Defining the Probability and Impact of Risk Occurrence

We have defined categories for describing the probability that risks we identify will occur. They provide a framework for understanding our evaluations of individual areas of risk. The categories define the range of probability as follows:

• Unlikely: under 25 percent
• Possible: 25 – 75 percent
• Likely: over 75 percent

We also use categories to describe how the occurrence of the risks listed might impact the Group’s earnings, net assets and financial position. We assess the possible effect on earnings using the net method, i.e. after taking appropriate countermeasures, such as establishing provisions or hedging. The following categories define the ranges:

• Low: up to € 25 million
• Medium: up to € 100 million
• High: over € 100 million

The following table shows our estimation of the risks’ probability and of how risk occurrence might impact the Group’s earnings, net assets and financial position. The statements refer to the forecast period, thus to fiscal 2014.

Probability and Possible Impact of Our Risks in 2014

Overall Economic Risks

Scenario: Continuing economic slowdown.

Impact on WACKER: Production-capacity utilization drops, specific manufacturing costs rise, and the Group’s sales and earnings decline.

Measures: We counter this risk by continuously monitoring economic trends in our key sales markets. If we detect economic weakness, we take early precautions to flexibly adjust production capacities, resources and inventories in line with customer demand. In such cases, we focus on, for example, production locations with the best cost position and temporarily shut down some production facilities. To counter an economic slowdown, we also use the instrument of short-time work and do not extend temporary employment contracts.

Evaluation: Market observers expect global economic growth to accelerate in 2014. Economic activity is forecast to gain momentum both in advanced economies and in the emerging markets of Asia, South America and Eastern Europe. At the same time, political and structural challenges remain high. The European financial and sovereign-debt crisis and the public-sector deficit in the USA still pose risks to the stability of the global economy.

Risk Assessment: We presently see no specific signs that economic trends will diverge substantially from the experts’ forecasts. Given the risks mentioned, however, we cannot completely rule out that the global economy in 2014 could perform below current projections.

Our chemical business supplies a large number of customers from a wide range of industrial sectors worldwide. As per our previous experience, we can use this to partially compensate for temporary weakness in some sectors and sales regions. If global economic growth should turn out to be weaker than currently forecast, the impact on our chemical-business earnings trend will probably be low. However, if a recession should unexpectedly occur and significantly dampen demand for our products in a number of key sales markets and sectors, this would reduce chemical-business earnings at least to a medium degree.

In Siltronic’s semiconductor-wafer business, volume and price trends depend essentially on two factors. First: on how consumer and industrial demand develops for electronic equipment, such as computers, smartphones and tablet PCs. Second: on the balance between global production capacities and semiconductor-manufacturer demand. Both factors are closely interlinked. If the consumer climate should cool off noticeably, contrary to expectations, this would probably have a medium impact on Siltronic’s earnings trend.

The continued development of our polysilicon business will primarily be determined by the regulatory framework for solar-power use and for international trade in photovoltaic systems and solar silicon. Economic influences are of subordinate importance by comparison. If the global economy turns out to be weaker than currently forecast, there would be a medium impact on earnings as regards WACKER’s polysilicon business.

Sales-Market Risks

Scenario 1: Chemical-segment overcapacity.

Impact on WACKER: Price and volume pressures on our products.

Measures: WACKER minimizes this risk in various ways. For example, we align production with demand and perform quantity controls to ensure appropriate plant-utilization rates. Our approach also includes structured price management, process optimization and intense development of growth markets. Importantly, a key ongoing goal is to increase the share of cyclically resilient product groups in our portfolio and to rank among the global leaders in all our business fields. By cooperating closely with customers, we aim to quickly open the way to novel applications, thus fostering long-term customer loyalty.

Evaluation: We expect overcapacity-related risks for our products to remain the same in 2014. At WACKER POLYMERS, we anticipate overcapacity for dispersions and dispersible polymer powders in Asia. Nevertheless, we expect plant utilization to be strong despite this overcapacity. WACKER SILICONES faces overcapacity for siloxane production in China and for certain segments (such as liquid silicone rubber) – which could reduce plant utilization. Price pressure on some of our chemical divisions’ products will persist in 2014.

Risk Assessment: It is unlikely that individual areas of our chemical business will experience overcapacity and, consequently, price pressure. We have already taken account of this development in our planning and forecasts. Any additional impacts on the Group’s earnings are considered to be in the medium range.

Scenario 2: Cyclical fluctuations and intense competition on the semiconductor market.

Impact on WACKER: Volumes and prices decline.

Measures: Siltronic tries to reduce these risks through systematic cost management and through flexible structures and production operations. We have aligned our capacity for < 300 mm diameters with market trends by closing the Hikari (Japan) site in 2012 and discontinuing 150 mm silicon-wafer production at Portland. In the 300 mm wafer segment, Siltronic is continuing to improve its production- and business-process efficiency and, thus, its cost basis.

Evaluation: 2014 will be another challenging year for the semiconductor industry. Market researchers expect volumes to increase by more than 5 percent, with the pressure on prices remaining high. Siltronic’s Japanese competitors are using the devaluation of the yen against the euro to lower their semiconductor-wafer prices. That could impact the asset value of Siltronic’s 300 mm wafer production facilities. We expect stronger demand, in particular for 300 mm silicon wafers. Volumes for wafer diameters below 300 mm might decline in 2014.

Risk Assessment: In our semiconductor business, we anticipate that volumes in 2014 will edge up year on year amid persistently strong price pressure. This scenario forms the basis for our planning and forecasts. We consider it possible that volumes and prices will diverge substantially from our expectations. If volumes came in considerably below our current estimates, this would have a medium impact on Siltronic’s earnings.

Scenario 3: Polysilicon overcapacities and price risks, difficult market conditions due to a rollback of government incentive programs, and the tight financial situation of many customers.

Impact on WACKER: There will be volume risks if the photovoltaic market is dampened by government solar incentives being curtailed too far and too quickly. Overcapacity could lead to intense price competition, which would exert pressure on margins. Both factors could result in declining sales and earnings and impact the asset value of our polysilicon production facilities.

Measures: We counter this risk by continually improving our productivity, cost positions and quality. If demand falls, we adjust our production capacities flexibly in line with the market trend. In February 2013, due to accelerating demand, we discontinued the short-time work schedule we had introduced in October 2012 in individual areas of the Burghausen plant. To align our capacity expansion with anticipated customer demand, we decided, as early as fall 2012, to extend the timeline for the new site in Charleston (Tennessee, USA) by about 18 months and to start production in the second half of 2015. This timeline is still in place.

Evaluation: The photovoltaic industry continues to face production overcapacity. The persistent price pressure at all stages of the supply chain has, however, recently let up. From early 2013, polysilicon prices remained more or less stable, however at a very low level. The industry’s consolidation process is not yet over and will probably continue in 2014. Overall, as the cost and quality leader, we expect to emerge from this consolidation process with renewed strength. However, as long as global production capacity exceeds market demand, there is little chance that prices will increase noticeably at every stage of the supply chain. In certain European countries, we also expect to see a tendency for further cuts in state incentives for photovoltaics. Conversely, incentive programs outside Europe – for example in China, Japan and the USA – will probably be expanded. At the same time, falling prices for photovoltaic components are making solar energy more competitive. Among the sources of renewable energy, pholtovoltaics is becoming one of the most cost-effective technologies for generating power. This trend will help promote access to new markets and spur further growth in the global market for photovoltaic applications.

Risk Assessment: In all probability, the consolidation process in the solar industry will carry on in 2014. As long as this trend continues and global production capacities exceed market demand, it is possible that polysilicon prices will not change substantially compared with the current level. Our planning and forecasts anticipate such a situation. Should solar-silicon demand clearly exceed supply, we believe that there would be a medium positive influence on WACKER POLYSILICON’s earnings. Conversely, a slump in solar-silicon demand would probably have a medium impact on WACKER POLYSILICON’s earnings in this business.

Procurement-Market Risks

Scenario: Higher raw-material and energy prices, and bottlenecks in the supply of certain raw materials.

Impact on WACKER: Earnings dampened by higher raw-material and energy prices. If there are supply bottlenecks, delivery times to customers grow longer and there could be volume losses.

Measures: On an annual basis – and if necessary, ad hoc – we prepare systematic procurement plans for strategic raw materials and energy, along with an evaluation of the procurement risk. Whenever possible, we counter any procurement risks deemed significant with corresponding measures. Examples of such measures include long-term supply contracts with partners, structured procurement from multiple suppliers under contracts with various maturities, expansion of our supplier base, and higher safety stocks. With our silicon-metal production site in Holla (Norway), we have achieved backward integration for one of our key raw materials, considerably reducing our dependency on external suppliers. We are now in a position to produce – in-house and to a high quality standard – just under one-third of the quantities we need.

Evaluation: WACKER has positioned itself well in energy and raw-material procurement to better manage the risks inherent in both economic upturns and downturns. If the global economy should weaken markedly, our contracts for key raw materials allow us to adjust purchase volumes flexibly and to benefit – wherever possible – from price decreases through escalator clauses. If the global economy grows, we have volume guarantees such that we do not see any major risks affecting the supply of raw materials. Prices could, of course, markedly increase in such a situation. There is, however, the possibility of at least partially compensating for these additional costs with higher selling prices for our own products. Overall, we see the risks WACKER faces in the area of raw-material procurement and prices as currently being low.

At present, energy-intensive companies or parts of such companies can for the most part be exempted from the EEG levy. Some entities at WACKER also profit from this exemption. Any restriction on the rules for exemption would considerably reduce the competitiveness of individual corporate entities. The scope of these exemption rules is currently the topic of political discussions and legal disputes in Germany and Europe. We are not able to predict the outcome of these proceedings.

Risk Assessment: We currently consider it unlikely that raw-material supply and price risks affecting WACKER's business could materialize. Correspondingly, we view the possible impact on Group earnings as low. Conversely, the risks and potential impact on our earnings emanating from the continued regulatory affect on energy prices in Europe, and in Germany in particular, are high (also see Regulatory Risks, Energy Transition in Germany).

Market-Trend Risks

Scenario: An incorrect projection of market trends, and lack of customer acceptance for newly developed products.

Impact on WACKER: If we misjudge future market trends, this could impact our market strength and earnings position. New product developments that fail to meet market needs could negatively impact our sales and earnings.

Measures: WACKER works closely with its customers and, therefore, has reliable information for developing new products and applications. At the same time, we monitor the market and our competitors very closely (all the way down to a business-field level), hold customer and supplier interviews and regularly attend tradeshows that are important to WACKER. In individual cases, we commission market research. We minimize risks relating to product developments by collaborating on specific projects with customers. WACKER also cooperates with universities and scientific institutions on R&D projects to stay abreast of state-of-the-art technological and product-development trends.

Evaluation: WACKER has many years of market experience and can update its detailed planning as soon as market developments change.

Risk Assessment: We consider the risk of misjudging market trends, or not reacting to them appropriately, to be low. If this should, nevertheless, occur in individual application fields, the impact on our earnings trend would probably be low.

Investment Risks

Scenario: Bad investments, higher-than-expected investment costs, postponed plant start-ups, deterioration of original market projections, and acceptance of risks from investments in joint ventures and associates.

Impact on WACKER: Bad investments lead to idle-capacity expenses and/or impairments of assets and investments. Higher investment costs will lead to higher depreciation expenses in our operating result. Postponed start-ups pose the risk of being unable to fulfill supply agreements and, thus, of posting lower sales and earnings.

Measures: WACKER has numerous measures in place for countering investment risks. We check the completeness and plausibility of plans for all new projects with an investment volume exceeding € 1.5 million. Economic feasibility is assessed using comparative studies that look at other plant projects, including those of competitors. Investments are approved in stages only. Intensive project-budget management helps prevent or minimize delays.

By establishing partnerships with companies such as Samsung or Dow Corning, we have reduced our own investment risk. In this regard, however, there are long-term purchasing and financing commitments with the respective associated companies or joint ventures. At the same time, the result from investments in joint ventures and associates can influence our profitability.

Evaluation: Over the past few years, WACKER has demonstrated that it can complete complex technical investment projects on schedule, or even earlier than planned. To ensure that polysilicon production at our new site in Charleston (Tennessee, USA) can be ramped up on schedule in the second half of 2015, calls for tenders are currently in progress for the remaining subcontracting work. As the chemical industry will be initiating a series of large-scale projects over the next few years to take advantage of the shale-gas boom in the USA, the resulting competitive situation may cause the capital expenditure on materials and assembly to be higher than originally expected. It will not be possible to gauge the extent of these additional costs – or whether third-party projects might have an impact on the scheduled production start in Charleston – until after these calls for tenders have been completed.

Risk Assessment: We consider it possible that commissioning of our new polysilicon production facility in Charleston could encounter delays and higher capital expenditure. It is currently difficult to estimate to what degree commissioning at a later date would impact the Group’s earnings trend. If commissioning took place several months later than as scheduled today, this could have a medium impact on earnings.

Production Risks

Scenario: Risks relating to the production, storage, filling and transport of raw materials, products and waste.

Impact on WACKER: Potential personal injury, property damage and environmental impairment; production downtimes and operational interruptions; and the obligation to pay damages.

Measures: WACKER coordinates its operational processes through its integrated management system (IMS). The system regulates workflows and responsibilities, attaching equal importance to productivity, quality, the environment, and health and safety. Our IMS is based on legal regulations, and on national and international standards, such as Responsible Care^® and the Global Compact, which go far beyond legally prescribed standards. We monitor maintenance extensively and regularly perform inspections to ensure the highest possible level of operational safety at our production sites. We conduct thorough safety and risk analyses, from the design stage through to commissioning, to ensure our plants’ safety. We regularly hold seminars on plant/workplace safety and explosion protection. Every WACKER site has its emergency response plan to regulate cooperation between internal and external emergency response teams, and with the authorities. When we work with logistics providers, we ensure that hazardous-goods transport vehicles are always checked prior to loading and that faults are systematically recorded and tracked.

Evaluation: Risks stemming from the production, storage, filling and transport of raw materials, products and waste can never be completely ruled out.

Risk Assessment: Even though it is generally possible for risks relating to the production, storage, filling and transport of raw materials, products and waste to materialize, we currently consider a serious loss event to be unlikely. Nevertheless, if such an event should occur, it could have a medium impact on WACKER’s earnings.

Financial Risks: WACKER is exposed to financial risks from ongoing operations and financing. Such risks include credit, market-price, financing and liquidity risks. They are managed by the individual WACKER departments responsible for them. We employ primary and derivative financial instruments to cover and control the financial needs and risks necessitated by our operations. Such financial instruments are not permitted, however, if they are not based on actual or planned operational activities. The Notes to the consolidated financial statements provide extensive information about risk hedging using derivative financial instruments. See further details in the Notes section 20.

Controlling Financial Risks

Credit Risks

Scenario: Customers or business partners fail to meet their payment obligations.

Impact on WACKER: Losses on trade receivables, and failure of banks to fulfill their obligations to WACKER (loan disbursements, repayment of deposits and compensatory payments arising from derivatives transactions).

Measures: We use a variety of instruments to reduce the risk of any loss on receivables. Depending on the nature of the product/service provided, we may demand collateral, including retention of title. Other preventive measures range from references and credit checks, to the evaluation of historical data from our business relationship to date (particularly payment behavior). We take out credit insurance to minimize the risk of default. We prevent counterparty risk vis-à-vis banks and contractual partners by carefully selecting these partners. We strictly limit cash investments and derivative dealings to banks with a minimum rating of A- from Standard & Poor’s or a comparable rating agency. Investment activities are additionally subject to maximum investment and term limits. In exceptional cases, investments or derivative dealings may be conducted with banks of lower creditworthiness within tight limits and terms. The same criteria apply to buying government and corporate bonds.

Evaluation: The credit risks stemming from customer business are manageable. Credit risks arising from contractual obligations to financial institutions are related to financial assets and derivative financial instruments. Our Corporate Finance and Insurance department centrally handles global dealings with currency-exchange and interest derivatives, as well as liquidity management.

Risk Assessment: We consider it unlikely that credit risks stemming from customer business will occur. The same applies to our risk concentration in relation to bank failures, thanks to our approach to counterparty risk. If, however, credit risks stemming from customer business should unexpectedly occur or should banks fail, the probable impact on WACKER’s earnings would be low.

Market-Price Risks and Risks of Fluctuating Payment Flows

Scenario: Fluctuations in currency-exchange rates, interest rates and raw-material prices.

Impact on WACKER: Effect on earnings, liquidity and financial investments.

Measures: Currency risks primarily arise from exchange-rate fluctuations for receivables, liabilities, and cash and cash equivalents not held in euros. The currency risk stemming from financial instruments is of particular importance with respect to the US dollar, Japanese yen, Singapore dollar and Chinese renminbi. WACKER hedges the resultant net exposure – as of a certain level – via derivative financial instruments. The use of such instruments is governed by WACKER’s regulation on currencies. We employ currency-option and forward-exchange contracts, and foreign-exchange swaps. Foreign currencies are hedged predominantly for the US dollar, Japanese yen and Singapore dollar. Plus, we counter exchange-rate risks through our non-eurozone production sites.

Interest-rate risks arise due to changes in market rates that impact future interest payments for variable-rate loans and investments. Thus, the changes have a direct influence on the Group’s liquidity and financial assets. When exposure for euro amounts is identified, interest-rate hedging is performed. The use of derivative financial instruments is governed by internal regulations that separate trading and settlement functions, and is subject to strict controls within the entire processing procedure. We continually monitor the effectiveness of any measures taken. In certain cases, commodity prices are hedged by traded futures.

Evaluation: We hedge part of our US dollar, yen and Singapore dollar business. The possible impact of a stronger euro will be partially cushioned by hedging measures. Consequently, we do not expect any major effects from exchange-rate shifts in 2014.

Risk Assessment: From today’s perspective, we consider it unlikely that exchange-rate and interest-rate changes in 2014 will substantially differ from our planning assumptions. Nevertheless, if this were to occur unexpectedly, we believe that it would have a low impact on Group earnings.

Liquidity Risk

Scenario: Lack of funds for payments, and tougher access to credit markets.

Impact on WACKER: Higher financing costs, and modifications to further expansion plans.

Measures: Liquidity risk is managed centrally at WACKER. Our Corporate Finance department employs efficient systems for both cash management and rolling liquidity planning. In order to counter financing risks, WACKER holds adequate long-term, contractually-agreed credit lines, and has set aside sufficient liquidity. By means of cash pooling, liquid funds are passed on internally within the Group as required.

Evaluation: WACKER’s liquidity increased in 2013 compared with the previous year as a result of new loans coupled with significantly lower investment spending. Liquidity totaled € 624.5 million at the reporting date. At that time, financial liabilities exceeded liquidity (consisting of current and noncurrent securities, and cash and cash equivalents) by € 792.2 million. The loans contain a net debt-to-EBITDA ratio as the key financial covenant. Concurrently, there were unused credit lines with terms of over one year totaling some € 700 million. We invest liquid funds only in issuers or banks that have a credit rating in the sound investment-grade range. The investment of liquid funds is, moreover, subject to limits that we have defined.

Risk Assessment: We consider the occurrence of financing and liquidity risks to be unlikely. At the moment, we see no risks relating to financial-covenant infringements. Nevertheless, if financial or liquidity bottlenecks were to occur, their impact on Group earnings would be low.

Pensions

Scenario: The greater life expectancy of pension-fund beneficiaries, additional obligations due to pay and pension adjustments, and falling discount factors increase the volume of pension obligations. Significant changes in the composition of the invested fund assets and capital-market interest rates produce a rise or fall in fund assets. Altered criteria used in the measurement of pension plans influence the net pension cost for the period.

As of 2013, IAS 19 requires enterprises to report actuarial gains and losses, as well as other changes in value immediately and in full in other comprehensive income. This leads to greater volatility in equity. Other future changes to the principles applied in accounting for pensions may adversely affect the Group’s earnings, net assets and financial position.

Impact on WACKER: A large portion of WACKER’s pension guarantees are covered by the Wacker Chemie VVaG pension fund, by pension-related funds and special-purpose assets, and by insurance plans. The largest contribution comes from the pension fund. A rise in the pension provisions as well as reduced plan assets and a possible injection of financial resources into the pension fund or into the plan assets will affect the financial position and earnings of the Group. Over and above the basic pension plan, there are defined-benefit pension plans in the form of direct commitments. Additionally, employees have the option of converting part of their remuneration into direct benefit commitments. What is more, the greater life expectancy of pension-fund beneficiaries, pay and pension increases, and the discount factor (calculation of the present value proceeding from the final capital amount) also impact WACKER’s equity and earnings to a substantial extent.

Measures: A large portion of WACKER’s pension guarantees are covered by the Wacker Chemie VVaG pension fund, by pension-related funds and special-purpose assets, and by insurance plans. The pension fund manages the pension insurance of our German-based employees in accordance with its Articles of Association and General Terms and Conditions of Insurance. To ensure a sufficient rate of return and to limit investment risks, the fund diversifies its investment portfolio among various asset classes and regions. In managing its assets and liabilities, the pension fund controls and optimizes all asset items to attain the required return within specified risk limits. As one of the fund’s sponsoring entities, WACKER makes payments to it (when necessary), thereby ensuring sufficient coverage for pension obligations. We periodically adjust the calculation parameters of the other defined-benefit pension commitments (e.g. the minimum interest rate).

Evaluation: Pension-fund beneficiaries are living longer, and capital-market interest rates have steadily declined in recent years. The rate of return will probably be insufficient to fulfill long-term pension obligations. The contribution for Wacker Chemie AG’s defined-benefit pension commitments thus rose from 350 percent of the employee contribution in 2013 to 400 percent in 2014 to protect the pension fund.

Risk Assessment: We consider it unlikely that WACKER will have to make further payments to the pension fund in 2014, along with increased pension payments to cover its other commitments. Since we have already sufficiently accounted for this, we estimate the impact on WACKER’s earnings trend as being low. Nonetheless, the likelihood that we will have to make further payments to the pension fund in the future is greater. See further details starting on page 231 of the Notes section

Legal Risks

Scenario: Diverse tax, brand, patent, competition, antitrust, environment, labor- and contract-related legal risks could arise from our international business.

Impact on WACKER: Drawn-out legal disputes that could impact our company’s operations, image and reputation, and that could be costly.

Measures: We limit legal risks with centralized contract management and legal review by our legal department. If necessary, we also seek highly-qualified and specialized external legal advice.

Our Intellectual Property department protects and monitors patents, brands and licenses. By reviewing patent regulations, we determine – before initiating R&D projects – whether existing third-party patents and intellectual property rights impair the competitive marketing of any newly developed products, technologies or processes.

We limit risks arising from possible legal infringements by means of compliance programs. WACKER’s Code of Conduct defines and stipulates binding rules of behavior for all employees. Through training programs, WACKER enhances awareness of these issues and attempts to prevent reputation-related risks.

Evaluation: We currently do not foresee any legal disputes, patent infringements or other legal risks that could significantly influence our business.

Risk Assessment: Due to the varied nature of our business activities in all major regions of the globe, the occurrence of legal risks, for example in the form of legal disputes, is always conceivable in principle. We do not, however, see any specific indication of any such events that would have a significant impact on our business and currently consider their occurrence to be unlikely. Should they occur, there would be a medium impact on Group earnings.

Regulatory Risks

Energy Transition in Germany

Scenario: The transformation of Germany’s energy supply system to 80 percent renewable energy in the electricity sector by 2050 (known as the “Energiewende” or energy transition) creates a regulatory environment that will probably be marked by continual legislative amendments in Berlin and Brussels (German Renewable Energy Act (EEG) reform, special compensation rules for energy-intensive companies, the grid charge, self-generated electricity, EU investigation into EEG state aid procedures, state aid rules, the 2030 EU Green Paper, and capacity mechanisms).

Impact on WACKER: Additional costs due to rising government levies on the cost of electricity procurement.

Measures: We continually monitor regulatory activity in Germany and in the EU. Whenever we anticipate changes in the current legal situation, we try to bring our position into the appropriate legislative procedures through discussion with policymakers and by participating in trade associations. In addition, we search for and take advantage of market opportunities arising, for example, from renewable energy (e.g. industrial load management).

Evaluation: We expect the regulatory environment for the energy transition to remain in transition during the next few years. WACKER supports implementation of the energy transition at the state, federal and EU level.

Risk Assessment: It is likely that there will be changes in the EEG Act and in the special compensation rules for energy-intensive companies. At the moment, we cannot reliably forecast whether this will cause any additional burden on WACKER, nor how substantial it might be. In our opinion, the most probable scenario entails limited changes that will have, at most, a medium impact on Group earnings. Should it be decided, however, to completely abolish rules relieving energy-intensive companies with regard to EEG feed-in tariffs, the privilege for self-generated electricity, and the grid charge, then there would be a high impact on WACKER’s earnings.

Anti-Dumping Proceedings

Scenario: Anti-dumping proceedings by the Chinese Ministry of Commerce against European polysilicon manufacturers.

Impact on WACKER: Negative impact on the company’s earnings, net assets and financial position; influence on the plans for the further expansion of polysilicon, impact on long-term customer relations.

Measures: Anti-dumping and anti-subsidy proceedings filed by the Chinese Ministry of Commerce against European polysilicon manufacturers are currently ongoing. By actively participating in these proceedings, WACKER is striving to prevent the imposition of punitive tariffs in China on European polysilicon producers. WACKER rejects all forms of restraints on trade. We try to avoid imposition of punitive tariffs on European polysilicon by conducting numerous discussions with policymakers in Germany, at the EU level and in China. To this end, we are cooperating with the Chinese Ministry of Commerce. Both WACKER and its Chinese customers are making every effort to highlight the adverse impact of punitive tariffs on their business performance and the market as a whole.

A final decision is expected from the Chinese Ministry of Commerce in April 2014. A preliminary decision has already been made which determined the tariffs to be imposed, but also suspends them.

Evaluation: It is unclear what verdict the Chinese Ministry of Commerce will reach in this issue.

Risk Assessment: WACKER assumes that the EU decision – meanwhile finally confirmed – to permanently accept the compromise reached in July 2013 and to generally waive punitive tariffs on Chinese solar products will have a positive effect on the outcome of the proceedings in China. In our estimation, however, it is possible that the Chinese Ministry of Commerce could impose significant punitive tariffs on European solar silicon. Should this occur, the impact on our earnings would be high since WACKER POLYSILICON’s business would be noticeably restrained and the asset value of our production facilities could be impacted.

New Regulations for Upstream, Intermediate and Downstream Products That WACKER Produces Itself or Uses and Their Effects on Our Production Processes

Scenario: The production and use of chemical substances will be more strictly regulated due to new legal regulations. New legal provisions necessitate changes in WACKER’s production processes.

Impact on WACKER: Additional investments in production facilities and revenue losses in individual application fields.

Measures: WACKER continually monitors how the regulatory environment impacts its products and production processes to enable it to quickly react to impending changes. This is why we have begun to additionally equip some silicone production plants in preparation for possible regulatory changes.

Evaluation: In principle, it is always possible that new legal regulations will make it necessary to modify our product portfolio or production processes.

Risk Assessment: We consider it unlikely that new legal provisions will require additional investment in our production facilities or changes to our product portfolio. We currently have no knowledge of specific decisions made that would influence our business in a significant way. Should such changes occur, there would, at most, be a low impact on WACKER’s earnings.

IT Risks

Scenario: Attacks on, interference with, and unauthorized access to, IT systems and networks, threatening data security.

Impact on WACKER: Negative impact on the company’s earnings, net assets and financial position, on production processes and on workflows; loss of know-how.

Measures: We continually monitor our use of information technology and do everything we can to ensure that IT-supported business processes function reliably. Our IT security and risk management specialists are responsible for handling hazards in a cost-efficient way. Their work is based on ISO 27001. Using risk analyses, we define the requirements for WACKER’s central systems – in terms of availability and data integrity/confidentiality. We anchor these requirements in SLAs (service level agreements) at our business divisions and corporate departments, and continually monitor compliance with those agreements. For our central ERP systems (Enterprise Resource Planning), we set – and exceeded – an availability goal of 99.5 percent for 2013. We achieved this primarily by designing our systems for maximum availability and by installing an associated backup and recovery procedure. We have taken appropriate precautions to cover emergency situations (business continuity management).

We minimize project-related IT risks with the help of a uniform project and quality-management method. It ensures that changes are integrated into our system landscape in a controlled manner. Before new IT solutions are rolled out, we ensure that development and security requirements have been observed. Systematic enterprise architecture management reduces complexity and risks.

As part of the risk management process, we log and evaluate any operations-related risks that arise and initiate countermeasures. We also optimize IT service management processes on an ongoing basis. We use state-of-the-art hardware and software solutions to counter network downtime, data loss or manipulation, and unauthorized access to our network. We use efficient software security programs to protect ourselves against malware. We have set up an international security team to address problems with the confidentiality, integrity and availability of data and systems by means of organizational and technical measures, and awareness programs. In addition, we regularly conduct comprehensive penetration tests and audits at domestic and international sites to prevent the risk of hacker attacks.

Evaluation: We can never completely rule out interference with, and attacks on, our IT systems and networks. The long-term failure of IT systems or a major loss of data can considerably impair WACKER’s operations.

Risk Assessment: Thanks to our precautionary measures, we consider the occurrence of such events – and the risks associated with them – to be unlikely. However, if one of our IT systems experiences a service disruption, downtime or hacker attack affecting a significant number of users or lasting a longer period of time, there would be a medium impact on Group earnings.

Personnel-Related Risks

Scenario: Demographic change, lack of qualified technical and managerial employees, and problems in filling executive positions.

Impact on WACKER: The lack of technical and managerial employees could dampen our continued growth and lead to the loss of our technological edge.

Measures: We counter these risks through personnel-policy measures. Our new Talent Management Process is an integral part of this policy. In addition, we offer a wide variety of training programs, good social benefits and performance-oriented compensation. We also offer our employees various working-time arrangements and models, as well as opportunities to achieve a positive work-life balance.

WACKER has a detailed groupwide successor-planning process in place for key positions in the company, as well as for all executive personnel. For every upper management position, we observe up to three candidates to assess their potential and performance. In successor planning, WACKER distinguishes between short-term needs (up to two years) and medium-term needs (two to four years). Regardless of the above distinction, WACKER has appointed deputies for executive personnel in the event of a lengthy absence or illness.

Evaluation: Demographic change will increase the risk of not being able to find enough appropriate personnel for qualified technical and managerial positions in the medium to long term.

Risk Assessment: For 2014, we consider the risks to our personnel needs as being low. Should these occur, we believe that the impact on Group earnings would be low.

External Risks

Scenario: Pandemic, natural disaster, war or civil war.

Impact on WACKER: Impairment of our entrepreneurial capacity to act, production downtimes, loss of trade receivables, impact on sales and earnings.

Measures: WACKER is a globally operating Group with production facilities and technical centers in Europe, the Americas and Asia, and about 50 sales offices worldwide. Pandemics, natural disasters and acts of war in individual countries or regions where we are active represent a potential risk to our business and production operations, product sales and fixed assets and, therefore, to our earnings, net assets and financial position. Our managerial entities and our sites have worked out and publicized plans and measures to minimize the effects of a pandemic on the health of our employees and on our business processes. A standardized and coordinated approach is ensured by a “pandemic preparedness plan.” The financial impact of damage to our production plants due to natural disaster is partly covered by insurance. Since WACKER has production sites on different continents, our manufacturing and delivery capability will remain viable to a certain extent even if particular plants should fail.

Evaluation: Risks from pandemics, natural disasters, acts of war or civil war can never be ruled out entirely.

Risk Assessment: In our view, it is unlikely that WACKER might be affected by risks from pandemics, natural disasters, acts of war or civil war. Our preparedness plan and our internationally distributed production sites and local offices help to limit the impact of local or regional damage on our business processes. This is why we expect that even if such an event should occur, the impact on WACKER’s earnings would be low.