2018 Integrated Report – On track towards a better Railway

Opportunity and risk report

Economic climate, market and competition

  • Scope: macroeconomic fundamentals, business environment, intermodal and intramodal competition, ordered services market for passenger transport, service offerings and penalties

Demand for our mobility services and, in particular, for our transport and logistics services is dependent on overall eco­­nomic development, among other things:

  • Economic growth fuels the trends underlying our strat­­egy in our markets.
  • Macroeconomic shocks such as economic and financial crises and economic fluctuations may adversely affect our business.
  • Risks arising from depleted public sector budgets in some European countries could have negative effects (particularly in the form of spending cuts), especially on DB Arriva activities. The market volume here is greatly determined by the financial situation of the contracting organizations. However, this creates the possibility that new markets or market segments will be opened for com­­petition. With DB Arriva, we have positioned ourselves in such a way that we are well prepared to take advantage of the opportunities posed by open and opening markets.
  • Developments in the competitive environment are of particular importance for DB Group:
    • In long-distance transport, we are exposed to heavy intermodal competition, particularly with motorized individual transport as the dominant competitor, but also with long-distance bus services and air transport.
    • There is intense competition in regional transport throughout Europe for securing long-term transport contracts. There is a risk of performance losses. To be able to remain competitive in this market, we are constantly working to optimize our tender management and our cost structures. In addition, risks arise from performing transport contracts if the parameters of the underlying calculation do not proceed as planned. In order to continuously increase quality and customer satisfaction and improve our efficiency, we have put together appropriate programs at DB Regional and DB Arriva.
    • There is a great deal of competition in rail freight transport. Risks arise from the fact that competitors can operate with less expensive cost structures while enjoying greater flexibility. Further risks result from possible future efficiency gains of trucks, for exam­ple, by digitalization. Several measures have been implemented to tackle these challenges.
    • In the freight forwarding business, there is on the one hand intense competition with other providers, and on the other hand, a concentration in the carrier market that causes changes in the offerings of cargo space with corresponding effects on purchase and sales prices. We are responding to this by further ex­­­­panding our networks and improving our cost structures, services and IT infrastructure.

Overall, a general risk is a loss of competitiveness. A key com­­ponent in facing competition is improvements in service quality. In terms of the integrated rail system, we set out the Agenda for a Better Railway, particularly in order to improve the product quality.

Key opportunities for performance enhancements result from the trend towards digitalization:

  • Processes can be made more efficient and more customer-focused.
  • Customers can be offered improved and new digital services.
  • Online portals and apps facilitate access for customers.
  • In the medium-term, changes in the competitive environment may result from the following developments:
    • New competitors: In addition to established competitors, providers that have so far remained outside the industry, such as automobile manufacturers, IT groups and start-ups are increasingly active in our markets.
    • New platforms/data-driven business models: Digital platform providers increase the intensity of competition and transparency in passenger transport and logistics and also change how customers perceive prices. Start-ups in particular are the driving force behind the platform business and aim to occupy the digital customer interface.
    • Shifts in added value: Added value in the mobility and logistics sector could shift towards additional services.
    • Integrated on-demand mobility: Mobility-as-a-Service (MaaS) concepts are becoming part of the standard offer in the long term. The customer can order, book and pay for transport easily and in real time.
    • Demographic developments are increasing the pressure on the public sector to make use of favorable offers. Public transport authorities could also change their ordering behavior and tenders could be supplemented to include on-demand, minibus and shuttle services. This increases the cost pressure on established providers.
    • Supply chain visibility: Transparency in the value-­added chain is one of the top trends in logistics. Start-­­ups and established players see data and analysis solutions as a significant business opportunity.
    • Goods structure effect: The production share of highly specialized goods such as pharmaceuticals and high-tech products is growing strongly. At the same time, types of goods with a generally lower weight and higher value density, such as electronic components, are growing at an above-average rate. Heavy, bulky goods, such as steel, paper and chemicals are becoming less important.

To adequately tackle the resulting risks and opportunities, we have developed, among other things, our comprehensive digitalization strategy with a separate digital eco-management system.

We are also responding to opportunities and risks arising from changing demand patterns and from shifts in traffic patterns throughout the Group with intensive market observation and by continuously upgrading our portfolio and our products.

The demand for our products and services is partly de­­pen­dent on the development of our customers’ sales markets:

  • Our customers’ economic development dictates their need for storage and transport services. In addition, there may be structural changes in the production structures of our customers. The rising costs of globally distributed production make regional production more efficient. Another reason for regionalization is the use of production innovations, such as automation, modularization and 3D printing with the potential to relativize wage cost differences and economies of scale.
  • Rail freight transport is partly dependent on industries that are stagnating. The decline of coal as an energy source, for example, is having an effect.
  • The development of demand in track infrastructure is dependent on the competitions of the rail mode of trans­­­port on the upstream transport markets.