The Sumida Group’s business is subject to many kinds of risks. The principal risks affecting the Sumida Group’s business are described briefly below.
1. Risks concerning changes in economic trends
The Sumida Group has business locations spreading all over the world without placing disproportionate weight on particular countries, and also, the Group has customers in various kinds of businesses without relying too much on customers in particular businesses, aiming to minimize effects of economic fluctuations in a particular country or in a particular business. In order to provide the customers with products that meet quality standard and function level requested by the customers, the Group actively promotes speedy design and self-manufacture of raw materials, and achieves diversified suppliers of raw materials and transportation efficiency. As the electronics industry, the Sumida Group’s main field of operations is so volatile and susceptible to the world economy that business environments surrounding the Group may be directly or indirectly affected by sudden changes in customers’ demands caused by fluctuations of the world economic trends. The electronics industry is expected to continue growing and to attract an increasing number of competitors entering into the market, where the Group’s business will be affected by intensifying price and quality competition.
2. Risks concerning fluctuations in currency exchange and interest rate
As 80% of the Sumida Group’s total consolidated sales for the current fiscal year come from overseas and almost entire products are manufactured at overseas plants, the Group’s most business transactions are made in foreign currencies such as U.S. dollar and euro. The Group seeks to hedge against the risk of exchange rate fluctuations by offsetting receivables and liabilities denominated in foreign currencies as much as possible at the Group’s central in-house bank in Netherlands and by employing forward exchange contracts. However, when financial statements made in foreign currencies are converted into Japanese yen in order to make a consolidation, profit and loss statement and balance sheet could be affected by exchange rate fluctuations. In terms of financing, the Group tries to accurately assess movement of interest rates and to diversify financing methods in order to minimize impact from interest rate fluctuations. Nonetheless, the Group’s profitability could be affected by interest rate trend.
3. Risks concerning technological innovation and price competition
Aiming for a leading coil company in the rapidly-changing electronics market, the Sumida Group makes every effort to provide high-quality products to the customers at reasonable prices and to gain their confidence. The Group makes aggressive R&D investments and is determined to continue differentiating its products from the competitors’ with better quality and competitive price. However, in the electronics market, quality as well as price competition has been intensifying year by year, especially with rapidly emerging local competitors in China, Taiwan, and Korea. This kind of competitive market situations could affect the Group’s operational results and financial condition.
4. Risks concerning raw material procurement
The Sumida Group procures most of the raw materials from outside suppliers, prices of which are linked to international market prices. With the international market prices rising, the Group’s production costs go up. In addition to the rising prices, shortage or supply-chain disruption of those raw materials caused by an accident or any other reason at supplier’s side could have a negative impact on the Group’s business results.
5. Risks concerning inventory
The Sumida Group keeps finished goods inventory in response to customer’s request for a quick delivery. Although the Group adopts make-to-order production system and tries to shorten production lead time in order to keep as little finished goods inventory as possible, the Group may have to take inventory risks in case of customer’s downward adjustments in demand projections, which could have a negative impact on the Group’s operational results and financial position.
6. Risks concerning customer credit
Business results of the Sumida Group’s customers are susceptible to various factors including trends of economy and consumer spending, seasonality, launching of new products, demand forecast for new specifications and other business environments such as technology innovation. When the customers face financial difficulties caused by deterioration of their business environments, the Group’s trade receivables may become uncollectible and the Group’s business results and financial position may be adversely affected.
7. Risks concerning intellectual property
The Sumida Group reinforces its intellectual department to newly acquire and better manage patents and other intellectual property rights for its proprietary technologies. The Group conducts research on patents, design rights and other intellectual property rights owned by a third party in the course of its R&D and design activities in order not to infringe on them. If the infringement is foreseeable, the measures to avoid it are taken. However, in case that the Group infringes on the intellectual property rights owned by a third party unknowingly and unintentionally because a numerous number of patent applications are filed on a daily basis all over the world, the Group is likely to be sued for damages by such a third party. As a result, the Group may have to pay a large amount of compensation or royalty. In terms of imitation of the Group’s products, the Group makes efforts to enhance its brand image and to eradicate imitation products. However, the Group’s sales revenue could be dragged down by those copycat products distributed in large quantities in the market.
8. Risks concerning overseas operations
Overseas operations are crucial factor to the success of the Sumida Group’s businesses because most of the Group’s production sites are located overseas, mainly in China and Germany. In addition, overseas sales account for 80% of the Group’s total consolidated sales for the current fiscal year. The Group tries hard to collect information about political, social and economic situations of each country and region of the Group’s business sites and takes appropriate actions to the various kinds of laws and regulations from compliance point of view. With cross-border economic activities increasing in recent years, changes in systems in each country and different handlings of the systems between countries occasionally affect the Group’s businesses. Coping with this situation, the Group pays a careful attention to the risks arising from different interpretations of laws and regulations while further expanding overseas operations from economic rationality point of view. However, the Group’s overseas operations could be adversely affected by various kinds of risks in overseas markets, including political risks such as a civil war and terrorist acts, unexpected changes in local laws and regulations, economic risks attributable to economic trends and foreign exchange fluctuations, and social risks such as plague outbreaks.
9. Risks concerning product quality and liability
The Sumida Group is committed to improve product quality to provide the best-quality products to the customers. However, defects of the Group’s products may disrupt the customer’s production lines or cause problems with electronics devices produced by the customers. Such defects or any other problems with the Group’s products may have a negative impact on reputation and awareness of Sumida brand as well as their sales and market share. There may be a further possibility of legal claims brought by the customers.
10. Risks concerning expansion of business by M&A
The Sumida Group aims to achieve mid-term business plan through business alliance with outside partners and merger & acquisition (M&A), intending to enhance technological competence and expand sales network. Before embarking on M&A, the Group carefully assesses what synergy effects it will create for the Group, and also after M&A, the Group tries as hard as possible to maximize the synergy effects out of such M&A. However, if the Group’s management policies fail to infiltrate into the acquired company, and integrating various systems in operations divisions or standardizing administrative practices between the Group and the acquired company takes too much time and costs, the initially expected synergy effects may not be realized. Significant acquisition costs including costs associated with integration or restructuring of acquired business may temporarily affect the Group’s operational results and financial position.
11. Risks concerning taxation
Business entities consisting of the Sumida Group are located in more than ten countries and each of them files an appropriate tax return computing taxes according to local tax regulations. Paying a careful attention to different interpretations of the tax laws in each country, the Group tries to implement the best tax planning for the Group. However, nowadays, the government in each country demands fair taxes based on appropriate transfer pricing, misinterpretation of the tax regulations could adversely affect the Group’s profits.
12. Risks concerning information security
The Sumida Group maintains and manages many trade secrets regarding the Group’s technology, marketing and other business operations. Even though the Group makes every effort to manage this information appropriately, the Group’s business performance and financial condition may be subject to negative influences in the event of an unanticipated leak of such information and such information is obtained and used illegally by a third party.
13. Risks concerning large-scale disasters
The Sumida Group has production factories and research and development facilities in Japan and overseas. Significant damage could be incurred at these factories and facilities in the event of outbreak of natural disasters such as big earthquakes and floods. In addition to natural disasters, outbreak of domestic warfare and pandemics could have a significant effect on the Group’s business results.
14. Risks concerning environmental regulations in Japan
The Sumida Group is subject to various environmental laws in Japan, including laws on prevention of global warming, water/air/ground pollution, waste disposal, and chemical substances in products. While the Group pays careful attention to these laws and regulations, it is possible that, in future, the Group will have to spend more expenses as a result of the introduction of more demanding environmental laws and regulations aiming to preserve global environments. Inability to comply with such environmental laws may lead to closures of some of the Group’s businesses and loss of social credibility, and eventually, have an adverse effect on the Group’s business results and financial condition.
15. Risks concerning securing personnel
A significant part of the success of the Sumida Group’s business depends on securing excellent human resources in every business area and process including product development, production, marketing, financing and business management. In particular, securing the necessary human resources is essential in respect of achieving globalization of the Group’s business. However, competition to secure excellent human resources is intensifying, as number of qualified personnel in each business area and process is limited, while demand for such personnel is increasing. To cope with this situation, the Group focuses on recruiting qualified personnel and tries to retain them by implementing various measures to enhance their motivation such as placing the right personnel in the right jobs. However, the inability to recruit and retain qualified personnel as planned due to changes of employment situation could have a critical impact on the Group’s future growth prospects.
16. Risks concerning interest-bearing debts
Bank borrowings are indispensable for the Sumida Group’s business operations. The balance of the Group’s interest-bearing debts (bank borrowings and bonds) as of the current fiscal year end is approximately 60% of the total assets. In the event that stricter scrutiny of bank lending due to changes in economic situation affects the Group’s ability to borrow funds, the Group’s operational results and financial position may be adversely affected.
17. Risks concerning public regulations and compliance
The Sumida Group is subject to various kinds of laws as well as government approvals and licenses both in Japan and overseas where the Group has business activities. In case of violation of these public regulations, the Group may run the risk of many things including disciplinary actions by regulatory agencies, legal proceedings, business shutdown, damage to value of corporate brand and loss of social credibility. The Group complies with public laws and regulations and sets up company rules compatible with them aiming to prevent their violations. In addition, the Group compiles business ethics and code of conduct in “Sumida Business Principles” as guidelines for actions that should be observed by both directors and employees alike to prevent violations of the public laws and regulations throughout the Group. In addition, the Group maintains a whistle-blowing system where employees are encouraged to report any compliance-related problem. While the Group is active in various businesses in many counties and regions worldwide, the Group may unknowingly and unintentionally violate the local regulations in case of introduction of new regulations or sudden change of the existing ones. This situation will lead to a limitation of the Group’s business activities and incur additional expenses, which may eventually affect the Group’s business results and financial position.