The following section describes certain risks which our management has considered could potentially have a material adverse impact on our financial condition, operational results, and cash flows, but it is not intended to be an exhaustive list of the risks we face.
This section includes forward-looking statements and future expectations as of June 17, 2022. This section should be read together with the disclaimer language related to forward-looking statements contained in the annual report.
(1) Economic Conditions
Since we are actively looking to expand our operations throughout the world, demand for our products may be materially affected by worldwide economic conditions and financial crises. Related end-product markets for many of our products, such as the markets for smartphones and tablet PCs in which our products are used, are influenced by changes in the economic environment and are subject to inherent cyclicality. An economic slowdown experienced by one or more significant economies, including China or other developing economies, economic turmoil triggered by higher crude natural resources prices including oil prices and other price increases, continued instability in the financial or banking sectors in Europe or elsewhere, the failure of government stimulus or monetary programs (particularly in Japan or other developed economies), political instability in countries around the world including situation in Russia and Ukraine, or the effects of diseases could cause or contribute to a broader and longer global economic downturn. While we are trying to improve our production and sales management structure in order to adapt to sudden changes in demand, it is difficult to rapidly reduce our fixed costs when demand for our products declines, which could have an adverse effect on our financial condition, operational results and cash flows.
(2) Intensified Competition
The markets for our products are subject to significant competition. Our competitors may have advantages over us in areas such as research and development, production capacity, financial strength and human resources. While we are improving our work environment by enacting diversity-based promotions and working-style reforms, we are also seeking to hire qualified individuals by hiring new graduates and engaging in year-round recruitment. However, If we are unable to secure talented researchers, engineers, and other human resources, if key personnel leave us to work for our competitors, or if we are unable to effectively allocate human resources due to delays in digital transformation (DX) initiatives, our competitiveness relative to our competitors may decline. In addition, customers of our products such as the manufacturers of displays and assembled products, who also face severe competition in their respective markets, may among other things terminate or reduce orders for our products, whether to adjust product quality or reduce costs, or as a result of their corporate reorganization or a change in their business strategies. While we seek to strengthen our business by utilizing methods such as the development of high added-value products via the use of differentiated technology, if we are unable to compete effectively in the markets in which we sell our products, our market share could decrease and this could result in an adverse effect on our financial condition, operational results and cash flows.
(3) Dependence on Limited Number of Products, Including Display-Related Products
We are manufacturing highly functional materials, specifically optical materials and electronic components, and we rely heavily on our ability to sell components for use in displays. Certain factors relating to display manufacturers, such as changes in their business or sales strategies, may affect the results of our operations. Furthermore, the number of established smartphone and tablet PC manufacturers in the market is limited, and the timing of their respective new product introductions and the demand for their products, as well as the changes in their business or sales strategies, could affect, in turn, the demand for our products. While we are currently endeavoring to expand the uses of our products to include applications in end-products other than displays, there is no guarantee that we will be successful in creating new demand for our products through such initiatives. If demand levels decline for the display industry as a whole, or for the display products in which our products are used, before we become successful in creating new demand or identifying new uses for our products, this could have an adverse effect on our financial condition, operational results and cash flows.
Due to the nature of our operations, we are subject to business trends that impact middle-size and small-size displays and certain types of electronic components used in end-products such as smartphones, tablet PCs, and laptop PCs. The results of our operations may be affected by the timing of releases of new models and the sales of end-products that include our products and the related orders of our key customers. We generally experience higher demand in the three-month periods ended September 30 and December 31 due to the impact of the production of end-products targeting the holiday shopping season at the end of the year and the Chinese New Year. While we seek to expand sales into new business areas, especially the field of automobile business which is less subject to seasonal fluctuations, we still rely heavily on our ability to sell products which are influenced by the business trends mentioned above, and our product sales and results may vary significantly on a year-to-year or quarter-to-quarter basis. As a result of these factors, our financial condition, operational results and cash flows may be adversely affected.
(5) Decreases in Prices for Our Products
We are continuously making efforts to add value to and improve the quality of our products, and we work to maintain and increase the price competitiveness of our products. We are also trying to offset a necessary decrease in the prices of our products through cost-cutting measures such as streamlining our manufacturing processes to improve manufacturing yield. However, due to constant pricing pressures from our customers, as well as overproduction or demand decreases in the market for optical materials and electronic components, or the entrance into the market of high quality products by other manufacturers, or requests by customers for price reductions, the sustainable price for our products may fall beyond the savings achieved through our cost-cutting measures, or our sales of higher-margin products may decrease, as a result of which our profitability may be worsened. As a result of these factors, our financial condition, operational results and cash flows may be adversely affected.
(6) Our International Operations
We conduct our business globally with production bases in Japan, China, and the United States. We are actively looking to expand our operations throughout the world, and a substantial portion of our net sales is derived from international sources. Our international operations and business are subject to risks accompanying international business in general, including:
- risks related to political instability and uncertainties in the economic environment;
- governmental regulations, including environmental and safety regulations and other regulations related to the import, export, production, and use of our products;
- difficulties associated with managing local personnel and increases in labor costs;
- higher tariffs and duties, and stricter trade regulations;
- unexpected enactments and changes in laws, regulations, policies, and taxation, and divergences in the interpretation and application thereof;
- unstable infrastructure leading to disruptions or delays in basic services such as electricity, transportation, and communication;
- fluctuations in foreign currency exchange rates;
- varying standards and practices in the legal, regulatory, and business cultures in which we operate; and
- acts of terrorism, war, economic sanction, trade friction, effects of diseases, boycotts stemming from international political relations, and other sources of social disruption.
While we internally share information regarding political and economic instability, and we are endeavoring to respond appropriately to such instability, it is difficult to fully account for all changes in political and economic conditions. Any of the foregoing factors or others could negatively impact our sales, lead to cost increases, or disrupt our operations, resulting in an adverse effect on our financial condition, operational results and cash flows.
(7) M&A, Business Alliance, and Other Strategic Investments
We consider M&As, business alliances, and other strategic investments as one of our growth strategies; therefore, we have conducted and may conduct M&As, business alliances and other strategic investments for the purpose of entering into a new market and developing our operations in new business areas and others. While we have published our mid-term management plan in which the acceleration of growth in new business areas, especially the field of automobile business, is one of our key strategies, our operations in new business areas may not develop as we originally planned because the development of our operations in new business areas depends on various factors, such as changes in market circumstances. In addition, although we will carry out detailed research on any investment targets, such as target companies and new business areas, and conduct sufficient risk analysis upon our M&As, business alliances, and other strategic investments, unforeseen issues may still arise. Additionally, valuation losses or additional payment may be required because value of our investment including our investee companies’ securities may fall sharply due to performance fluctuations of our investee companies. Additionally, when we acquire and own fixed assets relating to M&As, business alliances, other strategic investments, and our business, we consider investment-return risks by implementing economic investment evaluations. However, if we find that any of our assets no longer generate a sufficient amount of cash flow, for example due to market trends, price drops, or other factors that are expected to negatively affect our profitability, we would be required to recognize an impairment loss. As a result of any of the foregoing events, our financial condition, operational results and cash flows could be adversely affected.
(8) Research and Development
The business areas in which we operate are subject to significant competition in connection with technologies and costs. If any of our competitors develop new technologies or products that are more attractive to our customers, our products could be rendered obsolete or demand for our products could decrease. Similarly, end-products may evolve or be replaced by other new types of end-products in a manner that reduces the need for our products as components and materials, or the standards for products like ours or the needs of our customers may change to an extent that is beyond the capacity to which we can adapt. Additionally, because we have continuously derived a significant portion of our net sales and operating income from sales of certain key products, any adverse development relating to those products, including the use of technologies that could replace those products, or the introduction of superior products by our competitors, could have an adverse effect on the demand for such key products. We are continually engaging in research and development and making the capital investments that we believe are necessary and appropriate to develop new technologies and new products, identify new uses for existing products and technologies, develop new uses and markets for our products, and enhance our manufacturing processes in keeping with our mid-term development strategies. However, it is difficult for us to predict what events and conditions may occur in the future that could affect our business because the market conditions for our products have been changing rapidly, and will continue to do so. As a result, we may be unable to produce the desired results (such as meeting sales targets) in connection with the new products we have developed. In addition, because most of our customers and end-product manufacturers have very specific needs regarding specifications for product performance, we frequently collaborate with our customers to develop customized products that meet such needs. If we are unable to continue to offer products that meet the specifications of our customers or end-product manufacturers, our customers may choose alternate suppliers. Demand for our products is also affected by our ability to meet our customers’ expectations in terms of the pricing of our products, our ability to quickly respond to new orders and produce and deliver the desired quantities of products according to schedule, and our ability to provide long-term and high quality after-sale support. As a result of any of the foregoing events, our financial condition, operational results and cash flows could be adversely affected.
(9) Supplies of Raw Materials
While we have established our manufacturing and processing operations based on our ability to obtain adequate supplies of raw materials on a timely basis, we rely on the limited number of third-party suppliers with respect to a portion of our raw materials. Despite our efforts to reduce the risk of not being able to obtain key raw materials, by among other things entering into supply agreements with two or more third-party suppliers, it is difficult for us to obtain all types of raw materials from two or more suppliers. If any of our suppliers are unable to meet their obligations under our present or future supply agreements due to any factors such as delays, insufficient supply in their supply chains, or increases in the prices of the raw materials to be provided to us, or if any of our key supply agreements are terminated earlier than we anticipate, we may be forced to postpone delivery dates of our products or be forced to purchase raw materials on the open market or from alternative suppliers, and no assurances can be given that we would be able to make those purchases or make them at prices or quality levels that would allow us to remain competitive or deliver our products as anticipated. Our business may also be impacted by sudden increases in raw material prices or fuel surcharges, and we may not be able to adjust our prices and thereby pass along such rising costs to our customers. In addition, natural disasters, accidents, customer bankruptcies, and other factors that may impact our suppliers or transportation networks, including unexpected supply limitations or increased costs for key raw materials, may negatively impact our operations. Any or all of such events could have an adverse effect on our financial condition, operational results and cash flows.
(10) Intellectual Property
We own, maintain, and manage various forms of intellectual property, both domestically and abroad. We may not be able to adequately protect our intellectual property as a result of, among other things, any disruption or insufficient protections in certain countries or jurisdictions, or the unauthorized duplication or replication of our intellectual property. In addition to intellectual property owned by us, we have also entered into license agreements with manufacturers, including our major competitors. However, there is a possibility that such arrangements will be unexpectedly terminated or may only be available in the future on less favorable terms for us, or our competitors may obtain licenses on more favorable terms than we have. Additionally, from time to time, we may be subject to intellectual property disputes, legal proceedings, and claims which could cause us to incur significant costs and may prevent us from developing or manufacturing our products. A business combination or partnership between us and a third party could also result in our business becoming subject to new restrictions under license agreements to which such third party is bound. While we are endeavoring to monitor intellectual property owned by other companies to prevent these problems, we are unable to entirely eliminate all possibility of these problems, which may result in an adverse effect on our financial condition, operational results and cash flows.
(11) Issues Pertaining to Product Quality
While our products are generally sold to other manufacturers (not individual consumers), product failures could cause us to incur substantial expenses to repair or replace defective products, or to compensate our customers for defects caused in end-products. If we deliver products with errors or defects, our credibility, customer relations, and business reputation could be harmed and our products’ sales and market share could decline. Although we carry product liability insurance, there is no guarantee that our insurance will adequately cover us against potential liability. If it does not, our operational results could be adversely affected. In addition, any product liability claims brought in connection with any alleged defect of our products, whether with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage at affordable rates. In particular, in connection with new domains such as the automotive field and life sciences, our group may be subject to massive recalls or reputational risks resulting from product liability claims. While we constantly strive to implement international-standard quality control measures in our operations, any or all of such events could have an adverse effect on our financial condition, operational results and cash flows.
(12) Environmental Problems
Our handling, processing, storage, transportation, and disposal of hazardous materials are subject to extensive environmental laws and regulations at the local, national, and international levels. Such environmental laws and regulations include those governing the discharge of pollutants into the air, global-warming greenhouse gases, and the management and disposal of hazardous materials and waste. If any environmental pollution occurs in connection with our operations due to an accident or natural disaster, if any contaminant is found on sites currently or formerly owned or operated by us, or if any changes occur in connection with environmental laws or regulations which could impose additional costs and restrict our ability to operate as we are currently operating, our compliance with applicable environmental laws and regulations could be adversely affected. In addition, while environmental preservation is one of our important group policies and we have voluntarily established and made efforts to implement appropriate action plans, we cannot certain that such plans will be adequate or effectively implemented as we expect. Any or all of such events could have an adverse effect on our financial condition, operational results and cash flows.
(13) Climate Changes
We believe that the issue of climate change is an important challenge for mankind to solve in order to realize a sustainable society, and that addressing climate change is a prerequisite for companies to continue their business operations. In order to clarify our stance on climate change-related risks, opportunities, and assessment of their impacts, we have expressed our support for the recommendations of TCFD (Task Force on Climate-related Finance Disclosurses), and have set a goal of achieving zero CO2 emissions from business-derived electricity consumption in FY2030 by introducing renewable energy and other measures. In addition, we are promoting climate change initiatives to contribute to reducing the environmental impact of our entire supply chain by providing products that help our customers save energy in their manufacturing processes and improve the energy efficiency of their final products. We continuously disclose recommended information through the Integrated Report and our website. While we see addressing climate change not only as a risk but also as an opportunity, and aim to solve social issues related to climate change through our business activities, if expenses increase as a result of the realization of risks, our financial condition, operational results and cash flows could be adversely affected.
(14) Compliance and Regulations
We are subject to the regulatory regimes of each country in which we operate, including, among others, those relating to antitrust, anti-corruption, corporate governance, labor, consumer safety, energy generation, and taxation. If we violate any applicable law or regulation or fail to satisfy the conditions or comply with the restrictions imposed by our licenses, permits, and governmental approvals, or the restrictions imposed by any statutory or regulatory requirements, we may become subject to regulatory enforcement actions or be subject to fines, penalties, or additional costs or revocation of governmental approvals, permits, or licenses. We may also incur significant costs associated with enhancing our compliance functions as regulations and laws change in the countries in which we operate. Although we have internal control and compliance systems in place for the purpose of complying with such laws and regulations, there can be no assurance that such systems and our other efforts to promote compliance will be effective. Any or all of such events could have an adverse effect on our financial condition, operational results and cash flows.
Since we operate our business on a global basis, we may be subject to the risk of various types of litigation (including litigation brought by our business partners) in jurisdictions within and outside of Japan. If the cost to defend such litigation is significant, or if any adverse judgments are rendered with respect to any or all of those legal matters, our financial condition, operational results and cash flows may be adversely affected.
(16) Information Security
We have constructed our information system to conduct research and development, manufacturing, sales, and marketing activities. We also store and manage confidential information regarding technology and activities relating to both our company and our customers, in various forms (which includes such information system). If any confidential information stored or managed by us is improperly disclosed due to cyberattacks on our information system by third parties and such third parties improperly use or gain access to such confidential information, we may be subject to claims for damages, and our reputation and credibility could be adversely affected. Regarding information security, we have introduced a system which is resistant to cyberattacks, in cooperation with our IT vendor, and we have implemented systems on a company-wide level to protect and manage confidential information. However, there can be no assurance that our systems will prevent unauthorized access or leaks of confidential information in the future. Any or all of such events could have an adverse effect on our financial condition, operational results and cash flows.
(17) Accidents and Natural Disasters
We operate our business with an emphasis on operational safety and business continuity, implementing safety, security, and business continuity measures in the hope of reducing the likelihood of accidents and harm from natural disasters. However, the occurrence of severe natural disasters such as earthquakes, tsunamis, and floods in the locations in which we and our customers operate, or the occurrence of diseases could endanger or make more costly power and gas supplies, transportation networks, and other infrastructural resources. Such disasters could also damage us as well as one or more portions of our supply chain, including our procurement of raw materials necessary for the production of our products and delivery of our products to our customers, all of which may disrupt our business operations. In particular, Japan is a location that experiences frequent earthquakes, and severe earthquakes may result in physical damage to our facilities as well as human injury caused by the resulting fires, radiation, and other harmful effects. If we choose to consolidate our operations in Japan to a greater extent, such risks may increase. In addition to risks related to natural disasters, we may also be subject to riots and labor disputes, which could disrupt or severely reduce our business prospects. Any or all of such events could have an adverse effect on our financial condition, operational results and cash flows.
(18) Currency Exchange Rate Fluctuations
We conduct foreign currency denominated transactions, and the costs and prices of our products, services, assets and liabilities that are denominated in foreign currencies are influenced by fluctuations in exchange rates. We may engage in hedging transactions and other arrangements in order to minimize exchange rate risk, but there can be no assurance that such arrangements will be sufficient to protect us against adverse movements in foreign exchange rates, which could have an adverse effect on our financial condition, operational results and cash flows. In addition, since we convert the foreign currency-based figures (including the assets and liabilities) of our foreign group companies into Japanese yen in the process of preparing our consolidated financial statements, currency exchange rate fluctuations may also adversely affect our financial condition.
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