Business Risks

The following items describe potential risk factors for the business expansion by our group. We have included things that we do not necessarily consider as risks for our business, but that we consider important for investment decisions and for investors to understand our group's business activities, in order to actively disclose information to investors. While we understand the possibility of these risks occurring and try to avoid them while taking action in the event of their occurrence, investors should deliberate over investment decisions concerning our shares by reading this page along with matters that are not written here but in annual securities reports.
Furthermore, matters concerning the future in this document were estimated by the group as of the date of the annual securities report submission (March 27, 2020).

1.Risks regarding quality

Our group's main production plants are ones that are ISO 9001 and ISO 14001 certified, and that operate under equivalent systems. However, there is no guarantee that all products will be free of faults and defects and will not be recalled in the future. If these faults, defects, and recalls result in significant costs or credit loss for our group, they may affect the group's financial conditions and operating results.

2.Risks of disasters or accidents

Our group's domestic production plants are located in six places: Yamanashi City, Yamanashi Prefecture; Fushimi Ward, Kyoto City; Onojo City, Fukuoka Prefecture; Ogori City, Fukuoka Prefecture; Chikuzen, Asakura Ward, Fukuoka Prefecture; and Matsue City, Shimane Prefecture. Our group believes that if a major natural disaster or accident occurs, plants in the same industry but in a different region can act as a backup for production for those affected. However, certain products can only be manufactured by plants in a certain region, which makes back-up production for them impossible. A natural disaster on a production base for such specific products may cause problems in production activities and affect our group's financial conditions and operating results. The spread of the novel coronavirus could also affect our group's financial conditions and operating results.

3.Country risks

Our group has 12 plants in eight countries abroad (11 in seven Asian countries). Each of the overseas plants manufactures different products, and many of them are located in countries of unstable political and economic conditions. The manifestation of these country risks can cause difficulties in production activities and affect our group's financial conditions and operating results. The spread of the novel coronavirus could also affect our group's financial conditions and operating results.

4.Risks related to our technology

Since its establishment, our group has accumulated and inherited a wide range of technologies relating to production, etc. for more than 50 years, and operates the current business on the basis of the accumulated and inherited precision mold technology. We are always working on new technology that is ahead of its time, but technological innovation beyond the scope of our forecasts may impair our technological competitiveness and affect our group's financial conditions and operating results.

5.Risks related to intellectual property rights

Our group has a wide range of technologies relating to electric/electronic components for connectors, automotive components such as sensors, and semiconductor manufacturing equipment, which are based on precision mold technologies we have developed since our foundation. While we are working hard to file patents and register designs to protect our intellectual property rights with regard to these technologies, we do not systematically file patents for some technologies in order to prevent them from being outflowed. If these unpatented technologies are outflowed, they may be stolen and our group's financial conditions and operating results may be affected.
Our group strives to avoid infringing on intellectual property rights owned by other companies, but it is difficult to fully understand the current state of intellectual property rights in our group's business areas, and it is possible that we may infringe on intellectual properties owned by other companies without realizing. A claim for damages caused by such action may affect our group's financial conditions and operating results.

6.Competitive risks

Our group's businesses are competitive with other companies in the same industry in terms of technology, price, and delivery. We are working hard to improve product functions, develop production technologies, and improve production line efficiency, but intensified competition in the future may cause the competitiveness of our products to be lost and push down product prices, affecting our group's financial conditions and operating results.

7.Risks associated with large capital investment

We are making active capital investments in order to strengthen our production capacity.
Since making a decision on capital investments is an extremely important judgment for management, we will comprehensively deliberate on our business strategies and the profitability of such investments, and implement them while carefully taking the market and competitor trends into consideration. However, it is difficult to forecast accurate economic and market trends, and if we have made a large number of capital investments but product demand has not expanded as we expected, the depreciation expenses may dampen profitability and equipment used may be removed or lose its book value, affecting our group's financial conditions and operating results.

8.Risks of price fluctuations of raw materials and purchased components

The main raw materials for products manufactured and sold by our group are plastic molding materials, metal materials (copper and iron), and plating materials (gold). The increased cost for buying plastic materials owing to a hike in oil prices, a rising price of copper/iron materials, and an increased price or an exchange rate fluctuation for gold may increase these materials' prices.
In addition, we manufacture mechanical equipment in-house and sell it to other companies. This mechanical equipment consists of a wide range of electronic/mechanical components assembled on copper bases, and surges in demand for such components may increase their purchase price. In order to respond to this issue, we will use our technological power, which includes production technology, to work on improving production efficiency and reducing costs, and, if necessary, may pass on the increased costs to our customers. However, if these measures to absorb the price increase of raw materials and purchased components fail, it may affect our group's financial conditions and operating results.

9.Risks related to inventory

Because customers give short deadlines for mold/manufacturing equipment from our electric/electronic component / automotive component businesses, and for semiconductor manufacturing equipment from our equipment business, we carry out make-to-stock manufacturing for general-purpose parts based on unofficial purchase information that we obtain from customers. However, official orders from customers may differ from unofficial information, and, depending on the quantity/specification difference, the parts may be left as surplus or unshipped inventory, leading to valuation losses and losses on disposal of obsolete inventory. Large valuation losses from inventory like this may affect our group's financial conditions and operating results.

10.Regulatory risks

Our group is subject to patent-related laws/regulations in the manufacturing field, environmental laws/regulations on plant operation, labor-related laws/regulations on personnel and labor, accounting tax laws/regulations in the finance/tax field, and other laws/regulations.
Our group's failure to comply with various legal regulations, law/regulation changes, or the enactment of new laws/regulations that go beyond our expectations, may affect our group's financial conditions and operating results.

11.Currency exchange risks

Our group produces and sells products overseas, and holds foreign currencies of 11 different countries. We also carry out foreign-currency transactions in Japan, so we are subject to exchange-rate fluctuations. While we take measures to reduce risks, it is impossible to eliminate all of them, and sudden exchange fluctuations may affect our group's financial conditions and operating results.

12.Risks of dependency on specific buyers

We sell our products to a wide range of customers, but 25.9% of consolidated sales for the term ending December 2019 were from DENSO Corporation and its group companies, who are the main customers of our automotive component business, and we plan to continue to expand our business dealings with them. We consider that we have maintained a good relationship with DENSO, but a change in DENSO's parts composition or in our policies for transactions with partner companies, and a resulting significant decrease in our group's component supply, may change how we handle our businesses and affect our group's financial conditions and operating results.

13.Credit risks

Before we start transactions with a buyer, we carry out a field survey, collect its industrial information, interview banks about the buyer, employ an organization for external investigation, and check its transactions, credit worthiness, business performance, and asset quality. We also check the business performance of successive buyers and interview with them to some extent in order to confirm their credibility.
However, in the event of irrecoverable accounts due to a buyer's sudden drop in business performance, it may affect our group's financial conditions and operating results.

14.Risks related to trends in demand for our products

Our connectors are used in end products such as personal computers, smart phones / mobile phones, digital home appliances, and audio/visual devices. Our sales could be adversely affected by the launch timings of new-model end products, the slowdown in growth of the end product market, and the resulting changes in purchase trends and parts procurement trends in our customers, as well as the impact of overall economic fluctuations. If a deterioration of the economic environment progresses, it may adversely affect our group's businesses, operating performance, and financial conditions.

15.Trends in past operating results

Transition of operating results in our individual financial statements

(Unit: million yen)

  Term ending Dec 2015 Term ending Dec 2016 Term ending Dec 2017 Term ending Dec 2018 Term ending Dec 2019
Sales 40,788 38,178 47,394 44,821 44,773
Operating loss △551 △1,718 △132 △1,279 △550
Ordinary profit or ordinary loss 2,755 △764 1,286 △626 △283
Net income or net loss in the term 3,477 △674 1,012 △1,780 △365
Dividends received from affiliated companies 3,295 1,159 1,380 912 324

The profit and loss of operating results in our individual financial statements vary more widely than those in consolidated financial statements, and have a higher impact on the profit and loss of dividends received from affiliated companies. This fact needs to be noted when analyzing the transition of operating results.
Because the electric/electronic and automotive components we manufacture are incorporated into laptop PCs and cars, sales depend on the demand for end-products, and are subject to the influence of economic trends. The equipment business is also subject to the trends of capital investment, etc. in the semiconductor industry.
Decreases in gross profit rates were the main reason for operating losses in the terms ending December 2016 and December 2018. This was due to declines in orders for major products and lower equipment utilization rates in the electric/electronic components business.
Increases in sales administrative costs were the main factor for operating losses in the terms ending December 2015, December 2017, and December 2019. This was due to the increase in R&D expenses associated with development of new products.
The main factor behind the net loss in the term ending December 2018 was book value depreciation of some fixed assets and reversal of deferred tax assets, as a result of careful deliberation on the future business environment and on the recoverability of fixed assets such as production equipment.
As for dividends from affiliated companies, our company (the parent company) will receive earnings in affiliated companies as dividends, while making a comprehensive deliberation on their financing status and other matters.