Business Risks

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 operations, 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.Risks associated with changes in operating environment

(1) Impact of economic conditions

Demand for the Group’s products and services is affected by the economic conditions in the 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 operations, 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 deteriorating factors and put them on the market in a timely manner, the Group’s business operations, 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, and other changes in the countries and regions where customers are located. These may adversely affect the Group’s business operations, operating results, and financial position.

It is hard to measure the impact of these risks in advance, since they are uncertain in terms of the timing of occurrence, details, scale, and areas. However, the Group monitors any changes in comparison with our forecasts on an ongoing basis and implements prompt and flexible responses, which can accommodate any scale of risks from responding to risks in day-to-day operations to executing a contingency plan in accordance with the risk management plan. In doing so, we aim at risk aversion and impact minimization. Still, the Group's business operations, operating results, and financial position may be adversely affected, if there is any change (deterioration) in business environment that exceeds a scale and duration expected by the Group.

(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 operations, operating results, and financial position. In general, appreciation of the yen against the euro has a negative impact on the Group’s operating results while appreciation of the yen against the U.S. dollar has a positive impact on the Group’s operating results. 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 operations, operating results, and financial position.

Addressing these risks, the Group engages in hedging transactions, such as forward exchange contracts, for forecasted transactions as well as certain assets and liabilities denominated in major currencies in order to mitigate the risk of sharp fluctuations in foreign exchange rates. In addition, while there are certain transactions as well as credits and debts that cannot be hedged in certain currencies due to local regulations and other factors, their impact on the Group's overall operating results has been limited. However, the Group's business operations, operating results, and financial position may be adversely affected in the event of long-term adverse exchange rate fluctuations in major currencies that exceed the Group's expectations.

(3) 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. 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, management issues facing these vendors, a delay or suspension of supply from these vendors due to natural disasters, accidents and other factors occur, or a delay or suspension of development of Group products, the Group’s product development and production activities may be hindered, causing an adverse impact on the Group’s business operations, operating results, and financial position. In order to mitigate these risks, the Group not only strives to establish and maintain friendly business relationships with external vendors but also takes measures, such as securing multiple suppliers to back up product development and avoid the risk of supply chain interruptions, maintaining BCP inventory, and securing inventory through the use of brokers. These measures have enabled the Group to prevent any sudden deterioration in costs and the stoppage of manufacturing activities at its domestic and overseas production plants. However, if circumstances or the business environment of an external business operator were to change (worsen) further or go on longer than expected, the Group’s business operations, operating results, and financial position may be adversely affected.

(4) 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 operations, operating results, and financial position may be adversely affected. In order to mitigate this risk, the Group takes such risk prevention measures as examining the financial position of customers prior to transactions, setting credit limits based on their financial health, conducting letter of credit transactions, and obtaining credit insurance.

(5) Changes in industry trends

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, any reorganization or M&A by competitors may change companies’ positions or the structure of competition within the industry or with adjacent or other industries. This may cause the Group to fall behind competitors in terms of the advantage of scale, price competitiveness, brand power, financing capabilities, procurement of raw materials, production locations, sales channels, etc. This may mean the Group is unable to maintain its current position in the industry. 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 operations, operating results, and financial position may be adversely affected. In order to mitigate these risks, the Group continues to work on developing products and services that no other company can offer while keeping a close eye on competitor trends in the industry as it strives to maintain and expand a position that will not be affected by changes in the industry.

(6) 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 value. 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 operations, operating results, and financial position.

While the Group has facilitated cost reduction and development of high value-added products, fierce competition in the market may create pressure to lower prices that exceeds 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. In order to mitigate these risks, the Group continues to plan, in accordance with its corporate policy, high value-added products and services designed to create customer value in each of its business fields, with the aim of becoming a company with a competitive advantage.

(7) Competition in technological innovation

Since technological innovation is a key competitive factor, the Group must constantly invest funds and resources in research and development (R&D) activities. Funds necessary for such activities may increase as technologies, required by the Group to develop new products and by the market, keep advancing. 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. Furthermore, in the event some swift and sweeping technological innovation takes the Group by such surprise that it is unable to invest sufficient funds and resources into R&D activities and secure competent and skilled R&D personnel or if such personnel leave the Group, there is a risk that the Group may not be able to proceed with developing products that hit the mark and thus fail to generate sales revenues. On top of that, an increase in the total cost of components due to a sharp rise in market prices and other factors could affect the Group's performance and financial position. In order to minimize such risks, the Group maintains a systematic capacity development program for its engineers while updating its technology development and commercialization roadmap in a timely manner to reflect changes in the market environment, technology trends, component parts, and market conditions for third-party solutions. At the same time, the Group focuses on risk monitoring throughout its operations in order to detect and visualize possible risks at an early stage.

(8) Risks in international business activities

The Group conducts operations across the globe and may be exposed to cost and tax liabilities, and various other obstacles and restrictions on its business activities due to issues related to local labor-management relationships; religious, cultural, and regulatory differences; political instability; economic uncertainties; obstacles related to business practices; unexpected introductions of accounting standards or laws and regulations; differing interpretations of tax returns with tax authorities; and other factors. The Group performs product import declaration procedures both in and out of Japan based on tariff classifications that are deemed appropriate at the moment. Due to differences in interpretation with customs authorities in exporting countries, however, the Group may receive a request from the authorities to correct the customs declaration at a later date. In order to prepare for and respond to these risks, the Group will share information and work with its local subsidiaries, regional economic organizations, authorities, attorneys, consultants, and other parties to take necessary precautionary measures designed to minimize the impact of these risks should they materialize.

2. Risks associated with business operations

(1) Quality problems

The Group manufactures and sells a wide range of products. Some of its products may be found defective due to the product’s design, resulting in damages (including indirect damages) from the defect. 

In order to address these risks, the Group follows process standards and uses effective phase gates in the planning, development, and production processes, with an emphasis on quality, and conducts thorough checks to ensure that quality problems do not occur. However, the possibility of quality problems occurring still exists, and therefore the Group carries product liability (PL) insurance.

In addition, the Group works at a company-wide level to prevent quality problems, including serious product accidents (including the breach of PL laws). These efforts include: 1. conducting product safety evaluations for new models; 2. conducting audits and training related to the Electrical Appliances and Materials Safety Act, Telecommunications Business Act, and other relevant laws and regulations; 3. strengthening critical safety management for parts and components; and 4. restructuring the product safety management organization (clarifying and expediting operations in step with the implementation of an online PL database). In addition to establishing the above-mentioned framework, the Group holds a quality month and other events and regularly shares internal and external quality information within the Group to raise employees' awareness of quality. However, despite all these efforts, the Group cannot completely prevent defects in its products, and if the Group is held accountable for product liability beyond our expected scope, where the liability exceeds the coverage of purchased products liability insurance policies, we may have to bear compensation liability and expenses to ensure product quality. Furthermore, the Group's image and reputation could be damaged, or its brand value could be diminished. These could have an adverse effect on the Group's business operations, operating results, and financial position.

(2) Information security risk

The Group may obtain confidential customer information as well as privacy and credit information in the course of business operations. The Group also possesses important business information pertaining to internal research and development, new projects, etc. Such information could be leaked to outside parties through malicious acts, such as targeted cyberattacks, or negligence.

Some of the Group’s product lines include the products that connect data with external devices and media and internet of things (IoT) products and services. That is why the Group is exposed to safety risks where unauthorized access or alteration of information caused by a cyberattack could result in malfunctions, security risks where an insider could embed unauthorized software in the devices and divulge device operation information to third parties, and reliability risks where third-party data connected to the devices is unable to be properly processed.

If such risks materialize, they may have a material adverse effect on the Group's business operations, operating results, and financial position as the Group may be held liable for damages to its customers and other related parties or incur expenses in response to such an event, or consumers may lose confidence in the Group and its services.

In order to address these risks, the Group is continually enhancing information security through various measures, including consolidating information systems on an integrated server, conducting drills to counter targeted attacks from external sources, and maintaining a Computer Security Incident Response Team (CSIRT). To ensure product security, the Group works to enhance its security capability by adhering to the basic policy on product security across the Group, promoting Security by Design (SBD), and maintaining a Product Security Incident Response Team (PSIRT).

(3) Securing, loss, and aging of human resources

Much of the outcome of all of the Group's business activities is heavily dependent on its human resources. The Group's future business activities may be adversely affected, and the smooth transfer of technology and operational know-how may not occur, in the event that talented and skilled employees with a particularly high level of expertise and experience leave the Group due to a relative decline in wage levels and benefits, deterioration of the working environment, or other circumstances, or in the event that the Group’s workforce is not properly replenished after employees in their 50s, who make up a high proportion of the workforce, have retired. This may result in a decline in corporate competitiveness and have other adverse effects on the sustainability of the Group's business

In response to this risk, the Group is actively working to promote diversity and inclusion and establish a system to realize them, respecting the diversity of its human resources and embracing different ways of thinking, in light of current social trends of work style reforms. At the JVCKENWOOD Group, we believe that when people with diverse ideas and values respect and stimulate each other, we are able to generate innovative ideas and meet the diverse needs of our customers around the world. Although we had to temporarily freeze hiring for the year ending March 31, 2021 due to the novel Coronavirus crisis, we are working to secure a diverse workforce by expanding new graduate hiring, diversifying mid-career hiring, and more. At the same time, we are enhancing our employee training system and promoting career development while working to improve employee retention, optimize the employee age structure, and rebalance the workforce through synergies with work style reforms that focus on remote working, all with an eye to maintaining our competitiveness and reduce risks associated with business succession. 

(4) Outcome of alliance with other companies

The Group conducts M&As, forms business and capital alliances, or establishes joint ventures when it deems it necessary to form partnerships with other companies in order to provide new products and services, increase its corporate value, or launch new businesses. The Group analyzes risks and fully examines possible synergistic effects with the Group, etc. prior to carrying out an M&A, forming an alliance, or establishing a joint venture. However, the Group may not be able to achieve the results it initially expected and fail to recover its investment if there are significant changes in the market, competitive relationships, or technological innovations. 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 operations, operating results, and financial position may be adversely affected.

(5) Performance and financial standing of equity-method affiliates

The Group holds shares in equity-method affiliates. These affiliates generally operate under their own policies, and if they were to incur a loss, it could have a negative impact on the Group's business operations, operating results, and financial position.

3. Financial and accounting risks

(1) Default of financial covenant related to interest-bearing debt

The Group’s syndicated loan agreements, commitment line agreements, and term loan agreements related to interest-bearing debt are subject to prepayment and financial covenants. If the Group fails to meet the conditions specified in these covenants, it may need to make a prepayment. Should such a situation arise, the Group’s business operations, operating results, and financial position may be adversely affected.

To mitigate this risk, the Group is working to improve the efficiency of Group funds through cash management systems and other measures in an effort to reduce interest-bearing debt while building stronger relationships with its main financial institutions. 

4. Risks associated with laws and regulations

(1) 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 due to the introduction of more stringent laws and regulations, technical and economic reasons, or other circumstances, the Group’s business activities may be restricted, or the Group’s costs may increase in order to comply with these laws and regulations. In order to address this risk, the Group maintains a rigorous system of checks to ensure that processes and results are in accordance with all relevant laws and regulations governing its business operations. The Group also periodically conducts training for on-site managers and ensures that they understand the importance of complying with laws and regulations.

(2) Compliance

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 raise compliance awareness of its executives and employees and establish a compliance system. 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 operations, operating results, and financial position may be adversely affected. 

To address this risk, the JVCKENWOOD Group has established the JVCKENWOOD Group Compliance Code of Conduct and other rules and regulations, and reviews them in an appropriate manner to ensure their effectiveness. Furthermore, the Group monitors their implementation, and provides education and guidance on the stipulation and revision of rules and regulations through compliance training.

(3) Intellectual property rights

There is a possibility that in the future the Group may become unable to use intellectual property rights, such as patents, for which a license is currently granted by other companies, or terms and conditions of a license may be changed unfavorably. These risks may adversely affect the Group’s business operations, operating results, and financial position. There is also a possibility of the unintentional infringement of the intellectual property rights of third parties resulting in litigation, business loss or liability for damages due to product suspension, increased costs associated with the resolution disputes, or damage to the Group's reputation and brand value. In order to mitigate these risks, the Group has established the Intellectual Property Department at its head office as well as patent development group and intellectual property promotion officer, who specializes in handling intellectual property, in each business segment. The Group works to strengthen its group-wide intellectual property initiatives, including the development and operation of a management system designed to prevent the infringement of other companies’ patent rights.

(4) Overwork and breach of duty of care

Overwork or a breach of the duty of care could result in the loss of personnel, liability for damages and other direct damages, or damage to the Group's public reputation and brand image. In order to address this risk, the Group monitors overtime every day, and its human resources department also keeps track of overtime hours for all departments. The Group also systematically implements initiatives that focus on helping employees stay healthy, including encouragement to take annual leave and stress checks.

(5) Environmental protection

The Group is subject to various environment-related laws and regulations in and out of Japan, 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 groundwater 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, then the 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 operations, 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 operations, operating results, and financial position. In response to these risks, the Group strives to comply with increasingly stricter environmental laws and regulations, especially those that apply to its products and business locations, and continually collects relevant information to ensure that its products and services are compliant.

5. Disaster risks

(1) Natural and man-made disasters