Corporate Strategy

Risk Factors

Among the matters described in this document regarding our business operations, financial condition, and other related topics, the following are those that our management has recognized as potentially having a material adverse impact on our group’s financial condition, operating results, and cash flows. However, this section is not intended to be an exhaustive list of the risks we face, and there may be other risks, including those that are difficult to foresee. The forward-looking statements contained herein reflect the judgments of our group as of the end of the current consolidated fiscal year.

(1) Economic Conditions
Since we are actively looking to expand our operations throughout the world, demand for our products are materially affected by worldwide economic conditions and financial crises. The markets for finished products such as smartphones and tablet PCs that incorporate our group’s products are also influenced by changes in the economic environment and economic fluctuations.
An economic slowdown in key economies, including China and other emerging markets, disruptions in supply chains, economic turmoil triggered by surging resource prices such as crude oil and other inflationary pressures, continued instability in the financial or banking sectors in Europe, the United States, and elsewhere, the failure of government stimulus or monetary policies in Japan and other developed countries, political instability in countries and regions around the world including Ukraine and Taiwan, and the global spread of infectious diseases could lead to a broader and prolonged downturn in the global economy. While our group is working to establish a production and sales management structure that can appropriately respond to sudden changes in demand, it may be difficult to promptly implement adjustments such as reducing fixed costs when demand for our products declines, which may affect our financial condition, operating results and cash flows.

(2) Intensified Competition
The markets in which we operate our products continue to face intense competition. Our competitors may be more competitive than our group in areas such as research and development, production capacity, financial resources and human capital. In addition, we are working to create a more comfortable work environment by promoting diversity and reforming work styles, while also actively seeking to acquire talented individuals through new graduate recruitment and year-round hiring of experienced professionals. 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 sufficiently improve efficiency of our business operations due to delays in digital transformation (DX) initiatives or other factors, our competitiveness may decline relative to our competitors. In addition, customers of our products, including the manufacturers of displays and assembled products, who also face intense competition in their respective markets, may switch from our group to competitors or reduce orders for our products, either to improve product quality or reduce costs, or due to corporate reorganization or changes in their business strategies. While we seek to strengthen our business through the development of high value-added products using differentiated technology, if we are unable to compete effectively with other companies, our market share may decline, which could have an adverse effect on our financial condition, operating results and cash flows.

(3) Delay in Transformation of Business Portfolio
We are a manufacturer of highly functional materials, operating in the fields of optical and electronic materials, and our consumer IT-related products, which are included in our sales, are highly competitive. However, the demand for our products could be adversely affected by certain factors relating to display manufacturers and assembly manufacturers, such as the timing of product model updates and the demand for their products, as well as changes in their business or sales strategies. As part of our efforts to transform the business portfolio, we are currently endeavoring to expand the adoption of our products in fields and applications beyond consumer IT, such as automotive and photonics. However, if the transformation of our business portfolio is delayed and our dependence on consumer IT-related products remains high, a decline in demand in the consumer IT industry as a whole or in demand for products in which our products are used could effect on our financial condition, operating results, and cash flows.

(4) Seasonality
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. Accordingly, our group’s short-term business performance is susceptible to the timing of new model releases of the aforementioned end-products, the sales volume of those products, and the related orders from our key customers for associated components. In addition, our business performance tends to be concentrated in the second and third quarters, during which the production of end-products intensifies in preparation for major sales seasons such as the year-end holidays including Christmas and the Chinese New Year. While we are working to expand sales into growth areas, primarily in the automotive and photonics sectors, which are less subject to seasonal fluctuations, products that are susceptible to trends in the electronic components industry still account for a significant portion of our group’s sales. As a result, demand for our products may fluctuate on a quarterly or annual basis due to the influence of trends in small- and medium-sized displays and electronic components used in end-products, as well as the business trends of the end-products themselves. These factors could have an adverse effect on our financial condition, operating results and cash flows.

(5) Decreases in Prices for Our Products
We are constantly striving to create added value and enhance the quality of our products. In order to maintain and improve our pricing levels, we work on cost reduction through process improvements and yield enhancement, thereby preparing for the risk of declines in product selling prices. However, if the price of our group’s products declines beyond the extent of cost reductions achieved, due to factors such as overproduction or decreased demand in the optical and electronic materials markets, the entry of manufacturers offering low-priced products into the high-performance product segment, or outcomes of negotiations with customers, or if the proportion of sales of lower-margin products increases, our group may face difficulties in securing sufficient profitability. These factors could have an adverse effect on our financial condition, operating results and cash flow.

(6) Our International Operations
We have manufacturing bases in Japan, China, and the United States, and is actively expanding its global business by entering markets around the world. A substantial portion of our sales is derived from the sale of products to overseas customers. Our international operations are subject to common risks associated with conducting business globally, including:

  • risks related to political instability and uncertainties in the economic environment;
  • Laws and regulations, including those related to environmental and safety standards, concerning the manufacturing, import, export, and use of our group’s products;
  • Issues related to labor management 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, global pandemics, and politically motivated boycotts, 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, and this could have an adverse effect on our financial condition, operating results and cash flows.

(7) M&A, Business Alliance, and Other Strategic Investments
We consider M&As, business alliances, collaborations with business partners, and other strategic investments as one of our growth strategies; therefore, we have conducted and may conduct these strategic investments for purposes such as entering into a new market and developing our operations in new business domains. 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, collaborations with business partners, and other strategic investments, unforeseen issues may still arise. Additionally, the recording of losses or additional payments may be required if valuation of our investee companies may fall sharply due to their performance fluctuations. When we acquire and own fixed assets relating to M&As, business alliances, collaborations with business partners, other strategic investments, as well as our existing businesses, we examine investment returns and risks by implementing the return on investment (ROI) analysis. However, if we find that any of our assets no longer generate enough 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, operating 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.
Furthermore, due to the development of new technologies or products by our competitors, the development of new technologies or products in end products that incorporate our group’s products, or changes in industry standards or customer needs, there is a possibility that our group’s products may become unexpectedly obsolete. Additionally, a significant portion of our group’s net sales and business income is derived from the sales of certain key products. If competing companies develop technologies that could replace these key products, or if they introduce superior products, there is a possibility that demand for our group’s products may decline. In line with our group’s mid-term development strategy, we invest in R&D and capital expenditures to advance new technologies and products, explore new applications and markets, and enhance production processes. 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. 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, we customize our products for each customer in accordance with the specifications required by the customer. However, there is no guarantee that our group will always be able to meet such customer requirements. Furthermore, we may not be able to supply our products at the prices, timing, and quantities requested by our customers, and there may be cases where we are unable to provide the advanced after-sales support expected by them. As a result of any of the foregoing events, our financial condition, operating results and cash flows could be adversely affected.

(9) Supplies of Raw Materials
We have established a production system based on the assumption that raw materials can be procured in a timely and sufficient manner. However, we rely on specific suppliers for a portion of our raw material supply. We strive to reduce the risk of supply shortages by using multiple suppliers, but for some materials, we must rely on specific vendors. If any of our raw material suppliers fail to fulfill their contractual obligations due to delays, supply shortages, or other reasons, or if they raise prices or terminate key supply agreements, our group may be forced to procure raw materials from the market or alternative suppliers. In such cases, there is no guarantee that we will be able to obtain the materials at favorable prices, and this may result in delays in the scheduled shipment of our products. If sudden increases in raw material prices or fuel surcharges occur and we may not be able to pass along such rising costs to our customers, thereby our business may be negatively impacted. In addition, If the supply of key raw materials is disrupted due to events such as natural disasters, accidents, or bankruptcies affecting our suppliers, or if the use of certain raw materials becomes restricted due to the introduction or amendment of laws and regulations, our group’s financial condition, operating results, and cash flows may be adversely affected.

(10) Intellectual Property
We own, maintain, and manage a wide range of intellectual property rights both in Japan and overseas. However, there is a risk that some of our intellectual property rights may be deemed invalid, may not receive adequate protection in certain countries or regions, or may be subject to unauthorized imitation, which could compromise the protection of our intellectual property. In addition, our group may use intellectual property owned by third parties under license agreements, including those with major competitors. However, there is a possibility that our group may not be able to obtain necessary licenses from third parties in the future, may only be able to obtain such licenses under unfavorable conditions, or that our competitors may obtain licenses from third parties on more favorable terms than we do. Furthermore, our group may be held liable for damages to third parties if we are found to have infringed their intellectual property rights, and we may also lose the right to develop or manufacture certain products. In addition, if we enter into a business partnership or similar arrangement with another company, our group may become subject to restrictions under license agreements that the partner company has entered into with third parties. While we conduct investigations into the intellectual property rights of other companies to prevent such issues from arising, we cannot guarantee the complete elimination of all potential risks. If such situations do occur, they may have an adverse effect on our group’s financial condition, operating 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, recall, or replace defective products, or to compensate our customers for defects caused in end-products. Also, if our group’s products have defects, it could negatively affect our group’s credibility, reputation, and relationships with customers, and may lead to a decline in our group’s product sales and market share. Moreover, if we are required to compensate our customers or end-product consumers for damages exceeding the coverage of our product liability insurance, it could adversely affect our group’s business performance. In addition, if product liability lawsuits are filed against our group, our product liability insurance premiums may increase, or we may be unable to maintain coverage at reasonable rates. In particular, in fields such as automotive and medical applications, our group may face significant reputational risks or be subject to large-scale recalls as a result of product liability claims. While our group manufactures products and implements international-standard quality control measures in our operations, any or all of such events could have an adverse effect on our financial condition, operating results and cash flows.

(12) Environmental Problems
We are subject to a wide range of environmental regulations related to waste reduction, the prevention of global warming and air pollution, and the treatment of hazardous substances. In the event of unforeseen environmental contamination caused by accidents or natural disasters, or if pollutants are discovered on factory sites currently or formerly owned by our group, or if new environmental regulations are enacted, significant costs may be incurred. These circumstances could restrict our group’s operations and potentially prevent compliance with environmental regulations. Our group considers environmental preservation one of its key policies and has voluntarily formulated and implemented action plans aimed at reducing CO2 emissions and other environmental impacts. However, there is no guarantee that such plans will be executed as originally anticipated. Any or all such events could have an adverse effect on our financial condition, operating results and cash flows.

(13) Climate Changes
We believe that climate change is a critical issue that humanity must address in order to realize a sustainable society, and that responding to climate change is a fundamental prerequisite for the continuity of corporate activities. We express our support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) to clearly demonstrate our commitment to assessing climate-related risks, opportunities, and their impacts. We have set a goal of reducing Scope 1 and Scope 2 emissions by 46% in FY2030 compared to FY2019 and achieving net-zero Scope 2 emissions by introducing the use of renewable energy. We advance our efforts to address climate change by providing products that contribute to energy savings in our customers' manufacturing processes and improve the energy efficiency of final products, thereby helping to reduce the environmental impact across the entire supply chain. We continue to disclose recommended information through our integrated reports and corporate website.
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. However, if expenses increase or revenues decrease as a result of the realization of risks, our financial condition, operating results and cash flows could be adversely affected.

(14) Compliance and Regulations
Our group’s business operations are subject to various laws and regulations in each country, including those related to competition, anti-corruption, corporate governance, labor, consumer protection, electricity, 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. In addition, if regulations are significantly strengthened or undergo major changes, our group’s operations may be restricted, and we may incur new costs to ensure compliance with such regulations. While our group has established internal control systems and strives to comply with the laws and regulations of each country, there can be no assurance that our efforts to ensure compliance will be effective. Any or all such events could have an adverse effect on our financial condition, operating results and cash flows.

(15) Litigation
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) or we may file lawsuits in jurisdictions within and outside of Japan. If the cost to manage such litigation is significant, or if any adverse judgments are rendered with respect to any or all those legal matters, our financial condition, operating results and cash flows may be adversely affected.

(16) Information Security
In our corporate activities such as research and development, manufacturing, sales, and marketing, we retain and manage diverse information assets—including customer and business partner information, technical information, and operational know-how—within our information systems and in various other forms. However, if unexpected events such as increasingly sophisticated cyberattacks, unauthorized access, or natural disasters result in the leakage, loss, or falsification of information, our business operations may be disrupted, and we may face claims for damages, reputational harm, or legal liabilities, which could have a significant impact on our business operations. Regarding information security, we are working to strengthen our systems in cooperation with external IT vendors, raise employee awareness through training and education, and establish security monitoring frameworks. However, there can be no assurance that these measures will be sufficient to address all risks in the future. Any or all such events could have an adverse effect on our financial condition, operating results and cash flows.

(17) Accidents and Natural Disasters
We are committed to ensuring operational safety and business continuity, and has established preventive measures against disasters and accidents, as well as formulated a Business Continuity Plan (BCP). However, the occurrence of severe natural disasters such as earthquakes, tsunamis, and floods or global outbreaks of infectious diseases in countries where we operate or where our business partners are located, not only our group but also a wide range of supply chains—including infrastructure such as electricity and gas, procurement of raw materials, logistics, and customers—may be affected, potentially leading to business disruptions. In particular, Japan is a location where earthquakes occur frequently, and in the event of a major earthquake, there is a possibility of sustaining direct damage as well as human injury caused by fires or chemical substances during manufacturing processes. Furthermore, in addition to natural disasters, riot and labor disputes may also cause disruptions to our group’s business operations. Any or all such events could have an adverse effect on our financial condition, operating 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 engage in hedging activities, such as forward exchange contracts, as appropriate to minimize the impact of exchange rate fluctuations. However, such hedging does not completely eliminate foreign exchange risk, and adverse movements in exchange rates may still affect our group’s financial condition, operating 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.