Business Risks

The following factors related to our business and accounting practices may materially influence investment decisions. The Company is endeavoring to establish a system for anticipating potential risks for the Group, preventing their occurrence, and promptly and appropriately dealing with them if they occur. Forward-looking statements contained herein are based upon assessments made by SEKISUI CHEMICAL Group at the end of fiscal 2019.

1) Major market trends

The Group's business results and financial position may be affected should an unforeseen event arise. This includes a downturn in demand in a variety of mobility, electronics, housing, construction, infrastructure, and other fields, or an economic slowdown in such business areas as Japan, North America, Europe, and Asia. For example, markets where business is undertaken in the mobility field are easily affected by conditions and demand trends in the global automotive and aerospace industries. Markets for businesses in the electronics field, which are characterized by volatile fluctuations in demand, may shrink over a short period of time. In addition, the Housing Company's activities are subject to the policies and taxation systems that apply to the acquisition of houses in Japan. The Housing Company's business can also be affected by trends in consumption tax rates, interest rates, private consumption, and regional economies. As far as the UIEP Company is concerned, activities, which encompass the public sector, may be impacted by trends in public investment, which are determined by governments at both the national and local levels.

2) Raw material price volatility and procurement

The market prices of steel, timber, polyvinyl chloride, olefin, and other petroleum-related raw materials used in the Group's production activities are affected by a variety of factors including trends in the global economy, the balance between demand and supply, and fluctuations in foreign currency exchange rates. In addition, some of the raw materials used in the Group's products comprise scarce resources, which pose a risk regarding stable procurement. A sharp rise in the price of raw materials could lead to higher production costs, while demand trends for scarce resources and problems at suppliers could interfere with the Group's ability to supply products. As a result, the Group's business results and financial position may be affected. In response to rising raw material prices, the Group is implementing cost reduction measures. At the same time, energies are being directed toward maintaining a sufficient margin between selling and raw material prices, mainly in the UIEP and HPP companies.

3) Products and quality

The Group continues to engage in assurance and improvement activities to ensure that its products and services are of the utmost quality. However, despite these activities, the Group continues to run the risk of a product recall, discontinuation, payment of compensation, and loss of customer confidence should a major product-related incident, product safety, environmental, statutory and regulatory compliance, or other issue arise, and in the event of a dispute over intellectual property that results in a decision that is unfavorable to the Group. In this event, the possibility exists that the Group's business results and financial position may be affected. SEKISUI CHEMICAL Group engages in CS & Quality Management to consistently deliver value to customers so that they will always choose its products and services. We have also positioned "zero major quality issues" as one of our key indicators, and are working diligently to improve the level of consistent quality control across the entire value chain by preventing the incidence of a quality issue occurring through advance prediction of potential quality-related risks at the development stage after a product has been commercialized, and ensuring that basic guidelines for day-to-day management are being strictly adhered to by production departments. At the same time, the Group places the utmost importance on its intellectual property strategy in order to make the most of its prominence in technology. In striving to secure business competitiveness through the acquisition of strong patents, we conduct the necessary investigations to ensure that we do not infringe on the intellectual property of others, and take appropriate measures to avoid or prevent intellectual property infringement.

4)Foreign currency, interest rate, and owned asset price fluctuation

Operating and expanding its business globally, fluctuations in the value of the yen against foreign currencies could have a significant impact on the Group's foreign currency-denominated sales, raw material procurement costs, and the assets and liabilities of overseas subsidiaries and affiliates. Fluctuations in interest rates may also impact the amounts of interest income received and interest expense paid by the Group as well as housing-related business demand. In the event of a change in the market and business environments, there is a risk that the Group's real estate holdings including land, other inventories, property, plant and equipment, intangible non-current assets including goodwill, and investments and other assets such as investment securities may need to be written down. Each of the aforementioned has the potential to impact the Group's business results and financial position. The Group continues to promote local production by its businesses seeking to expand globally. Under these circumstances, every effort is being made to manage the balance of the Group's foreign currency holdings by converting them into yen and utilizing intra-Group loans and other means to reduce foreign currency exchange risk.

5) Overseas business activities

Engaging in manufacturing and sales activities through an overseas network that currently spans 23 countries, the Group is promoting the development of its global business as a key growth strategy. In addition to trends in the overall global economy, the Group's overseas business activities are subject to the risk of social and political disruption due to political turmoil such as terrorism and war, tariff retaliation measures, unexpected changes in policies, laws and regulations, tax changes, industrial base fragility, natural disasters, infectious diseases, racial discrimination, product boycotts, and other factors. In the event that these risks materialize, the Group's overseas business activities could be impeded, and its performance and future plans affected. SEKISUI CHEMICAL Group has established four regional headquarters in the U.S., Europe, China, and ASEAN regions to gather information on the economic, social, and political conditions and trends in the laws and regulations of each country in which it has a base of operations. Should an event that requires a response occur the Group company, regional headquarters, and specialized department at the Company's head office in Japan work together to respond as appropriate.

6)Major earthquake, natural disaster, industrial accident, and other incident

Major industrial accidents including fires, explosions, and the leakage of harmful substances that affect the areas surrounding the Group's factories and R&D facilities, as well as such natural disasters as earthquakes and tsunamis at the Group's business sites, together with the spread of infectious diseases could interrupt the Group's business activities. Any resulting loss of public confidence, expenses in responding to industrial accidents, including compensation and other costs, opportunity loss attributable to the suspension of production, compensation paid to customers, and other factors may affect the Group's performance and financial position. In order to prevent industrial accidents including fires, explosions, and the leakage of harmful substances, the Group identifies and responds to risks through risk management activities at production sites that also include simulations of natural disasters, and has a dedicated head office department that periodically conducts on-site audits while providing remedial guidance on a global basis. Taking the lead, the Overseas Crisis Management Office at the same time shares crisis management information with regional headquarters, alerting them to the need for timely action. In addition, we have built a system that allows us to keep abreast of disasters and accidents should they occur through a global emergency contact network, and have strengthened employee training to ensure an appropriate initial response.

7) Information security

As the Group makes efficient use of IT in a wide range of business processes including production, sales, research and development, procurement, and accounting, it is becoming increasingly dependent on IT systems. Moreover, and in addition to confidential business process information, we handle personal information about many of our customers due to the nature of the Housing business. Taking these circumstances into consideration, the Group is subject to such risks as cyberattacks, power outages, natural disasters, business interruptions and damages resulting from equipment and software failures or defects, and the leakage of confidential including personal information. In the event that any of these risks should materialize, the Group's business activities could be impeded affecting its business results and financial position. After putting in place certain guidelines codified in its Cyber Security Policy, the Group established a Computer Security Incident Response Team (CSIRT) to strengthen its response and constantly monitor the incidence or otherwise of system-based incidents. In addition, we have developed a system to take appropriate action and prevent recurrence in the event that an incident should arise, and are working to prevent the leakage of human-related information through employee training. To counter the risk of backbone system stoppages due to such natural disasters as a major earthquake, we have taken a wide range of measures including the decentralization of data centers to multiple locations and the complete duplication of critical business operations.

8) Legal and other compliance

The Group is subject to a variety of statutory and regulatory requirements in the conduct of its business. In the event that the Group should seriously violate any of these laws following an amendment or unexpected introduction of a law or regulation, undertake an action or carry out an injustice that violates societal norms caused by pressure to achieve performance targets, it could suffer a loss of customer confidence and incur costs in order to address the infraction thereby impacting its business results and financial position. The Group established its "Compliance Declaration" in 2003 based on principles such as"contributing to society," "being a trusted company," and "adherence to the letter and spirit of the law." In keeping with the spirit of the Group Principles and our Corporate Code of Ethics, we defined our stance for the acquisition of high social trust through compliance. In April 2019, under the leadership of then-president Koge, the declaration was made that compliance is management itself for SEKISUI CHEMICAL Group, and that each and every employee will work together to act in accordance with compliance regulations. In addition, the Sustainability Committee, chaired by the President, deliberates on "Fundamental Compliance Policies" that require the approval of the Board of Directors, and has established a designated Compliance Subcommittee, which reports to the Sustainability Committee, to plan, consider, and decide on important compliance-related matters, with the aim of establishing and implementing a compliance system for the Company and its Group companies. In order to ensure SEKISUI CHEMICAL Group will be widely trusted by society, we will continue to carry out initiatives for improving compliance awareness.

9) Climate change and environmental issues

Recognizing that climate change caused by greenhouse gases, resource depletion, water risk, and marine plastic waste are common social issues worldwide, the Group promotes ESG management to improve social and global environmental sustainability through solutions to social issues as well as its own sustainable growth, in a bid to realize its Long-term Vision "Vision 2030" and the Sekisui Environment Sustainability Vision 2050. In the event that efforts aimed at addressing these issues prove inadequate, the Group could suffer a loss of public trust and a deterioration of its reputation and competitiveness, thereby impacting sales. We are working to create, certify, and expand the market for products to enhance sustainability that contribute to the sustainability of the global environment and society by helping to resolve environmental and social issues. As a measure to combat global warming, we have set the target of increasing our utilization ratio for renewable energy from electricity purchased to 100% by 2030, and to promote various other measures including collaboration with suppliers to procure raw materials with low environmental impact. Among a host of other initiatives, we are also undertaking activities to promote solutions to the marine plastic problem through industry-government-academia collaboration. This includes participation in the CLOMA* and JaIME* corporate initiatives.

  • *CLOMA: Acronym for the Japan Clean Ocean Material Alliance.
  • *JaIME: Acronym for the Japan Initiative for Marine Environment.

10) Impact of COVID-19

The global spread of COVID-19, first reported in China in December 2019, could threaten the safety of our employees, restrict the activities of our Group's businesses domestically and internationally, and impact our profit and loss, including market stagnation. In addition to setting up a Groupwide Emergency Response Headquarters, and with the safety of employees our primary concern, we have in principle prohibited the holding of meetings, training, business trips, and social gatherings, and are promoting telecommuting, among other measures. From a customer service perspective, we are trying to reduce the number of face to-face meetings while emphasizing online communication and telephone negotiations to ensure that we address customers' needs in a timely manner. In similar fashion, we are promoting telecommuting and shortened work hours at our overseas offices while accommodating conditions in each country. We will continue to enhance safety measures for our stakeholders while monitoring future progress and prepare for unforeseen circumstances, including the need to secure stable working capital to deal with prolonged risks.