1. Risks in each of the Group's businesses
Competition in the watch market is intensifying, not only from Japanese brands, but also from high-end Swiss brands, low-end Chinese manufacturers, and smart watch manufacturers, along with alternative products such as mobile phones with watch functions. Although we are facing the environment of a decline in prices for increasing competition due to the rise of Chinese manufacturers in the movement sector, the Company employs a strategy to keep distance from price competition, so this may result in the declines of the number of our product sales and market share.
The machine tools business is susceptible to the effects of economic cycles and fluctuations in capital investment activities amongst companies. Competition is also intensifying, not only with domestic manufacturers, but also with manufacturers in other parts of Asia. In addition, as markets around the world are regaining momentum, there is a risk that the procurement of components may become difficult as a result of the imbalance of the supply and demand of materials for machine tools. There is also a risk that manufacturing and services may face a labor shortage.
Devices and components
The devices and components business is characterized by rapid technological innovation and fierce competition between companies, meaning that declining sales prices or delays in development, for example, can have a significant impact on business results. Precision machining components are susceptible to customer trends, including automotive and mobile phone manufacturers. The results for opto-devices could be affected by the occurrence of losses in lighting LED components that are subject to the inappropriate activities of Citizen Electronics. Patent licensing agreements are also essential for manufacturing certain products. Our business results could be affected should a cooperative relationship underpinning a patent agreement break down and access to the patent be lost.
The electronic products business is susceptible to declining capital expenditure and personal spending as a result of changing economic conditions. With intense competition, not only from domestic manufacturers but also from electronics manufacturers in China and other countries, and rapid technological innovation, business results could also be impacted by declining sales prices or development delays, for example.
2. Overseas sales
Overseas sales account for a high percentage of the Group’s overall product sales. As our products are sold worldwide, our operating results may be affected by economic and consumer trends in each area, as well as by political and socioeconomic factors.
3. Foreign currency fluctuation risk
As overseas sales account for a high percentage of the Group’s product sales, as mentioned above 2, we enter into foreign currency contracts, currency options and other such transactions to hedge against risks. Although we are expanding and strengthening our overseas production, currency fluctuations may still affect the Group’s operating results.
4. Manufacturing in China
About 40% of the Group’s products are manufactured overseas, with China being our main production base. It is therefore possible for our operating results to be affected by factors in China, such as the suspension of production due to problems, the enactment of new regulations that could affect production, or the sharp appreciation of the Chinese yuan.
5. Impairment loss
An impairment loss would be applicable if the market value of the Group’s assets were to decline significantly or the profitability of our business were to deteriorate. This may affect the Group’s operating results and financial position.
6. Patent and intangible property
As part of the Group’s R&D and production activities, we make use of a variety of technologies covered by intellectual property rights. These include intellectual property rights that are owned by the Citizen Group, and others for which we believe we have legitimately received licenses to use. Nevertheless, should a third party claim, based on grounds of which we are unaware, that its intellectual property rights have been violated, a dispute could arise that could affect the Group’s business results. For some products in particular, manufacturing is based on patent licensing agreements. If a cooperative relationship underpinning such an agreement were to break down, or access to the relevant patent were to be lost, it may affect our business results.
7. Risk related to natural disaster such as earthquakes
We have established a Group risk management system to avoid any injury or damage to facilities in the event of a fire, an earthquake or other disaster through drills and other safety activities at our headquarters and works. In the event of a particularly serious earthquake or other such disaster, however, our production activities and product supplies may be affected. There may also be a significant impact on our operating results and financial position due to reconstruction costs, for example.
8. Risks related to M&As and business alliances
We are committed to strengthening the Group’s business foundations through M&A and business alliances. When undertaking such activities, we carry out comprehensive research into and examinations of the companies involved. Nevertheless, there may be risks that we discover later, such as unrealized liabilities or obstacles in implementing projects, which may materially affect the Group’s operating results and financial position.
9. Risk related to borrowings
The Group’s borrowings include syndicated loans and commitment line agreements with financial institutions. Any violation of financial restrictions under such agreements could result in demands for the accelerated repayment of the relevant borrowings, which may affect the Group’s financial position.
10. Other risks
The Group’s operating results may be affected by a variety of factors in addition to the above, including changes in social infrastructure and market competition as a result of rapid advances in technology, changes in the Group’s financial or managerial situation as a result of ongoing restructuring initiatives, trading restrictions in major markets in Japan or overseas, or substantial changes in stock or bond markets.