Business and Other Risks

The Group is a group of companies principally engaged in the sale of equipment and systems related to "FA Systems," "Cooling & Heating and Building Systems," "X-Tech" (Cross Tech) such as network systems, intelligent agriculture and healthcare, and "Electronics" such as semiconductors and device products, with customers in a wide range of industries including manufacturing, wholesale, construction, medical, and services.

The status of each business partner is affected by economic fluctuations, sluggish demand in their respective industries, and declining capital investment, which may affect the Group's business performance and financial position.

In addition, the industries in which the Group operates continue to face high levels of uncertainty, including reduced automobile production and production adjustments due to a shortage of in-vehicle semiconductors as well as disruptions in the global supply chain. If these effects become more serious and prolonged, the performance and financial position of the Group could be affected.

Under these circumstances, the Group will continue to work on the strategies outlined in the medium-term management plan "ICHIGAN 2024": "Establishing business models for growth businesses and creating new, next-generation businesses," "Improving productivity in our mainstay core businesses," and "Strengthening the foundation for business growth." In addition, to improve the operating margin, we will promote high-margin businesses through further structural reforms, development of new commercial products and implementation of solution businesses, and will quickly launch new businesses such as cloud-based subscription businesses to nurture enterprises that are less susceptible to economic fluctuations and thereby strengthen our corporate structure.

The Group's main suppliers are Mitsubishi Electric Corporation and its Group companies for "FA Systems" and "Cooling & Heating and Building Systems," which accounted for 28% of consolidated purchases in the current consolidated fiscal year (Mitsubishi Electric Corporation accounted for 15% and its Group companies for 13%).

Changes in the business strategies of these main suppliers, product market strategies, distribution policies, supply trends, and other factors may affect the Group's operating results and financial position.

Although we have stable relationships with our main suppliers, we will work to strengthen them by sharing business strategies, etc. In addition, we will reinforce partnerships with various collaborators as we develop solutions and build stable and multifaceted relationships with suppliers to minimize the impact on our business performance.

In the event of a major earthquake, extreme weather conditions or other natural disasters, the functions and business activities of the Company's head office and branches may be disrupted due to damage to the Company's internal infrastructure (corporate buildings, telecommunications, etc.). In addition, the Group's operating results and financial condition could be adversely affected if its supply chain is severely disrupted as a result of damage to suppliers and customers arising from the disaster, delays in the restoration of social infrastructure and distribution networks, or even the restriction or cessation of business activities.

To minimize these effects, we take measures such as formulating BCPs, including a Disaster Prevention Manual, and ensuring that BCP inventories are in place to deal with supply shortages throughout the supply chain, including customers and suppliers.

The Group is working to create new businesses with the aim of becoming "a company that can continue to create new value as a business-creating enterprise creator that transcends the boundaries of an agency or trading company."

The new businesses are expected to be highly profitable and revenue-generating, not only because of the first-mover advantage, but also because they lead to differentiation from other companies.

On the other hand, we bear the quality risk that our suppliers have borne in the past, and unexpected defects attributable to us can affect the Group's performance and financial position.

To combat these risks, we identify quality risks in advance in accordance with the "Quality Risk Review Rules" and hold Quality Risk Review Meetings to discuss countermeasures designed to prevent quality problems from happening.

We believe that these efforts are essential when operating a company that creates new enterprises and they will also differentiate us from competitors.

The Group operates in East Asia, mainly in China, Southeast Asia, mainly in Thailand, and Western countries (Germany and the U.S.), with total overseas sales accounting for 18% of consolidated net sales in the current consolidated fiscal year. In developing overseas business, the division in charge of overseas business cooperates with related divisions in advance, investigates and examines laws and regulations and risks associated with business development through third parties (local law firms, consultants, etc.), and develops the business after consulting with the Executive Committee and the Board of Directors.

However, the occurrence of country risks that are different from those associated with business development in Japan, such as unexpected changes in laws or regulations, deterioration in political or economic conditions, or social unrest due to terrorism or war, in countries or regions where we operate may affect our Group's performance and financial position.

To mitigate these risks, we conduct annual self-assessments of laws and regulations against those of the countries and regions in which we operate, and work with local consultants and others to keep abreast of developments. In addition, divisions in charge of overseas subsidiaries regularly exchange information with directors of local subsidiaries and take appropriate measures as needed.

In the future, we are considering setting up a hotline exclusively for employees of overseas subsidiaries to detect fraud and risks at an early stage.

The Group's business includes the supply of products to overseas customers and the sourcing of products from overseas suppliers. Local currency items, including sales, expenses, and assets in each region, are translated into yen for the purpose of preparing the consolidated financial statements. Depending on the exchange rate at the time of closing, the yen value of these items may be affected even if their local currency value remains unchanged. In addition, medium- to long-term currency fluctuations may prevent us from executing planned sourcing and product supply and from securing planned profits, so exchange rate fluctuations may affect our group's business performance and financial position.

The Group conducts currency hedging transactions, such as forward-exchange contracts, to minimize the impact of short-term fluctuations in exchange rates between major currencies, including the U.S. dollar and the yen.

The Group endeavors to obtain information about estimated customer demand and the delivery status of suppliers, and strives to maintain adequate inventory levels and avoid inventory backlogs. However, a loss on disposal or a write-down due to a fall in originally anticipated customer demand resulting from market fluctuations or other factors could adversely affect the Group's operating results and financial position.

We are also paying particular attention to the development of our total inventory, which is on an upward trend due to an increase in customer orders as a result of the recent global semiconductor shortage.

The Group carefully manages its inventories in accordance with the "Standard Inventory Management Operation Rules," which specify the standard number of months of inventory for each business segment.

In addition, we strive to maintain appropriate inventory levels by focusing on setting order authorities based on value, carefully reviewing the quantities that customers needed when they place an order, and adjusting the order quantities to be placed with suppliers with firm collection commitments.

The Group may invest in business partners for future growth, but there is a risk that the performance of investees may differ significantly from that at the time of the investment, requiring recognition of impairment losses on the investment.

When making an investment, the financial position of the investee, the viability of the business plan, the return on investment and other factors are carefully evaluated and considered by the Executive Committee and the Board of Directors. Following investment, we regularly monitor the investee's financial position and the progress of its business plans.

The Paris Agreement, adopted at the 2015 Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC), set a goal for the world as a whole to significantly reduce greenhouse gas emissions in order to limit the rise in global average temperature. In response, the Japanese government has declared "carbon neutrality by 2050," a goal to reduce net greenhouse gas emissions to zero by 2050. In the future, an increase in environmental costs due to stricter environmental laws and regulations, measures to address the risks associated with climate change, and the introduction of a carbon tax or additional obligations to reduce environmental impact, could affect the Group's performance and financial position.

In response to this trend, the Group has stepped up its efforts to reduce greenhouse gas emissions from "low carbon" to "decarbonization," and is currently working to achieve zero greenhouse gas emissions from internal electricity consumption by 2030 under the "Ryoden Corporation Group's Environmental Vision" established in 2020.

To realize our environmental vision and reach environmental goals, we have established a framework for controlling an environmental management system headed by the Representative Director, President & CEO as the person with ultimate responsibility; we have written rules clearly stating the environmental management system and various procedures at the head office and at each of our domestic and overseas bases; and have established a system to continuously and objectively check whether environmentally friendly business activities are being carried out and whether the rules are being properly followed.

We also see the transition to a decarbonized society as an important business opportunity and are working to create businesses that help solve social problems.

The Group's guiding principle, based on its management philosophy, is to "comply with laws, regulations and rules," and the Group is committed, both internally and externally, to giving the highest priority to compliance with laws, regulations, and rules in all its business activities and to never engaging in unethical conduct.

However, the likelihood of problems occurring in the management framework will not be zero. As such, violations of laws and regulations may affect the Group's performance and financial position. In addition, depending on the nature of the misconduct, employee misconduct can affect our business performance and public credibility.

To mitigate such effects, the Group has established an Ethics and Legal Compliance Committee, chaired by the Director of the Board, and appointed a Compliance Manager to ensure legal compliance, equity, and ethics in business activities. In addition, each division, branch, and affiliate, including those overseas, conducts a compliance check to confirm the status of compliance with laws and regulations. We also conduct compliance e-learning for all Group employees to ensure compliance with laws and regulations.

Furthermore, the company launched a whistleblower system in May that year with even greater transparency and independence to detect and correct legal violations and misconduct at an early stage.

As of the end of the current fiscal year, the COVID-19 infection did not have any significant impact on the Group's business activities.

However, if the spread of infection becomes more serious or prolonged due to the emergence of new variants or other viruses, and our Group's employees or those of our business partners become infected, our Group's distribution system and sales activities may be disrupted. Thus could affect our Group's business performance and financial position.

In response to the global COVID-19 pandemic, the Group has established a COVID-19 Task Force under the direct control of the President, and continues to work on measures to prevent infection. Placing the highest priority on the health and safety of our business partners and our Group's employees and their families, we continue to implement infection prevention measures such as strict hygiene management, staggered work hours and telecommuting, and promote our business activities to meet customer requirements.