Risk management system

The Porsche AG Group’s risk management is organized along decentralized lines. Alongside the central risk management function as a method and reporting center, each main department of Porsche AG and each subsidiary linked to risk management is represented by risk managers who are responsible for managing the implementation of and adherence to baseline standards. The decentralized organizational structure is designed to emphasize the importance of risk management in the local operating units and ensure risks are managed effectively.

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The basis of consolidation of the RMS matches that of the Porsche AG Group. If it makes sense from a risk perspective, the basis of consolidation can be expanded for risk management purposes to include other subsidiaries.

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In line with the decentralized organizational structure, risks are identified and recorded in the risk management IT tool by the departments of Porsche AG and those subsidiaries linked to risk management as the risk owners. As part of the risk report, the risk owners provide control measures and an assessment of the financial net potential of the risk in a worst-case scenario. The financial net potential in a worst-case scenario indicates the greatest possible financial impact over the entire term of the risk for the Porsche AG Group, taking into account financial losses from reputational risks and legal consequences. All risk management elements already in place are taken into account. Bandwidths are defined within fixed risk classes to classify the financial net potential in a worst-case scenario.

The risks are checked for plausibility and assessed together in the next step by central risk management, the risk owners and other key functions. Relevant risks are quantified within the risk categories of sales risk, supply risk, financial risk, personnel risk and operational risk. Central risk management coordinates with the risk owner and other key functions in order to take the necessary information into account in the stochastic risk modeling.

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Stochastic risk modeling uses appropriate probability distributions (e.g. equal distribution, triangular distribution, etc.) and IT-supported simulation methods (Monte Carlo simulation). As part of the risk simulation, the expected value of the financial loss and the value at risk at a confidence level of 99% are determined for the RMS period under review.

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On a quarterly basis the relevant quantified risks are reviewed by the Risk Council for completeness. The Risk Council is an advisory body tasked with reviewing baseline standards for instruments and methods of the RMS and the associated reporting system. The risk situation for the respective quarter and the overall risk are reported to the Executive Board and Supervisory Board.

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A core element of risk management of the Porsche AG Group is that risks can be reported and updated without delay via the group-wide reporting channels that have been set up. Outside of the standard process, there is an event-based reporting process for risks of the utmost urgency.

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A risk requiring urgency is deemed as such if the financial net potential in a worst-case scenario over the entire term of the risk is greater than €1 billion for Porsche AG or €100 million for subsidiaries and the probability of occurrence exceeds 50% in the next two years.

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The Porsche AG Group has ensured the level of qualification and extensive training of employees involved in the risk management process. In addition, voluntary refresher trainings are also offered alongside compulsory trainings. Central risk management reviews the progress of training and the level of coverage on an ongoing basis and reports this on an annual basis to the Risk Council.

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For the documentation of the group-wide RMS and exercising the monitoring function, there is an IT system that reflects all of the risk management processes. It supports the employees involved in the risk management process in executing risk management processes and compliance with baseline standards defined in risk management. In addition, central risk management supports the employees involved in all phases of the process.

Internal control and risk management system in the context of the group accounting process

The internal control and risk management system relating to accounting aims to minimize the risk of material misstatements in the consolidated financial statements and in external reporting.

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The internal control system includes methods and principles as well as measures and controls derived therefrom, which ensure the complete, timely, uniform and correct recording and transmission of the relevant information for the consolidated financial statements and the combined group management report of Porsche AG.

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The Porsche AG Group’s accounting is generally organized along decentralized lines. Accounting duties are largely performed independently by the consolidated subsidiaries. The Volkswagen Group’s IFRS Accounting Manual is used to ensure the application of uniform accounting policies. In addition, the Porsche AG Group specifies these provisions with instructions for the quarterly and annual financial statements as well as further reporting rules.

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A central element of the internal control system is regular risk analysis and assessment in order to identify and manage significant risks to the accounting and financial reporting processes in the legal entities of the Porsche AG Group and central functions at an early stage. The group companies included are identified in a quantitative and risk-oriented process. The subsequent definition and implementation of controls as well as their execution and documentation are carried out uniformly in accordance with group-wide guidelines. The control system contains preventive and detective controls and is integrated into accounting-related processes at the respective group functions and companies.

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Alongside plausibility and consistency checks, other elements of the internal control system applied during the preparation of the annual and consolidated financial statements of Porsche AG include the clear delineation of areas of responsibility and the application of the principle of dual control. Further control activities at group level include analyzing and, if necessary, adjusting the data reported in the financial statements presented by the subsidiaries and the consolidation measures carried out. Furthermore, the Porsche AG Group uses data analyses to identify and eliminate any process and control weaknesses.

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The effectiveness of the internal control system is systematically assessed using standardized procedures. Regular tests based on samples are performed. This forms the basis of the assessment of whether the controls are appropriately designed and effective.

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If weaknesses are identified in the course of process-integrated controls or effectiveness tests, the Porsche AG Group takes mitigating measures to eliminate the weaknesses.

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The standards of the accounting-related internal control system are defined uniformly throughout the group and continuously enhanced. At the end of the annual cycle, the relevant group companies confirm that the group-wide guidelines have been implemented. The results from the accounting-related ICS are reported to the Executive Board and Supervisory Board of Porsche AG.

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Based on the controls, effectiveness tests and mitigating measures carried out for the fiscal year 2024, Porsche AG considers the accounting-related internal control and risk management system to be appropriate and effective.

Opportunity management

In a dynamic market environment, it is not only important to manage risks effectively when making business decisions, but also to identify and realize opportunities consistently and in the best possible way.

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Opportunities management is closely based on strategic targets and is an integral component of the operational structures and procedures in conjunction with the general planning and management processes in the Porsche AG Group. This includes optimizing revenue and costs as well as improving products, mobility and financial services. For this purpose, the Porsche AG Group is constantly analyzing the environment of its business model in order to identify trends, e.g. from the market, technology, society and environment as well as changes in key factors at an early stage. With the help of scenario analyses – involving strategic business planning, the affected business divisions and Controlling – the developments relevant for the business model are considered and assessed so as to derive any potential effects for the Porsche AG Group.

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The business divisions use this to derive short, medium- and long-term opportunity potential and operationalize this potential accordingly. In addition to the systematic implementation of its strategy, the Porsche AG Group aims to secure its long-term competitiveness and future viability through further efficiency and opportunity initiatives. The identification of specific targets from the aforementioned initiatives offer additional potential to generate opportunities.

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The earnings indicators and cost structures combined with a high level of financial strength provide the Porsche AG Group with the financial headroom for future investments in products, technology and services, even in a challenging environment. The Porsche AG Group is managed by targets and opportunities with a clear focus on a sustainable increase in the value of the company.

Sales risks and opportunities

Trade barriers

The Porsche AG Group is exposed to relevant risks in connection with trade barriers. This concerns both tariff trade barriers in the form of customs duties and non-tariff trade barriers, such as regulatory measures to protect domestic producers or the restriction of international trade. The number of trade restrictions continues to grow, increasing the risks associated with trade barriers, and are therefore to be classified as “high”.

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Based on the free trade agreements that the EU has concluded with various countries, Porsche vehicles can be imported to these countries at reduced rates of customs duties or duty-free, subject to compliance with the local content requirements. New and more stringent local content requirements necessitate an ongoing adjustment of the calculation processes. If local content requirements are not met, there is a risk for the Porsche AG Group that the standard rate of customs duty will have to be applied when importing vehicles.

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A key risk in this context is the possibility of import tariff increases by the USA, which could have a significant impact on pricing and sales in the US market. To counter this risk, the Porsche AG Group has developed preparatory measures that enable it to react to any changes quickly and in a targeted manner.

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Changes in trade policy frameworks may also give rise to positive earnings effects for the Porsche AG Group. Potential for lower cost of goods sold or also the possibility to offer products and services at lower prices is offered by a possible removal of tariff barriers, import restrictions or a reduction of direct excise duties.

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There are also further sales risks as a result of the ongoing trade conflict between Europe, the USA and China. Import restrictions in the US market in the form of potential bans on the use of certain foreign components and software solutions are of particular importance to the Porsche AG Group. As a result, adjustments may be necessary in the supply chain. The Porsche AG Group monitors local developments in the US market on an ongoing basis and takes appropriate preventive measures to reduce the impact on business activities.

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In the context of increasing trade barriers, laws governing export controls also play an important role for the Porsche AG Group. This means that components and materials from abroad that are subject to certain export control laws cannot be exported, or can only be exported with restrictions. This may affect significant business transactions and have a negative impact on the sales and reputation of the Porsche AG Group. Developments in this context are monitored and evaluated on an ongoing basis.

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Market development

Within the “Sales risks and opportunities” category, the risks for the Porsche AG Group in connection with market development are classified as “high”, as in the prior year.

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There is also still the risk of an increasing decline in demand due to the dynamic market and competitive situation in China. A deterioration in the overall economic situation in China, e.g. as a result of a real estate crisis and the associated loss of purchasing power, increasing competition in the Chinese market or localization efforts, as well as structural changes in the automotive sector continue to be felt and may continue to have an impact on sales expectations in the market. The market situation in China is constantly monitored and taken into account in sales planning.

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In addition, the entire automotive industry is undergoing a transformation toward electromobility. For the Porsche AG Group, product development and the electrification strategy not only offers opportunities and learning effects, but also poses risks. Increased transformation risks may arise in particular from a delayed transformation of the sales markets toward electromobility. These risks are countered by a flexible product portfolio, which includes vehicle models with combustion engines and plug-in hybrids in addition to electromobility.

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In addition, the Porsche AG Group is faced with scheduling risks that may arise from delays in the deployment of new electromobility technologies and that may have a negative impact on the competitiveness of the Porsche AG Group. There are also challenges in the area of the fast-charging infrastructure required for electromobility. An insufficiently developed charging infrastructure can lead to a potential loss of BEV sales.

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The development of the global political framework conditions and requirements in this context, such as the reduction or elimination of government subsidies for electric vehicles, may also affect expectations in the Porsche AG Group’s sales markets.

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However, the increasing importance of sustainability among all stakeholders offers the Porsche AG Group the opportunity to further improve its market position and create additional sales incentives through targeted communication and marketing of its sustainability attributes.

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In particular, the resource-saving use of raw materials, the increasing use of renewable raw materials in vehicles, the focus on climate-friendly drive technologies and other sustainability aspects along the value chain, such as green electricity, may generate positive reputational effects among customers and investors and thus increase demand for vehicles.

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If, contrary to expectations, the sales situation develops more positively, this may also create opportunities for additional earnings potential. This should be seen in particular against the backdrop of a balanced regional distribution, with an increased focus on Overseas and Emerging Markets such as the ASEAN region.

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In addition, the expansion of market shares due to a broad and rejuvenated product portfolio of various drive technologies and the growth of existing and the expansion of new business fields could have an advantageous impact. Moreover, the strength of the brand in conjunction with innovation can also support the realization of unit prices and the associated earnings potential.

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Supply risks and opportunities

Purchasing and logistics

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In the Porsche AG Group, the supply risks within the “Purchasing and logistics” sub-category decreased on the prior year, but are still classified as “high”.

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There are risks associated with the start of production of vehicles being scaled-back, delayed or postponed due to quality or scheduling problems in the supply chain. There are also significant risks associated with existing vehicle models. These arise, among other things, from potential insolvencies or liquidity bottlenecks at suppliers, which could have a negative impact on the Porsche AG Group’s production processes and thus on supply chain stability. In addition, possible recalls due to quality problems in the supply chain could have a negative impact on the Porsche AG Group and lead to cost and sales risks. By closely monitoring the supplier relationship, the necessary risk management measures can be initiated at an early stage.

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There are also significant risks due to business interruptions caused by climate hazards in the supply chain. Climate change means that extreme weather events are occurring more and more frequently, which can affect the operations of suppliers to the Porsche AG Group. These interruptions to operations may result in lost production increased operating costs for the Porsche AG Group. Suppliers are analyzed proactively for physical climate risks for risk management purposes.

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Significant risks may also arise from the provision of software for products and connectivity services for the Porsche AG Group. Risk factors here are the timely provision of the software in the required quality. Compared to the prior year, the risk factors have decreased as a result of expanding strategic partnerships in the area of software and connectivity services. However, there are still significant risks in this environment. As a result, project milestones are missed or delayed, which may impact vehicle launch schedules. Competitive disadvantages are also conceivable if demand requirements are not met as a result of quality problems.

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The Porsche AG Group is also exposed to significant risks in the area of battery cell and battery module production in connection with the supply of parts. Risk factors include in particular the increasing demand for battery cells and modules, the dynamic technology and regulatory environment and the service life of battery cells. In this context, it is particularly important for the Porsche AG Group that risks may arise with regard to the supply of parts as a result of unstable production processes at battery cell and battery module suppliers. Although these risks have decreased in comparison to the prior year due to progressing mitigation measures, there are still risks with regard to the start of production of vehicles being scaled-back, delayed or postponed, which could lead to an impairment in connection with the use of vehicle platforms, for example. There is also a risk that technical and regulatory specifications for the battery cell and battery module will be met late or not at all. As a result, the Porsche AG Group is faced with scheduling, quality and cost risks. Within the Porsche AG Group, these risks are managed through early and systematic identification of weak points in the start of production of a vehicle and close monitoring of the supplier relationship.

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The supply of semiconductors continues to be subject to significant risks that could affect the supply situation. Potential risks for the Porsche AG Group could manifest themselves in the form of production interruptions and thus also lost sales. However, supply chain stability has developed positively as a result of the early conclusion of long-term contracts and progressing mitigation measures.

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In addition, as in the past, additional cost demands from suppliers for various reasons may lead to cost risks in respect of investments and direct material costs. The reasons for this include, for example, increased raw materials prices and other cost increases in connection with manufacturing. Postponing the start of production of vehicles can also lead to additional cost claims from suppliers. Although these risks have decreased compared to the prior year, they do still exist. Closely monitoring these within the projects and taking countermeasures at an early stage, e.g. negotiations by procurement, have a positive impact on risk mitigation.

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Opportunities could in principle arise should, contrary to current estimates, the supply situation and its repercussions develop more positively or things return to normal earlier than anticipated.

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Furthermore, significant opportunities may arise from potential additional synergies with new vehicle architectures within the Porsche AG Group but also in association with the Volkswagen AG Group as well as from technological innovations. These synergy and innovation effects pertain to Development, Procurement and Production in particular. Furthermore, opportunities from product cost and process optimization program can contribute to the realization of earnings potential in this context.

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Geopolitics

Possible risks related to geopolitical events may also increasingly arise from the trade conflict between China and the USA and tensions in Asia. The Porsche AG Group is faced with possible sales losses and a dependence on Asian suppliers or sub-suppliers in the affected regions. In addition, conflicting sanction laws may exacerbate the risk situation. Geopolitical developments in this context are monitored on an ongoing basis.

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The conflicts in the Middle East may have a direct and indirect negative impact on the business activities of the Porsche AG Group. This can also include temporary disruptions to important sea routes, which can have an impact on supply chains, for example. The Porsche AG Group succeeded in reducing this risk in the fiscal year 2024 by increasingly securing its supply chains.

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Due to the continuing tense geopolitical environment, the risks in this context for the Porsche AG Group are classified as “high”, as in the prior year.

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If, contrary to previous planning and forecast assumptions, the geopolitical tensions in the aforementioned regions weaken or dissipate, this could lead to the effects on the global economy – including falling inflation rates, further decreasing interest rates, but also the sales situation in general and the challenges in the relevant markets – have a positive impact and possibly even result in opportunities on the sales and cost side for the Porsche AG Group.