Business Risks and Uncertainties
Forward-looking statements contained in this report are the reasonable judgments of the group based on available information as of the date of publication.
Major risks recognized by management as having the potential to materially impact the financial condition, operating results, and cash flows of the group include the following.
Major Risks that Require Company-wide Management
1. Geopolitical Risks
The group conducts commercial transactions and business activities in various overseas regions, and as a result, is exposed to risks associated with the manufacture and purchase of products, such as regulations imposed by foreign governments, political instability, and restrictions on funds transfers, as well as loss on investment or other impairment of asset value. The group employs trade insurance and takes other measures to mitigate risks associated with commercial transactions and investment in countries with high country risks. The group also sets upper limits for risk assets, which represent the maximum anticipated amount of loss, that the group holds in each country and ensures that risk is within the maximum defined limits in order to prevent excessive concentration of risk in specific regions or countries. Although the group hedges against and otherwise manages risk, it is difficult to completely avoid risk related to deteriorating environments in the countries of its business partners, or the countries where it conducts business activities. For this reason, delays in or impossibility of collecting receivables or conducting business resulting from such circumstances may adversely affect the operating results and financial condition of the group.
2. Risks Associated with the Changing Global Macroeconomic Environment
The group's main business line is the sale of automobile-related products and other types 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 relevant countries. Sluggish personal consumption or capital investment in conjunction with the situation in Russia and Ukraine or a global economic slowdown involving the United States or China may adversely affect the operating results and financial condition of the group.
3. Risks Associated with Natural Disasters, etc.
The Tohoku earthquake and tsunami in March 2011 and the extensive flooding in Thailand in October of that year had severe impacts on supply chains, and in response, we established the BCP Promotion Group within the General Affairs Department as a specialized organization in April 2012. Today, the Crisis Management & BCM Group of the Compliance & Crisis Management Department conducts business continuity management (BCM) including the formulation of contingency measures for both non-emergency and emergency times in the form of all-hazard business continuity plans (BCPs) for 210 businesses in Japan and overseas in accordance with the TTC Group Business Continuity Principles to respond to risks associated with natural disasters including earthquakes and typhoons, terrorism, pandemics, or any other scenario where employees are unable to report to work, entry into the Head Office is not possible, and IT or major assets cannot be used due to an extended power outage. In March and September of each year, we conduct situational drills (training where the scenario is not disclosed to the participants so that they can respond flexibly) based on a scenario in which the Nagoya or Tokyo Head Office is severely damaged by a large-scale earthquake, and continuously work to improve our initial disaster response manual and countermeasures. Despite these efforts, a natural disaster, such as an earthquake or flooding, may impede the group's business activities, and if additional countermeasure expenditures become necessary, there may be an adverse impact on the group's operating results and financial condition.
4. Customer Concentration
Sales to the Toyota Group account for 15.0% of revenue for the group. Therefore, trends in transactions with the Toyota Group may affect the operating results and financial condition of the group.
5. Risks Associated with Fluctuations in Interest Rates
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. 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.
6. Risks Associated with Fluctuations in the Price of Listed Securities
The group holds securities traded in active markets to maintain and strengthen relationships with business partners, to grow business earnings, and to improve its corporate value. Share prices of securities traded in active markets are affected by price changes, and declines in share prices may adversely affect the operating results and financial condition of the group.
Priority Risks under Check 10
7. Risks Associated with Commodity Pricing
Commodities that the group handles in its businesses, such as non-ferrous metals, petroleum products, rubber, foods, and textiles, are vulnerable to uncertainties arising from price fluctuations. To address this, we set position limits for each commodity and regularly monitor the status of operations within these limits. 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. Risks Associated with Customer 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. To address these credit risks, the group sets bond limits and contract limits for each type of transaction, such as accounts receivables and advances, and uses a company-wide system to understand group credit risks. We also set ratings (eight levels) using our own standards based on the financial status of business partners and regularly confirm the status of business partners. In the case of business partners with low ratings, 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, it is difficult to entirely avoid the risk of deterioration of the financial condition of business partners or risks arising from the occurrence of unforeseen events, and the group's operating results and financial condition could be adversely affected if it becomes difficult to collect receivables due to bankruptcy of business partners or other circumstances.
9. Risks Associated with Business Investment
As of March 31, 2023, the company had 775 consolidated subsidiaries and 232 affiliates subject to the equity method. The company seeks to expand and strengthen the functions of existing businesses or enter new business areas by reinforcing existing partnerships and forming new partnerships.
The group's stance on investment is based on strategic investment that will lead to the development of business over the medium to long term and expansion and reinforcement of the group's value chain, rather than investment that pursues short-term profit. The Midterm Business Plan Meeting and Investment Strategy Meeting confirm strategies and discuss company-wide priorities relating to new investment projects, and the Investment and Loan Meeting and Investment and Loan Committee screen business plans concerning the particulars of individual projects and make institutional decisions. In the course of deliberation, we use TVA*1, which is an indicator unique to the group for verifying that the expected revenue scale corresponding to the invested capital can be achieved, and RVA*2, which is an indicator used to verify that obtained revenue is commensurate with the risk, to carry out entry management. We also conduct assessments of climate change and other environmental risks, greenhouse gas emissions, reduction effects, and other aspects using our own environmental check sheets to verify investment returns, analysis of various risks, and other aspects from wide-ranging perspectives. After investments are made, the Administrative Unit and relevant sales divisions jointly and continuously monitor progress and support projects with issues ("check and support"). In addition, we monitor whether investment returns are obtained as planned and whether profits are commensurate with risk assets. Projects that do not proceed as planned are strictly managed in accordance with rules on restructuring and withdrawal.
Despite these efforts, if the value of an investment target company or the market value of the stock of such a company declines due to changes in the business environment, technological innovation, or other unforeseeable circumstances, the group may lose all or a substantial portion of the invested balance or the group may have no choice but to provide additional funding to such investment targets. In such cases, there could be adverse impacts on the group's operating results and financial condition.
- *1An abbreviation of Toyotsu Value Achievement;
TVA = (Ordinary income - Interest income or expenses) × (1 - Respective country's tax rate) - Invested capital × Cost rate of invested capital by country
Ordinary income is the earnings per share attributable to owners of the parent before income taxes, adjusted for non-recurring, extraordinary, and significant gains and losses arising from non-operating activities. Cost rate of invested capital by country, which indicates the "earning power" of a sales division or business entity, is the cost rate derived from the weighted average of the cost of capital and government bond yields by country, resulting from the invested capital used in operating and business activities.
- *2 An abbreviation of Risk-adjusted Value Added;
RVA = (Ordinary income × 60%) - Risk asset × Risk cost rate
Risk asset is the maximum amount of expected loss should a contingency (a once-in-a-century event) occur, and risk cost rate is the shareholder expected rate of return based on Toyota Tsusho's return on equity (ROE) target of 13% or more
10. Risks 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 foreign exchange forward 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.
11. Risks Associated with Financing
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. As a result, 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. Consequently, the group seeks to optimize funding according to its asset composition while reducing refinancing risks through diversification of the timing of repayment and redemption of long-term funds. We also use cash and deposits, commitment lines, and other means to ensure stable liquidity and strive to maintain good transactional relationships with financial institutions, but risks cannot be entirely avoided. If such risks were to arise, there may be adverse effects on the group's operating results and financial condition.
12. Risks Associated with Human Capital
- (Risks Associated with Personnel and Labor)
- The group conducts business in many countries and regions and endeavors to strengthen structures by increasing labor management knowledge through training, the provision of tools, and other measures at the Head Offices and overseas sites and prepares BCPs, but in the event of a suspension or restriction of operations due to labor disputes including strikes and the like, supply chains and the group's operating results and financial condition could be adversely affected.
- (Human Rights Risks)
- When conducting business in each country and region, the group takes action to ensure respect for human rights by performing human rights due diligence of consolidated subsidiaries. In addition, we established the Toyota Tsusho Group Human Rights Policy in accordance with such international standards as the United Nations International Bill of Human Rights, including the Universal Declaration of Human Rights, and the Guiding Principles on Business and Human Rights, and we urge all business partners including suppliers to comply with this policy. If, however, unforeseeable events occur, there could be adverse impacts on the group's operating results and financial condition.
13. Risks Associated with Information Security
The group established group standard rules and guidelines on information security based on Toyota Group and Toyota Tsusho Group standards and makes responses visible, and continuously makes improvements throughout the group. With regard to IT infrastructure including networks and email security, the group takes measures in accordance with these guidelines to efficiently raise effectiveness throughout the group through the use of shared systems. We established a cyberattack response system, regularly collect information on product vulnerabilities and threats including security incidents, and promptly implement countermeasures and preventive measures. In addition, based on recent trends relating to cyberattacks, we have introduced continuous monitoring of communications and terminal behavior as well as automatic isolation as measures to minimize damage in the event of an attack. However, the possibility of leaks of confidential information or personal information due to unforeseeable unauthorized access from outside or infection by a computer virus and shutdown of information systems due to failure of equipment or communications cannot be entirely eliminated. If such incidents were to occur, there could be adverse impacts on the group's operating results and financial condition.
14. Risks Associated with Compliance
The group is involved in a diverse range of businesses in Japan and overseas and is subject to extensive laws and regulations imposed in various business domains. These restrictions include the Companies Act, tax laws, the Antimonopoly Act, the Financial Instruments and Exchange Act, laws relating to corruption, laws relating to trade security, laws relating to sanctions, and other laws and regulations in Japan, as well as various types of laws and regulations in each of the countries where the group conducts business. Toyota Tsusho's fundamental policy on compliance is for the execution of business by officers and employees to follow these laws, regulations, and corporate ethics. The Compliance&Crisis Management Department, a specialized compliance organization, functions as a hub for strengthening the compliance systems of the entire group through a global network, and with the cooperation of relevant administrative departments including the Legal Department, formulates and implements various compliance measures (messages from the company head on compliance, rank-specific compliance training, creation of a global whistleblower system, etc.) to raise awareness of compliance with laws and regulations.
Regarding logistics-related compliance risks, we established trade management systems in compliance with the Foreign Exchange and Foreign Trade Act, customs laws, and other laws and regulations in Japan and the laws and regulations of relevant countries overseas as well as U.S. laws on sanctions and on re-export controls, and we strive to establish appropriate Harmonized System (HS) code determination rules to avoid subsequent surcharges due to HS code errors during import customs clearance in Japan and overseas. Despite the implementation of these measures, compliance risk in business activities cannot be completely eliminated. Any improper or unlawful conduct by officers or employees may damage the social trust of the group. This may adversely affect the group's operating results and financial condition.
15. Risks Associated with Safety
Occupational accidents involving employees or service providers could interfere with the group's business activities. The group maintains equipment, establishes work standards, and conducts education and daily management to prevent accidents, but if additional countermeasure costs become necessary as a result of the occurrence of a large-scale occupational accident or the like, there could be adverse impacts on the group's operating results and financial condition.
16. Risks Associated with the Environment
We have determined that environment-related risks including climate change, scarcity of clean-water resources, and biodiversity conservation have a substantial impact on the group's management, and the Safety and Environment Conference and the Sustainability Management Committee deliberate on these risks and report to the Board of Directors as necessary. The risks are incorporated into business strategies and activities through the relevant departments and the members of these bodies.
With respect to climate change, we select projects that will have a substantial impact and perform scenario analysis in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). In terms of risks, we consider transition risks and physical risks while taking into account resource efficiency, energy sources, products and services, and markets in terms of opportunities. The group also established targets for reducing greenhouse gas emissions generated through the business activities of Toyota Tsusho and its domestic and overseas consolidated subsidiaries by 50% compared to 2019 levels by 2030 and achieving carbon neutrality by 2050. In addition, the Key Sustainability Issues (Materiality) set in 2018 include "contribute to the transition to a carbon-neutral society by reducing CO2 emissions from automobiles and factories/plants through the use of clean energy and innovative technologies."
Climate change, deforestation, global-scale water shortages in conjunction with population growth, deterioration of water quality, flooding, and loss of biodiversity are becoming more serious. We recognize that the sustainable use of water resources and the maintenance of biodiversity pose risks that could have substantial impact on our business activities and are crucial issues. With respect to water risks, we conduct surveys of consolidated subsidiaries using Aqueduct (an assessment tool that has become a global standard relating to water risks provided by the World Resources Institute (WRI)) and are responding to risks including improving water usage efficiency and reducing water usage.
To address biodiversity, we conduct prior investigation and evaluation of impacts on ecosystem services from new investment projects and strive to conserve forests and reduce environmental impact. For existing businesses, we perform risk assessments including water and biodiversity through internal audits of our environmental management systems based on ISO 14001, an international standard for environmental management systems. Even with the implementation of these measures, however, the occurrence of unforeseen circumstances could adversely impact the group's operating results and financial condition.