Risks and opportunities
This section provides important additional information and explains recent changes in the risks and opportunities as described in the combined management report of the 2020 Annual Report. Readers are also referred to the Disclaimer at the end of this report.
Risk and opportunity management system
Starting in the second quarter of 2021, changes were made to the risk and opportunity management system in line with the revised IDW audit standard 340 on the auditing of the risk early warning system. These changes mainly relate to the implementation of a risk-bearing capacity conception, improvements to risk aggregation (e.g., greater quantification of risks), as well as some renaming and reassignment of risks and opportunities to the various categories. The parameters for classifying risk extent were also adjusted following a significant rise in Deutsche Telekom’s EBITDA AL on the back of organic corporate growth and the business combination of T‑Mobile US and Sprint. These changes affect the presentation and assessment of the risks and opportunities. We will provide detailed explanations of the changes in the 2021 Annual Report. The Interim Group Report as of September 30, 2021 only contains the “substantive” changes made to the risk and opportunity categories and no changes arising from adjustments to the methodology.
Economic risks, Germany and Europe
The economies of Germany and Europe are poised to recover substantially as coronavirus restrictions are eased. The business and consumer climate has seen a marked improvement in recent months. But at the same time growth in overall economic demand is leading to bottlenecks, with prices for raw materials soaring and companies increasingly facing a shortage of upstream products. These delivery bottlenecks are leading to inflationary pressures worldwide. Nonetheless, the general growth outlooks for Germany and Europe are positive. In October 2021, the International Monetary Fund (IMF) forecast a 5.0 % expansion of the eurozone economy for the current year (Germany +3.1 %) and considers a return to recession to be unlikely. Due to the uncertain path of the coronavirus pandemic, we cannot rule out economic implications resulting from possible further developments, such as the emergence of virus mutations. Based on experience so far, the coronavirus pandemic is expected to have only a limited impact on Deutsche Telekom’s business. We have thus reduced the risk significance for the risk category “Economic risks, Germany” and “Economic risks, Europe” to “low.”
Economic risks, United States
Leading economic research institutes have raised their growth forecasts for the United States. However, a USD 1,900 billion relief package passed in March 2021 could also entail higher U.S. corporate income tax rates going forward, potentially increasing the tax burden for our Group company T‑Mobile US. In October 2021, the IMF forecast a 6.0 % expansion of the U.S. economy for the current year and considers a return to recession to be unlikely. Economic activity in the United States returned to pre-pandemic levels in mid-2021. The current growth outlooks have prompted us to reduce the risk significance for the risk category “Economic risks, United States” to “low.”
Risks relating to strategic transformation and integration
Collaboration with Chinese suppliers is being impeded by the enduring trade conflict between the United States and China. Since 2020, the United States has restricted the use of U.S. technology for and by Chinese suppliers on account of security concerns. They also put pressure on other countries to do the same. In Germany, the legislator has put an end to many years of intensive discussion concerning the security of critical infrastructure with the new Second Act to Increase the Security of Information Technology Systems, or the IT Security Act 2.0 (IT-Sicherheitsgesetz 2.0). A positive outcome is that a number of long-disputed requirements for critical infrastructure (KRITIS) have now been laid down. Deutsche Telekom itself has long been scrutinizing security-critical components prior to installation and on an ongoing basis once in operation. We therefore assume that the assessment by the authorities will also be compatible with rapid network build-out and will not lead to any long-term delays. The IT Security Act 2.0 does not include any ban on individual manufacturers. The Federal Ministry of the Interior, Building and Community is currently drafting the necessary rules (on the certification of critical components, manufacturer declarations of trustworthiness, among others) for the practical application of the IT Security Act 2.0. The requirements laid down in the security catalog, drawn up by the Bundesnetzagentur and the Federal Office for Information Security in accordance with the Telecommunications Act and published in early August 2021, will be relevant to any critical components that could potentially be affected. In respect of the certification obligation for components that have already been installed, the catalog stipulates a transition period expiring on December 31, 2025. This is why the affected components can largely be considered to be grandfathered until that point in time. The risk of a retrospective order to remove components already installed in the network is low under current legislation. However, we cannot rule out the possibility that critical components from all manufacturers currently in operation may not be used from January 1, 2026 onwards. Several network operators have taken steps to file official objection proceedings to clarify the ambiguous legal terminology and scope of application of the security catalog. Irrespective of this, the hurdles for retrospective orders to remove components already approved will be high. In other countries, such as Austria and Poland, it is still possible that suppliers in critical infrastructure will have to be replaced within specific deadlines. In particular due to the adoption of the IT Security Act 2.0 in Germany, the extent of potential losses is reduced and we have lowered the risk significance in the risk category “Risks relating to strategic transformation and integration” to “medium.”
New state interventions in the context of cybersecurity in Poland under debate. In January 2021, the Polish government published a draft for a cybersecurity act and new provisions for an amendment to the national telecommunications act. These changes would give new mobile network operators privileged access to resources to foster their establishment in the market. This could result in unfair competition and negatively affect the competitive standing of our mobile communications subsidiary in Poland.
European Electronic Communications Code (EECC) transposed into national law. The transposition of the EECC into national law in each of Deutsche Telekom’s footprint countries confers both opportunities, in particular for a shift towards more investment-friendly regulation, and risks, primarily in connection with the higher costs of transposing extended consumer protection provisions. The rules are already in place in Germany in the form of the Telecommunications Modernization Act (Telekommunikationsmodernisierungsgesetz – TKMoG), which will enter into force on December 1, 2021.
For further information on the implementation of the EECC, please refer to the section “The economic environment – Regulation.”
Claims relating to charges for the shared use of cable ducts. In proceedings instituted against Telekom Deutschland GmbH by Kabel Deutschland Vertrieb und Service GmbH (now Vodafone Kabel Deutschland GmbH) on the one hand and Unitymedia Hessen GmbH & Co. KG (now Vodafone Hessen GmbH), Unitymedia NRW GmbH (now Vodafone NRW GmbH), and Kabel BW GmbH (now Vodafone BW GmbH) on the other, the Federal Court of Justice in its rulings of May 18, 2021 allowed the plaintiffs’ appeals to the extent that the proceedings relate to claims for the period from January 1, 2012 (for Vodafone Kabel Deutschland GmbH) and from January 1, 2016 (for the remaining plaintiffs). At present the financial impact of both these proceedings cannot be assessed with sufficient certainty.
Prospectus liability proceedings (third public offering, or DT3). This relates to initially around 2,600 ongoing lawsuits from some 16,000 alleged buyers of T-Shares sold on the basis of the prospectus published on May 26, 2000. The plaintiffs assert that individual figures given in this prospectus were inaccurate or incomplete. The amount in dispute currently totals approximately EUR 78 million plus interest. Some of the actions are also directed at KfW and/or the Federal Republic of Germany as well as the banks that handled the issuances. The Frankfurt/Main Regional Court had issued orders for reference to the Frankfurt/Main Higher Regional Court in accordance with the German Capital Investor Model Proceedings Act (Kapitalanleger-Musterverfahrensgesetz – KapMuG) and has temporarily suspended the initial proceedings. On May 16, 2012, the Frankfurt/Main Higher Regional Court had ruled that there were no material errors in Deutsche Telekom AG’s prospectus. In its decision on October 21, 2014, the Federal Court of Justice partly revoked this ruling, determined that there was a mistake in the prospectus, and referred the case back to the Frankfurt/Main Higher Regional Court. On November 30, 2016, the Frankfurt/Main Higher Regional Court ruled that the mistake in the prospectus identified by the Federal Court of Justice could result in liability on the part of Deutsche Telekom AG, although the details of that liability would have to be established in the initial proceedings. Following an appeal from both parties, in February 2021 the Federal Court of Justice once again referred the process back to the Frankfurt/Main Higher Regional Court. Deutsche Telekom has recognized appropriate provisions for risk in the statement of financial position.
Sprint Merger class action. On June 4, 2021, a shareholder class action and derivative action was filed in the Delaware Court of Chancery against Deutsche Telekom, SoftBank, T‑Mobile US, and all of our officers and directors at that time, asserting breach of fiduciary duties relating to the repricing amendment to the Business Combination Agreement, as well as SoftBank’s subsequent monetization of its T‑Mobile US shares. At present the financial impact of these proceedings cannot be assessed with sufficient certainty.
Proceedings against T‑Mobile US as a consequence of the cyberattack on T‑Mobile US. In August 2021 T‑Mobile US confirmed that their systems were subject to a criminal cyberattack that compromised data of millions of their customers, former customers, and prospective customers. With the assistance of outside cybersecurity experts, T‑Mobile US located and closed the unauthorized access to their systems and identified customers whose information was impacted and notified them, consistent with state and federal requirements. As a result of the cyberattack, T‑Mobile US is subject to numerous lawsuits, including multiple class action lawsuits seeking unspecified monetary damages, and inquiries by various government agencies, law enforcement and other governmental authorities, and T‑Mobile US may be subject to further regulatory inquiries and private litigation. At present the financial impact of these proceedings cannot be assessed with sufficient certainty.
Claims for damages against Slovak Telekom following a European Commission decision to impose fines. The European Commission decided on October 15, 2014 that Slovak Telekom had abused its market power on the Slovak broadband market and as a result imposed fines on Slovak Telekom and Deutsche Telekom, which were paid in full in January 2015. In 2018, following an appeal by Slovak Telekom and Deutsche Telekom, the Court of the European Union partially overturned the European Commission’s ruling and reduced the fines by a total of EUR 13 million. A ruling of March 25, 2021 dismissed in full a further appeal with the European Court of Justice. Following the decision of the European Commission, competitors had filed damage actions against Slovak Telekom with the civil court in Bratislava. These claims seek compensation for alleged damages due to Slovak Telekom’s abuse of a dominant market position, as determined by the European Commission. At present, two claims totaling EUR 112 million plus interest are still pending. It is currently not possible to estimate the financial impact with sufficient certainty.
Assessment of the aggregate risk position
The improved economic outlooks for Germany, Europe, and the United States, along with the new IT Security Act 2.0, which has introduced clarity in relation to restrictions with regard to Chinese suppliers, have led to an improvement in the aggregate risk position compared to the risks and opportunities as described in the combined management report of the 2020 Annual Report. At the time of preparing this report, neither our risk management system nor our management could identify any material risks to the continued existence of Deutsche Telekom AG or a significant Group company as a going concern.