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 the Risk Management Committee, which identifies and prioritizes potential risks to management of the Group in general, then deliberates and decides on risk response policies.

Matters concerning the future as stated herein are based on the Group's estimations as of September 30, 2023.

1. Rapid changes in the business environment

As for digital cameras, the leading products of the Imaging Products Business, the mirrorless camera market is seeing fierce competition. In addition, the business is adversely affected by the rising prices. This may lead to future deterioration in the market conditions. In response to this, the Group continues to strengthen the earnings structure of the business by taking steps such as optimizing production and sales processes, reforming supply chain and logistics, thoroughly reducing cost, reinforcing digital marketing, and increasing development efficiency.
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.
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. As part of strategic investment, the Company made a public takeover offer for SLM Solutions Group AG(now Nikon SLM Solutions AG), a global provider of integrated metal additive manufacturing solutions based in Germany, and made it its consolidated subsidiary. The Group will continue to take a range of measures on strategic investment 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. Regulations and other rules

As it operates many businesses on a global scale, the Group is required to apply various laws and regulations, including import and export regulations, competition laws, labor laws, anti-corruption, and transfer price taxation, and fulfill its corporate social responsibility in many countries. These laws and regulations and what the Group is required to do to fulfill its social responsibility could change significantly. Such changes may have adverse effects on the Group business, such as increasing business activity costs, imposing constraints on its business, and posing reputation risk. In addition, in the event of delay in response to the risk of violating laws and regulations in respective countries and business domains or response to changes therein, the Group may suffer financial losses.
In response to this, while the Group organizes and manages risks through the Risk Management Committee, its three subordinate committees, the Quality Committee, the Export Control Committee, and the Compliance Committee, address risks requiring specialized knowledge. At the same time, the Sustainable Committee also monitors and addresses risks, especially those defined as materialities, from a sustainability point of view.

5. Procurement

In recent years, the supply and demand balance of components has been disrupted by various factors, including infectious diseases, global abnormal weather and natural disasters, geopolitical impacts, and international conflicts, resulting in significant fluctuations in energy and raw material prices. In addition, our stakeholders have become more interested in social issues such as on human rights and the environment in the supply chain. As such, the Group is considered to face increasing uncertainty and risks associated with supply chain.
The current uncertainty and volatility are likely to continue also in component procurement and logistics. Against this background, the entire Group is making efforts to build a resilient supply chain that allows us to address these social issues by sharing the same vision not only within the Group but also with procurement partners and working together with them, while reflecting the views of society as a whole. Specifically, the Group is working to build strong relationships with procurement partners, visualize its supply chains, and, together with procurement partners, formulate and enhance a business continuity plan (BCP), monitor CO2 emissions, and strengthen responses to human rights due diligence. By doing so, the Group is building relationships and systems that enable us to assess supply chain risks and take immediate action during emergencies.

6. Securing of human resources and outflow of information

The Group is supported by diverse human resources, such as employees who possess advanced technical expertise and other skills, and securing such human resources is becoming increasingly more crucial in order to overcome intense competition in the market. If the Group fails to secure or develop talented personnel, or if key personnel resigns, this may adversely affect its business or result in an outflow of expertise and know-how. In response to this, the Group has clearly presented a direction it is heading to and organizational goals to achieve the Group’s vision and is executing its human resource strategy that is linked with such direction and goals. The Group has also established a specific curriculum and is promoting to standardize, share and hand on proprietary technologies and skills.
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 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.

7. 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, among other policies and laws and regulations, 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).
Companies are now required by environmental policies and laws and regulations to take actions such as compliance with standards and information disclosure. As such policies and laws and regulations have been increasingly tightened year by year, inadequate compliance 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, tightening of laws and regulations relating to chemical substances could make it more difficult to procure necessary materials and auxiliary materials. The Group therefore views them as risks that it is currently facing. In order to ensure compliance with these laws and regulations, the Group has established internal rules and conducted training for relevant employees, so as to strengthen its management system, including its supply chain, and is also striving to, among other efforts, track 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.