The principal risks that may materially affect financial condition, operating results or cash flows in the Konica Minolta Group (the “Group”) are described below. These risks are not necessarily exhaustive of all risks and may in the future be affected by other risks that we do not anticipate or that we believe to be immaterial.
All forward-looking statements are based on the beliefs of the Group in light of information available as of March 31, 2023.
1. Risks Related to Economic Conditions
1) Economic Trends and Market Environment
We provide MFPs and digital printing systems, healthcare equipment, genetic diagnosis, drug discovery support, measuring instruments, optical materials, optical systems, products and components for industrial use, display materials, and related services to customers around the world. Sales and profits in these businesses are significantly affected by economic trends and the business environment in each country.
In the fiscal year, there was a moderate recovery trend as social and economic activities continued to normalize from the effects of the COVID-19 pandemic. On the other hand, the economic environment became increasingly severe due to concerns of a global economic downturn due to soaring energy and food prices worldwide, and monetary tightening in Europe, the U.S. and other countries, among other factors.
The U.S. economy maintained a recovery trend, bolstered by steady consumer spending and exports. The employment situation remained robust, leading to tight labor conditions. With ongoing labor shortages and high wage increases, there are concerns over the impact of monetary tightening on the economy.
In addition, the European Union (EU) economy slowed due to constraints and soaring prices on energy supplies, especially oil and natural gas, due to the situation in Ukraine, as well as rising prices for other goods, raising concerns about the risk of a recession due to monetary tightening.
The Chinese economy entered a recovery phase following the lifting of its zero-COVID policy. The easing of strict mobility restrictions led to resurgence in the flow of people within the country, expanding service consumption and driving economic recovery. However, looking at demand outside the service sector, vulnerabilities remain, such as the downturn in the real estate market, which could dampen the momentum of the economic recovery going forward.
Looking ahead, the global economy is expected to face adverse effects from geopolitical risks such as the situation in Ukraine and tensions between the U.S. and China, as well as from monetary tightening by major countries around the world. In particular, if financial instability expands in the U.S. and EU, it could have a significant impact on economic activity. Furthermore, efforts to strengthen economic security in the U.S. involve heavy investments in strengthening its own technologies, primarily semiconductors, while moves to prevent the outflow of advanced technologies to foreign countries could accelerate. Such moves raise concerns about a major impact on existing supply chains, especially for advanced technologies and critical materials.
If these risks materialize and stall economic activity across different countries, it could lead to customers cutting back on investment and changing spending behavior. This in turn could adversely affect the Group’s operating results and financial position in the future, including decreases in new equipment purchases beyond expectations, declining sales prices due to intensifying competition, and inventory buildup.
2) Exchange Rate Fluctuation
As indicated by the high percentage of overseas revenue, we are expanding our business globally and are significantly affected by exchange rate fluctuation. In addition, there are fluctuation risks of the yen value of our assets and liabilities arising from transactions denominated in foreign currencies, and the translation differences of foreign operations arising from financial statements of foreign subsidiaries. With regard to the euro, if the exchange rate fluctuates to a depreciation of ¥1, an increase in profits in Europe would have a positive impact on operating profit of approximately ¥0.6 billion. Similarly, if the renminbi were to depreciate by ¥1, it would have a positive impact on operating profit of approximately ¥1.2 billion due to increased earnings in China. On the other hand, with respect to the U.S. dollar, if the yen weakens by ¥1, there would be a negative impact of approximately ¥0.3 billion on operating profit due to an increase in procurement and manufacturing costs, and so on.
2. Risks Related to Business Activities
1) Risks Related to Environmental Changes of Printing in Digital Workplace Business
Mainly in developed countries, the medium for sharing information has been rapidly shifting from paper to digital devices such as tablets and smartphones. Moreover, the swift spread of new work styles triggered by the COVID-19 pandemic, which have now taken root, suggests that the rate of employees commuting to offices will not return to pre-pandemic levels. Consequently, there is a risk that opportunities for print output will continue to decrease. If we cannot respond quickly to such changes in customer behavior, it could adversely affect the Group’s operating results.
2) Regulations in Each Country and Region
Many of the Group's business activities are conducted outside of Japan, such as North America, Europe and Asian countries, and are affected by legislation, regulations and approval procedures specific to the country or region. We always pay close attention to economic trends, such as increases in mutual tariffs triggered by trade friction between the U.S. and China, and restrictions on technological exports. However, in the future, if regulations by governments or international frameworks, such as taxation, import and export controls, currency controls, regulations on protection of personal information, digital tariffs, and various other rules, are newly introduced or changed, costs may be incurred to respond to them or the business activities may be hindered.
In particular, in the Healthcare Business, we are affected by various healthcare systems and licensing procedures in each country. If the healthcare system reform or other factors causes unpredictable and large-scale changes in healthcare administration policies, and if we are unable to respond quickly to those changes, our financial performance could be adversely affected.
3) Next-generation technological change
As the business environment undergoes major changes with the progressing mid- to long-term global trends, such as climate change due to global warming and the digital revolution, innovative technologies are expected to have a major impact on the competitive advantage among companies. Although technological innovation ahead of other companies is an important source of competitive advantage for our Group, competitors may develop and utilize similar or alternative technologies in their businesses in advance. If we are unable to identify innovative technologies as targets for development, which can give us a competitive advantage, from a global and broad perspective, and provide them to the market quickly and flexibly, our financial performance could be adversely affected, including the loss of our positions in the market in the future.
4) Transition to New Products
Our operating fields are those in which the functions required for products and services are rapidly generalized due to rapid technological advances in hardware and software, and we need to improve the performance, the content, and the functions of our services even within the product life cycle. For this reason, we constantly take on the challenge of developing innovative technologies in order to respond to customer and market needs with investing in a large amount of resources in R&D. But the transition to new products and services is inherently subject to many risks. Delays in development or production, quality issues in the early stages of mass production, fluctuation of production cost, the impact of new product introductions on current product sales, or procurement of semiconductor, components and materials could adversely affect our operating results.
In addition, our operating results may be adversely affected by the timing of launching new products and services in the market by our competitors, such as the advanced introduction of products and services similar to ours by the competitors.
5) Collaboration with Other Companies, and Acquisitions, etc.
From the perspective of enhancing our business competitiveness or effectiveness, we are pursuing collaborations with other companies, equity alliances and corporate acquisitions.
Accompanying acquisitions, the Company has recorded goodwill and intangible assets, and conducts periodic impairment tests. We may recognize impairment losses if changes in the business environment result in anticipated declines in future cash flows related to the acquired companies, which could adversely affect our operating results and financial condition.
6) Procurement, and Production, etc.
In the Group's mainstay businesses, such as Digital Workplace Business, Professional Print Business, and Industrial Business, we continue overseas manufacturing activities to strengthen cost-competitiveness and supply products swiftly to the market. One of the Group's key operating bases is located in China, where economic development is accompanied by ongoing legislative reforms and infrastructure improvements. Nevertheless, there is a possibility of unpredictable legal changes, difficulties in labor policies, rising labor costs, and changes in import and export regulations, taxation systems, environmental regulations, or other situations. For the Group, which conducts a portion of the production activities of our core businesses in China, our financial performance and growth strategies could be adversely affected if we are unable to address these risks.
The Group has adopted a procuring policy for certain products, parts, materials, and energy from multiple suppliers worldwide. Unforeseen situations at those suppliers could adversely affect our ability to produce and supply products.
The Group's financial performance could be affected by rising prices for raw materials, such as steel, aluminum, and other metals, petrochemical products made from crude oil, rare earths, and other rare natural resources used in the Group's manufacturing activities, as well as energy prices.
Particularly due to the situation in Ukraine, there has been a prolonged surge in raw material and energy prices, and the impact might continue further.
In addition, the risk of wage increases for workers due to the revaluation of minimum wages in each country has increased due to the impact of rising living costs caused by global inflation. It could lead to higher production costs.
Moreover, the “likelihood of occurrence” has been changed from “high” to “medium” because the procurement of materials and components, mainly semiconductors, has stabilized and the Group’s production system has stabilized due to the end of China’s zero-COVID policy. Similarly, the “impact” has been changed from “large” to “medium” because the risk of lockdowns in major Chinese cities has decreased, and we have been able to establish a system to secure safety stocks and handle emergencies such as infection outbreaks through diversified procurement.
7) Global Supply Chain
Many of our Group's production and sales activities are conducted outside of Japan, and our supply chain is also expanding globally. Logistical issues in each country and region could spill over to our Group's entire global supply chain, which could delay our supply and adversely affect our Group's results.
We produce many products in China and countries in ASEAN, and supply them globally from there. If activity restrictions occur again in China and ASEAN countries due to a resurgence of COVID-19 or similar events, bottlenecks and congestion in port and airport cargo handling could cause logistics delays, posing a major risk to supplying our sales bases.
On the other hand, in the U.S. and European countries that are our important export destinations, prolonged and failed labor negotiations at major ports resulting in strikes, bottlenecks and congestion in inland railway transportation, disruptions in passing through the Suez Canal, or delays in barge transportation due to low water levels on the Rhine River could prolong the lead time for supplying and stocking our main warehouses at sales bases. As a result, inventory shortages at sales bases could occur, leading to lost sales opportunities due to delivery delays to customers, which could adversely affect the Group’s operating results.
In addition, if the situation in Ukraine deteriorates, there is a risk that reduced air freight services to Europe could impact emergency air shipments.
Note that the “likelihood of occurrence” has been changed from “high” to “medium” because international maritime and air transportation from China and countries in ASEAN has stabilized due to the containment of COVID-19 and the end of China’s zero-COVID policy among other factors.
8) Responsibilities for Products and Quality
Our domestic and overseas Group companies and subcontractors have established a rigorous quality assurance system to provide our customers with high-performance and reliable products and services. In the unlikely event of a defect in our products or services, there is a possibility that the Group could incur liability of damages resulting from the defect and we could incur significant costs to measure the defect. In addition, this issue could damage corporate and product brands and adversely affect operating results.
3. Other Risks
1) Human Rights
With the adoption of the UN Guiding Principles on Business and Human Rights (UNGPs) by the United Nations Human Rights Council in 2011, countries have been formulating national action plans on business and human rights. For example, the UK has enacted the Modern Slavery Act, and Germany has enacted a law on corporate due diligence in the supply chain. When such laws and regulations are enacted or strengthened in various countries, the Group, as a global business, may incur costs to comply with them and spend work time and resources on internal preparations to ensure compliance. Also, if we are unable to address such unexpected situations, it could adversely affect the Group’s operating results.
Furthermore, if the Group, which has production sites and business partners in China and ASEAN countries, finds that children or migrant workers in the supply chain are subject to forced labor, excessive working hours, or other negative impacts on human rights, it could disrupt production activities and damage our corporate and product brands, adversely affecting operating results.
2) Severe Earthquakes, Natural Disasters, Infectious Diseases, etc.
We have R&D, procuring, manufacturing, sales, and other bases in various countries around the world, and are expanding our business activities globally. Earthquakes, fires, large-scale disasters associated with climate change such as typhoons, floods, and forest fires, the outbreak of major infectious diseases, or acts of war, terrorism, cyber-attacks, etc. could cause damage to our facilities, etc. It may cause temporarily operational shut down and delay in production and shipments, which could adversely affect our financial performance.
In particular, in the event of a severe earthquake occurring directly below the Tokyo metropolitan area or along the Nankai Trough, it may exceed the expected damage according to our contingency plan which has been formulated by considering the degree of the impact. Although we continue to promote disaster prevention measures and business continuity management, in such the event, the continuation of the Group's business activities may be affected by the suspension of providing services to customers or the product shipments, etc. due to functional stoppages, damage to facilities, supply suspensions of electricity, water, gas, etc., shutdowns of public transportation or communication methods, or damage to the supply chain, etc.
3) Climate Change and Environmental Regulations
In the event of a global transition to a low-carbon society, further tightening of environmental laws or regulations could adversely affect our financial performance.
In addition, reduction of paper output in offices, and increasing manufacturing and procurement costs due to the use of alternatives to fossil fuels or fossil resources, among other things, could affect the Group's results.
On the other hand, if the physical impact of climate change becomes apparent around the world, damage to forest resources from climate disasters could lead to unstable procurement of raw materials for paper and could lead to the loss of business opportunities for the Group. In addition, when chronic impacts of climate change, such as changes in climate patterns, occur, the supply of raw materials, etc., may be restricted or suspended temporarily, thereby causing temporary shutdowns at our sites or suppliers, delaying production and shipments.
In addition, the Group is subject to various environmental laws and regulations relating to air pollution, water pollution, removal of hazardous substances, waste disposal, chemical substances in products, product recycling, containers and packaging, and soil and groundwater contamination, and we invest the necessary management resources to comply with them. However, we may incur costs or be subject to environmental liabilities associated with our current and past activities in production, development, and marketing.
4) Intellectual Property Rights
The Group accumulates a great deal of technologies and much know-how in the product and service development process and strives to acquire intellectual property rights to protect them. However, in some regions and countries, systems to protect and operate intellectual property may be inadequate, and we may not be able to prevent third parties from manufacturing and selling similar products using the Group's intellectual property rights.
In addition, the Group develops products and services without infringing on the rights of other companies. However, we may be alleged to infringe on the intellectual property rights of other companies due to differences in views, and this may affect the development and sales of the Group’s products and services, or the Group could be found liable for heavy compensation for damages. In addition, the use of the intellectual property rights currently licensed by third parties to the Group could be discontinued in the future or changed to unreasonable terms.
5) Retaining Human Resources
We recognize that the continuous acquisition of excellent human resources is essential to the future growth driven by new businesses in the Group. In particular, for the Industry Business, which will drive the Group’s growth going forward, it is necessary to increase marketing personnel and product managers who can conceive and launch new services.
In addition, we must build up our teams of materials engineers and mechatronics engineers who support the core of our Industry Business, as well as IT engineers who are indispensable for service businesses that leverage data. If the reinforcement of human resources does not proceed as planned, the growth of the Industry Business could be delayed, potentially affecting the Group’s profitability.
6) Information Security
In recent years, the methods of cyber-attacks targeting companies have become increasingly advanced and sophisticated. Among them, there have been numerous incidents in and outside Japan where user account login credentials are stolen to infiltrate corporate networks that are centrally managed, administrative authority is seized, and unauthorized operations are performed.
In the Group as well, if administrative authority were seized in a cyber-attack, unauthorized operations could result in critical information security incidents such as the Group’s confidential information including technology, trade secrets, and personnel matters being leaked to third parties or misused. Such events could adversely affect the Group’s operating results.
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