included when measuring the financial credit risk exposure. When selecting counterparty banks and other investment targets, only counterparties with high creditworthiness are approved. The size of each limit reflects the creditworthiness of the counterparty. Counterparty creditworthiness is evaluated constantly and the required actions are considered case by case if significant changes in the creditworthiness of a counterparty occur. The fair values of interest rate funds are measured based on market information (fair value hierarchy level 2).

  • Customer credit risks relate to advance payments receivable from customers or to accounts receivable related to equipment deliveries or to services rendered. This risk is managed by defining the rules for tendering, payment terms, authorizations and credit control as well as project management controls. Advance payments, documentary credits and guarantees are used in payment terms to minimize customer credit risks. KONE proactively manages its accounts receivable in order to minimize the risk of customer defaults.

    KONE’s customer base consists of a large number of customers in several market areas and geographic split of receivables and contract assets well mirrors distribution of sales. KONE management follows particularly closely the credit risks related to Chinese developers. Customer portfolio being well diversified is limiting risks arising from any individual customer.

    The credit quality of advance payments receivable and accounts receivable is evaluated according to KONE’s credit policy. According to this policy, the rules for credit quality evaluation are set separately for the new equipment business and the service business. The credit quality is evaluated both on the basis of the aging of the receivables as well as on the basis of individual case by case customer analysis in order to identify customers with a potential higher credit risk due to individual customer specific reasons. The bad debt provision for the accounts receivable is recognized on the basis of this credit quality evaluation using the expected credit loss model.

    In 2020, KONE modified the calculation parameters for the receivables aging based allowance as well as recorded impairment charges on certain individual cases to reflect the effect of increased risk for credit losses pertaining to COVID-19. Overall, the disruption to the business arising from COVID-19 has been limited with a significant part of KONE’s operations being considered essential and as such, allowed even during lockdowns. According to management assessment, at the end of the reporting period the pandemic no longer poses additional risk to collection of receivables.

    The amount of bad debt provision recorded to cover doubtful accounts was EUR 284.4 (262.5) million at the end of the financial period.

    Aging structure of the accounts receivable
    after recognition of impairment, MEUR
    Dec 31, 2021Dec 31, 2020
    Not past due and less than one month due receivables
    Past due 1-3 months278.5277.5
    Past due 3-6 months133.1134.8
    Past due > 6 months86.491.9
    Accounts receivable in the consolidated statement
    of financial position

Risks related to the reporting of non-financial information

The assessment and analysis of KONE’s most significant risks also covers non-financial risks. In line with the requirements of the Finnish Accounting Act, KONE has identified the most significant non-financial risks regardless of their materiality for KONE as a whole. In addition, KONE applies TCFD guidelines on the reporting of climate-related risks. The typical effect of the non-financial risks materializing would be reputational damage to KONE or a negative impact on the surrounding society, environment or individuals. In addition to the risk mitigation actions described below, KONE aims for transparent and reliable communication in order to prevent reputational risks and to enable proactive management and learning from incidents, should they occur

Climate and environmental risks

We recognize climate and environmental risks as having a potential negative impact on our business in the short to medium term. While the effect is not determined to be significant, we expect climate risks to keep increasing in relevance and potential impact. Overall, we identify, assess and manage climate and environmental risks as integral part of our company-wide business risk management process and ISO 14001 environmental management system. Certain KONE functions and locations, e.g. the Supply Chain function or selected operational sites, conduct detailed climate and environmental risk assessments according to relevant business requirements.

Climate and environmental risks are classified as transition risks and physical risks as well as risks of negative impacts on the climate. Some of the most relevant climate and environmental risks for KONE are physical risks to our supply chain and own operations, for example, as a result of extreme weather events. These risks can materialize, for example, in the form of delivery disruptions or interruptions in our own manufacturing, installation or maintenance activities. KONE’s products are also subject to physical risks and possible damages due to changing environmental conditions or extreme weather events.

To mitigate the physical risks, we engage in several risk mitigation activities related to component availability and interruptions to our own or suppliers’ operations, as described in the risk management table in this text. We use, for example, dedicated location-based software tools to regularly monitor our supply chain locations for risks related to extreme weather events such as fires, floods or hurricanes. In terms of our product development, we apply design specifications and specific procedures that aim to ensure product resilience even in harsh and changing environmental conditions. For example, rigorous environmental testing is a part of KONE’s product development to ensure that our products sustain exceptional and changing weather conditions, such as temperature variations and moisture.

The most relevant transition risk to KONE arises from potential shifts in the supply and demand for low carbon materials, electricity and fuel, which may increase operating costs in the short to medium term. Also, technological improvements or innovations that support the transition to a lower-carbon, energy-efficient economy may impact KONE’s competitiveness and our customers’ demand for both KONE’s solutions and services. Not being able to offer the solutions and services our customers require could have a detrimental impact on KONE’s business. In addition to potential product-related requirements, emerging climate-related regulation may also impact our operations. For example, the need to transition towards more sustainable mobility solutions is evident for KONE’s current fleet of over approximately 18,000 service and benefit vehicles.

To mitigate the market transition risks, KONE evaluates plausible scenarios for market supply and demand, as well as the impact of emerging regulation in our high-level business plans. KONE is an active member in relevant industry forums and research consortiums and proactively monitors the regulatory landscape. To mitigate the technology transition risk, KONE bases its innovation work on the needs of our customers and equipment users. All in all, KONE sees the transition towards sustainable solutions as a source of innovation and competitive edge rather than a threat. As part of KONE’s climate pledge, we have set ambitious greenhouse gas reduction targets for our offering and operations and aim to have carbon neutral operations by 2030. The pledge will guide our work for more climate-friendly products, services and ways of working, and we actively collaborate with our suppliers and partners to achieve our targets.

Social and employee related risks

Safety is a top priority at KONE and potential safety incidents are among the most significant social and employee related risks. Incidents are mitigated through, for example, extensive training and communication, consistent safety management practices, standardized maintenance and installation methods and regular process audits. We also identify and assess risks related to any type of bullying, harassment, equal employment practices, working conditions and any form of discriminations. We address such risks by having adequate policies and processes in place and by training our managers and employees. We offer our employees channels for reporting misconduct as there is zero tolerance for this type of behavior. In 2021, the safety and wellbeing of KONE employees continued to be a top priority due to the conditions caused by COVID-19 pandemic.

Major repairs or retrofits in public infrastructure locations may also affect the daily life of many people and therefore, may have a reputational impact.

Both safety and quality have a key role in product design, supply, manufacturing, installation and maintenance and they involve strict quality controls. We follow globally implemented principles in how to manage potential incidents and implement improvements

Human rights related risks

The most significant human rights related risks are in the supply and delivery chain and are related to terms and conditions of work. All our suppliers and installation subcontractors are expected to sign KONE’s Supplier Code of Conduct, which sets out our ethical business practice requirements, including the standards we require in terms of labor and human rights. During 2021, we continued to prioritize our work on human rights in the supply chain and rolled-out online supplier human rights assessments to over 200 suppliers’ production sites.

Anti-corruption and bribery related risks

KONE requires its employees and partners to adhere to high ethical standards and to comply with its Code of Conduct, Distributor Code of Conduct and Supplier Code of Conduct. These codes cover numerous compliance topics, including competition law, trade sanctions compliance, and labor and human rights issues, as well as prohibiting corruption and bribery.

In 2021, we completed an anti-bribery and corruption risk assessment, which identified our highest risks as relating to third party intermediaries, sourcing and sales activities. Follow-up actions to mitigate risks were started in 2021 and will continue in 2022.

Unethical business practices among KONE’s employees or various stakeholders could cause reputational damage for KONE as well as a possible financial impact. The risks of such behaviors and practices materializing are included in the scope of KONE’s regular audit programs. In 2021, KONE implemented a supplier screening solution, which monitors entities against sanctions, watch lists and adverse media attention, including corruption and human rights issues. Processes under our Global Delegation of Authority policy help to mitigate the risk of unauthorized payments, donations and sponsorships. The most important action for internal mitigation continues to be the development of KONE’s corporate culture through training and awareness building. Ethics & Compliance KPIs and actions have been integrated into our new Sustainability strategy. All employees are required to complete at least one annual training on ethics & compliance, and supplier and distributor Code of Conduct sign-up rates are tracked annually.

Read more about Risk Management

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