The following section provides an overview of the risks the Group faces that may have a significant influence on investors’ decisions. However, the risks stated below are not a comprehensive list of those the Group faces and there are other risks that are difficult to foresee. Any of the said risk factors may cause a significant adverse impact on the Group’s business, operating results, and financial position. The forward-looking statements in the document are based on the judgment of the Group as of the end of the fiscal year under review.
(1) Impact of economic conditions
Demand for the Group’s products and services is affected by economic conditions of countries or regions where they are sold. Therefore, economic recessions in the global market and a subsequent decline in demand may have an adverse impact on the Group’s business, operating results, and financial position.
The sales volume of the Group’s products whose main consumers are retail customers is especially affected by changes in the preferences and disposable income of retail customers. Therefore, sales trends of products geared toward retail customers tend to change widely due to economic conditions and trends, personal consumption trends, and other factors in areas where they are sold. If these factors do not work advantageously for the Group, if the Group’s business reforms to respond to these factors do not produce results as expected, or if the Group is unable to develop and produce products that respond to these factors and put them on the market in a timely manner, the Group’s business, operating results, and financial position may be adversely affected.
In addition, the sales volume of the Group’s products whose main consumers are public offices and corporate customers, including private enterprises, in each country and region is affected by economic conditions and trends as well as political and financial trends, occurrence of special demand following emergency situations, a decline in demand, and other changes in countries and regions where customers are located. These may adversely affect the Group’s business, operating results, and financial position.
(2) Impact of fluctuations in foreign exchange and interest rates
Overseas business accounts for about 60% of the Group’s revenue and the Group’s offices and clients are located around the world. Costs and prices of overseas products and services that are traded in non-yen currencies are affected by fluctuations in foreign exchange. In addition, since overseas assets and liabilities that are denominated in local currencies are converted to yen for the development of consolidated financial statements, they are affected by fluctuations in foreign exchange. Therefore, fluctuations in foreign exchange may adversely affect the Group’s business, operating results, and financial position. In general terms, appreciation (depreciation) of the yen against the euro, which accounts for a large part of the Group’s local currency denominated export items, has a negative (positive) impact on the Group’s operating results. Appreciation (depreciation) of the yen against the U.S. dollar, which accounts for a large part of the Group’s local currency denominated import items, has a positive (negative) impact on the Group’s operating results. Foreign exchange may experience unexpected fluctuations due to the impact of economic conditions in countries and regions around the world. These fluctuations may adversely affect the Group’s business, operating results, and financial position.
In addition, fluctuations in interest rates may affect the value of operating expenses, interest expenses, interest income, and financial assets and liabilities and may adversely affect the Group’s business, operating results, and financial position.
(3) Risks in international business activities
The Group is actively operating business globally. In these international business activities, the Group may face political instability, uncertainties in economic trends, differences in religions and cultures, issues related to local labor-management relationships, collection of trade receivables, and other obstacles related to business practices, in addition to exchange rate fluctuation risks. The Group may also face various political, legal, and other obstacles, including changes in regulations related to investment, remittance of revenue to home countries, import/export, and foreign exchange.
In addition, introduction and revision of accounting standards and tax systems that are not expected by the Group may adversely affect the Group’s business, operating results, and financial position, both in Japan and abroad. Differences in interpretation of tax returns with tax authorities may impose an unexpectedly large tax burden on the Group.
There is a possibility that the competitiveness of the Group’s export products may weaken due to tariffs and other trade barriers, distribution costs, and other factors. The Group performs product import declaration procedures both in Japan and abroad based on tariff classifications that are deemed appropriate at the moment. Due to differences in interpretation with customs authorities in importing countries, the Group may receive a request from the authorities to correct the customs declaration at a later date. In such a case, the amended declaration may affect the Group’s business, operating results, and financial position.
(4) Intensifying market competition
In the market where the Group’s products are sold, various types of companies, ranging from large global companies to small but fast-growing specialty companies, are engaged in fierce competition. Among these competitors, companies with larger financial, technological, and marketing resources compared to the Group may make large investments or lower product prices for the purpose of increasing market share or having an oligopoly in the market. If the Group is unable to win amid competition with these competitors in such a market environment, there may be a decline in demand for the Group’s products, prices of the Group’s products, and the Group’s brand values. There is also a possibility that the size of the market where the Group has a competitive edge may decline or profitability may deteriorate. These may adversely affect the Group’s business, operating results, and financial position.
While the Group has facilitated cost reduction and development of high-definition products, fierce competition in the market may create pressure to lower prices beyond corporate efforts, making it difficult to set product prices to generate sufficient profits and posing a serious hindrance to maintaining the Group’s profits. Such hindrance becomes particularly noticeable when demand for products becomes stagnant.
(5) Competition in technological innovation
There is a possibility that the Group will be unable to develop or provide new products in a timely manner. Since technological innovation is a key focus of competition in the Group’s core business, funds and resources must be constantly invested into research and development (R&D). Funds necessary for such activities may increase in line with the advancement of technologies. However, there is no guarantee that the Group will be able to invest sufficient funds and resources into these R&D activities in a stable manner in the future. In addition, there is no guarantee that the Group develops products by engaging in R&D activities based on an accurate forecasting of new technologies that respond to future market needs and that such efforts will make a solid contribution to improving the Group’s operating results. Therefore, there is a possibility that the Group’s R&D activities will end up in a loss, adversely affecting the Group’s business, operating results, and financial position.
In addition, the Group’s R&D activities are largely dependent on its ability to retain human resources. Especially when skilled and experienced R&D staff leave the Group for any reason (including, but not limited to, headhunting by competitors, a relative decline in the Group’s pay level and treatment, and a deterioration in the R&D environment) or new human resources cannot be retained, the Group’s future R&D activities may be adversely affected, causing an adverse impact on the Group’s business, operating results, and financial position.
(6) Dependence on procurement of raw materials from external sources
It is essential for the Group’s product development and production activities that it obtains a sufficient quality and quantity of raw materials, components, equipment, software, services, and more at a competitive cost in a timely manner from external sources. Therefore, the Group is dependent above a certain level on purchase, production outsourcing, or joint development with external component development/production vendors, component suppliers, product development/production vendors, software development vendors, and more. Therefore, when situations such as a deterioration in the relationships with these vendors, a delay or suspension of supply from these vendors, management issues facing these vendors, and damage to manufacturing plants of these vendors due to natural disasters and other factors occur, the Group’s product development and production activities may be hindered, causing an adverse impact on the Group’s business, operating results, and financial position.
While the Group and these vendors decide transaction prices through agreement, changes in the demand and supply environment, exchange rate fluctuations, and other changes may cause a sharp increase in prices of raw materials, components, and other supplies. There are raw materials and components that can only be supplied by particular vendors. In such a case, the Group’s business, operating results, and financial position may be adversely affected.
(7) Customers’ funding and financial position
Some of the Group’s customers are purchasing products and services from the Group under conditions of deferred payment. When the financial position of customers with whom the Group has a large amount of operating receivables deteriorates, and the Group is unable to receive payment on the due date, the Group’s business, operating results, and financial position may be adversely affected.
(8) Outcome of alliance with other companies
It is essential for the Group to form partnerships with other companies in order to provide new products and services or launch new businesses. While the Group forms business and capital alliances or establishes joint ventures, there is a possibility that collaboration with these partners will not work smoothly or partnerships will not produce effects as expected. In addition, there is a possibility that alliance partners will make decisions in the process of business development that may conflict with the interests of the Group, including a situation where the Group is unable to fully control or monitor these partners, or these partners change their business strategies. In such a case, the Group may face difficulties in maintaining alliance relationships. In these situations, the Group’s business, operating results, and financial position may be adversely affected.
(9) Industry trends and reorganization
The industry where the Group is operating has the potential for new market development and growth that cross the boundaries between adjacent and other industries as a result of the merger of products and services based on scientific and technological advancement, including the development of networks and broadband services, as well as business advancement. In this environment, reorganization within the industry or with adjacent and other industries may redefine the structure of competition in the industry for the Group within a short period of time. More specifically, any reorganization or M&A by competitors may change companies’ positions or the structure of competition within or beyond the industry, causing the Group to fall behind competitors in terms of the advantage of scale in production and sales, price competitiveness, brand values, financing capabilities, procurement of raw materials, and securing of sales channels. Or if the Group becomes a party in the industrial reorganization, the flexibility and freedom of the Group’s management may be lost. In a situation where the structure of competition will be redefined through such industry reorganization, there is no guarantee that the Group will be able to maintain or improve the current position of its products in the industry. In such a situation, the Group’s business, operating results, and financial position may be adversely affected.
(10) Risks related to forward-looking statements
Guided by the corporate vision “Creating excitement and peace of mind for the people of the world,” the Group developed the Mid- to Long-Term Management Plan “Vision 2020” (partial revision on January 31, 2018) on May 18, 2015 with an eye to FY2020. The Group has promoted its management plan under the long-term vision “Evolution into a Customer Value Creator.” The plan was developed based on information and analysis that were deemed appropriate at the time of development. However, if items that were used as preconditions for the plan are revealed to be different from actual conditions, if the business environment changes significantly after the development, or if business realignment, reorganization, strategic M&A, rationalization, asset sales, and other efforts do not progress as expected or produce effects as expected, all of the goals of the Group’s management plan or expected results, including synergy effects, may not be achieved. In addition, unexpected factors, including an increase in costs related to additional business realignment and structural reforms, may prevent the improvement of efficiency and achievement of growth.
(11) Occurrence of direct and indirect costs associated with product liability and compensation claims
If defects occur in the Group’s products, the Group may assume liabilities for damages caused by the defects (including indirect damages) that cannot be fully covered by product liability insurance or large costs for measures. In addition, media reports related to the issue may cause a deterioration in the Group’s corporate image, reputation, and brand values as well as a loss of customers, causing an adverse impact on the Group’s business, operating results, and financial position.
(12) Intellectual property rights
While the Group earns income through the use of patents and other intellectual property rights owned by the Group, such income may decrease due to the expiry of patent rights and future market trends. There is a possibility that a patent is not granted for a patent application filed by the Group and the Group may not be able to receive sufficient protection by intellectual property rights. In addition, a part or all of the intellectual property rights are not protected in some countries. In addition, when the Group wants to use technologies of third parties that are protected under intellectual property rights, the Group may not be able to use these technologies or must use them under unfavorable conditions. Some of the Group’s products are using patents and other intellectual property rights of third parties under license from the third parties. Even if a license is currently granted by other companies, the license may not be available in the future or conditions may be changed unfavorably. There is also a possibility that the Group will be unable to receive the necessary licenses from third parties or only be able to receive a license under unfavorable conditions. In such a situation, the Group’s business, operating results, and financial position may be adversely affected. The Group is not necessarily aware of all of the intellectual property rights of third parties and thus is unable to deny the possibility of unintentional infringement of third parties’ intellectual property rights. In such a situation, third parties may file an infringement claim or lawsuit based on intellectual property rights against the Group, causing a loss of business caused by product suspension and a deterioration in the Group’s corporate image, reputation, and brand values. In addition, a large amount of payments may become necessary, including expenses to resolve disputes and legal fees. There is also a possibility that the Group will need to file a lawsuit to protect its intellectual property rights. In such a case, a large amount of expenses and management resources may be necessary. In the event of the disputes related to intellectual property rights described above, the Group’s business, operating results, and financial position may be adversely affected, regardless of the outcome of lawsuits.
(13) Laws and regulations
The Group conducts business pursuant to laws and regulations in Japan and other countries and regions. Laws and regulations include government permissions necessary to conduct business and investment as well as those related to the telecommunications business and safety of electrical products, national security, and import and export, in addition to those related to commercial transactions, antimonopoly, intellectual property rights, product liability, environmental protection, consumer protection, personal information protection, tax systems, accounting systems, financial transactions, and internal control.
If the Group becomes unable to comply with these laws and regulations and is deemed unable to continue business due to technical and economic reasons following the introduction of more stringent laws and regulations or stricter interpretation of laws and regulations by authorities, the Group’s business activities may be restricted. In addition, the Group’s costs may increase in order to comply with these laws and regulations. In such a situation, the Group’s business, operating results, and financial position may be adversely affected.
If authorities judge that the Group has violated these laws and regulations, the Group may be subject to administrative and criminal action or damage suits, causing an adverse impact, not only on the Group’s business, operating results, and financial position but also on its social reputation.
(14) Environmental protection
The Group is subject to various environment-related laws and regulations in Japan and abroad, including those pertaining to global warming, air pollution, water pollution, usage restriction and removal of hazardous substances, disposal of waste, recycling of products, and ground and underground pollution. Therefore, the Group may face environment-related costs and liability for damages. Environment-related regulations are becoming more stringent every year, including the Restriction of Hazardous Substances (RoHS) Directive, which added restricted substances to its list following the amendment, and the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), which adds substances under management semi-annually. If additional obligations to remove hazardous substances are added or the Group voluntarily tackles environmental issues from the perspective of corporate social responsibility, capital investment and payments necessary to comply with laws and regulations as well as to take voluntary actions to protect the environment may adversely affect the Group’s business, operating results, and financial position.
In conducting activities to comply with these environment-related regulations, the Group is unable to guarantee that it will completely prevent or mitigate discharges into the environment of restricted substances that exceed environmental standards because of an accident or other incident. Moreover, the Group is also unable to completely eliminate the possibility of being held responsible for removal and clean-up costs if restricted substances remain in the soil at its factory sites or other locations in excess of legal standards, or the possibility that this will negatively affect the sales price of these sites. These may adversely affect the Group’s social reputation as well as its business, operating results, and financial position.
(15) Information leakage
The Group obtains personal and credit-related information of customers and other parties (including customers’ personal information) or information of other companies and organizations in the course of business operations. Such information may be leaked to outside parties accidentally or for unavoidable reasons. If information is leaked to outside parties, the Group may be liable for compensation for losses of victims, causing an adverse impact on the Group’s business, social reputation, and brand image. In addition, the Group is unable to fully eliminate the risk of leakage of its trade secrets due to misconduct or fault of third parties. As a result, the Group’s business, operating results, and financial position may be adversely affected. Information systems are playing an extremely important role in the Group’s business activities. The Group has striven to ensure safe operation of its information system by enhancing its information security system. However, computer viruses, software or hardware failures, human errors, unauthorized access, natural disasters, cyberattacks, and other factors may cause the information system to cease functioning.
The Group is subject to various laws and regulations along with internal rules to conduct business in countries where its offices are located in the world. To ensure compliance with these rules, the Group has striven to establish a compliance system, including education and awareness campaigns for its executives and employees. However, there is a possibility that a violation of these rules will occur. If such a case occurs, the Group’s social credibility as well as business, operating results, and financial position may be adversely affected.
(17) Impact of natural disasters and political unrest
The Group maintains business bases around the world. In the case of occurrence of natural disasters, including earthquakes, tsunamis, fires, and floods; pandemics, including avian flus and Zika fever; political and social unrest; wars; worldwide terrorist attacks by the Islamic State in Iraq and the Levant (ISIL) and other extremists groups; or the occurrence of secondary disasters caused by them, including interruption of lifelines such as electricity; a decline in capacity utilization caused by power shortages; failure or malfunction of information systems and communication networks caused by computer viruses, cyberattacks, and other factors, facilities and equipment of the Group’s offices as well as employees may suffer damage. The Group’s corporate activities may also be affected temporarily or for a certain period of time, such as suspension of operation and work, including clients and logistics, or delay in production and shipping. In addition, costs to restore damage may be generated.
(18) Deferred tax assets and income tax expense
The Group assesses the possibility of recognizing deferred tax assets based on a reasonable forecast of future taxable income. If generating sufficient taxable income is considered to be unlikely due to a deterioration in business conditions or other factors, income tax expense may increase due to the reversal of deferred tax assets, causing an adverse impact on the Group’s operating results and financial position.
(19) Liabilities for retirement benefits
Retirement benefit liabilities and expenses for the Group’s current and former employees are calculated based on various experience assumptions, including the discount rate used for actuarial calculations. Fluctuations in retirement benefit liabilities and expenses caused by fluctuations in the fair value of plan assets, changes in experience assumptions such as the level of interest rates, revision of the retirement benefit program, and other factors may affect the Group’s operating results and financial position.
(20) Matters related to changes in financial position
<Impairment of non-current assets>
The Group has non-current assets, including property, plant and equipment, goodwill, and intangible assets. With regards to amounts reported in the statement of financial position of non-current assets, each group company considers regularly or as needed the recoverability of asset book value based on future cash flows from the said assets. If the said assets do not generate sufficient cash flows, the Group may need to recognize impairment.
The Group’s syndicated loan agreements, commitment line agreements, and term loan agreements related to interest-bearing debts are subject to prepayment and financial covenants. If these covenants cannot be maintained, the Group may need to make a prepayment.
<Available-for-sale financial assets>
As part of available-for-sale financial assets, the Group holds shares of client companies. A decline in the price of these shares may require the recognition of a valuation loss on shares held.
<Operating results and financial position of equity method affiliates>
The Group holds shares of affiliates with whom the equity method may be applied. These affiliates generally conduct business based on their own policies. When these affiliates report a loss, the Group’s business, operating results, and financial position may be adversely affected.
(21) Risks related to corrections to the earnings results
The Group compiles consolidated financial results pursuant to laws and regulations related to financial accounting in Japan and other countries and regions. The Group has established internal rules to comply with related laws and regulations and provided education on related laws and regulations to its employees.
However, if there are defects in the Group’s procedures for consolidated financial statements, including a failure to fully respond to the revision of related laws and regulations as well as changes in the interpretation of laws and regulations by the authorities, the Group may correct past earnings results.
If authorities judge that the Group has violated laws and regulations, the Group may be subject to administrative and criminal action or damage compensation, causing an impact, not only on the Group’s business, operating results, and financial position but also on its social reputation.