1.The impact of electronic industry trends on Income Statements
The Group is involved in the sale, import and export of products such as electrical materials, electronic parts, and mechanical devices to industries such as LCD, computer, information communication equipment, semiconductor, household appliance, heavy electric machinery, and automotive electronics, with electronics makers as our primary customers. The performance of our Group is affected by the state of the electronics industry in general, by the company-wide performance and business development of each major electronics maker that we do business with, and by the performance and business development of each business division within these companies.
Compliance with technological innovations, environmental standards, and quality standards
Due to the fast pace of technological progress made by electronics products, our company is affected by the product lifecycles of our customers, and there is risk that our company’s products will become obsolete, decline in competitiveness, or drop in price. It is therefore necessary that we continuously develop new technologies, enhance our market research abilities and product development capabilities, and improve our ability to propose original products. In addition, due to a widening in the supply area for products manufactured and sold by customers, there is greater risk in the event a product is recalled from the market. Therefore, maintaining and improving a quality control system targeting electrical and electronic equipment is called for that includes worldwide restrictions on the amount of toxic substances utilized. Against this backdrop, the Group is deepening its ties with partners and effort is being led by the Development Department and Environmental and Quality Assurance Office to increase our added value as a trading company to provide products sought by customers, including compliance with environmental standards and quality standards. However, our Group business may be affected if our response to partners is insufficient.
The electronics industry faces a tough business environment which includes product price reductions, competition over global shares, and ongoing efforts to reduce costs. Each product is exposed to large fluctuations in sales and production volume due to trends in economic environments and domestic and overseas demand. While influenced by these trends, our Group is working hard to discover and supply high added-value and high-quality products to each partner, and to stabilize and grow our results by expanding our partners with a main focus on major electronics maker groups. However, our business may be affected by drastic production adjustments accompanying downturns in demand.
11.8% of all products supplied to our Group as of the fiscal year ended March 2016 was supplied from 3M Japan Limited. This company is an important supplier of competitive products with a focus on display-related parts. Our Group concluded a basic agreement on sole agency with this company in 1982. While we have maintained stable business relations since then, the Group’s Income Statements may be affected by changes to this company’s business policies, among others.
Owing to the expansion in international sales channels and to reduce production costs and streamline processes, Japan’s electronics makers are transferring domestic production bases overseas, consolidating and relocating overseas production bases, or outsourcing design and production to overseas EMS makers (Electronic Manufacturing Service companies that undertake manufacturing, development, and distribution management of electronic equipment designed by OEM). In dealing with these trends, the Group is promoting its sales to overseas makers, establishing an overseas product supply system, and plans to build local sales bases and parts processing bases to increase our domestic and overseas cost competitiveness and business profitability.Based on this policy, the Group has established 21 subsidiaries and 2 affiliates in China, Taiwan, South Korea, India, South-East Asia, Europe, and North and Central America, as well as 42 sales bases (17 locations in China) and 3 processing bases overseas (as of the FY ended March 2016). Overseas sales accounted for 69.5% of the Group’s consolidated sales as of the fiscal year ended March 2016, 45.8% of which was in China. Therefore, the Group’s Income Statements may be affected by the progress of our overseas business in the event the development of new sales contacts and an on-site product procurement and supply system does not proceed according to plan, or if sales and operating activities are obstructed.
Impact of exchange rate fluctuations
As the relative importance of our overseas business increases in the future, there will be risks associated with exposure to exchange rate fluctuations and we are mitigating these risks such as through the use of exchange contracts. However, large and sudden exchange rate fluctuations may affect the Group’s performance. In addition, the financial statements prepared by overseas local corporations affiliated to the Group are denominated in foreign currencies. However, as the financial statements of these overseas local corporations are translated into Japanese yen in the company’s consolidated financial statements, this foreign currency translation adjustment may affect our net assets.