The principal risks that may materially affect financial condition, operating results or cash flows in 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.
In addition, we consider risk to be "uncertainty affecting organizational revenues or losses." Risk management is positioned as "activities that seek to maximize returns while minimizing the negative impact of risks" based on an understanding of risk not only from a negative perspective, but also from a positive perspective as an "opportunity."
All forward-looking statements are based on the beliefs of the Group in light of information available at the time of publication of this fiscal year ended March 31, 2020. In addition, items related to the impact of COVID-19 are summarized by segment at the end of this document. These forward-looking statements are based on judgments made by the Group as of May 31, 2020.
1. Risks Related to Economic Conditions
1) Economic Trends and Market Environment
We provide MFPs and digital printing systems, healthcare equipment, 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 Europe, economic stagnation continued from the second half of FY2019, and despite the decision by the United Kingdom to leave the European Union in January 2020, uncertainty persisted as negotiations between the United Kingdom and the European Union continued. There are also ongoing concerns over the trend of protectionist policies by the United States, the implementation of additional tariffs due to trade friction stemming from the fight for hegemony in the United States and China, the impact of the high-tech Cold War, geopolitical factors, particularly in the Middle East, and stagnant economic growth in China and emerging countries.
Economic downturns in national markets may cause customers to curtail investment, reduce expenses, or depress consumption. As a result, the Group's operating results and financial condition may be adversely affected in the future, including an increase in inventories that exceed our expectations, a decrease in selling prices due to intensified competition, or a decrease in the number of new installations.
We experienced a major impact on financial performance in FY2019 as global expansion of COVID-19 from the February constrained our sales activities, particularly installation of equipment, supply of services and new orders, due to lockdowns in Europe and the U.S. This issue is described in detail in "4. Risks Related to COVID-19."
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. With respect to the euro, the impact of a ¥1 in exchange rate on operating profit will be approximately ¥600 million, which will have a direct impact on earnings. In other major currencies as well, the yen's appreciation will have a negative impact on our financial performance and the yen's depreciation will have a positive impact. In addition, the yen value of our assets and liabilities arising from transactions denominated in foreign currencies, or the translation differences of foreign operations arising from financial statements of foreign subsidiaries denominated in foreign currency may be at risk of fluctuation.
2. Risks Related to Business Activities
1) Risks Related to Environmental Changes of Printing in Office Business
Mainly in developed countries, there is a risk that opportunities for printing on paper in offices will gradually decrease due to changes in work styles, in addition to the acceleration of the spread of digital equipment such as tablets and smartphones as a means of information sharing instead of paper. In addition to this, there are concerns that the spread of telework due to the spread of COVID-19 will accelerate the actualization of this risk. If we are unable to respond to these changes in our customers, our operating results will be adversely affected.
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 addition, if we are unable to respond to such unanticipated events, our financial performance could be adversely affected.
In particular, in Healthcare and Bio-healthcare businesses, 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
In the future, technological innovations ahead of other companies are a key source of competitive advantage in new business fields that we should develop. We constantly take on the challenge of developing innovative technologies with active R&D and capital investment in the fields. However, our competitors may be able to create similar or alternative technologies in advance.
In addition, the spread of digital technologies, such as IoT and AI, will expand the scope of data utilization, which is expected to bring about changes in various industrial fields and business models. If we are unable to respond to these changes, 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 or the impact of new product introductions on current product sales 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, including 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.
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.
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.
In the Group's mainstay businesses, such as Office 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, revaluation of the Renminbi, 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.
7) 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 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) 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 such as COVID-19 and the new influenza, 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.
2) Environmental Regulations and Climate Change
The Group is subject to various environmental laws and regulations relating to air pollution, water pollution, removal of hazardous substances, waste disposal, product recycling, soil and groundwater contamination, and we invest the necessary management resources to comply with them. However, we may incur costs or be liable for environmental liability associated with our current and past production activities. In addition, further tightening of regulations governing greenhouse gas emissions, energy efficiency, the European Circular Economy, new and additional environmental laws or regulations, such as carbon taxes, in the future could result in additional obligations and costs of compliance, which could adversely affect our financial performance.
In addition, the progress of climate change and other global environmental issues may adversely affect our financial performance in the future in phases of mitigation and adaptation of them. On the other hand, if we can contribute to the resolution of these issues, it could have a positive impact.
3) Intellectual Property Rights
The Group accumulates a great deal of technologies and know-hows in product development process and strives to acquire intellectual property rights to protect them. However, in some regions and countries, systems to protect 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, while the Group is developing products as preventing infringement of the rights of other companies, we may be alleged to infringe on the intellectual property rights of other companies due to differences in views, and the Group may not be able to use the technology or may be 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.
4) Keeping Human Resources
We recognize that the continuous acquisition of excellent human resources is essential to our future growth centered on new businesses in the Group. In particular, it is necessary to strengthen IoT human resources in order to respond to changes in various business models due to the expansion of the areas of data utilization accompanying the spread of digital technologies such as IoT and AI. If we are unable to strengthen our human resources as planned, it may affect the conversion of our business to the solution business that the Group is aiming for.
5) Information Security
Through its various business activities, the Group sometimes obtains personal or confidential information of its customers or business partners. In the information management, unforeseen incidents could cause unauthorized access, tampering, data destruction, loss, or leakage due to cyber-attacks or other events. The leak of, or unauthorized use of, the Group's confidential technical, contractual or personnel information to third parties could also adversely affect the Group's financial performance.
4. Risks Related to COVID-19
1) Impact of the Outbreak of COVID-19
The Group operates globally, and more than 80% of the revenue is earned in the market other than Japan. In this business circumstance, the global outbreak of COVID-19 that emerged in late January 2020 caused disruptions in supply chains and production activities in China and other Asian regions due to lockdowns and requests for self-restraint by governments. The Group also faced temporary shutdowns and reduction of production at some factories. In Europe and the U.S., our sales activities were forced to stagnate, because business activities of our client companies stagnated, and then demand declined significantly. The impact of COVID-19 is estimated by the Group based on information available at the end of May and is assumed to be certain condition. However, due to uncertainties, it is difficult to predict the impact on financial performance in concrete terms. On the other hand, in the process of resuming economic activities while fighting COVID-19, further support for healthcare professionals is expected to be required, and people's values and work styles are expected to change. We anticipate expanding our business opportunities by solving these social issues, such as diagnostic support system with AI for chest X-ray images, remote diagnosis assistance, support for working style reform through multi-site collaboration using Workplace Hub, and providing telework know-how gained from in-house implementation.
The following is a description of each segment from the perspectives of both risks (negative side) and opportunities (positive side).
(Office Business and Professional Print Business)
Telework and restricted business activities in client companies could result in delays in product purchasing decisions and installations, constrained opportunity or prolonger of business negotiations, and print volume reduction, which could adversely affect our operating results.
On the other hand, our IT service solution and “Workplace Hub,” which support new work styles such as teleworking, are expected to expand sales opportunities as solutions that realize remote collaboration while establishing robust information security in our main customers, such as small-and medium-sized companies and government agencies.
(Healthcare Business and Bio-healthcare)
We anticipate a temporary decrease in sales due to a decrease in the number of general patients and patients participating clinical trials, constraints on visits to hospitals and pharmaceutical companies from the Group, and other factors.
On the other hand, we expect these demands to return after COVID-19 subsides. In addition, we anticipate an expansion of sales opportunities for remote diagnostic imaging systems that support sustainable healthcare regime, including those for infectious diseases, Dynamic Digital Radiography, image interpretation supporting systems with AI, "informity," which supports medical image management and collaboration of medical facilities, remote medical diagnosis and counseling systems, and employee healthcare management programs.
In April 2020, in response to a request from the U.S. government, we are commissioned to conduct PCR and antibody tests for companies and healthcare professionals using our testing laboratories and DNA testing technologies. In drug discovery support service, we are working to support the study of a new treatment for COVID-19.
We anticipate delays in the expansion of flat panel display (FPD) manufacturing line in client companies and the impact of fluctuation in demand for final products.
On the other hand, with the spread of new work styles, we anticipate the possibility of expanding sales opportunities, such as the sales of materials for small-and medium-sized displays for notebook PCs, tablets, and smartphones, which are expected to grow in demand, as well as the Group's unique solutions that support labor-saving through the automation of inspection processes in clients’ manufacturing lines.
In the field of imaging IoT, demand for surface temperature measurement solutions with thermal cameras based on AI analysis is increasing, and sales opportunities are expanding.
(Procurement and Production)
The spread of COVID-19 also affects the business activities of our suppliers. There is a possibility that prices of procured items rise due to the business continuity costs of suppliers, or procuring substitutes cause additional if their business continuity is judged to be difficult.
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