Our business success substantially depends on the financial health of our customers. Despite turbulence in the financial markets, the world’s countries are expected on average to sustain their GDP growth, with particularly strong growth rates in emerging and developing economies. A sustained upturn is also accelerating the process of globalisation, leading to growth in demand for storage and transport. This can boost demand for the services of high-performance logistics providers but may also stoke regional and global competition with established and new market players. A cyclical slowdown could reduce customer demand to such an extent as to pose risks for our business activities. However, we do not currently perceive any far-reaching general economic risks facing the Group.

Risks associated with the general business environment primarily arise from the fact that both the Group and its subsidiaries provide some of their services in a regulated market. Our statutory exclusive licence was abolished in Germany on 1 January 2008. However, the Postgesetz (German postal act) has allowed exceptions enabling competitors to operate within the weight and price ceilings laid down in our exclusive licence from January 1998 onwards. As a result, around 55% of the revenue generated by competitors in 2007 was within the weight ceilings stipulated by the exclusive licence. By the end of the year, the regulatory authority (Bundesnetzagentur – Federal Network Agency) had issued licences to around 2,370 competitors.

On 7 November 2007, the regulatory authority announced its benchmark decision specifying the conditions which will apply from 2008 until the end of 2011 to regulations under the price cap procedure for mail prices requiring approval. This stipulates the general rate of inflation and the expected productivity growth rate for Deutsche Post AG as the key factors applicable to mail prices. Prices have to be lowered if the inflation rate in the reference period is less than the productivity growth rate specified by the regulatory authority. No price cuts are required in 2008, allowing the mail prices requiring approval to remain unchanged. The regulatory authority accepted an application from Deutsche Post AG to this effect on 20 November 2007.

On 18 October 2006, the European Commission presented its proposal for a third Postal Directive and recommended opening the EU postal markets fully to competition starting in January 2009. The European Parliament and Council have begun consultations on the proposal under the EU co-decision procedure. In a first hearing on 11 July 2007, the European Parliament came out in favour of fully opening the EU markets by 1 January 2011 – later than in the Commission proposal – and of granting certain member states a transitional period until 1 January 2013. The Council adopted its common position on 8 November, in which it endorsed the European Parliament’s proposed date for market opening. The European legislative procedure continues.

Whilst liberalisation of postal markets entails risks for Deutsche Post AG due to increased competition in Germany, it also opens up new opportunities in other European mail markets.

In 2007, cross-border mail in Europe between Deutsche Post AG and fifteen other western European postal operators was governed by the REIMS II agreement and with another nine eastern European postal companies by the REIMS EAST agreement. The postal operators are currently negotiating a new agreement called REIMS III, which is to come into force with retroactive effect from 1 January 2008 and replace the REIMS II and REIMS EAST agreements.

Discussions continue regarding the extent to which postal services should be exempt from value-added tax (VAT). In correspondence dated 10 April 2006, the European Commission initiated infringement proceedings against the Federal Republic of Germany with regard to the VAT exemption of postal universal services provided by Deutsche Post AG. Germany considers the current VAT exemption to be in compliance with applicable law and responded to the European Commission accordingly. On 24 July 2007, the Commission announced in its decision on the proceedings that the VAT exemption for postal universal services provided by Deutsche Post AG was too far-reaching and called on the German government to amend the applicable law. Independently of these infringement proceedings, the German government announced that it would review the VAT exemption of Deutsche Post AG against the backdrop of the expiration of the exclusive licence on 31 December 2007. In a first statement on the infringement proceedings, a spokesman for Germany’s finance ministry stated that the German government considers the current VAT exemption in Germany to be tenable throughout Europe. The German cabinet has resolved to retain the VAT exemption for nationwide universal services in the postal sector.

Concurring with Deutsche Post AG, the regulatory authority is of the opinion that the prices it approved are net prices not including VAT. VAT could therefore be added to the approved prices. However, it cannot be ruled out that the application of VAT would lead to a decrease in revenue and earnings.