Business and Other Risks

Following are principal matters that are considered likely to have a significant impact on decisions made by investors regarding risks involved in executing strategy, business, and other concerns of the Group.
The Group organizes and manages risks through a Risk Management Committee, which identifies and prioritizes potential risks to management of the Group in general, then deliberates and decides on risk response policies.
Risks related to COVID-19 may fluctuate due to such factors as resurgence of the disease. The Group will constantly track the latest information, while thoroughly organizing risks and opportunities in order to implement measures from a medium- to long-term perspective.

Matters concerning the future as stated herein are based on the Group's estimations as of September 30, 2022.

1. Rapid changes in the business environment

The market for digital cameras, the leading products of the Imaging Products Business, is seeing intensified competition for mirrorless cameras. In addition, the business is adversely affected by restrictions due to COVID-19 in various countries and delays in component procurement. In response to this, the Group continues to strengthen the earnings structure of the business, such as optimizing production and sales bases, thoroughly reducing cost and increasing development efficiency, as well as reforms to supply chain and logistics.
The demand for FPD lithography systems handled by the Precision Equipment Business is expected to be stable in the display market. However, if there is over-supply as a reaction to large-scale capital investment or curbing of consumption, demand for lithography systems may also experience a decline. In response to this, the Group is working to secure a certain level of profit under such a business environment through new lithography systems and service business, in addition to reducing total costs.
Although the semiconductor market, the target market for semiconductor lithography systems, is expected to grow significantly over the medium- to long-term, demand for immersion lithography systems may drop depending on the degree of the shift in the cutting-edge process development to EUVL. In addition, the Group's profit may be affected by such factors as changes in capital investment plans by its major customers. In response to this, the Group will vigorously work on business development other than with its existing customers and expand its service business, in accordance with the business strategy that prioritizes profitability.
Looking at the Precision Equipment Business as a whole, tighter regulations enforced by various countries in response to the spread of COVID-19 may potentially damage trust from customers due to delay or suspension of shipments, and cause an investment freeze due to decline in demand, as well as a decline in sales. In response, the Group will further strengthen communication with customers, as well as promoting local support for installation and service personnel.
In overseas business development, changes in political systems and economic environments, the effect of trade wars and conflicts between countries, social turmoil due to riots, terrorism, wars, disasters, and various infectious diseases, and other issues may cause major obstacles or losses to our business activities. It is difficult to make concrete predictions regarding the possibility and the extent of the effect of the materialization of these risks, as it depends on social conditions and other factors. In response to this, the Group examines and implements countermeasures by collecting information and analyzing the impact on business.

2. Revenue expansion of the growth drivers

In the new medium-term management plan (FY2022–FY2025) released in April 2022, the Group has positioned Material Processing and Robot Vision under the Digital Manufacturing Business, our strategic business, as medium-term growth drivers. If the transformation in the whole manufacturing industry is slow, the business may not grow to the expected scale by the end of the medium-term management plan, which is the fiscal year ending March 31, 2026.
In order to minimize the possibility of this risk materializing, the Group will provide the unique value to the manufacturing industry that has been embracing digitalization, to create a new market. With regard to strategic investment, the Group will take a range of measures to contribute to expanding the business.

3. Ability to develop new products and investment in development to maintain and enhance competitiveness

Being subject to intense competition, the Group's core businesses are constantly required to develop new products by continuing to engage in highly advanced research and development. Therefore, it is necessary to continue to invest in product development, regardless of the fluctuation in the Group's profit. Enterprise value may decline and profit may decrease if in the event of investments do not produce adequate results and new products or next-generation technology cannot be developed or introduced to the market in a timely manner, the technology developed by the Group is not accepted by the market, or if the Company's technology becomes unnecessary due to drastic changes such as game changing developments. In order to minimize the possibility of such risks materializing, based on future social and market trends, the Group's Technology Strategy Committee is exploring new areas that the Group should focus on, formulating a technology strategy that will lead to improved competitiveness of the existing businesses, in addition to a research and development plan to realize this strategy, and also working to visualize and optimize the technology of the Group.

4. Procurement

In each business, the Group ensures stable procurement of supply such as raw materials, key components, and finished products, while maintaining close relationships with suppliers. The Group's profit and financial position may be adversely affected in the event of social turmoil due to natural disasters such as earthquakes, riots, terrorism, wars, or pandemics, quality problems, policy changes made by suppliers, procurement of supply being significantly affected by bankruptcy or business failure on the part of a specific supplier, or a steep increase in purchase price. Specifically, some delays in procurement of supply are already materializing due to the consequences of the spread of COVID-19 and a deterioration of international environment, such as tighter regulations on suppliers and regions, suspension of operations, bankruptcy, and disruptions in logistics. As a consequence of growing demand and decreased supply due to a fire and other reasons, supply shortages of components have also emerged to some extent. It is difficult to make concrete predictions regarding the scale and timing of these risks, as it depends greatly on the social conditions. In response to this, however, the Group conducts multiple purchases as much as possible and assesses alternative supplier candidates. The Group also collects information regarding the procurement status of all business divisions in the event of a natural disaster or other such disruption. In addition, the Group implements measures from multiple perspectives, such as considering the availability of alternative supply and alternative measures such as design changes.

5. Outflow of human resources and information

The Group is supported by its employees, who possess advanced technical expertise and other abilities, and securing such human resources is becoming increasingly more crucial in order to overcome intense competition in the market. There is a possibility that such key personnel will resign, resulting in an outflow of their expertise and know-how. In order to minimize the effect of such outflow of expertise and knowhow, the Group has established a specific study curriculum and is promoting to standardize, share and hand on proprietary technologies and skills within the company.
The Group also retains crucial information such as technical information, corporate information concerning business partners, and personal information of its customers and other persons concerned. In order to prevent the risk of information leakage from materializing, the Group is taking measures such as enhancing its internal regulations regarding the handling of information and educating its employees, while thoroughly controlling external access to such information and improving the level of storage security.

6. Environmental issues

The Group considers environmental issues, such as climate change, depletion of natural resources, problems with waste disposal, and pollution by harmful chemical substances, to be matters that affect the survival of the Company. As such, the Group is taking various measures and conducting management that is conscious of the global environment.
With regard to climate change, when it causes abnormal weather, environmental disasters such as floods and droughts, or the spread of infectious diseases, bringing serious damage to the R&D and production bases of the Group and of our suppliers, such negative factors can affect the Group's operations and cause delays in production and shipment. The Group is therefore aware that these are risks that it is facing. Moreover, as the moves toward a decarbonized society accelerate, the introduction of a carbon tax is taking place or being considered in various countries. Such trends may result in increases in energy and raw material costs. To reduce these risks, the Group is working on efforts to reduce greenhouse gases throughout the entire supply chain, such as energy saving activities, utilization of renewable energy and streamlining of development and production processes, as well as the formulation of a business continuity plan (BCP).
Inadequate compliance with environmental laws and regulations may result in an impact on production, surcharges, or loss of social credibility due to administrative sanctions, which can seriously damage corporate management. In particular, laws and regulations relating to, among other things, energy, greenhouse gases and chemical substances, have been tightened year by year. The Group therefore views them as risks that it is currently facing. In order to ensure compliance, the Group has established internal rules and conducted training for relevant employees, so as to strengthen its management system, and is also striving to track and respond to regulatory changes in a timely manner. The Group is also working to prevent environmental pollution by establishing voluntary standards that are more rigorous than statutory requirements.