Business Risks

Among the matters related to the state of our business and accounts, etc. described in the Securities Report, we describe the key risk factors that our management recognizes as capable of impacting our Group’s corporate value, financial circumstances, business performance, and cash flow to a significant degree as follows. Matters concerning the future described in the text are based on judgments made as of the end of the current consolidated fiscal year (March 31, 2020), and may be affected by economic conditions, etc. both within and outside of Japan. Also, business risks are not limited to the following.

1.Risks Related to Business Activities

Changes in the Business Environment

Since its founding, our Group has contributed to the development of manufacturing worldwide by providing products such as coating equipment and air compressors, along with services associated with such products, to the market. As a result, the majority of our sales are realized abroad, and with the diversification of human capital, products, services, and capital, we find ourselves increasingly exposed to the rapidly changing business environment.
Therefore, clinging to existing markets, products, and business models may result in an inability to achieve sustained growth due to reasons such as a decrease in demand for our current products brought about by structural changes in the market. Given this risk, we recognize the urgent need to develop and build new businesses that will function as pillars, in addition to making continuous efforts to improve product quality in our existing businesses, and continuing to develop products that help address social issues through a globalized approach to manufacturing. And, in order to bring this about, we recognize that we must foster a corporate culture that is unafraid of failure and is capable of boldly taking on new challenges, and that we must also cooperate with a wide range of companies outside the Group, while reforming the mindset and behavior of all our employees as well.
The Group will further strengthen exchanges and the gathering of information within the Group, strive to understand market needs, and identify the important issues of each country and market, aiming to build a system and establish a management strategy that will enable the company to respond flexibly and speedily to changes in the business environment.

Product Quality

The Group closely monitors the quality of its products under a quality control system based on ISO 9001. However, if a defect due to procurement, processing, assembly, or other processes is overlooked, and a product that fails to meet quality standards is supplied to the market and causes damage due to such defects, the company may be liable for damages that are not covered by product liability insurance. Also, the processing of claims, product recalls and replacements, etc. may entail significant costs, and may adversely affect corporate value and business performance. Therefore, in order to prevent such an occurrence, we comply with necessary regulations such as raw material standards and product standards, and the Quality Assurance Department strives to eradicate potential problems by observing a product starting from the initial stages of development from an objective viewpoint. Furthermore, by installing appropriate quality control systems for production bases located not only within Japan but also overseas, we ensure the quality of products so that they meet the market requirements of each country.
In the event of unforeseen circumstances, the Board of Directors and the Management Conference will be promptly notified, and the Quality Assurance Department will promptly take necessary measures, including recalls.

Business Expansion, Including Mergers and Acquisitions

In order to accelerate the strengthening of the foundations of our business and to secure sustained growth, the Group has concluded four M&As during the previous Medium-Term Business Plan, and actively pursues comprehensive business alliances with companies that the Group considers necessary to cooperate with, including capital participation and acquisitions. As for M&As, we clearly state matters that need to be confirmed, and one is carried out only if it is judged capable of producing sufficient synergistic effects after careful prior evaluations of risks and returns, financial details of the target company, contractual relationships, and other factors, and after completing due diligence. However, a merger or acquisition may still result in circumstances that may adversely affect business performance, such as a deterioration in the relationship between the companies due to a lack of coordination regarding the direction they should proceed in, or the inability of the target company, for some reason, to capture the effects and profits that were initially expected, thereby delivering disappointing results, or, depending on the circumstances, the need to write off the goodwill in a lump sum due to the inability to maintain profitability at the expected level. If the relationship with the acquired company breaks down even further, it may result in losing the sales territory, the trust of the market, and customers. Given such risks, we will strive to prevent them from occurring by implementing PMI measures afterwards, and providing management support by top management and the business division in charge. However, if such a situation occurs despite our best efforts, our management will swiftly decide whether or not to proceed with the contract or to acknowledge any losses.

2.Risks Related to Human Capital

Securing Human Capital

The Group is hiring year-round with a view to converting all employees to full employment status as a general rule, but if we continue to cling to the hiring strategies, policies on nurturing talent thus hired, and personnel evaluation systems that are in place at present, and fail to make improvements in response to changes in the business environment, we may be unable to secure sufficient human capital in order for us to achieve sustained growth in the future, which may lead to the stagnation of our business and inability to achieve sustained growth. Therefore, while managing our labor force in compliance with the law, we will focus on developing our human capital in order to place the right person in the right position, building up a personnel evaluation system based on a global outlook, and training people responsible for evaluations.

Labor Issues

The majority of our Group employees consist of foreign nationals working at our overseas offices and production bases. Given how different workstyles are in demand according to the different social conditions and working environment in each country, labor issues related to working conditions, etc. may arise with organizations such as labor unions, both in Japan and overseas. If a labor dispute arises and cannot be resolved at an early stage, the stability and continuity of our business operations will be compromised, and if the situation deteriorates, it will gravely impact the supply of products and cause us to lose the trust of our customers, adversely affecting corporate value and business performance.
Therefore, by propagating the ANEST IWATA Corporate Philosophy centered on our corporate motto, “Makoto no Kokoro” (Trustworthy & Sincere), we aim to strengthen the sense of belonging in the Group. Also, by investing the heads of overseas offices and production bases with the discretionary power to set employment conditions and evaluation systems that are compatible with the systems and circumstances in each country, we strive to prevent dissatisfaction with working conditions and the working environment from arising. And should such a risk materialize, we will ready the systems necessary, including top management, and take necessary measures, beginning with a review of working conditions, etc. or the reorganization of the supply chain.

3.Risks Related to Information Technology

Investment in IT

In order to enhance our competitiveness as we expand globally, we consider it imperative to incorporate IT, with its endless innovations, into our operations, making it possible to radically improve our business model, enable the development of high value-added products, and improve operational efficiency. If there is a delay in the implementation of IT strategies due to the loss of IT knowledge and know-how from within the company caused by unforeseen circumstances, or if there is a delay in developing products that are in line with the latest IT trends, our competitiveness in the market may suffer and management efficiency decline, adversely affecting corporate value and business performance. Given such a risk, we are formulating a medium- to long-term IT strategy together with our business plan, positioning investment in IT as an important factor that will drive the growth of the company, and continuously verifying the degree it contributes to corporate growth. If such a risk materializes, we will aggressively recruit talent, initiate alliances with new partner companies, and amortize obsolete IT assets in order to rebuild our business foundations.

Information Security

In order to pursue business activities in a stable and sustained manner, it is becoming more and more important to maintain the safety and reliability of information systems. Confidential information related to technological development and sales acquired in the process of conducting our business activities, as well as personal information, is subject to stringent control.
However, if information is leaked or tampered with or the system fails due to reasons such as a natural disaster, an unexpected cyber-attack, or unauthorized access caused by the invasion of a computer virus, or if information is leaked intentionally or by mistake by an employee, the market’s trust in us will be eroded. Furthermore, if the leaked information is misused, assuming liability for damages may adversely affect corporate value and business performance. Therefore, the Group has established an appropriate information security system and taken necessary and sufficient security measures, in addition to conducting awareness training for employees.
If such a risk materializes, we will speedily ascertain its cause and circumstances, and establish a system to implement appropriate measures. Also, we will disclose the details of the damage as necessary, in order to minimize secondary damage and regain trust.

4.Risks Related to Laws and Regulations, etc.

Environmental Regulations

As environmental awareness continues to rise across the world, many countries including Japan are newly establishing and strengthening laws and regulations regarding the environment. Since the contents of the respective regulations vary depending on the country or region, we have been establishing a system that transfers necessary functions to our local subsidiaries scattered across countries, in order to allow each subsidiary to collect information and formulate a response. However, if there is a delay in launching products that meet the standards, or in responding to the regulations, the Group’s business activities may face restrictions. In that case, we will determine whether or not to invest further in the relevant item, considering whether dealing with the regulations is economically feasible.

Accounting Fraud and Other Fraudulent Activities

In recent years, there have been instances where the credibility of a company was significantly damaged, or the company’s existence imperiled, due to problems of inadequate internal control such as accounting fraud and other scandals. We strive to prevent non-compliance within the Group by establishing systems and mechanisms for Group executives and employees to act in compliance, and providing sound management support for Group companies. We have also established a whistleblowing system that includes overseas subsidiaries and a monitoring system in which Audit & Supervisory Committee members carry out irregular audits. However, in the unlikely event that such a transgression is discovered, it will not only damage short-term business performance in the form of liability for damages, but also result in the loss of credibility for the company, impeding sales and recruitment activities. The business environment may deteriorate over a significant period of time.
If such a situation arises, it will be promptly reported to the Board of Directors of the parent company, and then investigated by a third party. After that, we will take appropriate measures against the persons concerned, and formulate and announce measures to prevent such events from recurring.

Intellectual Property

The Group is actively expanding its operations abroad, and in this process, third parties may imitate the products, technologies, business models, etc. that the Group currently owns or develops in the future, or we may unintentionally infringe on the intellectual property rights, patents, and trademarks of other companies while pursuing such activities. In that case, it may not only be the expenses related to compensation of damages and litigation proceedings that may prove burdensome, but also the inability to use the technology itself, or the disadvantageous conditions imposed for its use, may adversely affect business performance or financial circumstances. Therefore, we will make a point of acquiring intellectual property rights, patents, and trademarks related to product functions and designs, and manage them stringently. We will also build up a system that will not be affected by, or minimally affected by, such issues, with the cooperation of relevant external organizations.

Transfer Pricing

The Group has subsidiaries in major regions of the world, and is expanding its operations on a global scale. In transactions between Group companies, we strive to comply with transfer pricing rules and set transaction prices accordingly, but should the tax authorities point out irregularities that stem from differences in interpretation, this may result in the collection of back taxes and other debts, and may adversely affect business performance and financial circumstances. Therefore, with the cooperation of external organizations, we will endeavor to operate with the correct legal understanding and avoid any differences in interpretation with the tax authorities.

5.Other Risks

COVID-19

Regarding COVID-19, which has continued to spread all over the world from late 2019 to the present, cases confirmed among our business partners or Group employees may adversely affect our business activities by causing the suspension of operations or temporary shutdowns of the relevant partners. The Group places the highest priority on the safety of its customers and employees, and strives to prevent infections in compliance with administrative guidelines. The company has cancelled unnecessary and non-urgent business trips, and is promoting remote working (teleworking) and staggering work hours for on-site work. At the same time, in order to minimize the impact on our production system, we continue to implement measures such as expanding inventory and reducing dependence on specific suppliers. In addition, since our business performance may deteriorate if the pandemic shows no signs of abating for an extended period of time, we have established a Crisis Management Committee chaired by the President and Chief Executive Officer. This Committee will strive to optimize the BCP (business continuity plan) and take necessary measures by promptly and accurately perceiving the nature of the business environment surrounding the Group.

Unexpected Events

The Group is expanding its operations all over the world. Should there be unpredictable political and economic change, outbreaks of terrorism/war, spread of infectious diseases, or natural disasters such as earthquakes and typhoons in these countries and regions, it will seriously impact our ability to supply products throughout the world due to the damage inflicted on our offices, inability to procure raw materials, and logistics failure, and adversely affect our business activities and business performance to a significant degree. We strive to create an organization that is capable of setting up a supply system rapidly even in the face of such unlikely events by formulating a BCP, dispersing production functions, and exploring the possibility of product procurement between Group companies.