Central Risk Areas

Defining the Probability and Impact of Risk Occurrence

We have defined categories to describe the probability that risks we identify will occur. This provides a framework for understanding our assessment of individual areas of risk. In percentage terms, our 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 or 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 table shows our estimation of the probability of risks and of how the occurrence of those risks might impact the Group’s earnings, net assets or financial position. The statements refer to the forecast period, thus to fiscal 2019.

Overall Economic Risks

Scenario: 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. Should the economy start slowing, we take early precautions to quickly adjust production capacities, resources and inventories to customer demand. In such a case, we concentrate capacity utilization on production locations with the best cost position, for example, and temporarily shut down some production facilities.

Evaluation and Risk Assessment: Economists project that the world economy will continue to expand in 2019. The pace of growth, though, slowed noticeably during 2018. At the same time, the risks to the global economy clearly intensified, say the experts. That is mainly because of the trade tensions between the USA, on the one hand, and China and the European Union on the other. Further risks to the economy could result from too rapid a normalization of monetary policy by major central banks and from the impact of Brexit.

In our chemical business, we supply many customers from a wide range of industries across the globe. This enables us, as we have shown, to at least partially compensate for temporary weaknesses in individual industries and geographical regions.

The development of our polysilicon business will depend on the regulatory conditions surrounding solar-power use and international trade in photovoltaic systems and solar silicon. Economic trends are another factor influencing the underlying conditions.

We presently see no specific signs that economic activity will diverge substantially from the forecasts of experts. Given the heightened risks, though, we consider it possible that, in 2019, the world economy could fall short of current projections. Should global economic activity prove weaker than currently anticipated, this would have a medium impact on WACKER’s earnings. The ramifications of Brexit would not have any direct material effects on WACKER’s earnings. There may be indirect effects, however, via Brexit’s impact on trade and the economy.

Sales-Market Risks

Scenario 1: Overcapacity at our chemical divisions.

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

Measures: We minimize this risk by aligning production with demand and by securing plant-utilization rates through quantity controls, structured price management, process optimization and the intense cultivation of growth markets. 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 and Risk Assessment: We anticipate that the risk of overcapacity will basically remain unchanged for our products in 2019. At WACKER POLYMERS, we see overcapacity for dispersions and dispersible polymer powders in Asia. But we expect plant utilization to be high despite this overcapacity. In silicones, 2018 saw a strong rise in demand, which was not fully covered by silicone producers’ existing capacities. At the same time, customers began building up inventories beyond their actual needs. WACKER SILICONES expects the supply-and-demand situation to return to normal in the course of 2019. On balance, we do not anticipate overcapacity or lower plant utilization at WACKER SILICONES during the forecast period. As for our polymer products, we see opportunities to achieve higher prices in 2019. WACKER SILICONES expects price levels for 2019 to be uneven across individual product groups and geographical regions.

Generally, we consider it possible that individual areas of our chemical business will face overcapacity and resultant price pressure. We have already factored this possibility into our planning and forecasts. Any effects that go beyond this would have a medium impact on Group earnings.

Scenario 2: Overcapacity and price risks at our polysilicon business; difficult market conditions due to a rollback of government incentive programs; the tight financial situation of many customers, and the expiry of long-term supply contracts.

Impact on WACKER: Volume risks arise if excessive and hurried cuts to government solar incentives or limitations on new PV capacity negatively impact the photovoltaic market. The expiry of long-term contracts and new competitor capacities increase the capacity-utilization risk, while overcapacity may pressure margins via intense price competition. Both factors could lower sales and earnings.

Measures: We counter this risk by continuously improving our cost positions and by optimizing our product and customer portfolio in line with market developments. We counter customers’ liquidity problems by demanding collateral.

Evaluation and Risk Assessment: In all probability, the consolidation process in the solar industry will continue in 2019. As long as this trend persists and global production capacities exceed market demand, polysilicon prices are likely to remain volatile and under pressure. Such a trend has been factored into our planning and forecasts. Should solar-silicon demand clearly exceed supply, this would presumably lift earnings at WACKER POLYSILICON. Conversely, weakening demand for WACKER’s solar silicon would probably have a high impact on earnings in this business. In our view, the risk of prices falling is possible.

Procurement-Market Risks

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

Impact on WACKER: Earnings dampened by higher raw-material and energy prices. Any supply bottlenecks could lead to longer customer delivery times and volume losses.

Measures: We prepare systematic procurement plans for strategic raw materials and energy on an annual basis and, if necessary, ad hoc. Such plans include evaluations of the procurement risk. The latter also takes in risks stemming from trade barriers (such as mounting trade conflicts) or from the United Kingdom’s withdrawal from the European Union. Whenever possible, we take appropriate measures to counter any procurement risks that are classed as relevant. Such measures include not only long-term supply contracts with partners and a structured procurement policy involving multiple suppliers under contracts with differing maturities, but also the expansion of our supplier base and an increased level of safety stocks. In select cases, we have achieved partial backward integration and produce strategic raw materials ourselves. Our silicon-metal production site in Holla (Norway) and our captive vinyl acetate production facilities in Burghausen, for example, are reducing our dependence on external suppliers.

Evaluation and Risk Assessment: WACKER’s good position in energy and raw-material procurement enables us to effectively manage risks during economic upturns and downturns. If the world economy weakened markedly, our purchasing terms for buying key raw materials would allow us to adjust contractual volumes flexibly and – wherever possible – to benefit from price decreases through appropriate pricing models. Should global growth become unexpectedly strong, our volume guarantees are so extensive that we do not see any major risks to raw-material security. Prices can rise markedly in such situations. But experience has shown that we then have chances to compensate, at least partially, for additional costs by increasing the selling prices of our own products. Higher crude oil prices also increase the prices of raw materials derived from oil, as well as energy costs. Additionally, purchasing prices for certain raw materials might be impacted by punitive tariffs. Such import tariffs exist, for example, for silicon metal exported from China to Europe and the USA.

WACKER requires a number of highly specialized raw materials that only a few suppliers can provide. If these suppliers were unable to deliver, our production might be restricted. We minimize this risk by taking appropriate measures (e. g. backup suppliers, safety stocks, and contingency lists of substitute products).

Under current German law, energy-intensive companies are partially exempt from paying various surcharges and additional costs. WACKER also benefits from these rules. Any restriction on the exemption rules would significantly reduce the competitiveness of specific business activities. In general, energy price trends (wholesale prices, infrastructure costs and ancillary costs) will remain heavily dependent on how German and European policymakers organize the energy transition.

On balance, we anticipate slightly lower raw-material costs for 2019 given the decline in economic momentum. These cost savings, though, are likely to be partially offset by higher electricity costs due to supply shortages following power-plant closures, and by high coal prices and more expensive natural gas. Such a scenario has been factored into our planning. From experience, we consider it possible that our raw-material suppliers could suffer production outages. The impact of such a bottleneck on our key raw materials and of higher-than-expected electricity costs would probably have a medium impact on the Group’s earnings.

Investment Risks

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

Impact on WACKER: Bad investments cause costs for idle capacity and impair assets and equity investments. The possible effect on earnings could be substantial. Higher investment costs mean higher cash outflows and, in the future, higher depreciation expenses in our operating result. Postponed start-ups expose us to the risk of being unable to fulfill supply contracts and consequently posting lower sales and earnings. Should Siltronic AG’s market capitalization fall substantially, this could necessitate a corresponding impairment of the carrying amount of our equity-accounted investment, negatively impacting WACKER’s earnings.

Measures: WACKER has numerous measures in place for countering investment risks. We check the completeness and plausibility of plans for new projects with an investment sum of more than €3 million. The Group’s corporate departments participate in such checks. Economic feasibility is assessed using comparative studies that look at other plant projects, including those of competitors. Capital expenditures are approved in stages only. Stringent project-budget management helps prevent or minimize delays.

Evaluation and Risk Assessment: Our capital expenditures in 2019 will be lower than last year. The focus will be on expanding our production capacities in the chemical divisions, especially for silicones. We currently consider it unlikely that investment spending will exceed our expectations. Even if this risk did materialize, the impact on our earnings, net assets and financial position would probably be low. Similarly, we currently consider the risk of a continued negative trend in Siltronic AG’s market capitalization to be unlikely. Were this risk to materialize, it would probably have a medium impact on our earnings, net assets and financial position.

Production and Environmental 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 statutory regulations, and on national and international standards, such as Responsible Care^® and the Global Compact, which go far beyond legally prescribed standards. We focus on securing the highest possible level of operational safety at our production sites by monitoring maintenance extensively and by performing regular plant inspections. We conduct thorough safety and risk analyses, from the design stage through to commissioning, to ensure the safety of our plants. We regularly hold seminars on plant and workplace safety and explosion protection. Every WACKER site has an emergency response plan in place to regulate cooperation between internal and external emergency response teams, and with the authorities. We are insured against loss events at our plants and the potential consequences of such events. Our insurance cover is in line with customary chemical-industry standards. When we work with logistics providers, we ensure that hazardous-goods transport vehicles are always checked prior to loading. Any faults are systematically recorded and tracked.

Evaluation and Risk Assessment: Experience has shown that risks stemming from the production, storage, filling and transport of raw materials, products and waste can never be completely ruled out. Although there is a general possibility such risks will occur, we currently consider a serious loss event to be unlikely. Should such an event occur, it could have a medium impact on WACKER’s earnings.

Financial Risks

WACKER is exposed to financial risks from ongoing operations and financing. These 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 requirements of our operations and the associated risks. Such financial instruments are not permitted, however, unless they are based on actual or planned operational activities. The Notes to the Consolidated Financial Statements provide extensive information about risk hedging using derivative financial instruments.

Credit Risk

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 or service provided and the amount involved, 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 limit default risks by means of credit insurance, advance payments and bank guarantees. We prevent counterparty risk with respect to banks and contractual partners by carefully selecting these partners. We transact cash investments and derivative dealings with banks that usually have 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 specified limits and terms.

Evaluation and Risk Assessment: We consider it unlikely that credit risks stemming from customer business will materialize. Thanks to our approach to counterparty risk, we consider our risk concentration with regard to bank failures to be low. If credit risks stemming from customer business or from a bank failure did unexpectedly occur, their impact on WACKER’s earnings would probably be low.

Currency-Exchange and Interest-Rate Risks

Scenario: Fluctuations in exchange rates and interest rates.

Impact on WACKER: Effect on earnings, liquidity, and financial assets and liabilities.

Measures: Currency risks essentially arise from exchange-rate fluctuations for receivables, liabilities, cash and cash equivalents, and financial liabilities not held in euros. The currency risk is of particular importance with respect to the US dollar and Chinese renminbi. WACKER hedges any net exposure above a certain level using derivative financial instruments. The use of such instruments is governed by WACKER’s foreign exchange management directive. We work with forward-exchange contracts, foreign-exchange swaps and currency-option contracts. Foreign exchange hedging is carried out mainly for the US dollar. We also counter exchange-rate risks through our non-eurozone production sites.

Interest-rate risks arise due to changes in market rates. Since such changes affect future interest payments for variable-rate loans and investments, they have a direct influence on the Group’s liquidity and financial assets. Once an exposure has been 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 throughout the entire transaction process. We continually monitor the effectiveness of any measures taken.

Evaluation and Risk Assessment: We hedge part of our US dollar business. Possible gains or losses from exchange-rate fluctuations are partially cushioned by hedging measures. From today’s perspective, we consider it possible that exchange-rate and interest-rate changes in 2019 will differ substantially from our planning assumptions. We believe that this would have a medium 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 investment projects.

Measures: Liquidity risk is managed centrally at WACKER. Our Corporate Finance and Insurance 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 lines of credit, and has set aside sufficient liquidity. We invest liquid funds only in issuers or banks that have a credit rating within the sound investment-grade range. The investment of liquid funds is, moreover, subject to self-defined limits. By means of cash pooling, liquid funds are passed on internally within the Group as required.

Evaluation and Risk Assessment: WACKER’s liquidity totaled €387.5 million as of the reporting date. At the same time, there were unused lines of credit with terms of over one year totaling €600 million. We consider the occurrence of financing and liquidity risks to be unlikely. At the moment, we see no risks relating to financial-covenant infringements. If financial or liquidity bottlenecks did occur, their impact on Group earnings would be low. If unused lines of credit were tapped, net financial debt would rise.

Pensions

Scenario: Higher life expectancy of those entitled to a pension; pay and pension adjustments; falling discount factors; significant changes in the composition of the invested fund assets and capital-market interest rates (environment of low interest rates).

Impact on WACKER: A rise in pension obligations, a decline in fund 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. In addition to the pension plan, defined-benefit pension plans exist in the form of direct commitments. Employees also have the option of converting part of their remuneration into direct benefit commitments. The greater life expectancy of pension-fund beneficiaries, adjustments to pay and pensions, and the discount factor (used to calculate the net present value of a final capital amount) also impact WACKER’s equity and earnings to a substantial degree.

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. 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. life expectancy).

Evaluation and Risk Assessment: The life expectancy of pension-fund beneficiaries continues to rise, and capital-market interest rates have declined to extremely low levels in recent years. The rate of return will probably be insufficient to fulfill pension obligations in the long term. Our contribution rate remained unchanged in the reporting year. We consider it possible that, in the future, we will have to continue making special payments into the Wacker Chemie VVaG pension fund and into fund assets, as we did in 2017, and that pension expenses and payments will also rise. This would have a medium impact on WACKER’s earnings, net assets and financial position.

Legal Risks

Scenario: Diverse legal risks related to tax, trademarks, patents, competition, antitrust proceedings, the environment, labor and contracts could arise from our international business.

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

Measures: We limit legal risks through centralized contract management and reviews by our Legal department. Where necessary, we also seek legal advice from highly qualified external specialists.

Our Intellectual Property department protects and monitors patents, trademarks and licenses. Before initiating R&D projects, we conduct searches to determine whether existing third-party patents and intellectual property rights could prevent us from marketing any newly developed products, technologies or processes.

We use compliance programs to limit risks arising from possible legal infringements. 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 and Risk Assessment: Due to the varied nature of our business activities in all major regions across the globe, it is always conceivable that legal risks could arise. We currently do not foresee any legal disputes, patent infringements or other legal risks that could significantly influence our business, and consider the probability of such risks materializing to be fundamentally unlikely. Should such an individual case occur, we would expect its impact on WACKER’s earnings to be low.

Regulatory Risks

Energy Transition in Germany

Scenario: The transition in Germany 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 repeated legislative amendments (the German Renewable Energy Act, including relief for energy-intensive companies and self-generated electricity; grid-charge regulations; EU laws on state aid; EU Energy-Efficiency Directive; the emissions trading system; integrated energy).

Impact on WACKER: Additional energy costs due to rising electricity prices and federal levies, as well as higher grid-usage fees if the German government departs from its current policy of exempting energy-intensive industry from paying such levies and ancillary costs in full or in part.

Measures: We continually monitor regulatory activity in Germany and in the EU. Whenever we anticipate changes in the current legal situation, we try to introduce our viewpoint into legislative procedures through discussions with policymakers and by participating in trade associations. In addition, we search for, and take advantage of, market opportunities arising from regulatory changes (e.g. industrial demand-response management).

Evaluation and Risk Assessment: Changes regarding the exemption from grid fees and the calculation inputs for ancillary network costs already led to a lower level of relief from grid fees in 2018 than in previous years. We consider it possible that 2019 will see higher electricity prices and further amendments to legal provisions on energy supply (e. g. grid-usage fees). Such amendments would probably have a medium impact on WACKER’s earnings this year, but that impact could increase substantially over the coming years.

Polysilicon Trade Restrictions

Scenario: The Chinese Ministry of Commerce (MOFCOM) concluded its anti-dumping proceedings against polysilicon imports from the USA. On January 20, 2019, MOFCOM began an expiry review of the existing anti-dumping and anti-subsidy tariffs on US-made polysilicon. The review could take up to one year to complete. During that period, the Chinese tariffs on US-made polysilicon will remain in place. The trade disputes between the USA and China escalated significantly during 2018. In Europe, the European Commission allowed the restrictions on Chinese solar cells and modules to expire in September 2018. In turn, MOFCOM ended its restrictions on polysilicon manufactured in Europe. This means that WACKER’s European-made polysilicon can once again be imported into China without restrictions.

Impact on WACKER: Negative impact of anti-dumping and anti-subsidy tariffs on earnings, net assets and financial position; influence on sales volumes; impact on long-term customer relations.

Measures: Despite the escalating trade conflict between the USA and China, we are holding numerous discussions with policymakers in the two countries to mitigate or eliminate punitive solar-sector tariffs (US tariffs on Chinese solar modules and cells, and Chinese tariffs on polysilicon from the USA) and, thus, to reduce or end Chinese anti-dumping and anti-subsidy tariffs on WACKER’s US-made polysilicon. In addition, we have the option under Chinese anti-dumping law to apply to have the tariffs reviewed individually and, if necessary, have separate tariffs set. This is because WACKER did not, in fact, import any polysilicon from the USA into China during the investigation period of the anti-dumping proceedings. We will apply for such a New Shipper Review in due course. In addition, we will qualify the polysilicon produced at our Charleston site with our customers in the semiconductor industry.

Evaluation and Risk Assessment: As the Chinese tariffs on European-made polysilicon expired on October 31, 2018, WACKER can once again sell this material to China without restrictions of any kind. At least until MOFCOM’s above-mentioned expiry review has been completed, WACKER will not be able to export its Charleston-made polysilicon from the USA to China at competitive terms. Given the escalating trade disputes worldwide, we consider it possible that WACKER’s polysilicon business could be affected by further trade barriers and punitive tariffs. The potential impact on our 2019 earnings would then probably be high.

New Regulations for Production Processes and Products

Scenario: Due to new legislation, the production and use of chemical substances is regulated more strictly. New regulations make it necessary to modify our production processes or reformulate our products. They also impose more extensive information requirements on us and, in some cases, on our customers as well.

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

Measures: WACKER continually monitors the regulatory environment surrounding its products and production processes so that it can react promptly to impending changes. We are continuously optimizing our production processes. Any other necessary measures will be aligned with the regulatory changes in each specific situation.

Evaluation and Risk Assessment: It is always possible that new legal provisions necessitate modifications to our product portfolio or production processes. We consider it likely that new legal provisions will require additional investment in our production facilities or changes to our product portfolio. Should such changes occur, their short-term impact on WACKER’s earnings would probably be low. In the medium term, though, they could have a medium-to-high impact.

IT Risks

Scenario: Attacks, system errors and unauthorized access to our IT systems and our production plants and networks, resulting in a threat to data security.

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

Measures: We continually monitor our use of information technology and do everything we can to ensure that computer-assisted 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. We use risk analyses to define the requirements for our central systems in terms of the availability, integrity and confidentiality of data. 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 enterprise resource planning (ERP) systems, we achieved an availability goal of 99.5 percent for 2018. The deciding factor here is to configure our systems for maximum availability, with 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 method of project and quality management. 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 regulations have been observed. Systematic enterprise-architecture management enables us to reduce complexity and the associated risks.

In 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. Our user-authorization systems are based on the need-to-know principle of granting individual users access only to the systems and information they need to fulfill their duties. We use efficient software security programs to protect ourselves against malware. We have set up an international security team, which addresses problems involving the confidentiality, integrity and availability of data and systems by introducing organizational and technical measures and by initiating awareness campaigns and training courses. Information events and training on IT security ensure that our employees have the necessary skills to enhance information security at the company. In addition, we regularly conduct comprehensive penetration tests and audits at our German and international sites to prevent the risk of attacks on our information systems.

Evaluation and Risk Assessment: Attempts to disrupt and attack our IT systems and networks are constantly increasing. It cannot be ruled out entirely that such attacks could succeed in certain cases. A long-term failure of IT systems or a major loss of data could considerably impair WACKER’s operations. Thanks to our precautionary measures, we consider the occurrence of such events to be unlikely. However, if one of our IT systems experienced downtime, a service disruption or a hacker attack that affected a significant number of users or lasted for a substantial period, the impact on WACKER’s earnings would be of medium scale.

Personnel-Related Risks

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

Impact on WACKER: A lack of technical and managerial employees could dampen our continued growth and cause us to lose our technological edge.

Measures: We limit these risks through our personnel policies. In particular, we have a Talent Management process in place, which we use to create development plans for our employees. In addition, we offer a wide variety of training programs, good social benefits and performance-oriented compensation. We also offer our employees in Germany a wide range of working-time models and arrangements to better balance career demands with the different phases of their lives.

WACKER has a detailed, groupwide succession planning process in place for all key positions in the company, including all positions held by senior executives (OFKs). For every upper management position, we observe and develop up to three candidates to assess their potential and performance. In its succession planning, WACKER distinguishes between short-term needs (up to two years) and medium-term needs (two to four years). In addition, WACKER has appointed deputies for senior executives (OFKs) in the event of a lengthy absence or illness.

Evaluation and Risk Assessment: Demographic change will increase the risk of not being able to find sufficiently qualified personnel for technical and managerial positions in the medium to long term. We consider it unlikely that risks to our personnel needs will arise in 2019. Should these risks materialize, the impact on Group earnings would probably be low.

External Risks

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

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

Measures: WACKER is a global operation with production facilities and technical centers in Europe, the Americas and Asia, and some 50 sales offices worldwide. Possible pandemics, natural disasters and acts of war in any of the countries or regions where we operate represent a potential risk to our business and production operations, product sales and noncurrent assets and, therefore, to our earnings, net assets and financial position. Our managerial entities and our sites have elaborated and published plans and measures to minimize the effects of a pandemic on the health of our employees and on our business processes. A pandemic-preparedness plan ensures a standardized, coordinated approach. The financial impact of damage to our production plants due to natural disasters is partly covered by insurance. Since WACKER has production sites on various continents, we can ensure manufacturing and delivery capability to some degree even if individual plants should fail.

Evaluation and Risk Assessment: Risks from pandemics, natural disasters, and acts of war or civil war can never be ruled out entirely. In our view, it is unlikely that WACKER would be affected by risks from pandemics, natural disasters, and acts of war or civil war. Our preparedness plan and our internationally distributed production sites and sales offices help to limit the impact of local or regional damage on our business processes. As a result, we estimate that, even if such events occurred, the impact on WACKER’s earnings would be low.