Business Risks

Matters related to business conditions, accounting conditions, etc., as described in the Securities Report that may have a material effect on investors’ decision-making include the following. Forward-looking statements in the text are determined by the Group as of the end of the current consolidated fiscal year.

The Group’s products are widely used in automobiles and various industrial machines and in buildings and structures. In the event of a global or Japanese economic recession or slowdown in economic growth, product demand, i.e., the number of units produced and construction projects started, may decrease and affect the Group’s business performance and financial position.

Steel, copper alloys, and resin raw materials are the main materials for the Group’s products. Prices of these materials may fluctuate in accordance with the balance of supply and demand, exchange rate fluctuations, and other factors, and some of the sources of procured materials may be limited. Recently, the risk of a sharp rise in global raw material prices has become apparent. The Group reviews its supply chain to flexibly respond to market fluctuations in raw material prices and risks related to the procurement of raw materials, and we implements cost reduction measures by streamlining production, considering the diversification of suppliers to obtain quality raw materials in a timely manner and in required quantities, and selecting alternative materials. In addition, the Group also tries to mitigate the impact of price fluctuations by paying attention to the price trends of its competitors and appropriately reflecting them in the Group’s sales prices. However, a more abrupt change in market prices than expected could affect the Group’s business performance and financial position.

The Group could be affected by exchange rate fluctuations arising from transactions denominated in foreign currencies. When consolidated financial statements are prepared, the foreign currency financial statements of overseas affiliated companies are converted into yen. Even if the value of those companies’ items in a foreign currency does not change, fluctuations in foreign exchange rates could affect the Group’s business performance and financial position.

When engaging in individual foreign currency-denominated transactions, the Group strives to minimize the impact of exchange rate fluctuations by procuring raw materials locally and hedging risks through currency swap agreements. Unforeseen fluctuations, however, could affect the Group’s business performance and financial position.

The Group has been enhancing its local production system in line with the overseas expansion of automobile manufacturers, and it has manufacturing sites and sales offices in North America, Europe, and Asia. As a result, sales to customers overseas account for 36.1% of consolidated net sales. However, the Group’s sales could be affected by an economic recession in countries where the Group manufactures and sells its products and the resulting shrinkage in product demand or by changes in political, social, or economic systems in foreign countries.

The Group recognizes geopolitical risks in particular, such as the recent conflict in Ukraine, as important risks due to the magnitude of their impact. The Group strives to minimize risks by having the Corporate Strategy Department and the divisions in charge of overseas affiliated companies work with each other, by closely exchanging information with and continuously monitoring overseas affiliated companies, and by ascertaining and analyzing trends in individual countries.

Nevertheless, unexpected abrupt changes in business conditions or the political, social, or economic systems in the countries in which the Group manufactures and sells its products could affect the Group’s business performance and financial position.

Automotive-related sales account for 46.8% of the Group’s total sales. Thus far, the Group has ensured relatively consistent performance thanks to the superiority of its products, expanded use of products for new applications, and global expansion. However, the Group’s performance could be affected by CASE (connected, autonomous/automated, shared, and electric) vehicles that are transforming the automotive industry itself, the entry of businesses other than automobile manufacturers, and fluctuations in components due to restructuring of the industry, as well as major changes in demand trends in the automotive market.

The Group has been promoting new development with an eye toward the future of the automotive industry (which includes CASE vehicles), and it will respond to changes by expanding its areas of technology and accelerating the speed of development for the distant future.

Global competition is intense in all industries. This includes the automotive industry, which is the Group’s main customer. In addition, conditions are even harsher due to the effects of soaring raw material prices. The Group will satisfy customers by developing quality products that are technologically superior, providing added value by enhancing solutions-based technical sales to solve customers’ problems, and expanding its product lineup.

However, continued demand for lower prices due to the growth in inexpensive products as a result of the emergence of manufacturers in emerging countries and other factors could affect the Group’s business performance.

The Group considers "developing and providing advanced products and technologies that contribute to the resolution of resolving social issues” to be a major issue (materiality) for sustainable growth. The Group has applied for patents, trademarks, and other intellectual property rights in Japan and overseas through R&D related to two core technologies: tribology technology, which involves "friction," "wear," and "lubrication," and damping (vibration control) technology. These barriers to entry provide the Group with a competitive advantage in its business activities, but there is also an inherent risk that other companies will enter the market upon the expiration of patents and other rights. The Group will acquire new patents, including peripheral patents, through technological and product development in order to preclude other companies from entering the market. Entry of other companies into the markets for products that account for a high percentage of the Group’s net sales could affect its business performance.

If the Group is sued by a third party for infringement of that party’s intellectual property rights, the Group may not only incur dispute costs but may also be required to pay damages or face an injunction against manufacturing and sales. This could result in the loss of access to the market itself, which could significantly affect the Group’s business expansion and performance.

To prepare for these risks, the Group adequately investigates and examines the possible infringement of intellectual property rights of third parties starting in the product development stage in accordance with the Rules on Management of Intellectual Property and the possibility of obtaining rights to new inventions. In addition, the Group will ensure that know-how is properly protected and managed in accordance with the Rules on Management of Confidential Information.

The Group’s structural devices business accounts for 18.1% of its total sales. Sales related to this business could be affected by factors such as budgets for public investment works in Japan.

The Group is working to improve business profitability, it is reviewing the number of personnel to match the size of the business, it is enhancing systems with an improved cost structure so that they are less affected by public investments, and it is developing new products to create new key markets in addition to bridges and buildings.

The Group’s products are often used in machinery and industry, which require a high level of precision and reduced labor, and as end products. In addition to automobiles, the Group’s products are widely used in infrastructure such as railroad vehicles, water turbines and water gates, and bridges, as seismic isolation and vibration control devices in various buildings, and in residences.

The Group’s domestic and overseas operations have been certified in international quality management standards (ISO 9001 and IATF 16949) to ensure that the Group’s quality assurance system meets the requirements of all customers and markets. In addition, the Group has strict controls in place to meet the particular quality standards and other requirements of its customers.

In product development, departments such as R&D, production technology, manufacturing, and sales identify quality issues from their respective perspectives starting in the initial stage and use information on past internal and external quality problems to resolve them. Before a new product is launched, the Group tries to minimize risk by verifying quality through reviews of product and process designs.

If, however, there is a serious unknown defect in a product and that defect causes an accident, recall, or suspended production by a customer, the Group’s reputation may be damaged. Incurring vast expenditures on compensation may adversely affect the Group’s business performance and financial position.

The Group has global product liability insurance, but it may not be sufficient to cover all losses such as damages.

The Group considers “environmental initiatives” to be a major issue (materiality) for sustainable growth, it has formulated the Oiles Group Environmental Policy, and it is striving to reduce its environmental impact and take care of the aquatic environment as part of environmental protection globally. In order to comply with environmental laws and ordinances and other requirements related to global warming, water pollution, industrial waste, hazardous substances, soil contamination, etc., the Group has created and is implementing an environmental management system in line with ISO 14001.

However, unforeseen circumstances could lead to the Group being held legally or socially liable in some way. In such an event, the Group could incur the costs of a response or its reputation could be damaged.

The Japanese Government declared in 2020 that Japan would be “Carbon Neutral by 2050.” Carbon neutrality has become a global trend as well. In addition to the risk of harm to the Group’s business due to disasters caused by global warming, an inadequate environmental response by the Group could result in a loss of trust from customers and the Group’s exclusion from customers’ supply chains as the world moves toward decarbonization. In addition, the Group may lose the trust of shareholders, investors, and others who value ESG compliance.

With this in mind, the Group will help to reduce the environmental impact of its business through products and technologies, and individual companies in the Group will continue to implement environmental initiatives, such as reducing CO2 emissions. The Group’s environmental target is to reduce total CO2 emissions by 46% from their FY2013 level by FY2030. Along with the aforementioned environmental target, an environmental target that has been set for the Group as a whole is to achieve Carbon Neutrality by 2050, starting in FY2023 (Scope 1 and Scope 2 cover total CO₂ emissions).

The Group recognizes that its human resources initiatives are a key management priority (materiality) to increase corporate value over the medium to long term. The Group supports the growth of all employees and it promotes the creation of a comfortable working environment through respect for human rights, promotion of diversity, development of human resources, and implementation of appropriate labor practices.

In addition to the decline in the working-age population, the inability to attract excellent human resources due to labor market conditions, the failure to properly pass skills along due to a shortage of human resources, the departure of talented human resources from the Group, or insufficient or ineffective investment in human capital could limit corporate growth and affect the Group’s business performance.

Amidst such circumstances, the Group strives to attract excellent human resources in management, technological development, manufacturing, sales, and other capacities. To attract human resources, the Group actively recruits new graduates and experienced personnel throughout the year. In addition, the Group is hiring needed human resources, it is creating an environment where they can enjoy long careers, and it is systematically training and mentoring successors who will be trained in and entrusted with production techniques passed down from their predecessors. The Group is also actively investing in those efforts.

In addition to confidential information related to R&D, production, sales, etc., the Group possesses personal information on its customers and employees. In managing that information, the Group will strive to implement information management and employee training based on various regulations on handling information. The Group is also certified in ISO 27001:2013, an international standard for information security, and it will strive to consistently operate information security systems.

In addition to the risk of the leakage of confidential and personal information, a major failure of the information system due to unauthorized access as a result of a cyberattack, natural disaster, accident, computer virus, or other causes could adversely affect the Group’s business performance and financial position. In order to minimize these risks, the Group has created a system that facilitates system restoration through network redundancy, backups of important data, and storage at multiple data centers.

There are a wide variety of laws, ordinances, and regulations, both domestic and international, related to the Group’s business, including antitrust laws, security export controls, and bribery laws.

A violation of applicable laws and ordinances occurring as a result of insufficient compliance or an accusation that the Group has violated laws and ordinances in conjunction with its past business activities could result in punishment, disciplinary action, other sanctions or damage to the Group's reputation or image that could adversely affect its business performance.

In addition to the Oiles Group Corporate Conduct Charter and the Corporate Code of Conduct, the Group strives to ensure compliance with these laws and ordinances through various training programs for officers and employees.

The Group has manufacturing sites and sales offices in Japan as well as in the Americas, Europe, and Asia. A major earthquake, flood, fire, or other disaster, a global epidemic of an infectious disease (a pandemic), a terrorist attack on a company, or political unrest due to conflict at these business sites and offices could affect raw material procurement, harm business resources such as production equipment and human resources, disrupt the supply chain, or halt the supply of products. This could severely hamper the Group’s ability to continue operating. Such events are infrequent, but if they were to occur, they would significantly affect the Group’s business performance and financial position.

To deal with such events, the Group has formulated a business continuity plan (BCP) to respond to a large-scale earthquake or other unforeseen circumstances. The Group is preparing for such risks in advance by implementing measures to mitigate damage, considering the diversification of procurement sources, and selecting alternative materials in order to quickly recover from a disaster and ensure a consistent supply of products according to an action plan for such contingencies. Presumably, novel coronavirus disease 2019 (COVID-19) will gradually subside. Nonetheless, the Group will consider the impact of a further spread of infection on the Group’s business continuity and continue to take measures to prevent infection.

Insurance may cover some of the damage caused by a natural disaster but not all. The Group will make every effort to address this key management priority, which includes countermeasures against terrorism, but completely avoiding that risk is difficult.