(1) Custom Order Products and Dependency on Specific Markets

Over half of the Shindengen Group's operating revenue is made up of custom order products from specific corporate clients, and the Group's business performance may be significantly impacted by fluctuations in demand from these corporate clients.

The Group is also significantly dependent on the automobile market, including motorcycles, and is strongly affected by economic fluctuations in Japan and overseas in general. This could result in a decrease in profitability.

To avoid this, the Group diversifies its risk by providing products for a wide range of other markets that require power electronics, such as the industrial machinery market, consumer electronics market and telecommunications market (mainly telecommunications infrastructure and information devices).

(2) Dependency on Specific External Suppliers

While the Shindengen Group manufacturers the semiconductors that are the base components for its power supply circuit products in-house, the Group is dependent on multiple external suppliers for other important components and the raw materials for semiconductors. As such, general economic fluctuations and individual supplier issues could result in sudden, drastic demand fluctuations or price increases, hindering the acquisition of the required components and materials, which could result in the Shindengen Group being unable to fulfill its obligations to supply products to corporate customers or needing to increases prices as a result of increased component and material costs. This could negatively impact the Group’s operating performance and financial position.

To avoid this, the Group works to reduce supply risk by regularly sharing information with suppliers and encouraging purchasing from multiple suppliers.

(3) Global Activities and Overseas Expansion

The Shindengen Group carries out production and sales activities not just within Japan but also in various countries/regions in Asia, North America and Europe, and sells products to other regions through a variety of sales channels. The relative importance of the Shindengen Group's overseas production and sales has increased in recent years. As a result, unforeseen changes or amendments to laws or regulations, changes in political or economic conditions, labor disputes or sudden changes in employment conditions, natural disasters or fires, wars or terrorism, the spread of infectious diseases or other changes in the social circumstances in such regions could disrupt the Group’s supply chains and limit its business activities. This could negatively impact the Group’s operating performance and financial position.

To avoid this, the Group has reinforced its readiness for supply chain disruptions, regularly shares information internally, and has in place a system for alternate production using multiple sites.

(4) Exchange Rate Fluctuations

The Shindengen Group carries out sales and procurement activities not only in Japanese yen, but also in U.S. dollars, euros, various Asian currencies and other currencies. In general, the Group’s overseas production and sales bases prepare financial statements in the currency of the country/region in which they are located. The Group’s consolidated financial statements are then created by converting these statements to Japanese yen. As such, fluctuations in exchange rates impact the operating performance and financial position of the Group. In general, a stronger yen has a negative impact on the Group's operating performance, and a weaker yen has a positive impact.

The Shindengen Group strives to minimize the negative impact of exchange rate fluctuations by utilizing forward exchange contracts, currency options and other such transactions and by locally procuring materials.

(5) Demand Fluctuations

Some of the Shindengen Group’s corporate clients are affected by factors that cause fluctuations in demand that are unique to their respective markets. In addition, changes in industry structure or in the competitive environments of the Group or its corporate clients could negatively impact the Group’s operating performance and financial position.

In recent years there has been an increasing demand for shorter delivery times from corporate clients. To meet this demand, the Group must procure some materials in advance in order to reduce supply risks. However, in the event of subsequent client demand fluctuations, the Group may bear the responsibility of disposing of excess stock that was procured based solely on the Group's judgement. This could result in a decrease in profitability.

To avoid this, the Group strives to shorten lead times, and related divisions regularly share information to ensure rapid response to market fluctuations.

(6) Price Competition

Competition in the electronics component industry, in which the Shindengen Group operates, is very intense. Requests for price reductions from corporate clients, offensive moves from competitors and other factors have resulted in growing pressure to lower prices. In the Group’s mainstay Electronic Device and Car Electronics businesses, in particular, the entry of new competitors has further intensified competition within Japan and internationally. At the same time, rising procurement costs, such as those for the transport of raw materials, products and personnel, present the risk of decreasing profitability. As such, there is a risk that the Group will not be able to maintain competitive pricing in the future, which could lead to a decrease in the Group’s market share and negatively impact the Group’s operating performance and financial position.

To avoid this, the Group is advancing the development of new products that can achieve differentiation and works with suppliers to reduce costs and improve productivity.

(7) Technology Patents and Other Intellectual Property Rights

The Shindengen Group manufactures and sells a variety of products based on proprietary semiconductor and circuit technologies. However, it is impossible to fully protect intellectual property (IP) rights in certain countries/regions. As a result, the Group may not always be able to prevent third parties from utilizing the Group's IP to produce similar products.

In addition, there is no guarantee that the technologies used by the Shindengen Group do not in any way conflict with patents or other technology rights held by other companies. Such conflicts could negatively impact the Group’s operating performance and financial position.

To avoid this, the Shindengen Group thoroughly researches patents and other rights held or claimed by other companies at the development stage, forms licensing agreements with other companies and takes other steps as necessary.

(8) Product Defects

The Shindengen Group carries out production in accordance with ISO, TS and other globally recognized quality management standards at all its production bases. There is, however, no guarantee that all products will be completely free from defects or that there will be no recalls, claims from corporate clients or other related issues in the future.

In addition, although the Group is enrolled in product liability insurance, there is no guarantee that this insurance will be sufficient to cover any compensation ultimately required.

In the event a serious product defect leads to a large-scale recall or product liability compensation, a loss of trust in the marketplace could negatively impact the Group’s operating performance and financial position, in addition to requiring expenditures to compensate corporate clients and implement countermeasures.

To avoid this, the Group advances development with an awareness of quality from the initial design stages onward and carries out product evaluations that simulate the way that customers will use products. In addition, the Group holds regular liaison meetings across operating departments to promote the lateral sharing of insights.

(9) New Product Development Capabilities

The Shindengen Group continually strives to develop products and elemental technologies that satisfy corporate client and market needs and believes that the Shindengen Group's future growth depends on these research and development (R&D) activities. However, in the electronics industry, needs are becoming ever more diverse, with ever-shorter technology and product cycles. Furthermore, in the automobile market in particular, the adoption of electric and self-driving technologies is driving needs for sophisticated and complex technologies. In the event that the Shindengen Group is unable to provide products that satisfy corporate client and market needs in a timely manner, or a competitor begins providing such products first, the Group’s opportunities to sell new products may be lost or restricted, making it difficult to recover R&D investments.

In addition, the Group could lose business opportunities due to the effect of competing standards, which have become more prominent in the electronics industry in recent years, or if the technologies that the Group and its corporate clients have adopted as the foundation of their products do not become mainstream for the industry. This could negatively impact the Group’s operating performance and financial position.

To avoid this, the Group utilizes outside expertise through such means as industry-academia collaboration to speed up development and is working to expand its areas of business.

(10) Securing and Cultivating Human Resources

The sources of the Shindengen Group's competitiveness are its technological development capabilities, productivity, quality, sales capabilities and efficient management knowhow. Securing and cultivating human resources who are capable of maintaining and continually developing these is a vitally important element in determining the future of the Shindengen Group. As such, if the Group is unable to do so, it could negatively impact the Group’s future operating performance and financial position.

To avoid this, the Group focuses efforts on securing and cultivating the necessary human resources, especially engineers with advanced skills in software and other areas and individuals with specific qualifications, by such means as corporate acquisitions and wide-ranging hiring regardless of nationality.

(11) Facility Investment

The Shindengen Group continually makes facility investments in order to maintain or increase production capacity and R&D capabilities. The amount of such investment is determined based on forecasts of demand. The improvements resulting from facility investment may not always positively contribute to business performance. This could negatively impact the Group’s operating performance, financial position and cash flows.

The Group strives to maintain cost competitiveness and efficient production activities by such means as locating its Car Electronics production sites mainly in the ASEAN region, where there are major motorcycle markets. The Group ensures that it can fulfill its supply responsibilities by such means as setting up a system of alternate production sites and maintaining certain inventory levels. The Group also implements measures related to ongoing safety management and risk management at production bases.

(12) Official Regulations, Etc.

The Shindengen Group is subject to a variety of government regulations in the countries/regions where it operates. These include business and investment approval requirements, national security-related and other export restrictions, customs, and other export/import restrictions. The Group is also subject to a variety of commerce, antimonopoly, patent, consumer, tax, exchange control, environmental and recycling laws and regulations. The Group is careful to abide by all of these regulations in its business activities. However, if the Group is unable to comply with such regulations, its activities could be restricted, and it could incur penalties or other increased costs. This could negatively impact the Group’s operating performance and financial position.

To avoid this, the Group proactively implements countermeasures related to regulations, creating Groupwide organizations to this end and working to spread awareness of them.

The business activities of the Group and its corporate clients are subject to a variety of regulations related to environmental and human rights issues in various countries/regions, including the European Union’s Restriction of Hazardous Substances (RoHS) Directive. However technical and other limitations may make it impossible to comply with some regulations. In such cases, the Group may be subject to restrictions on its sales activities or lose business opportunities, which could negatively impact operating performance. In addition, the costs incurred to comply with regulations may put pressure on the Group’s operating performance and financial position.

To avoid this, the Group has established a specialized division to research the latest regulations and amendments, and has in place a system for implementing countermeasures.

(13) Disasters and Accidents

Damage or harm to Shindengen Group buildings, facilities or employees as a result of earthquakes, typhoons, or other large scale natural disasters, fires or other accidents or industrial disasters, or infectious disease pandemics could cause an unavoidable suspension of operations or have a severe or long-term impact on economic activity. This could negatively impact the Group’s operating performance, financial position and cash flows.

The Shindengen Group has established business continuity plans (BCPs) in preparation for such occurrences in order to minimize their impact and improve its resilience to risk.

(14) Information Security

The Shindengen Group obtains and stores confidential information from clients, suppliers and other parties through its business activities. The Group also holds personal information on employees, etc. The Group manages this information in strict accordance with relevant rules/regulations. However, a data breach resulting from unforeseen circumstances could lead to the loss of trust in the Group or liability for compensation. This could negatively impact the Group’s operating performance and financial position.

To avoid this, the Group strives to improve security against data breaches and other threats in order to reduce risk and is implementing initiatives to build organizational systems in this area, such as reviewing related rules/regulations and carrying out information security education for all employees.

(15) The COVID-19 Pandemic

Lockdowns or other measures implemented in response to the COVID-19 pandemic in regions where the Shindengen Group's operational bases are located could lead to the interruption or suspension of operations at such bases. Such measures could also cause a variety of other impediments to operations in affected regions, such as difficulties in raw material procurement or product transport, or restrictions on employees’ ability to come to work. These could negatively impact the Group’s operating performance and financial position.

To prepare for and flexibly respond to such occurrences, the Group is reinforcing systems to ensure the prompt sharing of information between operational bases and enable alternate production at multiple operation bases. In addition, the Group has implemented initiatives aimed at preventing the spread of infection, including the introduction of remote work systems and thorough health and safety management, and established systems to ensure business continuity.