Chaired by the president, who is responsible for risk management, the Shimadzu Group holds a semiannual Risk Management and Corporate Ethics Meeting as a deliberative body to report and make necessary decisions on initiatives against risks that the Company should give priority to addressing and risks related to compliance.
The following is a list of major risks that management recognizes as having the potential to materially affect the financial position, operating results, and cash flows of the consolidated companies, among the matters related to business conditions and accounting conditions, etc., as stated in the Annual Securities Report.
Forward-looking statements in the text reflect the Group's assessments as of the end of the current consolidated fiscal year.
(1) Market Trends in and outside Japan
The Group closely collaborates with subsidiaries around the world to formulate and execute sales strategies in accordance with the market size and industrial structure of each region. However, changes in policies, economic trends, and capital investment trends in various countries, including Japan, that were unforeseeable at the time the strategies were formulated may affect the Group's performance and financial position. In addition, supply chain disruptions and surging resource prices caused by wars, acts of terrorism, spread of epidemics, and other factors could stagnate economic activities in countries around the world, which could affect the Group's performance and financial position.
(2) Business Activities outside Japan
As part of our business strategy, the Shimadzu Group is currently expanding business operations in markets outside Japan to increase sales revenue, reduce costs, and improve profitability. In order to strengthen the management foundation supporting overseas business activities and realize appropriate and efficient operations, we have established the Shimadzu Group Management Basic Regulations and are implementing the necessary controls and management. Furthermore, major subsidiaries in each region are assigned the function of overseeing governance within the region, and we strive to identify and appropriately respond to risks in each region. In response to recent changes in the international circumstances, we monitor the situation using internal and external resources, share and disseminate information within the Group, and adapt to these changes. However, our overseas business activities are subject to risks such as unforeseen changes in laws, regulations, and policies; vulnerability of the industrial base; trade restrictions and retaliatory measures between countries; and social or political turmoil due to terrorism, war, and other factors. These risks may affect the Group's results of operations and financial position.
(3) Product Quality
The Group has established a quality system certified by ISO standards and set forth a Basic Quality Assurance Policy. We strive to provide products and services of exceptional quality, creating maximum value for our customers through continuous improvement at every stage of the product lifecycle, including development, manufacturing, sales, and service. Additionally, to enhance customer satisfaction, we have declared our commitment to prioritize customer safety and trust through our Basic Policy for Product Safety, which aims to further improve product safety, recognizing it as fundamental and crucial. However, if quality issues or safety concerns arise from product use in diverse and unpredictable environments, it could lead to a decline in the Group's reliability and brand strength, potentially impacting our performance and financial condition.
(4) New Product Development Capabilities
The Group's business is highly specialized and requires advanced technological capabilities. Therefore, we invest heavily in research and development of new products and technologies. However, delays in commercialization or failure to develop new products that meet market needs could diminish our competitiveness or hinder our ability to align with market trends. This may reduce future business growth and profitability, ultimately negatively impacting the Group's performance and financial position.
(5) Purchasing/Procurement
We select reliable suppliers to ensure stable procurement of raw materials and services that meet our requirements in terms of quality and environmental friendliness. In addition, we maintain a certain level of inventory of important raw materials, select alternative suppliers, and acquire our own production capacity to avoid dependence on specific suppliers. However, natural disasters, epidemics, accidents, bankruptcy of suppliers, geopolitical risks, and other factors may cause shortages of or restrictions on the supply of raw materials, which may affect the Group's production activities. In addition, a prolonged deterioration in the supply of raw materials or a sudden rise in procurement prices could result in lost opportunities, reduced product price competitiveness, or a deterioration in profit margins, which could affect the Group's business performance and financial position.
(6) Hiring Human Resources
The human resources necessary for the growth of the Group's business overlap with the candidates needed by manufacturing companies, including those involved in research and development. Therefore, there is competition among companies for recruitment. Particularly in Japan, where most of our R&D departments are located, there is a risk that we may struggle to meet internal demand in the future due to the declining labor force. In addition, although our personnel retention rate is relatively stable, there is a risk of increased employee turnover if the mobility of human resources in the Japanese labor market continues to advance. To address this risk, we are focusing on recruiting global talent, specialists including PhDs, and individuals with immediate skills through various recruiting activities such as internships and boomerang hires. We are also working to mitigate the impact on our business by enhancing attractive compensation packages and developing flexible work systems to prevent the loss of talent. In addition, we are introducing a multi-track personnel system that leverages employees' strengths, implementing an internal recruitment system that supports autonomous career development, and securing experienced and skilled talent by raising the retirement age to 65. We are working to reduce the impact on our business. However, if we are unable to secure competent human resources or prevent turnover, the Group's business performance and financial position may be adversely affected.
(7) Laws and Regulations
As the Group conducts various businesses globally, it is subject to various domestic and international laws and regulations, including security trade control, anti-bribery, and anti-monopoly laws and regulations, as well as governmental permits and restrictions. In addition to compliance with laws and regulations, the Group has established the Shimadzu Group Corporate Code of Ethics, which serves as a code of conduct for executive members and employees, based on the corporate philosophy, management principle, and Shimadzu Group Sustainability Charter. Through educational activities such as group training and e-learning, we promote and instill the relevant regulations to prevent compliance issues. We also monitor adherence to the aforementioned laws and regulations in a timely manner. In addition, by establishing both internal and external reporting channels for whistleblowing and creating a reporting system for any issues that may arise, we ensure the effectiveness of compliance within the Group. However, in the event of insufficient understanding of laws and regulations, or inadequate response to unexpected changes, the Group may be deemed non-compliant. This could lead to losses from fines and surcharges, administrative penalties such as suspension of business, or a loss of credibility, which could adversely affect the Group's performance and financial position.
(8) Intellectual Property Rights
To acquire intellectual property rights that are beneficial for our current and future business activities, the Group's research laboratories, business divisions, and Intellectual Property Department collaborate to create intellectual property. Simultaneously, we have established a system for investigating and analyzing the intellectual property rights of other companies to proactively prevent potential issues. In addition, by conducting regular intellectual property training sessions for engineers, we aim to enhance their intellectual property skills. However, depending on the interpretation of the scope of rights, intellectual property disputes may arise with other companies, which may impact the Group's performance and financial position.
(9) Compliance with Environmental Regulations and Addressing Climate Change
The Group is subject to various domestic and international environmental laws, regulations, and standards related to climate change, water pollution, air pollution, noise, soil contamination, waste, and hazardous chemicals, and is committed to complying with them. Furthermore, we have established an environmental management system based on the ISO 14001 international standard and have received third-party certification. In alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), we disclose relevant environmental information, including climate change countermeasures, and implement appropriate measures to address environmental issues while considering associated risks and opportunities. However, if we face significant challenges in adapting to environmental regulations or unforeseen circumstances in the future, the Group's performance and financial position could be affected by increased costs related to environmental measures or potential suspensions of business activities.
(10) Information Security
The Group holds confidential information, including critical business data and personal information obtained from customers. To prevent data breaches due to theft or loss of IT assets, as well as damage from cyberattacks such as tampering, data leaks, and system outages, the Group has established an information security promotion system. We have implemented the Shimadzu Group Basic Information Security Top Policy and are taking security measures that include preventing unauthorized access from external sources, data encryption, and safeguarding against information leaks and tampering on external-facing websites. In addition to security measures for networks and IT assets, we also conduct regular information security training for employees. However, a cyberattack beyond our expectations or unforeseen unauthorized use of our information could lead to the leakage of important data or personal information, suspension of business activities, or other damages, all of which could affect the Group's performance and financial position.
(11) Natural Disasters, Etc.
In preparation for disasters, including large-scale earthquakes and outbreaks of infectious diseases such as new strains of influenza, the Group has implemented necessary safety measures, formulated a business continuity plan (BCP) for prompt recovery, introduced a safety confirmation system, and conducted disaster drills. In addition, through our response to the COVID-19 pandemic, we have gained valuable knowledge on preventing the spread of infectious diseases. However, since the Group's business activities are conducted globally, it is challenging to avoid or manage all risks associated with the outbreak of new infectious diseases or natural disasters. Damage on an unexpected scale could impact the Group's performance and financial position.
(12) Impact of Exchange Rate Fluctuations
As the Group operates globally, its business activities involving transactions denominated in foreign currencies are exposed to the risk of exchange rate fluctuations. Although we strive to minimize foreign currency risk through local production systems and forward exchange contracts, completely eliminating this impact is challenging. When preparing consolidated financial statements, items denominated in the local currency of each region are converted into yen, and the converted value will fluctuate based on the exchange rate at the time of conversion. Generally, the appreciation of the yen against other currencies negatively impacts the Group's business, and excessive exchange rate fluctuations may affect the Group's performance and financial position.
(13) International Taxes
The Group operates globally and conducts transactions among its entities, which involves international tax risks such as transfer pricing taxation. While we ensure that we pay appropriate taxes in accordance with the tax laws of each country and remain vigilant regarding international tax risks, changes in tax systems in each country or differing interpretations with tax authorities could lead to unexpected tax burdens that may affect the Group's performance and financial position.