Business Risks and Uncertainties
The company and its consolidated subsidiaries (the “Group”) believe that the following risks and accounting policies may have a material impact on the decision-making of investors with regard to data contained in this report.
Forward-looking statements contained in this report are based on the judgment of the Group as of the date of publication.
1. Risk Associated with the Changing Global Macro-economic Environment
The main business line of the Group is the purchase and sale of products in domestic and overseas markets, with involvement in a wide range of businesses including manufacturing, processing and sales, business investments, and the provision of services relevant to these products.Therefore, the Group is exposed to risks associated with political and economic conditions in Japan and other countries concerned.Any deteriorating or sluggish conditions in these countries may adversely affect the operating results and financial condition of the Group.
2. Dependence on Specific Customers
The Group consists of the company, its 717 consolidated subsidiaries, and 238 equity method affiliates. The main business line of the Group is the sale of automotive-related and other products in the domestic and overseas markets. Sales to the Toyota Group account for 12.2% of earnings for the Group. Therefore, trends in transactions with the Toyota Group may affect the operating results and financial condition of the Group.
3. Risk Associated with Exchange Rates
Of the product sales, investment, and other business activities conducted by the Group, transactions conducted in foreign currencies may be affected by changes in exchange rates. While the Group uses forward exchange contracts and other methods to hedge against and reduce these exchange rate risks, we may be unable to completely avoid them. Many group companies are also located overseas, so exchange rate fluctuations when converting the financial statements of these companies into Japanese yen may affect the operating results and financial condition of the Group.
4. Risk Associated with Fluctuations in Interest Rates
The Group secures business funding through various methods, such as acquiring loans from financial institutions and issuing commercial paper and corporate bonds, for such activities as extending credit for trade receivables, or acquiring marketable securities or fixed assets, with a portion of this debt subject to variable interest rates. For a considerable portion of such debt, we are able to absorb the effect of changes in interest rates within working capital. The Group also works to minimize risk associated with fluctuations in interest rates through Asset Liability Management (ALM). However, a certain portion of debt cannot be avoided, so future interest rate movements may affect the operating results and financial condition of the Group.
5. Risk Associated with Fluctuations in the Price of Listed Securities
The Group holds marketable securities to maintain and strengthen relationships with business partners, to grow business earnings, and to improve its corporate value. Share prices of marketable securities are affected by price changes, and declines in share prices may adversely affect the operating results and financial condition of the Group.
6. Risk Associated with Employee Retirement Benefits
Pension assets of the Group are invested in stocks, bonds, and other investment vehicles in Japan and overseas, so trends in stock and bond markets may result in reduced asset values or increased costs of providing employee retirement benefits. This may adversely affect the operating results and financial condition of the Group.
7. Risk Associated with Commodities
Commodities that the Group deals with in its businesses, such as non-ferrous metals, crude oil, petroleum products, rubber, food, and textiles, are vulnerable to uncertainties arising from price fluctuations. Position limits are set for each commodity, and compliance with these limits is monitored periodically. While the Group takes various measures to reduce such price variation risks, it may not be possible to completely avoid them, so the state of commodity markets and market price movements may affect the operating results and financial condition of the Group.
8. Risk Associated with Customer’s Credit
The Group faces a degree of risk arising from the collection of loans and receivables associated with commercial transactions with its domestic and overseas business partners. For credit risk management, the Group rates the financial status of suppliers using its own criteria (8 levels) and sets limits for each type of transaction, such as accounts receivable or advances. In the case of a low-rated supplier, the Group reviews the transaction conditions, determines the transaction policy, such as the protection of accounts receivables or withdrawal, carries out individually focused management, and endeavors to prevent losses. While the Group manages credit in this way, there is no guarantee that risk associated with credit can be completely avoided, so any deterioration in the financial status of its business partners may adversely affect the operating results and financial condition of the Group.
9. Risk Associated with Business Investment
The Group intends to grow existing businesses, enhance functions, and take on new business through the strengthening of current partnerships and establishment of new partnerships with companies within or outside the Group. Therefore, the Group has established new ventures in partnership with other companies and has also invested in existing companies, and may continue to conduct such investing activities. The Group discusses the strategic and companywide priorities of any new investment, and examines the investment from many angles, including investment return and various risk analyses, with participation of managers from the Administrative Division in addition to the relevant sales department. After making an investment, the Group continues monitoring such factors as whether the planned investment return has been obtained and whether profit commensurate with the risk asset has been achieved. If the investment did not proceed as planned, the Group then acts in line with the policies and procedures it has set for restructuring or withdrawing from such an investment. However, the Group may lose all or part of such investments or be obliged to provide additional funds in the event of a decline in the corporate value or market value of the shares of invested companies. This may adversely affect the operating results and financial condition of the Group.
10. Risk Associated with Countries
The Group has many transactions with overseas business partners, including imports, exports, and investments in the overseas business partners. Therefore, the Group is exposed to risks arising from the manufacture and purchase of foreign products, such as regulations imposed by foreign governments, political uncertainties, and fund transfer restraints, as well as loss on investment or other reduced asset value. The Group holds export and investment insurance and takes other measures to reduce risks associated with transactions in countries with a high country risk. The Group identifies the at risk assets, which represent the maximum anticipated amount of loss, that the Group holds by country and ensures risk for each country is within the maximum defined limits in order to correct any concentration of those assets in specific regions or countries. While the Group hedges against and otherwise manages risk, it is not possible to completely avoid risk related to deteriorating business environments in the countries of its business partners, or the countries where it conducts business activities. For this reason, any deterioration in those environments may adversely affect the operating results and financial condition of the Group.
11. Impairment Risk Associated with Fixed Assets
The Group has machinery and vehicles, carriers, buildings and structures, goodwill and other fixed assets, and lease assets that are exposed to impairment risk. Any reduction in the value of these assets incurs impairment losses that may adversely affect the operating results and financial condition of the Group.
12. Risk Associated with Raising Funds
The Group secures business funding through various methods, such as acquiring loans from financial institutions in Japan and overseas, and issuing commercial paper and corporate bonds. The Group works to maintain positive transactional relationships with financial institutions, to conduct ALM, and to minimize liquidity risk by raising funds appropriate to the asset. However, any turmoil in financial markets, significant downgrades to the Group’s credit rating by ratings organizations, or other similar events may result in restrictions on funding for the Group, or on increased funding costs. This may adversely affect the operating results and financial condition of the Group.
13. Risk Associated with Compliance
The Group is involved in a diverse range of businesses in Japan and overseas, with extensive restrictions imposed in various business domains. These restrictions include the Companies Act, Tax Acts, Antimonopoly Act, Financial Instruments and Exchange Act and other laws and regulations in Japan, and laws and regulations in each of the countries where the Group conducts business. The Compliance Administration Group is responsible for enhancing compliance systems across the whole group and for raising awareness of compliance with laws and regulations. However, any improper or unlawful conduct by officers or employees may damage the social trust of the Group. This may adversely affect the operating results and financial condition of the Group.
14. Environment-related Risks
The Group is engaged in businesses in Japan and overseas that are exposed to a broad range of environment-related risks. To mitigate these risks, the Group conducts risk management throughout its supply chain. Specific activities include enforcing compliance with laws and regulations concerning the handling of emissions, wastewater, and solid waste with the potential to pollute the environment. The Group’s businesses in Japan and overseas are also exposed to various environmental risks associated with climate change, water resources, biodiversity, and other factors. Any changes in environmental regulations, environmental pollution caused by natural disasters and other events, or other factors could result in additional costs that may adversely affect the operating results and financial condition of the Group.
15. Effect of Natural Disasters and Other Events
The Group’s businesses could be impacted by natural disasters such as fires, earthquakes, and floods. To minimize the impact, the Group establishes, maintains, and improves business continuity plans (BCPs), takes measures to earthquake-proof its equipment, establishes employee safety confirmation systems, and implements other measures, but a large-scale natural disaster could result in additional costs that may adversely affect the operating results and financial condition of the Group.