Business and Other Risks

Risk management systems and operations

For sustainable corporate development, the Group has established a Risk Management Committee to implement risk management based on the recognition that identifying, assessing, and controlling risk factors that may have a significant impact on corporate management and business continuity are critical issues.
The Risk Management Committee is chaired by the Chief Risk Management Officer (CRO), an officer in charge of risk management. The committee consists of members of the Management Committee and others, and the secretariat consists of the Administration Department and the Internal Control Promotion Section. Meetings are held twice a year on a regular basis and as needed. The committee strives to develop a system to appropriately manage risks surrounding the Group by, for example, identifying risks from a company-wide perspective, continuously monitoring priority target risks, and establishing a system that enables flexible support of the continuous monitoring.
The Risk Management Committee oversees all risks, while the Quality Committee, the Export Control Committee, and the Compliance Committee address risks requiring specialized measures. In addition, the Sustainability Committee, its Environmental Subcommittee, and the Supply Chain Subcommittee identify sustainability-related risks and deliberate on measures to address them group-wide.

Identification of risks and countermeasures

The Group conducts an annual Risk Identification Survey as a risk assessment to ascertain the risks faced by the Group. This survey, administered to all employees at or above the rank of department manager and to the presidents of domestic and overseas group companies, identifies, analyzes, and assesses company-wide important risks and monitors the status of measures to these risks. Based on the survey results, a risk map is created to express the scale of impact and probability of occurrence. The Risk Management Committee then identifies important risks and determines which issues must be strengthened.
The following is a list of principal themes that may significantly impact investors' decisions regarding risks involved in executing strategy, business, and other activities of the Group. These risks are not an exhaustive list of all risks to the Group, and the Group may be affected in the future by other risks that are not anticipated or are considered immaterial.
The forward-looking statements in the text are based on the Group's judgment as of the end of March 2024.

1. Risks related to business and management

Risks

In the medium-term management plan, the Group has positioned Material Processing and Robot Vision as mid-term growth drivers for its strategic business under the Digital Manufacturing Business. As part of strategic investments, the Group has been expanding its business by, for example, making 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 making it its consolidated subsidiary. However, if the growth of the related market is slower than expected, the business may not reach the expected scale by FY2025, the period of this plan.
Digital cameras are the leading products of the Imaging Products Business, which is one of the main businesses of the Group. The mirrorless camera market is seeing fierce competition. In addition, the business is adversely affected by rising prices and delays in procuring components, which may lead to future deterioration in market conditions.
The demand for FPD lithography systems managed by the Precision Equipment Business is expected to be stable in the display market. However, the recovery in demand for lithography equipment may be sluggish due to the continued contraction of capital investment.
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 competitors' cutting-edge process development. In addition, the Group's profit may be affected by factors such as changes in capital investment plans by its major customers.

Responses

In the Digital Manufacturing Business, the Group will promote the formation of new markets by offering unique value to the increasingly digitized manufacturing industry and introducing competitive new products to the market. In addition, the Group has a system that allows it to review and revise its strategies in a timely manner by closely monitoring market trends through regular monitoring by the Board of Directors and other relevant bodies.
The Imaging Products Business continues strengthening its earnings structure by optimizing production and sales aspects, reforming the supply chain and logistics, thoroughly reducing costs, strengthening digital marketing, and improving development efficiency.
In the FPD lithography systems field, the Group is expanding earnings and reducing total costs through new lithography systems and service businesses to secure a certain profit level, even in declining demand for lithography systems.
In the semiconductor lithography systems field, the Group will aggressively cultivate non-existing customers and expand the service business under a business strategy emphasizing profitability.

2. Risks related to research and development

Risks

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. However, enterprise value may decline, and profit may decrease if the Group’s investments do not produce adequate results to enable the timely development and launch of new products or next-generation technologies, if the market does not accept the technologies developed by the Group, or if the Group's technologies are no longer needed due to drastic changes such as game-changing developments.

Responses

The Group's Technology Strategy Committee clarifies the technological strategies that will lead to the development of new areas of focus and the improvement of the competitiveness of existing businesses and determines the direction of technological development and priority investment areas. While proactively responding to a wide range of social issues and needs, the committee will realize the long-term growth of the Group.

3. Risks related to changes in regulations and systems

Risks

As it develops its business globally, most of its production and sales activities are conducted outside Japan, and the ratio of overseas sales revenue to consolidated sales revenue is high. The Group must 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 must do to fulfill its social responsibility could change significantly. Such changes may adversely affect the Group business, such as increasing business activity costs, imposing constraints on its business, and posing reputation risk.

Responses

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 Sustainability Committee and its subordinate committees also monitor and address risks, especially those defined as materialities, from a sustainability point of view. Through such responses, the Group is working to further strengthen the system by collecting information on regulatory changes on a group-wide basis, providing feedback on the practical process based on such information, and formulating strategies based on the regulations.

4. Risks related to M&A and strategic investments

Risks

The Group conducts M&As and strategic investments to create new businesses, expand existing business areas, and realize business synergies. Suppose the Group cannot achieve the desired results due to significant changes in the market environment or an exodus of human resources from the target company. In that case, impairment losses on goodwill, marketable securities, and other assets may adversely affect its financial position.

Responses

Based on its business strategy, the Group searches for M&A and strategic investment targets and conducts due diligence on the value and risks of the target companies. For post-acquisition and post-investment verification, the Investment Monitoring Committee, chaired by the CFO, periodically checks progress against the original objectives and revises the strategy course as necessary.

5. Geopolitical risks

Risks

As mentioned above, the Group's global operations have resulted in a high percentage of consolidated revenue from overseas, and the Group is highly dependent on overseas markets. Overseas business development may be affected by political problems, trade friction and disputes, and social turmoil due to riots, terrorism, wars, etc., in addition to overall trends in the world economy, which may cause significant obstacles or losses in business activities. In addition, sudden or significant fluctuations in foreign exchange rates could significantly impact the Group's earnings and financial position.

Responses

In addition to the risk management by the Risk Management Committee, the Group monitors and responds to risks by the committees under the Group, the Sustainability Committee, and its subcommittees. Although it is difficult to predict the likelihood of such risks materializing and the level of their impact, as they depend on social conditions and other factors, the Group collects information. It analyzes their impact on its business and considers and implements responses. In addition, the Group conducts appropriate currency hedging based on the size of its sales and sales regions.

6. Risks related to procurement

Risks

In recent years, labor, raw material, and energy costs have fluctuated significantly due to various factors, including abnormal global weather, natural disasters, and geopolitical impacts on a global scale. In addition, our stakeholders have become more interested in social issues related to human rights, the labor environment, health and safety, and environmental issues such as decarbonization in the supply chain. As such, the Group faces increasing uncertainty and risks associated with the supply chain.

Responses

The current uncertainty and volatility also continue to be high in component procurement and logistics. Therefore, the Group is working with its procurement partners to build a resilient supply chain by collaborating on quality and Environmental, Social, and Governance (ESG) perspectives.
The Group is also building strong relationships with its procurement partners. Through initiatives such as visualizing its supply chains, formulating and strengthening a business continuity plan (BCP), monitoring greenhouse gas emissions, and enhancing human rights due diligence, the Group has established a system that can flexibly respond to drastically changing business risks and social issues. The Group aims to reduce risks and achieve sustainable growth through these efforts.

7. Environmental risks

Risks

Abnormal weather, floods, droughts, and other natural disasters caused by climate change and the spread of infectious diseases could cause extensive damage to development and production sites and suppliers, affecting operations or delaying production and shipments. In addition, as the movement toward a decarbonized society accelerates, countries are introducing or considering introducing carbon taxes and other policies and regulations, and there is a risk that the cost of energy and raw materials will increase.
Environmental policies, laws, and regulations require compliance with standards, information disclosure, and other responses, which tend to become more stringent yearly. Insufficient response may cause enormous damage to the company's management, such as impact on production due to administrative penalties, surcharges, and loss of social credibility. If laws and regulations related to chemical substances are strengthened, obtaining necessary materials and sub-materials may become difficult.

Responses

The Group considers environmental issues such as climate change, depletion of natural resources, waste, and pollution by hazardous chemicals to be materiality issues that affect the survival of the Group. The Sustainability Committee and related committees and subcommittees monitor risks and take various responses. The Group also conducts environmentally conscious management. Furthermore, the Group as a whole is working on reducing greenhouse gas emissions and formulating BCPs throughout the entire value chain, including energy conservation activities, renewable energy utilization, and the streamlining of development and production processes.
By establishing internal rules and regulations and providing training to those in charge, the Group is strengthening its management system, including the value chain. The Group is also working to keep abreast of changes in regulations promptly and striving to prevent environmental pollution by setting voluntary standards that are stricter than legal requirements.

8. Risk of securing human resources

Risks

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 crucial to overcome intense competition in the market and achieve business growth. Failure to secure or develop talented personnel, or the departure of key personnel, may adversely affect its business activities, outflow of knowledge and expertise, and earnings and financial position. The risk of the outflow of human resources is exceptionally high in countries and regions with high labor mobility. If key personnel leave the Group and are challenging to replace, the Group's growth may be affected. In addition, due to the mass hiring around 1990 and the curtailment of new hiring that has occurred several times in the past, there is a risk of an aging population within the Group and a lack of mid-career and younger workers, which may prevent the proper handing down of technology, skills, and business know-how.

Responses

The Group is strengthening the management foundation supporting its business under the medium-term management plan. Based on the concept of human capital management, the Group is executing measures to "acquire," "develop," and "leverage" human resources as the three pillars of its human resource strategy and putting more effort than ever into executing the recruitment strategy to acquire human resources to support the realization of the Group’s growth strategy. In addition, the Group has established a specific curriculum for developing and advancing human resources. It promotes transmission, standardization, and sharing of proprietary technologies and skills, as well as creating an environment and opportunities for diverse human resources to play active roles on a global scale.

9. Risks related to information assets and cyber security

Risks

The Group retains many information assets, including technical information and business partners' and customers' information. If a cyber-attack, intentional or negligent act, or disaster causes a severe information system failure, unauthorized use of personal information, or information security incident, the Group's corporate value may be damaged, and it may be subject to claims for compensation for damages. Violations of laws and regulations worldwide concerning protecting personal information or product security requirements could result in severe penalties.
In addition, the aging of internal systems, the increasing complexity and specialization of operations, and the end of support for core systems may lead to inefficiencies in operations with the rapid progress of digitalization.

Responses

The Group has designated the Representative Director and President as the Chief Officer in charge of information management, including protecting personal information. It has established business processes that are compliant with the Information Security Management System (ISMS).
To maintain a high level of defense against cyber-attacks and detect and respond to incidents as early as possible, the Group has implemented various security measures and improved and strengthened its operational system to collectively monitor and respond to incidents on a global basis. In addition to improving the level of storage security, the Group is also improving internal rules for information handling and conducting employee training.
By promoting the core system renewal project, the Group will enhance business efficiency through digitalization, strengthen digital marketing, and improve its service platform.

10. Risks related to intellectual property and litigation

Risks

The Group acquires and retains many intellectual property rights during product development and licenses these rights to other companies. If a lawsuit is filed against the Group due to another company's unauthorized use of its intellectual property rights, the Group may incur significant litigation costs. On the other hand, the Group may receive an injunction against manufacturing and sales or a claim for damages from other companies, individuals, or other parties for infringement of intellectual property rights, which may adversely affect the Group's earnings and financial position.

Responses

The Group has formulated an intellectual property strategy designed to generate growth in existing operations and create new business and is continuously promoting intellectual property activities per this strategy. The Group protects intellectual property such as patents, designs, and trademarks related to technologies and products created through research and development activities. By creating and obtaining rights to intellectual property with an eye to the future, in collaboration with each business unit and R&D division, the Group is working to establish a competitive advantage in the marketplace. In addition, the Group’s legal and intellectual property divisions and related divisions work together to investigate intellectual property rights of other companies as appropriate and ensure that the Group does not infringe on intellectual property rights of other companies.

11. Risk related to disasters, infectious diseases, etc.

Risks

Major disruptions or losses in business activities may occur due to disruptions in infrastructure such as water, power, and communication networks and logistics functions caused by natural disasters such as major earthquakes, fires, and floods (including those caused by abnormal weather conditions and weather fluctuations), or the spread of infectious diseases. In the event of catastrophic damage to the Group's development and manufacturing bases, suppliers, and other facilities, operations may be interrupted, and production and shipments may be delayed. If production and sales are restricted due to such damage, and significant costs are incurred in restoring operations, the Group's earnings and financial position may be adversely affected.

Responses

The Group has formulated and regularly reviews its BCP in preparation for large-scale disasters and outbreaks of infectious diseases. In anticipation of a large-scale earthquake, such as an earthquake directly under the Tokyo metropolitan area, the Group has re-examined and updated the BCPs of its primary business divisions and implemented measures for business continuity. In addition, the Group conducts various drills, including those at domestic group companies, to educate employees on how to act during a large-scale earthquake and safety confirmation and communication drills in anticipation of a disaster.

Management Policy