Risk Information

(1) Risks related to domestic and overseas politics, economy, and economic trends

The Group is globally engaged in the manufacturing and sales business of chemical products with the overseas sales revenue accounting for approximately 56% of the total sales revenue. Furthermore, our products are used for various purpose products mainly as intermediate materials in various countries and areas; therefore, our business does not heavily depend on specific countries and areas as well as specific-purpose product markets, which can reduce the impact of those trends on operating results and financial position. On the other hand, sales of a variety of products may be affected by deterioration in politics, economy, and economic trends in each country and area as well as an associated decrease in product demand. Additionally, the Group owns production sites of acrylic acid, acrylates, superabsorbent polymers (SAP), etc. in Japan, Asia, Europe, and North America, which may affect not only the operation of facilities but also sales in the said areas. As a result, operating results and financial position may be affected.

(2) Risks related to fluctuations in the oil and naphtha markets

Main raw materials procured by the Group have high relativity with oil and naphtha prices; therefore, in the event that the oil and naphtha prices sharply fluctuate due to geopolitical risks such as the situation in the Middle East and Ukraine, the production status of shale oil in the United States, and exchange rate fluctuations, all of the increase in raw material prices may not be able to be shifted to product prices or may be shifted behind. Product pricing based on the formula method, which reflects fluctuations in the domestic naphtha price in product pricing, is adopted to parts of products and suppliers, not all. Thus, while around 70% to 80% of the said risks has been reduced, operating results and financial position may be affected.

(3) Financial risks

(4) Risks related to overseas business expansion

The Group is engaged in overseas business with the aim of production and sales in the most suitable locations, owning sales and production sites in Asia, Europe, and North America with the production capacity for acrylic acid and SAP at overseas sites accounting for approximately 50% of that of the whole Group. In overseas business, there are risks of unexpected changes in laws and regulations, natural disasters, the vulnerability of industrial foundations, and the difficulty in recruiting and securing human resources, as well as terrorism, wars, and other social and political turmoil. We are taking actions against these risks as necessary after collecting the information on them from experts, government-related organizations, etc.; however, the materialization of these risks may pose problems to overseas business activities, which may affect operating results and financial position.

(5) Risks related to business portfolio transformation

Although the Group has expanded our business focusing on products such as ethylene oxide, acrylic acid, and SAP, the Group is aiming for at its medium- to long-term growth holding up business portfolio transformation to solutions business that can be expected to be more stably profitable and grown. This is because the Group is recently susceptible to market fluctuations due to intensified competition in these materials businesses. However, in the event that risks materialize that enough profit cannot be obtained from the solutions business due to a delay in business portfolio transformation, sudden changes in market needs, etc., operating results and financial position may be affected.

(6) Risks related to research and development

The Group are conducting multi-layered research and development ranging from basic research that creates seeds to applied research that promptly and accurately meets customers' real needs. Also, we are promoting research and development by making active use of open innovation such as research and development as well as business alliances with third-party partners including domestic and overseas universities. However, there are always the possibilities of failure in research and development or unexpected events such as rapid changes in market needs beyond our expectations. In the event that profits proportionate to investments cannot be obtained or highly profitable products cannot be created, operating results and financial position may be affected.

(7) Risks related to intellectual property rights

In the event that other companies infringe patents of the Group, the Group takes actions such as warning and filing a lawsuit; however, it may not be able to completely prevent other companies from investigating and analyzing patents or products of the Group to develop similar technologies or products. On the other hand, although in the new product area aimed at the Group’s new business expansion, the Group develops its proprietary technology and new products after investigating and analyzing other companies' intellectual property rights thoroughly, unfavorable judgment may be made against the Group if legal disputes arise regarding other companies' intellectual property rights in the future. In the event that risks as described above materialize, operating results and financial position may be affected.

(8) Risks related to information security

The Group stores confidential information as digital data etc., such as proprietary technology and know-how based on its research and development activities, business information of products for sales, customers, etc., production data accumulated through manufacturing activities, and accounting data. These pieces of confidential information are the foundation of the Group's business activities as well as the source of competitiveness. Accordingly, after having established the information security policy, we are striving to thoroughly manage information, while conducting education to raise employees' awareness about morales and security in addition to actions such as enhancing information system, infrastructure, and cyber security, establishing multiple data centers, setting up access rights, designating information as confidential, and preparing operational manuals. However, if information leakage to the outside, information loss, etc. occur, significant problems such as a decrease in the competitive advantage of our business, the emergence of similar products, and long-term suspension of business may be posed to the Group's business activities. In the event that risks materialize, operating results and financial position may be affected.

(9) Risks related to digital transformation

The Group is cross-functionally working on reforming core systems, taking advantage of data and digital technology in research and development and manufacturing, making use of digital tools to develop new customers, etc. led by the specialized divisions. However, if we cannot adapt to rapidly advanced information technology and digital technology and make good use of them for our business activities such as research and development, manufacturing, and sales, the competitive advantage of our business may decrease in the future. In the event that risks materialize, operating results and financial position may be affected.

(10) Risks related to occurrence of natural disasters, accidents, etc.

The Group is making efforts to earn high trust from customers and communities by pledging to promote Responsible Care and the entire Group being actively engaged in activities such as environmental conservation, chemical safety, and security and disaster prevention. Furthermore, we are taking actions as necessary by developing our Business Continuity Plan (BCP) on the assumption that a catastrophe has occurred. However, it is impossible to completely rule out the possibility that we will have the difficulty in continuing our production activities due to natural disasters, blackouts and power shortages, epidemics of infectious diseases, accidental disasters at plants, etc.
For example, in the event that major earthquakes, tsunamis, accidents, or other events that force us to stop our operations occur in the districts where Himeji Plant and Kawasaki Plant, key plants, are located, the production capacity of key products may significantly decline. In addition, the spread of infectious diseases may cause restrictions on economic activity, stagnancy in business activities due to work attendance restrictions etc., which may affect operating results and financial position.

(11) Risks related to climate change

The Group promotes efforts to recognize climate change as important social issues to be solved, continuously reduce greenhouse gases emitted from business activities, as well as contribute to the reduction in greenhouse gas emissions across the supply chain through our business. Furthermore, we have endorsed the Task Force on Climate-related Financial Disclosures (TCFD) and are also working on disclosure of information. However, if we cannot appropriately adapt to the risks of natural disasters because of climate change, the shift to a decarbonized society, etc., our business activities may be adversely influenced, which may affect operating results and financial position.

(12) Environmental risks

The Group is actively engaged in Responsible Care Initiatives with the aim of undertaking voluntary initiatives to ensure excellence in environmental matters, safety, and health in all processes from the development to the manufacturing, distribution, and industrial and consumer use of chemical substances to their disposal and recycling. Furthermore, we are making efforts to reduce the environmental impact by controlling the emission of chemical substances, promoting saving energy activities, reducing waste, making effective use of resources, etc. together with complying with environmental legal regulations. However, in the event that stricter environmental regulations are introduced, new legal and social responsibilities arise, or environmental pollution caused by actions taken prior to the legislation occurs, an increase in the expenditures for compliance or restrictions on manufacturing and sales due to administrative guidance etc. may affect operating results and financial position.

(13) Risks related to human resources

In order to secure and develop autonomous talent with diverse range of values, the Group is implementing measures such as developing talent for leaders and promoting the active participation and advancement of seniors and women led by organizations that promote diversity and inclusion. However, if talent development is behind schedule or we cannot retain talent, medium- to long-term growth may not be able to be achieved, which may affect operating results and financial position.

(14) Risks related to impairment losses on assets

The Group owns multiple items of property, plant and equipment such as manufacturing facilities, which account for approximately 36% of the total assets. Also, Inventories are equivalent to around 16% of the total assets. Thereby, in the event that the product market significantly declines due to sharply worsening supply-demand balance etc., impairment losses on non-current assets or write-down of inventories may affect operating results and financial position.

(15) Risks related to corporate acquisition, capital alliances, etc.

The Group sometimes makes corporate acquisition or a capital alliance in domestic and overseas to expand its business and enhance its competitiveness. When conducting these activities, we have decided to investigate targeted companies thoroughly to consider risks. However, in the event originally expected synergy effects, creation of new businesses, and other anticipated benefits cannot be obtained due to changes in the business environment surrounding the Group and targeted companies or impairment losses on goodwill, book value of shares, etc. are recorded due to poor business performance of investee companies, operating results and financial position may be affected.