KONE - INVESTORS HOME INVESTORS KONE AS AN INVESTMENT RISKS MOST SIGNIFICANT RISKS 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 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 30% of KONE’s sales, a sustained market decline in the Chinese construction industry, in particular, could have an adverse effect on KONE’s growth and profitability. Liquidity constraints in the Chinese property markets raised market concerns in the third quarter. KONE’s customer portfolio is well diversified, limiting individual customer risks. However, a worsening liquidity situation among Chinese property developers could impact construction activity in China, and, consequently, the demand for KONE’s solutions. Following the COVID-19 outbreak in 2020, many governments across the world took significant measures to contain the pandemic by restricting the movement of people and limiting some business activities. In 2021, construction markets have started to recover in many countries thanks to successful vaccination campaigns, easing restrictions, and government stimulus. However, a deterioration of the situation, e.g. due to new COVID-19 variants, could have an adverse impact on the overall economic environment, construction activity and the demand for KONE’s services and solutions. Geopolitical tensions and protectionism continue to expose KONE to various business risks. In addition to the potential adverse impacts on general economic activity, geopolitical tensions and protectionism could impact the competitiveness of KONE’s supply chain, and lead to increased costs from trade and customs tariffs. A significant portion of KONE’s component suppliers and global supply capacity is located in China. 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 Engaged employees with relevant competencies and skills are key to the successful execution of our strategy. With the business models and ways of working changing in the elevator and escalator industry, KONE needs new organizational capabilities and new competencies on the individual employee level in the field of, for example, digitalization. At the same time, the competition over skilled field workforce is increasing and securing the needed field resources and their competence management is critical. A failure to develop and retain the needed 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. KONE also uses a significant amount of subcontracted installation resources, has outsourced some business support processes and works with partners in e.g. digital services and logistics. These expose KONE to component and subcontracted labor availability and cost risk as well as 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. The recovery in the global economy witnessed over the last few quarters has put pressure on supply chains resulting in, for example, increased prices and component availability constraints. The shortage of semiconductors, in particular, is closely monitored and managed e.g. with detailed planning of delivery execution and active involvement of supply chain partners. Continued challenges in the global supply chains could have an adverse impact on KONE’s financial performance. 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 e.g. in the case of an incident, a major delivery issue or a product or service quality issue. Matters concerning product integrity, safety or quality could also have an impact on KONE’s financial performance and affect customer operations. 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. KONE’s, its suppliers’ and customers’ operations also utilize information technology extensively and KONE’s business is dependent on the quality, integrity and availability of information. Thus, KONE is exposed to IT disruptions 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. Any breach of sensitive employee or customer data may also result in significant penalties as well as reputational damage. Such cyber incidents could be caused by, including but not limited to, cyber-crime, cyber-attacks, computer malware, information theft, fraud, misappropriation, or inadvertent actions from our employees and vendors. Physical damage caused by fire, extreme weather conditions, natural catastrophes or terrorism, among other things, to these operations, 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 the liquidity and payment schedules 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. Foreign exchange risks Interest rate risks Refinancing and liquidity risks Financial credit risks Customer credit risk management 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 is applying TCFD guidelines on the reporting of climate-related risks. The typical impact of the non-financial risks materializing would be reputational damage. 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, albeit they are not considered being very significant in comparison to other business risks which are reported under “Most significant risks”. However, we see that climate risks will only 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 conduct detailed climate and environmental risk assessments, according to relevant business requirements, e.g. in the Supply Chain function or at selected operational sites. 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 and 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. We have equally identified transition risks in the form of changing market demands and emerging regulation for both KONE’s solutions and operations. Not being able to meet the climate-related demands and 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 19,000 service and benefit vehicles. To mitigate the transition risks, KONE constantly evaluates emerging regulation and market demands in our high-level business plans. KONE is an active member in relevant industry forums and research consortiums and proactively monitors the regulatory landscape. 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. KONE also identifies and assesses risks related to any type of harassment, equal employment practices, working conditions and any form of discriminations. KONE prevents such situations by having adequate policies and processes in place and training its managers. KONE also offers its employees channels for reporting misconduct as there is no tolerance for such behavior. 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. KONE also follows 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 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. These standards were further clarified in our 2020 Supplier Code of Conduct. On the basis of the 2019 human rights risk assessment we conducted, we have prioritized our work on human rights in the supply chain, set up a human rights network and prepared supplier on-site and online assessment processes and documentation for roll-out in 2021. 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. 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 addition, processes introduced under our Global Delegation of Authority policy help to mitigate the risk of unauthorized payments, donations and sponsorships. We have introduced more stringent disclosure requirements in China for conflicts of interest and this work has continued worldwide in 2020. The most important action for internal mitigation continues to be the development of KONE’s corporate culture through training and awareness building. In addition, in 2020 we began an anti-bribery and corruption risk assessment, which will be completed in early 2021. Read more about Risk Management We use cookies to optimize site functionality and to give you the best possible experience while browsing our site. If you are fine with this and accept all cookies, just click the 'Accept' button. You can also review our privacy statement. 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