Strategic Risk

Competition in an international market, with high technological innovation content, and a small number of firms

The businesses in which the Group operates - transportation solutions and signalling - are characterised by a competitive environment based on technological innovation, in which only a few industrial groups are present.
This competitive environment requires a constant commitment to technological innovation on the part of the Group, as well as the pursuit of efficiency and the penetration of new markets.

The Ansaldo STS Group’s ability to sustain its present investment policy of and to properly evaluate innovations - one of the factors of the Group’s success in recent years, enabling it to successfully compete with larger firms with greater investment capabilities - is crucial.

In recent years the Group has achieved some important commercial successes in new markets. The policy of penetrating new markets - especially those with the fastest growth rates - exposes the Group to risks such as: political, social and economic instability, mistaken assessments of local regulations and legislation (company law, tax law, or the rules governing the validation of signalling equipment), problems of intellectual property protection, exchange rate fluctuations and the credit of business counterparties. The policy of internationalisation also exposes the Group to a greater risk of misjudging market opportunities and competitors’ positioning.

These risks could bring about a weakening of the Group’s competitive position, the loss of business opportunities, a waste of resources in investments with a poor return in terms of profitability, difficulties in preparing suitable offers and in carrying through projects on time and on budget, which might negatively impact the order backlog and the profit, capital and financial strength of the Group.

To mitigate these risks, the Group has implemented an organisational and operational structure designed to provide integrated management of the Group’s various businesses. The aim is to create the conditions for greater marketing effectiveness, to enhance our attention to marketing intelligence and innovation, and to increase operational efficiency. The new organisational set-up came into force on 1 January 2010, with the exception of our US subsidiary, which will be integrated starting from Q2 2011.

In addition, the 2011 Budget and the 2012-2015 Plan reaffirm selectivity in the choice of our main markets and the management of technological innovation, identifying efficiency objectives to be attained through a number of Excellence Programs.

Changes in the macroeconomic scenario and efficiency objectives

The Ansaldo STS Group operates, as mentioned above, an international market and is therefore exposed to risks of change in the global macro economy and the markets in which it operates or plans to operate. Various macroeconomic factors can impact the Group’s business, such as the growth rate in specific markets and government plans for investment in infrastructure. Any failure to correctly judge the evolution of factors like these could jeopardise the Group’s operational capability.

The current economic crisis and the government deficit reduction programmes - whether initiated or merely announced - designed to deal with the present economic situation, could cause contracts to be cancelled or postponed, payment delays, less favourable financial terms and conditions in new contracts and thus adversely impact Group performance.

In this phase the competitive environment becomes increasingly fragmented, complex and subject to pricing pressures. This could weaken the Group’s competitiveness, should there be no proper standardisation of the solutions and the products offered, or a lack of increased efficiency and optimisation of the use of resources when carrying out our contracts.

In mitigation of this risk, as noted above, a new organisational and operational set-up was introduced in 2010 to increase the standardisation of solutions and products and, more generally, improve operational efficiency and effectiveness, in order to react to the competitive environment. In addition, market trends and the risks involved in specific markets are assessed during preparation of the Strategic Plan, commercial opportunities are assessed more selectively, offer evaluation processes and assessment of new contract negotiations paying attention to the reference parameters for the creation of value in our contracts, and specific areas have been identified in which steps will be taken to improve the offer and delivery processes. Lastly, the Group has a solid capital and financial structure and a significant order backlog (equivalent to some three years’ work) which enables it to ride out this unfavourable economic period.

However, the current economic and market situation requires increasingly determined action to preserve our margins and thus the value of the company.

In this connection, as noted above, the 2011 Budget and the 2012-2015 Plan identify certain efficiency objectives to be attained through Excellence Programmes. Should these programmes fall short of expectations, there could be an adverse effect on margins and the value of the company.