Risks and uncertainties

The principal areas of risk to which the company might be exposed are illustrated in detail in the section Principal Risks and Uncertainties of the Directors’ Report on Operations - Volume A of the Annual Financial Report at December 31, 2011, to which the reader is referred for detailed discussion of these issues. A summary of these risks and uncertainties is provided as follows:

Strategic risks

These are closely tied to the Group’s objectives and consequent strategic choices. This category includes the risks stemming from evolution in the external context where the Group operates and the risks stemming from internal factors, such as financial risks, the risks connected with typical business processes and human resource/organisation risks. In 2012, 80 risk/opportunity events have been identified and assessed in reference to the strategic plan horizon. Thirty-three of these events are considered material in pursuit of Group strategies.

First and foremost among the most significant risk factors for 2012 is the business cycle. In line with the forecasts made by leading analysts, Pirelli expects an economic slowdown. In this regard, Pirelli has already prepared a Contingency Plan to respond as flexibly as possible to the changed context, should global macroeconomic conditions significantly deteriorate.

Pirelli implements a “local for local” strategy by setting up production sites in rapidly developing countries to serve local demand at competitive industrial and logistic costs.

The Pirelli Group adopts this strategy for its operations in countries such as Argentina, Brazil, Mexico, Russia, China, Egypt, Turkey and Venezuela, where the general political and economic context and tax systems might prove unstable in future. In order to adopt prompt (or even preventive, when possible) measures to mitigate the possible impact stemming from changes in the local context, the Group constantly monitors the evolution of political, earnings, financial and safety risks associated with the countries where it operates.

In regard to market risks, competition continues to stiffen in the markets where Pirelli operates, especially in Europe and Latin America. In response to this pressure and to protect its overall profitability, Pirelli will be able to adjust the commercial price/mix component and internal component to recover cost efficiency.

In 2012 natural rubber, synthetic rubber and petroleum based raw materials (especially chemicals and carbon black) will remain an uncertain factor in the Group’s cost structure, due to the sharp volatility witnessed over the past several months and their impact on the cost of finished products.

Cross business risks

The complexity of the information environment and of the system used, the distribution of activities worldwide and links between them may increase the level of risks connected with information and communication technology. The global scale of Group operations exposes it to a plethora of risks (stemming from natural events, malicious acts, malfunction of auxiliary plants or interruption in the supply of utilities) that might even cause an interruption in business activities for an indefinite period of time. For this reason, in 2011 Pirelli elaborated mitigation actions and laid the bases for realisation of business continuity plan for each of the 13 production sites analyses. In 2010 the Group finished mapping the principal risks connected with the ten most important information systems supporting core processes (production, purchasing, sales, and logistics). Specific measures for further upgrades to physical, logical and infrastructure safety measures were developed for the principal “vulnerabilities.” Their implementation was constantly monitored in 2011 by the Managerial Risk Committee. Implementation of the risk mitigation measures will be completed in 2012, and mapping of the risks facing other information systems (finance, human resources, etc.) will be undertaken.

2012 - 2014 Plan Risk Assessment

2012 - 2014 Plan Risk Assessment