Risk management

Balancing risks and rewards

A dynamic operating environment comes with risks and opportunities. A comprehensive risk management system (RMS) ensures the timely identification of risks, the analysis of mitigation strategies, and finds potential areas of improvement to combat any unforeseen adverse event in our business.

How we assess risk

We adopt a multi-layered process involving the entire organisation from the Board of Directors to the risk operator. Our Risk Management Committee (RMC) oversees this entire process.

During the year under review, Risk Management Working Group (RMWG) operates as an interface between various functions/divisions of Schaeffler India and the RMC of the Schaeffler India Board. On the one hand, the RMWG will monitor, review, and guide the productive implementation of risk management at Schaeffler India, and on the other hand, it will provide valuable feedback to the RMC.

Risk assessment is carried out in a hierarchical format, with bottom-up approach. The process owner of each risk area assesses the risk, evaluates its impact on our earnings and assets, and describes the mitigation plan in existence to offset the adverse impact thereof. If such mitigation plan is insufficient, future measures are identified for implementation. RMWG analyses the risk assessment so done and provides its inputs for further safeguarding the assets.

The value-added report is presented by RMWG to RMC for review. The RMC annually reports to the Board of Directors, which ensures they are continually updated on the current risk situation of the company.

Structure of risk management system

Risk assessment matrix

We have a two-dimensional approach: the number of adverse impacts each risk can have annually and the probability of its occurrence. Each risk is classified in terms of its severity. The probability of occurrence is assessed using percentages and is classified as improbable, possible, probable, and highly probable. The combination of the estimated amount of damage and probability of occurrence determines the risk class, which can be low, medium, or high based on its impact on net assets, financial position, and earnings.

Each risk is evaluated before and after implementing risk mitigation measures, and are referred to as gross and net valuation, respectively. Based on net valuation, risks are assigned to various risk classes using the risk matrix.

Amount of damage: Financial impact each risk is likely to have on the Company’s assets and/ or earnings.

Probability of occurrence: Likelihood of each risk to impact the Company’s assets and/or earnings.

Risk categories at Schaeffler India

Classification of risks

Risks are divided into strategic, operating, legal and financial risks and are described in decreasing order of the magnitude of their impact on the next assets, financial position and earnings of the Company.

Risk	Key risk	Risk description	Mitigation measures	Risk class	Capitals impacted
	Strategic risks
	Country	Changes in the social, political, legal or economic stability within or outside the country could hamper our regular operations or planned future expansion. Changes in the political and regulatory environment of markets, in which the Company operates, could have an impact on its net assets, financial position, and earnings. During the year 2022, the geo-political conflict between Russia & Ukraine, and inflationary pressure on food and energy prices had a dampening impact on general consumer sentiments and the global economy.	The socio – economic – political risks are mitigated with continuous observations of the developments in the relevant business environment and taking appropriate actions in terms of changes in strategies to protect the interest of the Company. Several proactive cost countermeasures were identified and implemented in order to mostly offset the adverse impacts.
	Strategic market and technology	There are transformative changes forecasted in the marketplace like reducing diesel penetration, stricter emission norms, potential electrification of vehicle powertrain and so on. Customers are increasingly looking for bundled offering of products and services. The evolution of our business from being componentdriven to more systems-based could reduce the proportion of value added by our organisation. The government of India aims to increase the penetration of electric vehicles in the automobile landscape. Accordingly, automobile manufacturer continues to emphasise and act towards this industry trend. To address the changing priorities of Automobile OEMs, our product offering need to evolve to capture the industry requirements.	We are taking various measures to address these trends. We continue to focus on the development of products compliant with the latest emission norms. Our product offerings include system-based solutions which are value accretive to our customers. We are strategically enhancing our local production systems to be more modular and aiming towards ‘Factory for Tomorrow’. We are dedicated to developing evolving technologies and innovative offerings in the E-mobility space through a dedicated division focused on motor and control modules. This is helping us penetrate the growing E-mobility market and further expand our market position.
	Operational risks
	Market developments	As a supplier in the automotive and industrial sector, our product demand is driven by macro-economic conditions and various factors such as consumption patterns, fuel/commodity prices, availability of components, and interest rates, which make exact sales forecasting challenging. Sales in Industrial division is spread across diversified business fields and no significant risks are identified in these markets. A change in forecasted market trends could have an impact on the net assets, financial position, and the earnings of both Automotive and Industrial markets.	Markets are analysed on an ongoing basis to detect changes in market structure or regulations early on. We use managed cost efficiency programmes to reduce the amount of damage, flexibly and dynamically from unexpected market slowdowns. Impact arising due to significant price fluctuations is managed by renegotiating with customers.
	Delivery performance	The ability to deliver represent a key competitive factor for a long-term relationship of trust with customers; this competitive factor is being constantly enhanced by systematic improvements in production and delivery logistics. Inability to meet contractual delivery dates could have an impact on the financial position and earnings of our Company	We have built high-performance distribution centres aimed at improving market supply and delivery performance with strategic logistics locations. Component sourcing options and capacity of critical production lines are being enhanced. Alternate material/source is identified for cost optimisation and uninterrupted supplies.
	Procurement	Procurement risks arise mainly due to raw materials price fluctuations, ability of suppliers to deliver quality products in time. Adverse fluctuations in market prices and/or supplier’s financial distress could have an impact on the Company’s financial position and earnings. There is constant threat emanating from global supply chain disruptions and import restrictions due to government policies.	We ensure optimal supply of goods and services, focusing on quality, cost and delivery performance. Multiple product sourcing and localisation options are continuously explored. By negotiating prices and utilising economic synergies, we are largely able to obtain competitive prices. We keep a close watch on the operations of its suppliers, by deploying dedicated personnel performing quality checks, for early signs of distress so that interventions can be made to secure its interests. Representations are made to government to ensure timely clearance of import consignments.
	Information Technology (IT)	The importance of the IT systems utilised across various functions in the Company is growing. The operability of business processes and, therefore, the continuity of operations depend on the availability of IT systems. Three protection targets – confidentiality, integrity and availability – steer the Company’s IT security management and protection of data and IT systems. Unauthorised access to IT systems, modification and misappropriation of sensitive business data could have an impact on the Company’s net assets, financial position, and earnings.	We have the highest standards of IT security systems and are constantly upgrading our IT security infrastructure. It educates/ trains its employees on IT security and what precautions the users should take, to ensure that the IT infrastructure and business data are adequately protected against any possible IT risks.
	Information or cyber security	The prevalent threat of cyber-attacks remains an area of concern in an increasingly digital space. Cyber security risk is an important and continuous focus for us. We devote significant attention and resources to protect and improve the security of our computer systems, software, networks and other technology assets. Nonetheless, cyber-attacks/ breaches pose a significant threat to the protection of our intellectual property, and that of our business partners, from theft, loss, unauthorised disclosure, and illegal access or misuse. Given the increase in both the frequency and sophistication of such attacks, the possibility of cyber attacks/breaches cannot be entirely ruled out and could have an impact on our net assets, financial position, and earnings.	Cyber security initiatives have been implemented to mitigate potential incremental security threats from possible security risk exposures. We reinforced and scaled up the internal environment to ensure the network is secure and healthy. To mitigate cyber security risk, we put in place a robust information security policy based on the ISO/IEC 27001 standard and taking into account sector-specific regulations. Procedures and other IT security specifications supplement our information security regulations. Several technical measures have been established for any illegal intrusions and to mitigate the risk of cyber-attacks and secure data thefts, which also includes monitoring the networks for cyber threats through Security Operations Centre (SOC) to detect and respond to cyber security events. We will continuously buttress our cyber security defences and place responsible guidelines along with security controls to strengthen our security roadmap in managing risks in data, IT systems and cyber security across the Group businesses.
	Production	As our manufacturing facility is capital-intensive, a large proportion of its costs are fixed. As a result, decrease in utilisation of plant capacity leads to under absorption of costs and, thereby impacts its earnings adversely. Moreover, influence of force majeure could result in delays or interruptions of production and supply chain, leading to non-fulfilment of market demand. The period between failure at plant and arrangement from alternative source could impact the Company’s net assets, financial position and earnings.	We regularly review market conditions and align our production plan accordingly, where necessary alternative source can be realised from another plant within Schaeffler Group. Maintaining safety stock helps reduce losses. To minimise the probability of occurrence of unplanned interruptions, we take extensive fire prevention measures. Several cost containment measures were identified and implemented in material and process costs.
	Loss of market share	We face competition in every field of our operations. As a result, we are exposed to dual risk of either being displaced by existing or new competitors or its products being replaced by product innovations or new technological features. Customer dissatisfaction on price, quality, delivery performance and design could lead to loss of market share.	We ensure close cooperation with our key customers on product development. It has implemented strict product quality controls to reduce the likelihood of substitution. We are also developing products, which will help us step up the value chain from components to systems. We are expanding our local footprint to comply with local content requirements under ‘Make in India’ programme of government.
	Warranty and liability	We are known for our high standard of product quality. We leverage a certified quality management system besides continuously striving to improve quality processes. Notwithstanding these, there is a risk that poor quality products get delivered. Usage of defective parts can lead to damages, unplanned repairs or recall on the part of customer, which can result in liability claim or reputation damage.	We respond to such risks by adopting strict quality control measures and continually improving its production processes to minimise the probability of warranty and liability risks materialising. Adherence to quality standards is strictly implemented. All product and recall liability risks are insured.
	Product piracy	Our product brands – INA, LuK, and FAG are associated with best-in-class standards of quality, durability and reliability, making them increasingly susceptible to product piracy.	We protect our intellectual property by making by special markings on products, which makes counterfeiting difficult. Secondly, we follow a strict vigilance process to ensure timely detection of counterfeiting instances and initiation of legal actions against the offender. Moreover, digital anti-counterfeit app is regularly upgraded to support these initiatives. We evaluate other technology-driven initiatives on an ongoing basis to overcome this risk. We also conduct awareness and engagement activities with our distributors.
	Legal risks
	Compliance	As a Company with operations at different locations, we comply with laws and regulations across the country. It is possible that violations of any existing law occur, despite careful observance of such legal requirements.	We have in place a comprehensive Compliance Management System, wherein laws and regulations applicable to us are mapped. Each compliance requirement is mapped to relevant process owner. The system sends alerts and reminders to each process owner to enable him to comply with the requirements in a timely manner. Our management regularly reviews a comprehensive compliance report. The system is also updated regularly to capture regulatory changes and amendments.
	Financial risks
	Tax	We are subject to tax audits. Tax authority’s interpretation of the tax law or of relevant facts made in current or future tax audits may differ from us. This may lead to adjustments to tax base and increase in the tax liabilities, as additional tax payment because of an adjustment to the tax base could have an impact on the Company’s financial position.	We extensively evaluate corporate tax and international tax, both internally and with external tax experts, before implementing within the Company. We have a robust transfer pricing policy and the implementation strategy is well documented, reviewed periodically and amended as necessary.
	Pension	We have pension obligations towards our employees. Such obligations are measured using actuarial valuation based on assumptions with respect to the discount rate, increases in personnel payments and statistical life expectancy. Planned assets are invested with external agencies, which are subject to fluctuations in value. A change in these parameters could have an impact on our net assets.	We use government bond rate as discount rate and invest in pension fund with a Government of India enterprise (LIC). Quarterly actuarial valuation is carried out, adequate provisions are established in books of accounts and annually funds are appropriately transferred to LIC.
	Currency	We are exposed to currency risks due to our cross- border transactions. The largest currency risks from operations result from fluctuations in the USD and Euro exchange rates.	We have INR as the inter-company invoicing currency with German entities. This leads to substantial reduction in our foreign exchange exposure and nullifies currency volatility impact. Additionally, we have a structured hedging strategy to counter currency risks. The strategy is followed consistently and reviewed periodically. We also monitor overall FX developments closely and revisits our FX strategy annually.
	Liquidity	The risk that we will not be able to meet its payment obligations when due is referred to as liquidity risk. Such risks can arise if financing needs cannot be met by existing funding arrangements, including surplus cash balance. Even though we are cash surplus and does not expect any liquidity risks, it has put efficient liquidity management measures to mitigate associated risks.	We monitor liquidity risks using a rolling liquidity plan with a forecast period of twelve months. Short-term cash flows are monitored daily, involving key stakeholders. The working capital controls are adequately in place via appropriate actions including benchmarking and reviews. Credit insurance is undertaken in order to minimise the credit risk and thereby manage the overall liquidity risk in a better way.