Business Risks

(Excerpt from the Securities Report from the 183th Term)

At the Company, the Risk Management Committee exhaustively and comprehensively manages the risks of the entire Group under the operating officer in charge of risks (head of the Risk Management Committee under the CSR Generalization Committee). In addition, Group companies and departments identify, assess, and examine the risks involved in daily operations and implement measures to address these risks.
The Risk Management Committee assesses the risks of each company and department based on the frequency of occurrence and severity and creates a risk map, which is shared by the overall Group. It reports serious risks to the Board of Directors and checks the progress and achievement of activities for reducing these risks. If an issue arises that could develop into a serious risk, the Company organizes an emergency task force.
Major risks that management recognizes as having a significant impact on the financial position, operating results and cash flows of the Group in the course of the risk management activities above are as follows.
Forward-looking statements in the text are judgments of the Company as of the end of the consolidated fiscal year under review, and are not limited to business risks.

(1) Risks specific to business segments

(i) Colorants and Functional Materials Related Business

For the Group, the synthetic technology of organic pigments is one of its starting points. In addition, dispersal technology cultivated in the manufacturing of inks and coatings has gone beyond the application of coloring and has expanded into the development of new dispersants to which materials for LCD color filters and carbon nanotubes are applied.
In the pigment business, there is a risk that demand for pigments for printing inks will shrink significantly in the structural depression associated with the digitalization of the domestic printing market, which could result in falls in net sales and profits. Therefore, we will make efforts to reduce business risks by expanding pigments into food packaging applications with high growth potential. In the colorants business, there is a risk that demand will decrease associated with growing environmental awareness, including the waste plastic problem. However, we will contribute to a sustainable society and reduce business risks through the development of eco-friendly products, such as colorants for biodegradable resins.

(ii) Polymers and Coatings Related Business

The Group is expanding the polymers and coatings-related business into fields such as packaging materials, automobiles, electronics, energy and medical and healthcare, leveraging its polymer and coating technologies.
Many of the raw materials in this business are petroleum-derived, and their use is restricted by regulations and societal demand in countries for environmental conservation. Therefore, net sales could fluctuate. We will expand the development of and replacement with eco-friendly products that secure the functions of existing products to fulfill our responsibility as a material supplier for end products that are necessary for daily life.
With respect to materials for the electronics market, net sales and profits could fluctuate, depending on whether our products are adopted because the specifications of end products change every year, as is the case with smartphones. We will make efforts to reduce the risk by increasing the probability of adoption and expanding the user companies through the enhancement of our advantages in terms of quality and cost.
With respect to materials for the medical and healthcare market, research and development takes a considerable amount of time and expense, and there is a possibility of delay, change or cancellation in the process before launching. Revisions to related laws and regulations following the trends of the pharmaceutical administration and the fluctuation of authorized prices could also impact net sales and profits. We will diversify risks by increasing the development pipeline and expanding the business base into adhesives for healthcare use and peripheral materials of medical devices.

(iii) Packaging Materials Related Business

The Group provides a wide variety of high-performance products in the manufacturing process of packaging materials. In the field of food packaging, where security and safety are required, we are expanding the replacement of inks and adhesives with water-based and non-solvent ones. We are also actively developing biomass products to achieve the sustainable development goals (SDGs).
In the packaging materials-related business, consumer demand for film inks and adhesives may decline due to growing environmental awareness, including the waste plastic problem, which could result in falls in net sales and profits. We will diversify risks by strengthening the development of new products, regarding changes in the market and the environment as an opportunity.

(iv) Printing and Information Related Business

The Group develops a broad range of products, including eco-friendly products and high-performance UV curable inks, and provides solutions in the printing process for customers, taking advantage of its strengths in integrated production from pigments and resins, which are raw materials, to end products.
In the printing and information business, there is risk that net sales and profits will decline faster than expected due to the shrinking of the information-related print market associated with digitalization, and the collection of trade receivables will be affected, depending on the business situation of customers and business partners associated with changes around the printing market. Therefore, we will fully enforce information gathering and credit management to be able to early detect changes in economic conditions and signs of credit insecurity. We will expand adaptation to the market environment by flexibly shifting management resources to growth areas and thoroughly improving business efficiency.

(2) Risks concerning the entire Group

(i) Risks related to overseas operations

The Group conducts production and sales activities both in Japan and overseas and will cultivate overseas operations more deeply in business fields where growth is expected in the future. These overseas operations involve risks as described below.

  • Unexpected changes in laws and regulations and changes in tax systems that could have adverse effects
  • The adverse effect of inadequate social common capital on the Group's operations
  • Unfavorable political factors
  • Social turmoil caused by terrorism, war, or infectious disease
  • Unexpected rapid changes in the work environment

It is difficult to reasonably predict the probability of the occurrence and impact of these events, and there is a possibility that they will have an adverse effect on the Group's operating results and financial position. However, the Group is working to minimize the risk by taking measures such as the expansion of business development worldwide, the improvement of the balance of business fields, the construction of supply chain management (SCM) that is able to respond flexibly to risks, and the reduction of fixed costs and variable costs including raw material expenses to build an earnings structure that is less vulnerable to economic trends and other risks.

(ii) Risks related to information leakage, loss and damage

The Group holds confidential information associated with its operations, including the confidential information and personal information of the Group and business partners. Most of the confidential information is stored and used as electronic information, but the risk of information leakage, loss or damage due to computer viruses and security violations via the Internet is rising in the business environment where telework is expanding. The Group is taking all possible steps in fortifying its information system and mitigates risks by establishing the Information Security Office, strengthening the information management, and providing employee trainings. Nonetheless, if information leakage, loss or damage due to unforeseen circumstances has occurred, it could lead to loss of social trust, a breach of a non-disclosure agreement, or a decline in competitiveness due to an outflow or loss of expertise of the Group, which could impact the business performance of the Group.

(iii) Risks related to quality and product liability

The Group is strengthening its quality assurance system, but there is a possibility that accidents or claims caused by the quality of products will impact the business performance of the Group. In addition, there is no guarantee that compensation for damage paid by the Company will be fully covered by product liability insurance. The Group will strive to reduce risks by continuing to make efforts to comply with laws and regulations for quality and safety and to increase customer satisfaction and gaining the customers' confidence by improving the performance of products and continuously developing products that will contribute to the security and safety of customers.

(iv) Risks related to natural disasters and epidemics

At the Group, in addition to sluggish sales growth associated with the world-wide stagnation of consumer activities, the procurement of raw materials and production activities were disturbed by the spread and prolongation of the COVID-19 pandemic. If demand for the Group's products decline or if the Group faces negative developments, such as difficulty procuring raw materials on a larger scale than expected, the shutdown of business locations, the inability of employees to come to work and the stagnation of logistics functions due to the prolongation of the COVID-19 pandemic, it could additionally impact the Group's operating results and financial position. The Group is implementing the measures below after preparing and disseminating an employee handbook of countermeasures regarding the COVID-19 pandemic for the safety of those concerned and business continuity.

  • Temperature checks, wearing a mask, hand washing and sterilization
  • Staggered commuting, working from home and a web meeting system
  • Prompt situation reporting to managers and departments that address the COVID-19 pandemic and attendance restrictions according to the infection status and symptoms in cases where an employee and their family members may be infected.

Recently, risks related to natural disasters, such as large-scale earthquakes, heavy rain and the pandemic, have been increasing in Japan and overseas. A greater-than-expected expansion or prolongation of damage could harm assets, including buildings and production facilities, and result in limits on the use of electricity and water, difficulty with the sourcing of raw materials, stalled distribution, and even the inability of employees to come to work. These factors could lead to a reduction in supply capacity and have enormous adverse effects on the Group's operating results and financial position. Assuming these inevitable business interruption risks, the Group is working to develop a business continuity system by assembling emergency response manuals and regularly providing practical training.

(v) Risks related to the sourcing of raw materials

The main raw materials for products that the Group manufactures are petrochemical products. The purchase prices and sourcing of petrochemical products are significantly affected by changes in the oil and naphtha markets, natural disasters, accidents and policies. Particularly in the consolidated fiscal year under review, there was a risk that some raw materials would be difficult to procure due to the spread of the COVID-19 pandemic. There is a possibility that rises in purchase prices will result in falls in net sales and profits of the Group, because it will take time for consumer goods that use the Group's products to influence the rises in purchase prices to sales prices, given the market prices and their supply responsibility. In addition, the risk that raw materials will be difficult to procure could result in an inability to supply products to customers and have adverse effects on the operating results and financial position, depending on the amount of compensation for damage. In order to avoid this risk, we are expanding purchases at an appropriate price by increasing the accuracy of our market price and demand forecasts and reflecting them on the procurement of raw materials, as well as proceeding with the procurement of raw materials for stable product supply by securing stock according to the characteristics of raw materials under the production plan based on the market conditions and customer demand. We are also making efforts to mitigate the impact on the business performance of the Group by procuring raw materials without placing a disproportionate emphasis on certain companies and countries by widely collecting information on raw material suppliers on a daily basis.

(vi) Risks related to exchange rate fuctuations

The Group operates business overseas, and the financial statement items for overseas consolidated subsidiaries are converted to the yen to prepare consolidated financial statements, which may impact the Group's operating results and financial position due to dramatic fluctuations in exchange rates. The same could apply to foreign currency transactions, such as imports and exports. Therefore, the Group is taking steps to reduce FOREX fluctuation risks, including exchange forward contracts and the balancing of foreign currency receivables and payables.

(vii) Risks related to general legal restrictions

The Group's operations in Japan and overseas are subject to general legal restrictions. In order to comply with general legal restrictions, the Company has established and operates the CSR Promotion Coordination Meeting and special committees such as the Compliance Committee, Risk Management Committee, and Environment and Safety Committee under the CSR Generalization Committee to develop necessary measures, including the verification and review of operating processes in each activity field of manufacturing, sales and research and development, the creation of internal rules, and education for those concerned in order to examine and extract legal regulations related to the Company's business activities and ensure legitimate and appropriate business activities. In addition, the Company is developing and operating an internal control system for proper financial reporting.
However, there is no guarantee that litigation or other legal procedures that could have a material impact on the Group's operations will not occur in association with environmental issues, product liability, and patent infringement, among other issues, related to the Group's domestic and overseas operations. Litigation and other legal procedures could have an immense impact on the Group's operating results and financial position as the case may be, depending on the amounts claimed in litigation, along with other factors.

(viii) Risks of environmental burdens

The Group's principal business is the manufacture of chemicals, and the raw materials and products associated with this business include a number of chemical materials. As part of the Group's CSR management, the Environment and Safety Committee under the CSR Generalization Committee is actively leading efforts to check the degree of impact of these chemical materials on the environment and reduce the environmental burden. In addition, waste, discharged water, noise, vibration, soil contamination and CO2 emissions generated in the manufacturing process are also ruled by a variety of environmental laws and regulations in Japan and overseas. Recently, these laws and regulations related to chemical materials and the environment tend to be strengthened to improve the environment in Japan and overseas. Deplasticization and carbon neutral are also required as societal demand. These trends and requirements could give rise to additional obligations (costs), reduce the production scale or change the business form in all raw materials, products and manufacturing processes and have adverse effects on the Group's operating results and financial position. However, there is also a possibility that the Group will achieve a competitive advantage if social confidence in the Group increases in the long term as a result of appropriately addressing these risks. In its long-term management plan, the Group is working on a variety of measures, such as the reduction of energy usage and CO2 emissions by reviewing the manufacturing processes, the stronger management and systematization of chemical materials, developing VOC-free products, and the recycling of materials.

(ix) Risks related to common debt collection

The Group delivers its products to many customers in a range of industries in Japan and overseas and may be unable to collect trade receivables and other claims, including loans to customers associated with transactions, depending on the customers' financial condition. The Group has already posted an expected non-recoverable amount as an allowance for receivables it currently holds. However, if a greater-than-expected non-recoverable amount has occurred, it could adversely affect the Group's operating results and financial position. Therefore, the Group will make efforts to strengthen credit management by regularly reviewing the credit risk of customers and implementing measures to protect receivables tailored to the risk by adding qualitative information from sales sites, as well as using credit information and others as a reference.