Konecranes Board of Directors has defined and adopted a set of risk management principles based on widely accepted international good management practices. The Audit Committee evaluates and reports on the adequacy and appropriateness of internal controls and risk management to the Board.
Risk management principles
Risk is anything that will clearly affect Konecranes ability to achieve its business objectives and execute its strategies. Risk management is part of Konecranes control system and is designed to ensure that any risks related to the Company’s business operations, are identified and managed adequately and appropriately to safeguard the continuity of Konecranes business at all times.
The Group’s risk management principles provide a basic framework for risk management across Konecranes, and each Group company or operating unit is responsible for its own risk management. This approach guarantees the best possible knowledge of local conditions, experience, and relevance.
The Group’s risk management principles define risk management as a continuous and systematic activity aimed at protecting employees from personal injury, safeguarding the assets of all Group companies and the Group as a whole, and ensuring stable and profitable financial performance. By minimizing losses due to realized risks, and optimizing the cost of risk management, Konecranes can safeguard its overall long-term competitiveness.
Significant risks for Konecranes
Konecranes has assessed its strategic, operational, financial, and hazard-related risks. The list of risks below, and the risk management methods described here, are intended to be indicative only and should not be considered exhaustive.
Demand for Konecranes products and services is affected by the development of local and global economies, regional and country-specific political issues and stability, as well as the business cycles of Konecranes customer industries. Currency fluctuations may cause changes in competitiveness of our products in a specific market and affect our customers’ businesses. Capital expenditure on industrial cranes varies with the development of industrial production and production capacity, while demand for port equipment follows trends in global transportation and, over the shorter term, port investment cycles. The lift truck cycle follows other product segments. Demand for maintenance services is driven by the capacity utilization rates of our customers. In addition to risks related to sales volumes, adverse changes in demand can also result in overcapacity and affect market prices, as can the actions of competitors.
Konecranes aim is to increase the proportion of service revenue in its total revenue stream and thereby reduce its exposure to economic cycles. In general, the demand for service is less volatile than that for equipment.
As part of its strategy, Konecranes strives to maintain a reasonably wide geographical market presence to balance out economic trends in different market areas, while paying attention to relevant distribution costs. Konecranes also aims to limit the risks resulting from changes in demand in different customer segments, as well as the demand for certain products by maintaining a diverse customer base and offering a wide range of products and services. By active product development, Konecranes also strives to differentiate itself from its competitors and reduce the competitive pressures that it experiences.
Following the acquisition of MHPS, Konecranes has continued this strategy and has further deve-loped its go-to-market strategy given the newly acquired brands, products and channels.
During 2017 the rollout of new IT-systems continued; these systems improve our capabilities in risk management, as they improve transparency to the local operations and markets. In addition, we begun the alignment and integration of the MHPS systems and reporting.
Customer credit risks
Challenges with customer payments could adversely affect Konecranes financial situation. To limit this risk, we apply a conservative credit policy in respect of our customers. It is Konecranes practice to review customers carefully before entering into a formal business relationship with them and to require credit reports from new customers. The credit risks of our customers are mitigated with advance payments, letters of credit, payment guarantees, and credit insurance where applicable. By using these tools and carefully monitoring customer payments, we have been able to successfully limit our credit risks.
During 2017, “Know Your Customer” -practices of frontline units have been enhanced by several process improvements. Konecranes has started a project to extend the use of integrated 3rd party services to a majority of its ERP-systems in order to verify customer data against outstanding sanctions lists and products and spare-parts against the dual-use items lists.
Konecranes recognizes that there are various threats and opportunities related to the development of new products and services in its business. Active management of intellectual property rights is essential in the global marketplace.
The MHPS acquisition opened Konecranes new avenues to continuously monitor general market trends, technological developments, competitors’ actions, customer behavior, and developments in various industry segments, in order to identify signs of potential changes that could impact us.
We have developed internal processes to secure systematic follow-up of key technologies. Similarly, we have refined process-driven approaches, from innovations to needed technological research, all the way to product development projects.
In 2017 we started collaborating with Maria01, the biggest startup incubator in the Nordics, and continued working closely with a number of start-up companies to ensure early knowledge of new ideas and technologies. We continue utilizing and actively seeking new opportunities to work with external research institutes, universities, and specialized companies with specific know-how, experience, and skills. All of these provide awareness of and secure access to technological development in our field of business.
We utilize our global testing centers to further improve safety and reliability of our products. We carry out extensive life-time testing of our new and existing products, creating new knowledge to reduce technical risks. Testing centers are also an integral part of our in-house research and are audited to ISO 17025 standard, ensuring the quality of testing processes, proper test planning and documentation of the results. We use the results actively to develop the reliability of our products.
With more data after the MHPS acquisition, we continued to analyze technical data collected from cranes via our Industrial Internet solution, to increase our awareness of how cranes behave in daily operations. Based on this, we continue to develop algorithms, helping us predict issues related to crane safety and operations. All this limits the technical risks in crane usage, and grants us better knowledge for crane designs and service operations.
In 2017 we conducted an external cyber security audit to our devices and connectivity solutions.
With the MHPS acquisition we doubled our patent portfolio and continued active management of our intellectual property. We aim to secure our freedom to operate. In 2017 we continued to actively protect our designs, innovations, trademarks, and domains. We have a regular process to monitor possible violations and react on those.
Technical training of our service technicians is an essential risk management effort. The same applies to lifting equipment specific training for engineers and designers. Service technician training continued actively during the year. For engineers, we continued developing specific training material and conducted trainings based on this.
Konecranes’ ability to operate is dependent on the availability, expertise, and competence of professional personnel.
Due to the integration, related to the acquisition of Terex MHPS segment in 2017, Konecranes increased the investments to change management trainings and cultural integration. In addition, the investment continued in industry-leading technical skills of our service technicians, leadership development, along with customer-centric and effective sales and sales management skills. In these focus areas, Konecranes invested in training efforts to ensure customer satisfaction.
Konecranes continued investing in safety programs, including a new, improved safety organization. The integration of Terex MHPS required significant changes to organizational structure. This said, Konecranes has been able to select the key executives based on the best competences and retain almost all key executives in the company.
Furthermore, Konecranes continued employee engagement programs, such as our Employee Share Savings Plan, and invested in employee well-being.
Unsuccessful acquisitions or a failure to successfully integrate an acquired company, could result in reduced profitability or hamper the implementation of corporate strategy. Konecranes reduces the risks associated with acquisitions by carrying out due diligence analyses, using external advisors when needed.
On January 4, 2017 Konecranes closed the acquisition of Material Handling & Port Solutions segment from Terex Corporation. During 2017, Konecranes invested substantial resources to execute the successful closing of the transaction and professional integration of acquired entities. The scale and expected benefits of this acquisition will create unprecedented opportunities for Konecranes, while failure to achieve the objectives may result in substantial risks.
Konecranes strategy is to maintain the in-house production of key components that have high added value, and/or provide core competitive advantages. There are specific risks involved with different aspects of production, such as production capacity management, operational efficiency, continuity, and quality.
In 2017, activities were focused to further increase our internal supply chain capabilities and efficiencies while adjusting the production capacity to the market demand. Replacement investments continued during the year, with increased focus on safety and security of operations.
Procurement operates a proactive approach to mitigate risks related to pricing, quality, capacity, availability, supplier Code of Conduct, and other expectations as expressed in Konecranes Global Supplier Manual. Inefficiencies and deficiencies in these areas could affect the performance and reputation of Konecranes adversely. Konecranes manages its purchases, and the logistics of materials and components of substantial importance for its operations, on a centralized basis. Contracts with key suppliers are designed to optimize these purchases globally.
In 2017, Konecranes continued to develop the quality and scope of supplier cooperation and its audit process. We also continued to improve demand-supply monitoring, balancing, forecasting, and supplier communications to improve our ability to respond to customer needs rapidly.
Konecranes recognizes that price and continuity risks are associated with some of its key suppliers, as they could be difficult to replace. In the event of major production problems, this could undermine our delivery capability. Quality risks and defects associated with subcontracted components are also quality risks for Konecranes.
To reduce subcontracting risks, Konecranes constantly seeks competitive alternative sources while improving cooperation with existing suppliers. When available, alternative suppliers enhance price competition, increase production capacity, and reduce risks of single supplier dependency. Konecranes supplier portfolio is reviewed, categorized and managed centrally.
To reduce exchange rate risks, a global supply arrangement aims to naturally balance long-term movements in exchange rates that potentially affect the competitiveness of our operations.
In 2017, Konecranes continued and enhanced the cooperation with critical suppliers. We also continued to drive business continuity management development efforts with selected suppliers.
High-quality services and equipment along with business procedures and processes, play a key role in minimizing Konecranes business risks. Most companies in the Group and all major Group operations use certified quality procedures.
In 2017, Konecranes continued developing both its local and global quality improvement processes. That development was supported by continuing to deploy the Company’s shared IT tools to better register customer experiences and approaches to problem-solving, with the goal of improving our business performance. To strive for operational excellence, Konecranes continued to use and develop the Lean Six Sigma methodology with good results. The methodology plays a key role in systematic improvement of the Company’s processes and quality.
Konecranes IT is responsible for all IT services, applications, and assets used by Group companies. Konecranes operations depend on the availability, reliability, quality, confidentiality, and integrity of information. During 2017, there was an increasing amount of attacks against Konecranes IT services. These information security risks and incidents may have an unfavorable effect on business performance. Therefore, Konecranes continues to invest in IT security.
Konecranes uses reliable IT solutions and employs efficient information security management, to avoid data loss and prevent the confidentiality, availability, or integrity of data from being compromised. User care and support is exercised with internal and outsourced IT services to ensure the high availability, resiliency, and continuity of services, combined with rapid recovery in the event of any temporary loss of key services. Third party experts are utilized to audit, test, and improve cyber security for internally and externally developed IT services.
During 2017, the implementation of global IT applications and harmonized business processes continued. For the next few years, Konecranes IT will focus on the integration activities due to the acquisition of Terex MHPS business. Analytics and business intelligence capabilities are increasingly in focus, aiming to turn increasing amounts of business-, user-, and device-generated data into new business opportunities.
Contract and product liability risks
Konecranes can be subject to various legal actions, claims, and other proceedings in various countries, typical for a company in its industry and consistent with a global business that encompasses a wide range of products and services. These may involve contractual disputes, warranty claims, product liability (including design defects, manufacturing defects, failure to post appropriate warnings, and asbestos legacy), employment, auto liability, and other matters involving claims related to general liability. These risks are managed by continuously monitoring operations, improving product safety and documentation, training customers, and enhancing sales terms.
In 2017 Konecranes updated its Contractual Instructions with respective contract language improvements and related training program was extended to cover the acquired MHPS operations. Systematic contracts management efforts continued and we recognize that our contract base extended substantially due to the acquisition of MHPS.
Konecranes issues written policies to ensure compliance with legislation, regulations, and our own principles across the Konecranes Group. Particular emphasis is placed on training, to ensure that employees are aware of and comply with the applicable legislation, regulations, internal policies, practices, and principles relating to their work. Comprehensive training programs for global target groups covered controls, policies, and many best practices that mitigate the risks related to illegal activities.
Konecranes is committed to complying with all applicable laws and regulations, but breaches of the company’s policies resulting in illegal activities can threaten the company. Konecranes recognizes that even small-scale illegal activity could damage its reputation and affect its financials and results adversely, but does not consider the risk to be material. Internal procedures, supervision, audits, and practical tools are used to reduce Konecranes exposure to these types of risks.
Illegal and fraudulent criminal activities targeting Konecranes cause risks that may have substantial impact on our financial results. We continued our efforts to decrease the exposure to such activity.
Konecranes continued, and after the MHPS acquisition, increased its efforts to ensure good governance and management practices throughout the year.
Damage risks include business interruption risks, occupational health and safety-related risks, environmental risks, fire and other disasters, natural events, and premises security risks. Konecranes identifies and assesses these risks continuously as part of its business processes. To mitigate these risks, we have adopted a number of occupational health and safety guidelines, rescue planning, and premises security instructions. Konecranes has also sought to prepare for the materialization of these risks through various insurance programs and by continuously improving its preparedness to deal with various potential crisis situations.
During 2017, we created a strategy to help focus our performance on several important areas of safety and security. We have created this program to improve our capacity to react quicker to trends from near miss reporting and other tools.
To ensure development, we are focusing on the building blocks of continuous improvement. We have created a global process to help us discover our risks and by standardizing the related processes and digitalizing the tools we enable a reduction of risks.
Konecranes manages most of its financial risks on a centralized basis through its Group Treasury. The Group Treasury operates through Konecranes Finance Corporation, which acts as a financial vehicle for the Group at Corporate Headquarters. Konecranes Finance Corporation is not a profit center that strives to maximize its profits, but rather its role is to help the Group’s companies reduce the financial risks associated with global business operations, such as market, credit, and liquidity risks. The most significant market risk relates to foreign currency transaction risk.
The responsibility for identifying, evaluating, and controlling the financial risks arising from the Group’s global business operations is divided between business units and Konecranes Finance Corporation.
Units hedge their risks internally with Group Treasury. Most of the Group’s financial risks are channeled through Konecranes Finance Corporation, where they can be evaluated and controlled efficiently.
Almost all funding, cash management, and foreign exchange transactions with banks and other external counterparties are carried out centrally by Konecranes Finance Corporation, and in accordance with the Group’s Treasury Policy. Only in a few special cases, where local central bank regulations prohibit the use of Group services for hedging and funding, is this done directly between an operating company and a bank under the supervision of Group Treasury. Konecranes Finance Corporation uses a treasury system that enables transactions to be processed in real-time and provides in-depth records of activities and performance. Standard reporting is done on a weekly basis and covers Group-level commercial and financial cash flows, foreign currency transaction exposure, debt positions, derivatives portfolios, and counterparty credit exposure for financial transactions. In addition, all Group companies participate in monthly managerial and statutory reporting.
The Group reviews its insurance policies as part of its overall risk management on a continuous basis. Insurance policies are used to cover all risks that are economically feasible or otherwise reasonable to insure.