Business and Other Risks
Matters which may affect the Group's results, financial position and share price, etc. include the following:
1. Risks in each of the Group's businesses
The Group operates on a worldwide scale and its main businesses involve the manufacturing and sales of watches and clocks, devices and components, electronic products, machine Tools and others. The users of our products include not only general individual consumers but also manufacturers in various sectors. Consequently, many changeable factors affect the Group's results. The main factors are provided below.
Watches and Clocks
In Watches and Clocks, we face intense competition in the area of finished products from other domestic manufacturers as well as Swiss premium-priced watch manufacturers and Chinese manufacturers of affordable-priced watches and clocks. There is also a competition with products with watch and clock functions such as mobile phones. In Movements, although we have a high market share, intensifying market competition due to the rise of Chinese manufacturers may trigger price decline and a fall in our market share. We may also face a fall in demand in the domestic market for watches and clocks due to a decline in foreign visitors to Japan.
Devices and Components
In Devices and Components, opto-devices are dependent on trends of our major customers for them, namely mobile phone manufacturers and lighting manufacturers. Crystal devices may also be affected significantly by trends of mobile phone manufacturers, the major customers for them. Technological innovation is rapid and competition between companies is tough. Decline in sales prices and delay in development may affect our results significantly.
In addition, part of our production is conducted under patent licensing agreements. If circumstances result in the termination of business alliances, leaving us incapable of acquiring such agreements for patent licensing, our business may be affected.
Electronic Products
Electronic Products is vulnerable to changes in capital expenditure and personal consumption caused by recession. Therefore, future economic trends may negatively affect revenue. Also, competition with domestic manufacturers as well as electronic product manufacturers in China and other countries is intense and technological innovation is rapid. Decline in sales prices and delay in development may affect our results significantly.
Machine Tools
In Machine Tools, results are dependent on economic cycles and capital spending demand among companies. On top of this, we face increasingly intense competition, not only from domestic manufacturers, but also from Asian manufacturers.
2. Dependence on overseas sales
The ratio of overseas sales within the net sales of the Group's products is high and our products are sold all over the world. Because of this, economic and consumption trends in each area may affect the Group's results. Each area's political and economic circumstances may also have a similar impact.
3. Foreign currency fluctuation risks
As mentioned in 2. above, the ratio of overseas sales within the net sales of the Group's products is high. Because of this, we hedge risks using forward exchange contracts as well as currency options, and are pursuing to expand and strengthen our overseas production. Despite this, the Group's results may be affected by foreign currency fluctuation.
4. Dependence on production in China
Approximately 40% of the Group's products are manufactured at overseas bases, mainly in China. Because of this, the Group's results may be affected if trouble arises in China that disrupts production, if laws or regulations that may result in a disruption in production are implemented, or if the renminbi is revalued drastically.
5. Impairment loss
In the event of a sharp drop in the market value of the Group's assets or the deterioration of business profitability, the application of impairment accounting may result in impairment loss for fixed assets, affecting the Group's results and financial position.
6. Patents and other intellectual property
The Group uses technologies that involve various intellectual property rights in its research and development as well as production activities. As far as we are aware, such rights are either owned by the Group or licensed to us legitimately. However, any claim by a third party regarding the infringement of intellectual property rights that we were not aware of resulting in disputes may affect the Group's results.
7. Risks resulting from earthquakes or other natural disaster
For the safety of the Group's head office and plants, a management system is established through disaster prevention activities and other efforts to prevent casualties as well as damage to plants and other facilities in the event of a fire, earthquake or other natural disaster. However, an earthquake or other disaster occurring at a degree that exceeds expectations may disrupt production and supply of products, and any costs incurred for recovery, etc. may greatly affect our results and financial position.
8. Risks associated with loans
Some of the loans taken out by the Group involve entering into syndicated loan and commitment line agreements with counterparty financial institutions. Any breach of clauses dealing with financial restrictions may result in demands for early repayment, which could affect the Group's financial position.
9. Other risks
In addition to the above, the Group's results are affected by various other factors, such as changes in the social infrastructure or market competition as a result of dramatic technological innovations, fluctuations in the Group's financial and operational conditions attributable to currently advancing structural reforms, regulations such as those dealing with trading in major markets both in Japan and overseas, and significant fluctuations in stock and bond markets.
