Business and Other Risks

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Listed below are the principal business and other risks that may impact the Group’s operating performance, financial situation, etc. Please note that the risks related to future developments mentioned below include items that the Group deems necessary to publicly disclose as of the date of submission of the Securities Report for the 194th Business Term.
It should be noted that the following is not an exhaustive list of all the business and other risks that may affect the Group.

(1) Risks concerning business development

i) Changes in market environment

While the Group’s products are used in a wide range of industries, such as the automotive, buildings, construction materials, structures, metal products, electric machinery and vessels industries, domestic demand for paints has demonstrated a downward trend since 1996. Despite the Group’s efforts for growth by developing new demand and expanding overseas businesses to make up for the decrease in domestic demand, the sluggish demand in the relevant industries, etc. could impact the Group’s operating performance, financial situation, etc.

ii) Trend of selling prices

The Group endeavors to incorporate the rising cost of raw materials into our selling prices. However, when it is difficult to pass on the rising costs appropriately, this could impact the Group’s operating performance, financial situation, etc.

iii) Overseas business activities

a. Fluctuations in exchange rates

The financial statements of the Group’s overseas subsidiaries are prepared in foreign currencies, and converted into Japanese yen when the consolidated financial statements are prepared. Therefore, even without significantfluctuations in the operating results in local currencies, the Group’s operating performance and financial situation, etc. could be affected by exchange rates.

b. Changes in political and economic situation

Changes in political and economic situationAny significantchanges in laws and regulations, drastic changes in the political and economic situation, and the occurrence of other unpredictable social and political confusion such as terrorist attacks and wars in countries where the Group operates could impact the Group’s operating performance, financial situation, etc.

iv) Trend of raw material situation

a. Procurement of raw materials

In the event the Group faces difficulties in procuring raw materials and an inability to fulfil our responsibility to provide products as a result of the suspension of production activities of raw material producers due to a natural disaster, accident, etc., and a disruption of the supply chain, this could impact the Group’s operating performance, financial situation, etc. Therefore, the Group always focuses on stable procurement of raw materials by promoting the compatibility and purchase of multiple kinds of raw materials, and by enhancing procurement on a global basis to prepare for such events and minimize damage when it occurs.

b. Price fluctuations of raw materials

As to raw materials, the Group relies heavily on petrochemical-based materials due its product characteristics. Therefore, the price fluctuations in crude oil and naphtha could impact the Group’s operating performance, financial situation, etc. Although price fluctuations of raw material prices cannot be controlled by the efforts of a single enterprise, the Group has been striving to ensure stable procurement of raw materials through various efforts to reduce risk caused by price fluctuations of raw material prices, such as the concentration and geographical diversification of procurement sources and the conclusion of longer-term procurement contracts.

v) Securing of human resources

As to the securing of human resources, there are three main risk areas: (a) recruitment of young employees and experts, (b) decrease in the number of employees in Japan, and (c) retention of employees.

a. Recruitment of young employees and experts

If the Group faces difficulties continuing business due to its failure to secure young employees and experts, this could impact the Group’s operating performance, financial situation, etc. The Group has endeavored to recruit talented personnel in each country by actively visiting universities and graduate schools in Japan and overseas to hold employment seminars and provide global internship opportunities. The Group has also aggressively increased the recruitment of mid-career employees to secure skilled human resources.

b. Decrease in the number of employees in Japan

The number of the Group’s employees in Japan is expected to decrease due to an increase in the number of employees who reach the mandatory retirement age. This could hinder the Group’s business activities, impacting the Group’s operating performance, financial situation, etc. To prepare for a future decrease in the number of employees, the Group has introduced a personnel system that enables employees to work for longer years, such as an upgraded reemployment system for retired employees, and has also raised productivity through efforts to save labor and improve efficiency, including the introduction of an environment-friendly plant with the most up-to-date equipment and visualization of technology, such as the promotion of IoT and digitalization. In the future, the Group will strive to secure human resources and skills by making the most use of its global network, its major strength, to enhance its “use of borderless human resources” including overseas employees.

c. Retention of employees

In Asian countries, human resource mobility is high with a high turnover rate, which could hinder the Group’s business activities. Such cases could impact the Group’s operating performance, financial situation, etc.
The Group has been endeavoring to retain employees by raising employee engagement through efforts such as increasing its corporate brand power via various publicity activities and conducting business with SDGs and ESG in mind, including the establishment of an environmentally friendly "green" plant in India.

The Group supplies its products to a broad range of industries, and plans to further expand its business overseas, not only in Asia, but also in Oceania and the United States, etc. The Group will strive to grasp and respond to risks concerning markets, policies, and laws and regulations promptly and appropriately by drastically delegating powers to an executive department after transitioning to a company structure with Three Committees (Nomination, Audit, and Remuneration).
Meanwhile, risks concerning changes in political and economic conditions, the revision of laws and regulations, labor disputes and the retention of human resources, and differences in business practices exist in the Group’s overseas business activities. When these risks come to light, this could impact the Group’s operating performance, financial situation, etc.

(2) Risks concerning laws and regulations

i) Quality assurance of products and product liability

The Group has established a quality assurance system through a strict implementation of design examination and upgrading of its quality control system, and its products are covered by product liability insurance. However, in the event that problems involving defects or product quality emerge due to unexpected circumstances, such cases could impact the Group’s operating performance, financial situation, etc.

ii) Intellectual property rights

The Group has established a protection system of intellectual property rights. In the event that the Group’s intellectual property rights are infringed and leaked to a third party, or a conflict related to intellectual property rights occurs against a third party in the future, such cases could impact the Group’s operating performance, financial situation, etc. To handle such risks, the Group has formulated internal regulations regarding the management of intellectual property. While the Group recognizes intellectual property as its important asset and has accumulated and utilized such intellectual property as its business resource, it respects the intellectual property of others. The Group also controls technical information that falls under intellectual property in accordance with its internal regulations regarding information management, and has implemented strict information management, such as the storing of technical information in an exclusive database to prevent the illegal outflow of such information.

iii) Compliance with environment-related laws and regulations

The laws and regulations for the environment, chemical substances and safety and health relating to the paint industry to which the Group belongs have been amended or enhanced. To respond to changes in these laws and regulations, the Group has been examining if it complies with the laws and regulations at each stage of its activities, including the adoption of raw materials and product development, in addition to developing and introducing environment-friendly products that are expected to contribute to the solution of social problems. Furthermore, the Group has been respecting the laws and regulations regarding the operation of its plants and has also been endeavoring to reduce its burden on the environment by setting reduction targets. However, if these laws and regulations become stricter than expected, this could impact the Group’s operating performance, financial situation, etc.

(3) Risks concerning natural disasters and accident disasters

i) Significant natural disasters

Considering the importance of disaster prevention and mitigation to minimize damage and loss caused by natural disasters, as well as a crisis management system, the Group has implemented appropriate measures. However, the occurrence of a significant natural disaster, particularly a large-scale earthquake centered on the Tonankai Trough and a subsequent larger-than-expected tsunami, or a large-scale flood disaster caused by a huge typhoon (of which global warming is said to be one of the causes), could hinder the stable supply of our products to customers, thus leading to the possibility of impacting the Group’s operating performance, financial situation, etc.

ii) Fires and explosions

As to the handling of dangerous substances and chemicals, the Group has strengthened its safety operation system daily to prevent the occurrence of accidents. The occurrence of a fire or explosion in a Group plant could force the Group to suspend operations, thus leading to the possibility of impacting the Group’s operating performance, financial situation, etc.

iii) Spread of infection, such as by the new coronavirus

If infection by the new coronavirus, influenza, norovirus or the like spreads among the Group’s employees, the Group would be forced to shut down its operations temporarily. Such incident could impact the Group’s operating performance, financial situation, etc. To handle such risks, the Group has prepared an appropriate control system to prevent infection from occurring or spreading.
In particular, with regard to infection by the new coronavirus that has spread globally, the Group established a Coronavirus Emergency Headquarters chaired by the president in January 2020, and has implemented the following measures to minimize the impact of the coronavirus outbreak:
a. Thorough implementation of measures that give the first priority to securing the safety and health of employees, such as telework, prohibition of business trips, and daily measurement of body temperature;
b. Grasping of the production, sales, inventory, and logistics situation on a global basis;
c. BCP in the case that an employee is infected with the coronavirus;
d. Management of funds; and
e. Implementation of various projects, such as “Zhongguo Jiayou!” in Chinese or “Hang in there, China!” and global exchange and distribution of masks.

(4) Risks concerning climate change

i) Long-term risks

Considering the government’s policies and laws and regulations, as well as market demand, the Group has been developing and introducing environment-friendly products. However, if these laws and regulations become stricter than expected, this could impact the Group’s operating performance, financial situation, etc.

ii) Short-term risks

The Group’s products are used in a wide range of industries, such as the automotive, buildings, construction materials, structures, metal products, electric machinery and vessels industries. However, if industries through which the Company supplies its products suffer material damage due to abnormal weather, such as typhoons or torrential downpours that have been increasing recently due to climate change, the Group’s production or shipments could be suspended for a long period before these industries return to their former conditions. In addition, in the event that industries through which the Company supplies its products suffer due to unusual weather, such as a cool summer or warm winter, or continuous rain, this could impact the Group’s operating performance, financial situation, etc.
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