The major risks that we recognize as having the potential to materially affect the financial position, operating results, and cash flows of our group are as follows.
The course of the COVID-19 pandemic remains difficult to predict due to the threat of new virus mutations and the impact of the Chinese lockdown on production and distribution.There are also concerns about stagnation in production activities due to shortages of semiconductors and other components.If these negative effects on the global economy are prolonged and orders from major customers decrease more than expected, the burden of fixed costs, such as labor and depreciation, will become relatively heavier, which may have a significant impact on our group's performance.Furthermore, delays in the recovery of capital investment funds could be a factor in impairment losses occurring.
Regarding the risk that a decline in orders may affect our business performance, we will take prompt and appropriate measures, considering the status of orders from our customers as well as trends in the industries in which our group provides products.Specifically, in addition to the expertise we have accumulated through our production innovation activities, we will vigorously promote cost reductions by leveraging our experience during the COVID-19 pandemic, and build a business structure that can resist fluctuations in orders.To this end, we will promote multi-skilled workers, including those in indirect departments, and aim to allocate personnel to where they best suit business needs. In addition, we will invest mainly in automated facilities and other equipment that will contribute to labor savings.
The Group provides a wide range of products mainly to the civil engineering and construction industries, as well as to the automotive industry.Since these products are used in critical areas, we are aware of our responsibility as a supplier and pay close attention to quality inspections and performance checks.However, in the unlikely event of a quality problem that results in personal injury or social damage, the Group's credibility and business performance could be affected.
With regard to risks related to product quality, we have been actively working to acquire ISO9000 certification and are diligently establishing a quality assurance system. We have also established a Quality Assurance Department to build a company-wide quality assurance system.
Electricity rates are rising against a backdrop of soaring resource and energy prices.Since the processes using heat treatment technology, which are the core of the Group's business, primarily use electricity as their energy source, electricity prices are an important component of production costs.
The Group's business performance may be affected by circumstances related to future electricity rate hikes.
With regard to risks tied to electricity rates, we will promote energy-saving measures, including capital investment.
Prices are rising for raw materials, predominantly steel. Steel is a key material particularly for Group businesses related to the Specialty Steel & Wire Products Division and an important element of manufacturing cost.
If prices fluctuate higher than expected, the Group’s business performance may be affected. It may also become difficult to obtain the materials needed for production.
To address risks related to materials procurement, we are promoting shifting of cost increases to the selling price and continual cost reduction.
The Group policy is to continue promotion of global business expansion going forward. Risks which must be recognized in global business include the economic situations, legal systems, political trends, and public security in expansion countries.
Also, business investments may be large. If there is an unanticipated change in the legal system or the political or economic situation in an expansion country, the Group’s business performance may be affected.
To address risks related to global business expansion, efforts will be made to develop a system enabling reliable implementation of control to identify and resolve issues through cooperation by each functional department, including business development departments with the main divisions, in each process from the time of business plan formulation to business operation.
