1.The impact of electronic industry trends on Income Statements
The Group is mainly involved in the sale, processing and assembly, as well as design and subcontracted manufacturing of products such as electronic materials, electronic parts, and equipment in and outside Japan. It is active in a variety of electronics products industries such as automotive electronics, information device terminals including cell phones, industrial equipment and medical equipment.
In recent years, we have also focused on the ODM business, which handles everything from designing to manufacturing other companies' brand products. (We outsource manufacturing.)
For that reason, the Group’s performance is affected by the business conditions of the electronics industry in general. The Group works to have risk diversification management by providing a variety of products to a wide range of customers. However, its business may be adversely affected by a slowdown in the business conditions of the electronics industry in general to which its customers belong.
2.Technological innovation risk
Given the fast technological advancement of electronics products with which the Group deals, the Group may be affected by the life cycle of products of its major customers. Moreover, if technological innovation allows a competitor to create a more beneficial product, there is a risk of deterioration in competitiveness, commoditization, a low liquidity of inventory, a price decline, etc. of products with which the Group deals. 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.
The Sales Division, Marketing & Development Division, Design Dept, and Environment Preservation & Quality Assurance Dept of the Group work together to have new technologies adopted. They also work to make plans and proposals relating to new technology. The aim is to develop a more profitable new product and business. However, an insufficient catching up with such technological innovation may adversely affect the Group's business.
3.Risk arising from customers' business conditions
Customers of the Group are facing a tough business environment due to lower product prices and global competition for market share. A variety of developments in the economic environment in and outside Japan may also affect product demand largely in a short period. In these circumstances, the Group strives to discover and supply products that provide high added-value and high-quality products to each customer, while expanding and developing its customer base.
However, in cases of a decline in a customer’s products’ competitive edge which slows demand, or a subsequent production adjustment on a large scale, the Group, which supplies products to the customer, may also suffer a decrease in sales or a low liquidity of inventory. A deterioration in customer’s business conditions as mentioned above may adversely affect the Group’s business.
4.Risk arising from suppliers' business conditions
10.6% of all products supplied to our Group as of the fiscal year ended March 2021 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.
5.Risk of defects, recalls, environmental standards, and quality assurance
If a product supplied by the Group, or a manufactured product in which a product supplied by the Group is installed is found to be defective or subject to recall, etc. at the customer’s side, and the Group is liable to pay compensation for the damage, it may adversely affect the Group’s performance.
In recent years, as regulations on the use of hazardous substances in electrical and electronic equipment, etc. have been tightened, it has become more important to maintain and improve a quality control system which enables us to supply qualified products. For this reason, the Group works more closely with its suppliers and takes group-wide measures in order to provide customers with products which meet environmental standards (for example, the RoHS Directive) and quality standards of Japan and other countries. However, in cases where the measures are found insufficient, for example, in cases where a substance that does not conform to an environmental standard is found in a product provided by the Group, and the Group is liable to pay compensation to a customer, the Group’s business may be adversely affected.
6.Overseas business risk
Many domestic manufacturers are relocating their domestic production sites to overseas locations, consolidating and relocating their overseas production sites, or outsourcing design and production to an overseas EMS manufacturer (a provider of a contract manufacturing service which ranges from design and manufacturing to development and logistics management of electronic equipment manufacturing). Their aim is to expand international sales channels, reduce production costs, and have higher efficiency.
In response to this trend, the Group has established an overseas product supply system to promote sales to overseas manufacturers through its overseas subsidiaries, increasing cost competitiveness and profitability in and outside Japan. As a result, the Group’s overseas sales accounted for 52.9% of consolidated net sales in the fiscal year ended March 2021, boosted mainly by sales to China (22.3%) and to Other Asian countries(15.2%（Korea, India, Southeast Asia, etc.）) In light of the above, in cases where political developments, economic conditions, changes in laws and measures, or other country-specific matters of individual countries trigger a situation where the Group’s sales and business activities are restricted or the Group fails to respond to such changes sufficiently, the Group’s business may be adversely affected.
The Group strives to expand its business with major domestic customers, while promoting the development of and trading with high value-added SMEs. The Group also promotes its global business with a focus on the exploration of Chinese manufacturers and other overseas partners.
For each of the transactions with partners in and outside Japan, the Group extends credit in the form of accounts receivable, etc. For this reason, it has introduced its own credit assessment system which enables credit management based on a credit limit assigned for individual partners in line with the internal regulations, while periodically monitoring their creditworthiness to eliminate a bad debt risk. However, in cases where accounts receivables, etc. become uncollectible due to a change in economic and business conditions of Japan and other countries, or other partner-specific matters, etc., the Group’s business may be adversely affected.
8.Currency exchange fluctuation risk
The Group’s business is expected to depend more on overseas business in the future. Its overseas subsidiaries not only execute transactions in foreign currencies, but also prepare financial statements in foreign currencies. Since consolidated financial statements of the Group are prepared based on those of overseas subsidiaries on a yen equivalent basis, an upward or downward fluctuation in the value of the Japanese yen or other currencies may incur a consolidated gain or loss. Accordingly, the Group uses a currency forward contract.Furthermore, in February 2019, we changed the policy for dividends paid from consolidated subsidiaries to the Company in order to reduce currency exchange fluctuation risk arising from changes in foreign currency translation adjustments in the consolidated financial statements. However, this does not ensure outright avoidance of currency exchange fluctuation risk. A significant and acute change in currency exchange rates may adversely affect the Group’s business.
9.Force majeure including theCOVID-19 infections
In the event of natural disasters including earthquakes, heavy rains and floods, abnormal weather conditions, the spread of infectious diseases, wars, terrorism, riots and other events that exceed the scope of forecasts, damage to the Group's employees, offices and systems, etc. may adversely affect its business activities. The Group has formulated a business continuity plan (BCP) in preparation for business continuity if such an event occurs. Given, however, that this cannot eliminate all impacts, an occurrence of such an event may adversely affect the Group's business.
In addition, it is not yet clear when the pandemic of the COVID-19 will subside, which is having a great impact not only on the health and livelihoods of people inside and outside Japan, but also on domestic and global economic activities. The Group’s newly established COVID-19 emergency center ensures the observance of individual policies of national and municipal governments, and implements measures for smooth continuation of business activities under these circumstances. It does this by promoting telework to ensure the safety of employees and putting in place the infrastructure needed for running remote operations to prevent the spread of virus. Moreover, by taking advantage of the Group's strengths of a "wide product lineup" and "diverse partners" in promoting sales activities unbiased to a particular field, the Group believes it can demonstrate solidity even in this uncertain business environment.
However, the Group’s business may be adversely affected by restrictions on business activities due to the recommendation for people to refrain from travelling as a measure to contain the virus, serious flaws in supply chains due to the reduction or termination of production by partners, decreased demand due to slowdowns of domestic and global economies, surging freight charges due to reductions of flights or shortages of marine containers, and other factors.
10.Information security risk
The system used by the Group has an appropriate security and back-up system. However, system termination, data loss and other unexpected incidents caused by a large-scale blackout which exceeds the scope of forecasts, natural disasters, computer virus infections, unauthorized access or other events may hinder the normal business activities and adversely affect the Group’s business.
11.Risks related to the existence of sales transactions with new business partners
The Group is developing new products inside and outside Japan and is rolling out products to non-Japanese customers overseas. Given the nature of a trading company that conducts various intermediary transactions, we pay attention to the risk of fictitious and round-tripping transactions.
During the fiscal year ended March 31, 2021, sales transactions with new customers which may be subject to these risks totaled 2,448 million yen (1.4% of consolidated sales) in the consolidated financial statements and 522 million yen (0.4% of sales) in the non-consolidated financial statements. The potential risks related to the existence of these sales are being closely monitored. For this reason, when starting business with a new partner, our examination of a transaction includes surveys of customers and suppliers to confirm the existence and appropriateness of the transaction.
In addition, we have formulated internal guidelines and apply them to direct delivery transactions. These measures allow us to proactively avoid the risk of the Group becoming a party to fictitious and round-tripping transactions.
However, if the Group becomes a party to such fictitious and round-tripping transactions due to circumstances that are unforeseen by the Company, it may adversely affect the Group's business, such as by incurring unexpected losses.