Risk Report (Report in accordance with section 289(5) of the HGB) Using effective systems to identify and control risks

Our Company’s sustainable success also depends on how promptly we identify the risks arising from our operating activities and how forward-looking we are in managing them. The Volkswagen Group’s internal control system and a comprehensive risk management system help the Group deal with these risks in a responsible manner.

In this chapter, we first explain the internal control and detailed guidance on the application of legal requirements risk management system relevant for Volkswagen’s financial and industry-specific issues. Components of the reporting reporting process. We then outline the specific risks facing packages required to be prepared by the Group companies us in our business activities. The “Report on Expected are also set out in detail and requirements established Developments” on pages 237 to 246 describes the oppor- regarding the presentation and settlement of intragroup tunities arising from our work.

transactions and the balance reconciliation process building on this.

I NTEGRATED I NTERNAL CONTROL AN D RISK MANAGEMENT

Control activities at Group level include analyzing and,

SYSTEM RELEVANT FOR THE FINANCIAL REPORTING PROCESS

if necessary, adjusting the data reported in the financial The accounting-related internal control and risk manage- statements presented by the subsidiaries, taking into account ment system that is relevant for the financial statements of the reports submitted by the auditors and the outcome of Volkswagen AG and the Volkswagen Group comprises mea- the meetings on the financial statements with represen- sures that are intended to ensure the complete, accurate tatives of the individual companies. These discussions and timely transmission of the information required for address both the reasonableness of the single-entity financial the preparation of the financial statements of Volkswagen statements and specific critical issues at the subsidiaries. AG, the consolidated financial statements and the Group Alongside reasonableness reviews, the clear delineation of management report, and to minimize the risk of material areas of responsibility and the application of the dual misstatement in the accounts and in the external reporting.

control principle are further control mechanisms applied during the preparation of the single-entity and consolidated

Main features of the integrated internal control and risk

financial statements of Volkswagen AG.

management system relevant for the financial reporting

In addition, the financial reporting-related internal

process

control system is independently reviewed by Group Internal The Volkswagen Group’s accounting is organized along Audit in Germany and abroad. decentralized lines. For the most part, accounting duties

are performed by the consolidated companies themselves Integrated consolidation and planning system

or entrusted to the Group’s centralized shared service The Volkswagen consolidation and corporate management centers. The financial statements of Volkswagen AG and system (VoKUs) enables the Volkswagen Group to consolidate the subsidiaries prepared in accordance with IFRS s and and analyze both Financial Reporting’s backward-looking the Volkswagen Group accounting manual and reported on data and Controlling’s forward-looking data. It offers by the auditors are transmitted to the Group in encrypted centralized master data management, uniform reporting form. A standard market product is used for encryption.

and maximum flexibility with regard to changes to the legal The Group accounting manual ensures the application environment, providing a future-proof technical platform of uniform accounting policies based on the requirements that benefits Group Financial Reporting and Group applicable to the parent. In particular, these include more

Controlling in equal measure. To verify data consistency,

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VoKUs has a multi-level validation system that primarily In addition, the Financial Services Division is subject to checks content plausibility between the balance sheet, the scheduled checks as part of the audit of the annual income statement and the notes.

financial statements and unscheduled checks within the meaning of section 44 of the Kreditwesengesetz (KWG –

RISK EARLY WARN I NG SYSTEM IN LIN E WITH THE KONTRAG

German Banking Act) by Bundesanstalt für Finanzdienst- The Company’s risk situation is ascertained, assessed and leistungsaufsicht (BaFin – the German Federal Financial documented annually in accordance with the require- Supervisory Authority), as well as checks by association ments of the Gesetz zur Kontrolle und Transparenz im auditors. Unternehmensbereich (KonTraG – German Act on Control

Workflow rules, guidelines, instructions and descriptions and Transparency in Business). The purpose of risk are systematically recorded and can for the most part be management as an operational component of our business accessed online. Adherence to these rules is assured by processes is to identify risks at an early stage, assess their internal controls performed by the heads of the Group extent, promptly initiate any necessary countermeasures Internal Audit, Quality Assurance, Group Treasury, Brand and report to the Board of Management in accordance Controlling and Group Controlling organizational units. with the internal rules. Each year, the auditors check the

processes and procedures implemented for this as well as The risk management system – goals and operation

the adequacy of the documentation. The Group’s risk management system is designed to The Scania brand, which has been consolidated in the identify potential risks at any early stage so that suitable Group since July 22, 2008, has not yet been incorporated into counter-measures can be taken to avert the threat of loss to the Volkswagen Group’s risk management system due to the Company, and any risks that might jeopardize its various provisions of Swedish company law. According to continued existence can be ruled out. Scania’s Corporate Governance Report, risk management

The risk management system is an integral part of the and risk assessment are integral parts of corporate manage- Volkswagen Group’s structure and workflows and is embed- ment. Risk areas are evaluated by the Controlling depart- ded in its business processes. Events that may give rise to ment and reflected in the financial reporting.

risk are identified and assessed on a decentralized basis in Porsche Holding Salzburg, which was consolidated in the divisions and at the investees. Countermeasures are 2011, was fully integrated into the Volkswagen Group’s introduced immediately, their effects are assessed and the existing systems in the reporting period. MAN SE , likewise information is incorporated into the planning in a timely

manner. The results of the operational risk management which was consolidated in 2012, have already imple- process are incorporated into budget planning and mented mature structures for a risk early warning system controlling on an ongoing basis. The targets agreed in the and are included in the annual reporting. Ducati Motor budget planning rounds are continually reviewed in Holding S.p.A., which was also consolidated in 2012, will revolving planning updates. gradually be integrated starting in 2013.

consolidated in 2011, and Dr. Ing. h.c. F. Porsche AG ,

At the same time, the results of risk mitigation measures that have already been taken are incorporated

Updating the risk documentation

into the monthly forecasts on further business develop- Each year, both the risk managers of the individual ment in a timely manner. This means that the Board of divisions and the members of the boards of management Management has access to an overall picture of the current and managing directors of significant investees receive risk situation through the documented reporting channels standardized risk position surveys. Their responses are during the year as well. used to update the overall picture of the potential risk

We are prepared to enter into transparent risks that situation. In the process, the expected likelihood of are proportionate to the benefits expected from the occurrence and the expected loss are assigned to each business. significant risk identified and the measures taken are docu-

mented. The annual updating of the risk documentation is Continuous monitoring and enhancement

coordinated centrally by the Governance, Risk and The internal control and risk management system is Compliance function. Under the guidance of the auditors, constantly optimized as part of our continuous monitoring the plausibility and adequacy of the risk reports are and improvement processes. In the process, equal consid- examined on a test basis in detailed interviews with the eration is given to both internal and external requirements divisions and companies concerned. The auditors assessed – such as the provisions of the Bilanzrechtsmodernisierungs- the effectiveness of our risk early warning system based on gesetz (BilMoG – German Accounting Law Modernization this information and established both that the risks Act). External appraisers support the continuous enhance- identified were presented accurately and that measures ment of our internal control and risk management systems and rules have been assigned to the risks adequately and in on a case-by-case basis. The objective of the monitoring full. We therefore meet the requirements of the KonTraG. and improvements is to ensure the effectiveness of the

internal control and risk management systems. The results deliveries being shifted from commercial vehicles to other culminate in both regular and event-driven reporting to means of transport and of demand for the Group’s the Board of Management and Supervisory Board of Volks- commercial vehicles falling as a result. wagen AG.

Price pressure in established automotive markets is a particular challenge for the Volkswagen Group as a

SPECI FIC RISKS

supplier of volume and premium models due to its high This section explains the specific risks arising from our level of market coverage. If global economic conditions business activities in the coming years.

deteriorate, competitive pressures are likely to increase further. Manufacturers will respond by offering price

Macroeconomic risk

discounts in order to meet their sales targets, thereby We believe the biggest risks to continued global economic putting the entire sector under pressure, particularly in expansion consist primarily of unanswered questions Western Europe, the USA and China. surrounding the resolution of the European and US debt

Western Europe is one of the Volkswagen Group’s main crises and the future institutional structures in the eurozone. sales markets. A combination of a drop in prices due to the Imbalances in foreign trade and volatile financial markets economic climate and a fall in demand in this region are also contributing to a high level of uncertainty. Added would therefore have a particularly strong impact on the to this are geopolitical risks resulting from tensions in the Company’s earnings. Volkswagen counters this risk with a Middle East and North Africa, which could impact clear, customer-oriented and innovative product and negatively on the trend in energy and commodity prices.

pricing policy. Outside Western Europe, its overall delivery Due to the persistent structural challenges in the volume is broadly diversified throughout the world. The industrialized nations, a climate of uncertainty remains in Chinese market accounts for an increasing share of the evidence in the international markets. This is indicated by volume. In addition, we are already market leader in

a lack of investment by businesses and hesitant lending on numerous existing and developing markets or are working the part of commercial banks. This has a considerable resolutely to take pole position. Moreover, strategic impact on the Volkswagen Group’s risk position.

partnerships help us to increase our presence in the We see further risks in protectionist tendencies in the relevant countries and regions and cater to requirements economic policies adopted by certain countries, which there. could lead to the implementation of trade restrictions and

The global economic climate deteriorated noticeably hence hinder the international exchange of goods.

during the reporting period. The resulting challenges for We consider the risk of renewed global recession to be our trading and sales companies, for example efficient relatively low, but see the possibility of a prolonged period warehouse management and the profitability of the dealer of below-average growth due to the factors mentioned.

network, are considerable. They meet them by taking appropriate measures. Although it remains difficult to

Sector-specific risk

finance business activities through bank loans, our The growth markets of Asia, South America, and Central financial services companies offer dealers financing on and Eastern Europe are particularly important in terms of attractive terms with the aim of bolstering their business the global trend in demand for passenger cars. Although model and reducing operational risk. We have also these markets harbor the greatest potential, the overall developed and installed a comprehensive liquidity risk environment in some of the countries in these regions management system so that we can promptly counteract makes it difficult to increase unit sales figures there. Some any liquidity bottlenecks at the dealers’ end that could have high customs barriers or minimum local content hinder smooth business operations. requirements for domestic production, for example.

We continue to approve loans for vehicle finance on the Following the reduction in the number of new vehicles basis of the same cautious principles applied in the past, allowed to be registered in places such as Beijing, further taking into account the regulatory requirements of section restrictions on registrations could enter into force in other 25a(1) of the KWG . Chinese metropolitan areas as well. Furthermore, the

Volkswagen may be exposed to increased competition global economic slowdown could impact negatively on in aftermarkets for two reasons: firstly, because of the consumer confidence in some of these countries. provisions of the new Block Exemption Regulation, which Likewise, we cannot entirely rule out the risk of freight have been in force for after-sales service since June 2010,

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and, secondly, because of the amendments included in EU Regulation 566/2011 dated June 8, 2011 expanding independent market participants’ access to technical information.

The European Commission is planning to end design protection for visible vehicle parts. If this plan is actually implemented, it could adversely affect the Volkswagen Group’s genuine parts business.

Research and development risk

We ensure that we give our customers’ requirements adequate consideration during development by conducting extensive trend analyses, customer surveys and scouting activities. These measures guarantee that we recognize trends at an early stage and verify their relevance for our customers in good time.

We counter the risk that it may not be possible to develop products or modules within the specified timeframe, to the required quality standards, or in line with cost specifications by continuously and systematically monitoring the progress of all projects. We regularly compare this progress with the original targets; in the event of deviations, we introduce appropriate countermeasures in good time. Our end-to-end project organi- zation supports effective cooperation among all areas involved in the process, ensuring that specific requirements are incorporated into the development process as early as possible and that their implementation is planned in good time.

Procurement risk

The global rise in automotive industry unit sales is also reflected in an increased need among suppliers for investment financing and working capital. In the eurozone, however, the euro crisis is impeding provision of the necessary financing. This may lead to declines in individual market segments and an adverse effect on suppliers’ financial position. In the second half of 2012, investors became more reluctant to invest in the automotive supply sector due to the drop in demand in Europe and the difficult situation facing competitors. Our procurement risk management system is well prepared for this situation. We continuously monitor changes at the suppliers’ end and, if there are any negative developments, use a suite of different measures intended to help reduce risks and ensure supplies. This enables us both to largely avoid supply risks due to supplier defaults and minimize the financial effects of crises up to and including insolvencies in the supply chain.

Production risk In the second half of the reporting period, most European markets experienced a sharp fall in unit sales that had a noticeable impact on the entire European automotive industry. At our largest competitors, the drop in unit sales in core segments led to a decline in plant and workforce capacity utilization, which in extreme cases even resulted in factory closures. For several reasons, the Volkswagen Group was able to address this risk successfully and thus keep capacity utilization at its European locations largely unchanged: firstly, the Volkswagen Group benefits from its broad product range, so that declines in individual vehicle segments can be offset elsewhere. Secondly, our presence in almost all the world’s markets also helps us to absorb fluctuations in demand in one region in our global production network. However, these two factors can only come into play as a result of our flexible production network, which uses turntable concepts, for example, to distribute production volumes evenly and hence minimize the impact on individual sites. This applies to both vehicle and component factories.

Nevertheless, shifts between the vehicle segments – as

a result of the sales crisis in Europe – may, for example, cause the balance of demand between different vehicle equipment features to deviate sharply from the original plan in the short term, potentially leading to supply bottlenecks, for example. We have various tools that enable us to spot such changes in demand as early as possible, introduce appropriate measures to adjust capacity and thus minimize the supply risk during peaks in demand for individual vehicle features. For instance, we regularly examine the feasibility of various demand scenarios in light of the components available and, if necessary, identify appropriate adjustment measures based on our findings. We also have extensive flexibility in the areas of logistics and existing working time models.

Special risks may arise during large projects. These result in particular from contracting deficiencies, miscosting, post-contracting changes in economic and technical conditions, and poor performance on the part of subcontractors. We counter these risks by performing appropriate project controls throughout all project phases.

Risks arising from changes in demand

Quality risk

Consumer demand not only depends on real factors such Sustained high demand in the Volkswagen Group’s key as disposable income; it is also shaped by psychological markets poses particular challenges for quality assurance. factors that are impossible to plan for.

Quality assurance is of fundamental importance especially Increased fuel and energy prices could lead to in the growing automotive markets of Brazil, Russia, India unexpected buyer reluctance, which could be further and China, for which dedicated vehicles are developed and exacerbated by media reports. This is particularly the case where local manufacturing operations and suppliers have in saturated automotive markets such as Western Europe, been established. We analyze the conditions specific to where demand could drop as a result of owners holding on each market and thus ensure growth in these regions. In to their vehicles for longer.

cooperation with the central quality assurance function, In 2012, the effect of unplannable psychological we continuously develop effective measures to counter demand factors was exacerbated by the euro crisis and its identified local risks and then implement those measures impact on the global economy and the entire automotive locally, thus minimizing quality defects from the outset. industry. Several automotive markets, particularly in

Our need for high-grade supplier components of Southern Europe, were in a downward spiral, which in impeccable quality is rising due to growing production some cases assumed dramatic proportions. We are volumes, increasing complexity and the use of the Group’s countering this buyer reluctance with our attractive range toolkit system. To ensure production and hence meet of models and in-depth customer orientation.

customer expectations, it is extremely important that our In addition to buyer reluctance as a result of the crisis, own plants and our suppliers deliver on time. The

a combination of vehicle taxes based on CO 2 emissions – like introduction of an internally-tested risk management those already structured in some European countries – and system at suppliers is an important step towards ensuring high oil and energy prices is causing a shift in demand long-term quality and supply capability early on in the towards smaller segments and engines in individual supply chain. Quality assurance thus helps to fulfill markets. We counter the risk that such a shift will customer expectations and consequently boost our negatively impact the Volkswagen Group’s earnings by Company’s reputation, sales figures and earnings. constantly developing new, fuel-efficient vehicles and

alternative drive technologies on the basis of our Personnel risk

drivetrain and fuel strategy. In the rapidly expanding The individual skills and technical expertise of our markets of Asia and Eastern Europe, risks arise due to employees are a major factor contributing to the Volks- government intervention in the form of tax increases, for wagen Group’s success. Our aim of becoming the top example, which could reduce private consumption.

employer in the automotive industry improves Volkswagen’s chances of recruiting and retaining the most talented

Dependence on fleet customer business

employees.

In fiscal year 2012, the percentage of total registrations in Our strategic, end-to-end human resources development Germany accounted for by business fleet customers strategy gives all employees attractive training and develop- increased to 12.7% (12.4%). The Volkswagen Group’s ment opportunities, with particular emphasis placed on share of this segment rose to 47.7% (46.8%). In Europe, increasing technical expertise in the Company’s different Volkwagen’s extensive product range and target group- vocational groups. By continuously expanding our recruit- specific customer care enabled it to extend its successful ment tools and boosting training programs, particularly at position in this segment: although registrations by our international locations, we are able to adequately business fleet customers fell by 4.3% in a declining address the challenges posed by growth on the human market, the Group’s share increased to 29.3% (28.7%). resources side. The fleet customer business continues to be marked by

In addition to the standard twin-track vocational increasing concentration and internationalization. Thanks training, programs such as our StIP integrated degree and to its broad product portfolio, however, the Volkswagen traineeship scheme ensure a pipeline of highly qualified Group is well positioned to face the growing importance of and motivated employees. At a cross-functional level, the

the issue of CO 2 and the trend towards downsizing. No Top 100 program ensures that key expertise continues to default risk concentrations exist for individual corporate

be acquired and propagated within the Volkswagen Group. customers.

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Risk Report (Report in accordance with section 289(5) of the HGB) Using effective systems to identify and control risks