Macroeconomic conditions, political uncertainties, technological transformations and changes in industry dynamics are factors that impact the environment in which Electrolux operates. The Electrolux board and the business area boards monitor the development in key markets and proactively assess external risks as well as opportunities that may influence the Group’s strategy and operations.
Macroeconomic and political risk
Political uncertainty and weak macro-economic conditions may indirectly impact demand for appliances. This has implications for Electrolux business and strategy in regions, which carry a high political and macro risk. While such risks have historically been mainly associated with certain markets in Latin America, the Middle East and Africa the development around Brexit have made it more difficult to predict the political risk also in Europe and other regions. Consequently, Electrolux must take proactive steps to assess the risks and manage them accordingly.
Business risks surrounding rising international trade tariffs also include costlier imports, less competitive exports, fluctuating foreign exchange rates, shorter contracts, cancelled orders, reduced consumer demand, and slower customs procedures. Ultimately, such risks can affect Electrolux operating margins negatively.
The pace of change in global markets along with the digital transformation are leading to new trends that influence the appliance industry. Increased consumer power, digitalization, consolidation and sustainable development place increasing demand on investments and the ability to adapt, but also present major opportunities. Electrolux is focusing investments on innovation and areas such as digitalization and connectivity and has transformed its product offering by reinventing taste, care and wellbeing experiences. The Group has also set ambitious targets to further strengthen its sustainability profile.
Variations in demand
In times of fast changes in market conditions and fluctuating demand for the Group’s products, decisive action and cost saving initiatives throughout the Group have proven that Electrolux can be agile and make timely adjustments in its production and cost structure. When there is strong market demand, it is essential that Electrolux can benefit from its global scale by delivering new innovative products and experiences with a high speed to market.
A number of Electrolux markets are experiencing price competition. This is particularly evident in low-cost segments and in product categories with significant overcapacity. In markets with high inflation combined with currency rate fluctuations, Electrolux has better opportunities to carry out price increases to offset potentially negative effects.
Regulatory changes (industry, environmental, social, labor and human rights) can impact reputation and the Group’s ability to successfully conduct business. There are a number of processes in place to control these risks such as internal and supplier auditing, environmental management and certification, the Ethics program and the safety management system. The regulatory environment is monitored in order to prepare for changes that impact the business.
Purchasing and raw material impact
Materials account for a large share of Electrolux costs. Electrolux purchases raw materials and components for approximately SEK 50bn, of which approximately SEK 17bn referred to raw materials in 2019. Electrolux also sources a significant number of finished products from external suppliers. Fluctuations in commodity prices impact the Group’s input costs and, therefore, its profitability. In order to mitigate increased input costs related to higher raw material prices, Electrolux may have to take actions to increase cost efficiency, negotiate purchasing contracts for finished products and/or commodities such as steel and chemicals or increase the prices of its products. The purchasing of materials and finished products also involves risks for Electrolux if suppliers encounter constraints to deliver according to plan, which could be caused by many reasons, such as extreme weather conditions, pandemic situations or political disruptions.
For a sensitivity analysis on the impact of raw materials, see table below.
Sensitivity analysis year-end 2019
|Raw materials||Change +/-||Pre-tax earnings impact -/+, SEKm|
Changes in raw materials refer to Electrolux prices and contracts, which may differ from market prices. The figures in the sensitivity table are rounded and as of year-end 2019.
Electrolux also looks at Emerging risks. They can either develop from macro-level changes such as global warming, consumer preferences or the introduction of artificial intelligence (AI), or from risks that are closer to home (resulting from industry/sector prospects and trends etc.).
Emerging risks include:
Cyber Security risk
The digital transformation of the global economy, and of Electrolux more specifically, leads to great opportunities. As Electrolux uses technology to speed up the transfer of information, it also creates potential greater risk. Electrolux continuously mitigates against attacks by assessing its cyber risk profile, remediating where recommended and proactively managing its defenses.
Climate change risk
Financial stakes arising from climate change can be high, both from a risk and opportunity perspective. Electrolux is closely monitoring operational, market and financial risks emerging from climate change, like the increase of natural catastrophes, which might subsequently impact property values. Protection of factories and distribution centers may have to be adapted to face extreme weather conditions. In parallel, the need to transition to a low-carbon economy implies possible tax and legal implications which Electrolux proactively analyzes, as well as the consequences of these risks on its large suppliers.