- Management Board report
- Business risks
TomTom can be adversely affected by a variety of business risks and economic developments. A structured risk management process helps management to better understand how risks might impact the company and to take appropriate risk mitigation initiatives that provide reasonable, but not absolute assurance regarding the achievement of the strategic, operational and financial objectives, reliability of the financial statements and compliance with laws and regulations.
Senior management together agree on the risk management priorities for the group. The group risk profile is discussed and agreed with the Management Board. A single owner is assigned responsibility for each risk, which helps to ensure clear accountability for the mitigating actions. The Business Assurance department facilitates the annual assessment of business risks to achieve an appropriate level of objectivity in our assessment of risks. We update our group risk profile every year in order to manage our most important risks. Over the year, we monitor the mitigating actions in relation to each risk and the trend for each risk. The business risk profile is taken into account when establishing our strategy, annual business plans and budgets.
Risk management is a process that we are committed to continuously improve. In 2015, we strengthened our control environment with the Internal Control Department driving risk and control ownership by business process owners. We will continue to focus on this in 2016. The key features of the systems of internal control are described in the In Control and Responsibility Statement section. We also increased the alignment between risk management efforts and our internal audit roadmap to gain more value from our internal audits. The result has been a more responsive and relevant internal audit planning from which we will benefit in 2016 onwards.
Our willingness to assume risks and uncertainties (the risk appetite) differ for each risk category. The level of the company’s risk appetite gives guidance as to whether TomTom would take measures to control such uncertainties. The risk overview table shows the risk appetite and the expected impact on the group's achievement of its strategic, financial and operational objectives if one or more of the main risks and uncertainties were to materialise. The likelihood of the risk taking place is also disclosed. The risks are shown net. This means that the risks are described after taking the risk response into consideration.
Below is an overview of the risks that we believe are most relevant to the achievement of our strategy. The sequence of risks below does not reflect an order of importance, vulnerability or materiality. This overview is not exhaustive and should be considered in connection with forward-looking statements. There may be risks not yet known to us or which are currently not deemed to be material.
Although the PND market shows a declining trend, a significant part of our revenue is still derived from PNDs and we expect this to remain a meaningful category in its own right for the foreseeable future. If we are unable to successfully launch new Consumer products and fail to adapt our organisation to remain competitive this could have a material adverse effect on our business and TomTom's financial condition, results of operations and liquidity.
Many of our current competitors are large, well-known organisations with greater financial, technical and human resources than ours. They may have greater ability to fund product research and development and capitalise on potential market opportunities. New competitors interested in the same markets and products may also emerge. Industry consolidation may also result in increased competition.
We aim to establish a multi-product Consumer business while maximising the value from the PND category. We continuously develop new innovative products in the navigation area as well as in sports. When opportunities arise we enter into carefully selected strategic partnerships to bring competitive products and service offerings to the market.
We might be unable to pursue new automotive opportunities and lose market share versus competition. Also, new map and navigation providers may choose to enter the automotive market, which could significantly increase the level of competition we face. There could be additional operational and technical challenges in growing our Automotive business and maintaining profitability over the longer term in such a rapidly evolving environment. If we are unsuccessful in maintaining and growing a profitable Automotive business, our financial condition, results of operations and liquidity may be materially adversely affected.
In 2015, one of TomTom’s global competitors in mapping (HERE) was acquired from Nokia Corporation by a consortium comprised of AUDI AG, BMW Group and Daimler AG. This change in ownership to a consortium of automotive companies significantly impacts a substantial market in which TomTom operates, creating both risks as well as opportunities.
We believe TomTom is well positioned to address the future needs of our customers and to successfully pursue Automotive opportunities. With our technological innovation we continuously develop new product and service offerings in the area of navigation, traffic and maps (such as our easy to integrate NDS-based Connected Navigation System and RoadDNA). We believe these and other innovations will allow us to remain competitive in the automotive market.
All our products and services are brought to market under one brand. This leads to brand concentration risk. Brand value can be severely damaged, even by isolated incidents affecting the reputation of our business or our products and services. Some of these incidents may be beyond our ability to control and can erode customer confidence in our products or services.
Factors that negatively affect our reputation or brand image, such as adverse consumer publicity, inferior product quality or poor service, could have a material adverse effect on our financial condition and results of operation.
TomTom employs a rigorous continuous quality management process for its products and services before they are entered into the market. Additionally, TomTom’s Customer Care department aims to provide quality, fast-response customer service and proactively monitors various digital platforms for customer feedback and issues. Furthermore, internal policies and our Code of Conduct are designed to further mitigate the risk of incidents that could result in reputation or brand damage.
The competitive environment requires continuous investment in new technology for creating and updating map databases. Maps need to be continuously updated for changes in the environment and we are continuously adding new geographies and attributes to our map database to enable us to meet the needs of existing and new customers, bring out new products and expand into new markets. If we are unable to invest sufficiently to compete with other global map providers in terms of both the quality and coverage and to modernise our map delivery platforms, our business, our financial condition, results of operations and liquidity may be materially adversely affected.
Over the last few years, we have invested significantly in developing a new Content Production Platform (CPP) which went into production in the fourth quarter of 2015. This transactional mapmaking platform revolutionises mapmaking and we believe will strengthen TomTom’s competitive positioning by moving away from traditional batch processing towards a continuously releasable real-time map. Additionally, we have set up partnerships to develop technologies to support Autonomous Driving.
Our markets are characterised by rapid technological change, which challenges us to deliver highly competitive products and services on an ongoing basis. In order to be a market leader in our industry, we need to have the most talented people working effectively together.
We aim to employ highly talented people in our organisation. Having the best people enables us to create and deliver highly innovative products and services to our customers. If we are unable to attract, develop and retain the right people, our ability to operate our business successfully could be significantly impaired.
In our ambition to be the employer of choice in technology, our rigorous recruitment process aims to attract the best talents. We monitor the organisational health of the company and have programmes in place to retain and keep key employees engaged. Ongoing significant investments are made in understanding what our employees need and want so we can offer customised experiences. We invest in our increasingly agile and talented workforce and in ensuring that we have the right employer brand strategy in place to attract and retain the talent we need. For example, we continuously invest in and develop our software engineering and product management capabilities through initiatives such as our World Class Software Development Programme.
We provide a variety customer-facing online services on a 24/7 basis. These include fleet management services, live traffic information, location-based services and sales via our website. To provide these services to our customers we rely on our own, as well as outsourced, information technology, tele- communications and other infrastructure systems. A significant disruption to the availability of these systems could cause interruptions in our service to customers that may cause reputational damage for TomTom and could trigger contractual penalties, which could have a material adverse effect on our financial condition and results of operations.
We have established a process in relation to Business Continuity for internal infrastructure including full redundancy for key services such as fleet management, location-based services and some traffic delivery platforms. We also agreed minimum service levels with relevant outsourced service providers. Continuous monitoring of system availability is in place.
Unforeseen business disruptions could affect our service to customers and cause loss of, or delays in TomTom's critical business systems, our research and development work and/or product shipments. Any permanent or temporary loss of these systems would result in reputational damage, loss of revenue and liabilities to our clients. In the case of a catastrophic disaster, our company's success rests on our ability to restore our critical data and rebuild our IT business systems.
We have business continuity and disaster recovery planning in place for business critical systems and various eventualities. However, we are unable to plan for every possible disaster or incident. A major failure of a business critical system from which we are not able to quickly recover, could have a material adverse effect on our financial condition, results of operations and liquidity.
We rely on a combination of trademarks, trade names, patents, confidentiality and non-disclosure agreements, copyrights and design rights, to defend and protect our trade secrets and the intellectual property in our expanding range of products. We may be faced with claims that we have infringed the intellectual property rights or patents of others, which if asserted against us may result in us being ordered to pay substantial damages or forced to stop or delay the development, manufacturing or sale of infringing products. Any such outcome could have a material adverse effect on our financial condition, results of operations and liquidity. Furthermore, even if we were to prevail, any litigation could be costly and time-consuming.
We have a dedicated Intellectual Property team responsible for the protection of TomTom's products and services against unauthorised use by third parties. By obtaining and enforcing intellectual property rights, such as patents and trademarks, TomTom can prevent the competition from reproducing our unique products. TomTom has built a substantial prior art portfolio and has a reputation for strongly defending its position in all intellectual property litigation, including against non-practicing entities (NPE).
We provide location-based and fitness products and services to individual customers and as there is growing public awareness and increased scrutiny by regulatory authorities, this means that compliance with privacy regulations and customer expectations is increasingly important in maintaining our competitive position. Next to this, various governments across the globe are implementing legislation allowing law enforcement and intelligence services bodies direct access to data held by businesses. Depending on country and cultural background, this could raise additional concerns regarding the use of our products and services. Our reputation and brand may suffer and regulatory sanctions may be imposed if we fail to comply with privacy laws and regulations or otherwise fail to meet our customers' expectations in relation to privacy matters.
Inherent in the design and operations of our products and services we apply 'privacy-by-design' to ensure that TomTom's own Privacy Principles as well as obligations from applicable privacy laws and regulations are structurally adhered to in the design of our products and services and throughout our operations.
Our business operations and reputation are substantially dependent on our ability to maintain confidentiality, integrity and availability of information regarding customers, employees, suppliers, proprietary technologies, intellectual property and business processes. Additionally, the volume and sophistication of information security ('cybersecurity') threats continue to grow. The inadvertent disclosure of confidential information, unauthorised access to our systems and networks, defective products and sanctions potentially imposed by regulators could adversely affect our business, our reputation and could have a material adverse effect on our financial conditions, results of operations and liquidity.
We structurally deploy and maintain information security governance, controls, processes and tools in our engineering, operations and products using a risk-based approach, based on ISO information security standards.
The financial risk relevant to the risk section is foreign currency risk. Other risks related to financial instruments are credit, liquidity and loan covenants, interest rates and capital risk management. These are presented in note 28 in the consolidated financial statements.
The group operates internationally and conducts business in multiple currencies. Revenues are earned in euro, pound sterling, the US dollar and other currencies, and do not necessarily match cost of sales and other costs which are largely in euro and the US dollar and to a lesser extent in other currencies. Foreign currency exposures on commercial transactions relate mainly to estimated purchases and sales transactions that are denominated in currencies other than reporting currency - the euro (€). Unfavourable foreign currency movements such as a strengthening of the US dollar will have a negative impact on our profitability.
We manage foreign currency transaction risk through options and forward contracts to cover forecasted net exposures. All such transactions are carried out within the guidelines set by our Corporate Treasury Policy. Furthermore we try to temper any negative foreign currency effect by conscious and calculated pricing of TomTom products and services to combat the negative impact of the exchange rate movement. For additional information, see note 28 to the consolidated financial statements.