Business Risk
The Group regularly reviews the principal financial and operating risk factors considered relevant to its current business activities and financial position. An updated analysis of the principal financial and operating risk factors facing the Group is presented below.
There were no material issues or events occurring during the year that cast doubt on the ability of the Group to continue to operate as a going concern for the foreseeable future.
1. Economic conditions
The majority of the Group’s products are sold in the Japanese, European and North American markets, with these markets representing 29 percent, 41 percent and 14 percent, respectively, of net sales (by origin) for the year ended 31 March 2011. The majority of sales made outside of these three areas are in emerging markets such as South America and Asia.
The Group expects that its growth in emerging markets is likely to exceed its growth in more mature markets, and therefore the proportion of Group sales recorded in such markets is likely to increase in the future. Such markets may be considered to have a more significant level of risk than the more mature markets that the Group operates in. Further, changes in the business environments of the Group’s customers might affect the Group’s business, and if economic conditions or particular business environments in these regions of the Group’s major markets and emerging markets deteriorate, this could have a significant negative effect on the Group’s results of operations and financial position.
2. Dependency on certain specified industries and sectors
The Group’s Building Products and Automotive businesses together account for 89 percent of net sales to outside customers, and for the year
ended 31 March 2011, the Group’s Building Products and Automotive businesses accounted for 43 percent and 46 percent of net sales to external customers respectively. Also, the products to external customers are principally provided to customers in the construction, housing and automotive industries. These industries have been strongly affected by the global economic downturn that began in the fiscal year ended 31 March 2009.
The Group is working to increase its revenues generated from added value coated glass that can be used as part of a photovoltaic (Solar Energy) unit glass for solar cells, and from added value coated glass that can be used to conserve energy in buildings. Demand for such products is impacted partly by government incentives and government legislation. In recent years, certain governments around the world have provided incentives that have encouraged the construction of Solar Energy generation facilities and have passed legislation mandating the use of low-emissivity glass in buildings. This trend is expected to continue but there is no assurance that this will be
the case.
In the Automotive business, the Group is working to expand its sales of high value-added products and its presence in emerging markets, and is also working at the same time to diversify its customer base. In recent years there has been a significant level of consolidation in the Automotive industry, leading to increased purchasing power for the Group’s automotive customers. If such consolidation continues then this could mean that the Group’s automotive customer base becomes more concentrated.
3. Competition
The Group competes with domestic and overseas glass product manufacturers. The Group also competes with material manufacturers of various plastic, metal and other materials used in the Building products, Automotive and/or IT sectors. Although the Group endeavors to ensure a competitive edge in the provision of original technologies and products in these markets, if the Group is unable to ensure a competitive advantage due to changes in market needs or due to the emergence of a manufacturer providing low-cost products, or due to a manufacturer with a solid customer base and a high level of name recognition, or if our competitors receive governmental subsidies which are not available to us, there could be an adverse effect on the Group’s results of operations and financial position.
4. Development of new products and technological innovation
The Group focuses on developing original technologies and products in its existing business fields and on developing new products in non-exploited business fields. The new product development process could require considerable time and expense, and the Group might be requested to invest considerable amounts of capital and resources before achieving sales revenues from the sale of new products. Should any competitor launch a similar product in the target market earlier than the Group, or if alternative technologies and products are preferred by the market, the previous investment in the Group’s product development might not produce the profits initially expected. Should the Group be unable to predict or respond to an anticipated technological innovation and/or succeed in the development of a new product that sufficiently meets customers’ needs, such failure in product development or technological innovation could adversely affect the Group’s businesses, results of operations and financial position.
5. Funds necessary for future business operations
The Group might have to additionally raise funds to 1) launch new products, 2) conduct business or R&D projects, 3) extend manufacturing capacity, 4) acquire a supplementary business, technology or service, or 5) repay debt. If such funds cannot be raised under the intended conditions or at all, the Group might not be able to 1) invest in the expansion, development or reinforcement of any product or service, 2) capitalize on an opportunity for business development, or 3) ensure higher competitiveness to its competitors, or the Group’s financial position could be negatively affected.
6. Overseas operations
The Group has many production facilities in numerous areas around the world including Japan, elsewhere in Asia, Europe, North America, and South America.
In particular, the Group is working to expand operations in emerging markets, such as South America, Eastern Europe and China, and if economic growth slows in one or more of these markets it could also adversely affect the Group’s results of operations and financial position.
The Group has joint venture operations, investments, alliances and other operations in China, South America and other areas. The Groupbelieves that the stakes it holds in these operations are an important part of its strategy to expand its manufacturing capacities in these regions. However, there is no assurance that the Group will be able to effectively execute these strategies through these joint ventures.
In addition, the Group could face unexpected losses from these investments if it becomes difficult to continue an operation as a result of disagreements with its joint venture partners or other partners regarding business operation policy or for other reasons.
7. Risk involved in the suspension of production
The Group undertakes regular anti-disaster inspections and the maintenance of facilities in order to minimize the potential adverse effects that might be caused by the suspension of production activity. Nevertheless, the potential adverse effects on production facilities due to a natural disaster (including an earthquake, an electric power outage or any other type of event that causes disruption) cannot always be prevented or mitigated. In some cases, certain types of products manufactured at a Group facility might not be able to be produced by another facility. Consequently, in case production activity is suspended at a facility due to an earthquake or any other similar event, the possibility of considerably reduced production capacity for certain specific products could adversely affect the Group’s results of operations and financial position. The Group insures against such events but there can be no guarantee that such insurance will fully compensate the Group in all circumstances.
8. Fluctuations in foreign exchange and interest rates
The Group has manufacturing operations in 29 countries and sales in around 130 countries. Consequently, the Group is exposed to the risk of fluctuations in foreign exchange and interest rates in markets related to the Group. In addition, as the assets and liabilities denominated in local currencies are translated into yen when consolidated financial statements are prepared, the Group might be exposed to the risk of fluctuations in foreign exchange rates. Furthermore, fluctuations in interest rates might affect the value of interest expense, interest income or financial assets and liabilities. Although the Group aims to hedge these risks, such fluctuations in foreign exchange and interest rates could adversely affect the Group’s businesses, results of operations and financial position.
9. Changes in supply of raw materials and fuel, and distribution of products
Specific raw materials, such as silica sand and soda ash, and fuels, such as fuel oil and natural gas, are critical to the glass manufacturing process. Fluctuations in the cost of supplying raw materials and fuel may adversely affect the Group’s results of operations and financial condition. The Group uses commodity derivatives and swap contracts to hedge the effect of fluctuations in the market prices for raw materials and fuel. However, there can be no assurance that such measures can eliminate the impact of increases in the prices of raw materials and fuel.
The Group has entered into purchase agreements with selected suppliers of raw materials and fuel for medium and long-term fixed prices. The Group also sells its products through third party distributors in addition to its own distribution channels. If, for some reason, the Group’s relationship with a major supplier or distributor ended, or such suppliers failed to perform their contractual obligations, the Group may have to enter into agreements with less favorable terms and conditions, or the supply of raw materials and the distribution of products may be impeded. This may result in the Group’s results of operations and financial condition being adversely affected.
10. Retirement Benefit Obligations
The Group operates numerous corporate pension plans and health-care benefit plans for retiring employees. In the event of large fluctuations in the market value of the Group’s pension assets or discount rates used to calculate pension liabilities, the Group may be obliged to contribute additional funds into the schemes. While providing appropriate retirement benefit plans for our employees, the Group also regularly reviews its retirement benefit obligations in order to reduce the risk to the Group. However, due to the scale of such retirement benefit plans and recent economic conditions, there is no assurance that the evaluations will be consistent with actual results, and it is possible that the Group will not be able to sufficiently reduce its risk regarding its obligation to contribute additional funds.
11. Legal restrictions
Foreign subsidiaries and affiliates of the Group are subject to local regulations relative to investment, imports and exports, fair competition rules, regulations for environmental conservation, and other laws regarding business transactions, labor, intellectual property rights, income tax, currency control and so forth of the respective countries and regions where they operate. Any change to these laws and regulations or operation thereof could adversely affect the Group’s results of operations and financial position through limitation of the Group’s business activities or imposition of expenses to be disbursed regarding legal compliance or penalty fees to the Group by reason of infringement of any of the relevant laws and regulations.
12. Business strategies
The Group’s business strategies are affected by a variety of factors, including the economic environment, the price of raw materials, foreign exchange rates, and the development and provision of new technologies and products. However, there can be no assurances that, under these conditions, the Group’s business plan will be successful, or that the intended results of the business strategies, through the success of the strategy, will be achieved. Furthermore, it is possible that the proposed execution of the Group’s business plan will not be delivered, or that the intended effects will not be realized.
The Group acquired Pilkington plc in June 2006, a company with a significant presence in Europe. If the results of operations in Europe underperform compared to the Group’s expectations at the time of acquisition, or if some or all of the synergies cannot be achieved as planned, the Group could be required to recognize impairment charges on the goodwill or other intangible assets, which may have an adverse effect on the Group’s results of operations and financial condition.
The Group invests intensively in shifting from relatively low-margin products to high value-added products which require advanced technology in order to keep its competitive advantages. Also, in order to meet the increasing demand for Solar Energy products, the Group invests constantly in R&D activities related to such sectors, and also invests intensively in shifting some of the existing Building Products plants for glass into facilities for solar cells and related products. However, there can be no assurance that the Group can succeed in development of higher technology earlier than its competitors, or, as a result, can ensure higher competitiveness than its competitors.
13. Intellectual property rights
Patents and other intellectual property rights are an important competitive factor in the Group’s operation. However, there can be no assurance that the Group will always be successful in adequately protecting our intellectual property rights. In addition, we conduct our operations globally, which increases the risk of disputes between us and third parties over intellectual property rights. Any such infringements or disputes could have a negative impact on the Group’s business, results of operations and financial condition.
14. Civil Liability
If individuals are injured as a result of defects in the Group’s products, the Group could be subject to claims for damages based on product liability. In addition, the occurrence of the claim could negatively affect the Group’s reputation.
The Group strives to ensure that its products are of the highest quality. However, if unexpected quality problems occur, the Group may need to conduct a major recall. If this happens, the Group’s reputation may be harmed and its performance and financial position may be adversely affected.
15. Environmental laws and regulations
The Group is subject to a variety of environmental laws and regulations. Although the Group makes efforts to implement a variety of measures in regard to product development and manufacturing process in order to have a beneficial environmental impact and comply with the relevant laws and regulations, there can be no assurance that the Group can achieve expected results through those measures. Also, any change to these laws and regulations or operation thereof could adversely affect the Group’s results of operations and financial position through limitation of the Group’s business activities or imposition of expenses to be disbursed regarding legal compliance or penalty fees to the Group by reason of infringement of any of the relevant laws and regulations.
From the English Translation of the 145th Annual Securities Report