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Business Risks

Business Risks Listed in the Financial Report (for the Year Ended March 2023)

(1) Basic policy

On matters such as overview of business and financial information in the Annual Securities Report, the management identifies significant risks that may materially affect investors making decisions. Two significant risks described below are: “business risks,” which are risks associated with the business, and “operational risks,” which are other risks that may affect our entire Group. The forward-looking statements in the report are based on the judgment of the Group as of March 31, 2023.

(2) Risk management system

The Group promotes risk management for significant risks under the risk management system specified in the “basic policy on internal control.”
Business execution departments manage “business risks,” and special function departments manage “operational risks.” To monitor risks globally, we appoint regional managers for each major overseas geographic region to develop a regional monitoring function.
Each responsible department manages risk information and provides reports at the Corporate Strategy Meeting every month. The Meeting members, joined by Directors and Vice Presidents, deliberate the risk information. The results of the deliberations are immediately instructed to each responsible department, which promptly implements measures, strengthens controls, and reports.

Risk Management System Chart
(3) Management of respective risks

The major risks in the current fiscal year, in addition to the remaining risks since the previous fiscal year, were managed and subject to be reported by the officer in charge of risk management and the department in charge of risk management after gathering opinions from Directors, departments in charge, the audit firm, etc., analyzing the agenda and deliberation topics at the Board of Directors and the Corporate Strategy Meeting, and deliberating at the Corporate Strategy Meeting.
We considered the significance of respective risks by categorizing the significance of these risks in the following chart with two axes: the vertical axis showing the “impact” on the businesses when such risks arise and surface, and the horizontal axis showing the “probability.”

Risk map of the fiscal year 2022

Those risks (business and operational risks) that were subject to deliberations at the Corporate Strategy Meeting for the current fiscal year are self-assessed by the responsible departments based on the assessment criteria (implementation systems, implementation of controls and measures, and occurrence of and response to incidents), and independently evaluated by the department in charge of risk management and the officer in charge of risk management, etc. The results are reported to the Corporate Strategy Meeting and the Board of Directors at the end of the current fiscal year.
The assessment result below indicates a change in risk from the beginning to the end of the current fiscal year.

Assessment results of the current fiscal year

Status of respective risks at the end of the current fiscal year

(1) Business risks

a. Overseas transactions and foreign exchange risks
The Group operates a global business, with more than 80% of total sales revenue earned outside Japan, and about 40 subsidiaries and affiliates conduct trade activities such as export and import.
Accordingly, there are risks in the various countries in which we operate, such as interruption of electric power supply or transportation services, rising labor costs, and deterioration of employment relationships or labor disputes. The Group’s performance may also be adversely affected by abrupt changes in the global economy triggered by events such as conflicts or outbreak of infectious diseases. Furthermore, the Group’s performance may be adversely affected by unforeseeably large forex fluctuations, financial instability, the rise of protectionism, and trade restrictions for the sake of national security.
The Group manages distribution by increasing risk visibility in the supply chain and establishing BCP (business continuity plan) for distribution. In addition to conducting timely monitoring of the Group’s internal fund balance, financing situation, asset and liability by currency, etc., we have established financial control centers in each area and are working to consolidate funds and hedge foreign exchange risks, among other measures.

(Additional item) Russia-Ukraine conflict
The Group has a local subsidiary in Moscow, Russia, which is engaged in local sale of the Company’s products exported from Japan and Europe.
After the outbreak of the Russia-Ukraine conflict in February 2022, this local subsidiary’s business was affected throughout the fiscal year due to export restrictions in each country, but the impact on the performance was minimal. Other wide ranges of indirect impacts resulting from the conflict are described in the sections of each risk.
The Group continues to monitor the developments not only with direct impacts, such as countries’ export restrictions, but also indirect impacts affected by the prolonged conflict.

b. Financial position of customers
Serious financial problems could develop at some customers from whom the Group holds accounts receivable due to major changes in their operating environments.
Should such receivables become irrecoverable at any one of its largest customers in the fast-changing electronics and life science sectors, the amount to be written off could be enormous, which in turn could negatively affect the performance of the Group.
The Group has established Credit Control Group, and makes it a rule to closely investigate the financial positions of its customers before starting business. The Group has also purchased credit insurance to mitigate risks.

c. Procurement of raw materials
Some of the Group’s raw materials are sourced from specific individual suppliers.
If the supply of raw materials were to decrease or be disrupted due to unavoidable circumstances on the part of those suppliers, such as damage from natural disasters, accidents, or bankruptcy, the supply-demand balance could be disturbed, resulting in failure to procure necessary raw materials or an increase in costs. Any of these contingencies could influence the performance of the Group.
The Group endeavors to reduce the risks involved in securing sufficient supply of key raw materials through measures including sourcing materials from multiple suppliers and setting and managing inventory levels for a given period of time. We launched the Supply Chain Committee the current fiscal year, aiming for sustainable procurement in the supply chain. In recent years, we have seen more risks involved in the upstream supply chain, such as geopolitical risks and risks related to chemical substance regulations forming a cross-sectional team to address these risks. While dealing with existing risks, we are working to improve our ability to anticipate and respond to potential risks.

d. Research and development
The industry in which we operate our business experiences turbulent market changes that are not easy to predict.
New technologies or products from other companies can suddenly and unexpectedly cause our products to become obsolete. Situations like this can impact our future financial results.
In order not to be influenced by trends in a given business, the Group works on R&D to develop new technologies and products focusing on the Sanshin (“three new”) Activities, which is to stimulate demand through the development of new applications and new products, as well as make relevant equipment investments. We also practice rigorous intellectual property management to create barriers to entry.

e. Intellectual property rights
The Group owns, maintains and manages a large amount of intellectual property rights for the purpose of enhancing its market competitiveness.
However, it is possible that a third party could claim that such rights are invalid, or such rights could be inadequately protected, imitated, or involved in litigation in some regions. Should the protection afforded by intellectual property rights be seriously lost, the performance of the Group may be adversely affected.
The Group’s Technology and IP Strategy Division and business divisions work together to pay due attention to the intellectual property rights of other companies to ensure the Group does not infringe upon them, while at the same time pursuing initiatives to uncover any products on the market that infringe upon the Group's intellectual property rights.

Business risks in each operating segment are as follows:

f. Industrial Tape business
The Group globally supplies a diverse range of Functional Base Products to a broad range of industries, including its three focus domains of Digital Interface, Power & Mobility, and Human Life. In each domain, customers are increasingly seeking products with high added value.
In Digital Interface, there is the possibility that our performance may fluctuate in line with market conditions for electronics or semiconductors. By creating Global Niche Top™ products and Area Niche Top™ products under our Niche Top Strategy and Sanshin Activities initiatives, we are working to create PlanetFlags/HumanFlags as new axes for growth while developing a business constitution that is resilient to market forces.
In Power & Mobility, we offer adhesive materials for the automobile structure and sealing materials for airtight and waterproofing applications in the global market, and fluctuations in automobile production volumes can therefore impact our financial results. By pushing expansion into growth areas such as EVs (electric vehicles) and CASE (Connected, Autonomous, Sharing/Service, and Electric) and working to add to our existing business by capturing new business in growth areas, we are, also in this sector, working to create a business constitution that is resilient to market forces. As part of our efforts in growth areas, we are strengthening collaboration among the Group companies and working to provide a wide range of product lines.
In Human Life, we are developing solutions to improve people’s lives. Specifically, we have developed functional films and porous materials from precision-processed special engineering plastics with dustproof and chemical resistance features.
In the markets that the Industrial Tape business serves, an increasing number of customers in the automotive and electronics industries are focusing their efforts on contributing to the environment. To this end, in our Industrial Tape business we are also working to develop and manufacture products with lower environmental impact, while participating in supply chain initiatives and other measures to support our customers’ environmental efforts.

g. Optronics business
A major market for the Information Fine Materials sector is the display industry, which is rapidly changing and is exposed to fierce competition from a number of companies. The commoditization of products and technologies in which the Group’s components are incorporated, a decline in sales revenue due to market maturation, and pressure on profit margins due to the entry of competitors may negatively affect the Group’s performance. Price hikes and unstable supply of materials affected by geopolitical risks and environmental regulations may affect the Group’s production and supply of products.
We immediately identify the evolving needs of our customers, the leaders of the display industry, and continue to develop and launch new products built on our technology. We also expand markets for our products by accelerating product launches in non-display markets. In addition, to prepare for the various changes in the external environment, we implement BCP measures for our business, such as ensuring stable procurement and diversifying our production locations.
In the circuit materials business, we are focusing our efforts on markets and products that support a data-driven society/smart society and are anticipated to grow, and supply products with high market share. Rising geopolitical risks and economic stagnation in major markets such as the U.S. may temporarily affect our financial results. However, if market growth is sustained over the long term, the risk of our responsibilities for stable product supply may affect our financial results. In response, we are planning and implementing proactive capital investments to secure production capacity, including creating a BCP for our production operations and procurement of materials via a backup system across our sites, implementing productivity innovations to reduce reliance on manual labor, and constructing new plants in Japan and other countries.

h. Human Life business
The Human Life business consists of Life Science, Membrane, and Personal Care Materials businesses. In the Life Science business, we are strengthening our initiatives as a new business field for the Group, with a focus on the oligonucleotide therapeutics business. The oligonucleotide therapeutics market is forecast to grow in the future, with a rise in the number of late-stage clinical research topics and new drug approvals. Demand for contract manufacturing of oligonucleotide therapeutics, which we undertake in the Life Science business, fluctuates according to the progress of customers’ research and development and clinical trials. Accordingly, suspension or discontinuation of customers’ clinical trials based on scientific evidence may affect our performance.
The Group strives to mitigate the impact of demand fluctuations by handling a wide range of research and development activities and clinical trial projects commissioned by customers.
Meanwhile, as for drug discovery of oligonucleotide therapeutics, which the Group undertakes in the Life Science business, we provide technologies to customers in the pharmaceutical industry after conducting in-house research and development. Performance may therefore be affected by the progress of the Group’s research and development efforts.
In drug discovery of oligonucleotide therapeutics, we are steadily advancing our research and development initiatives, including collaborations with external organizations, in order to ensure both safety and efficacy.
The Membrane business supplies components for water treatment plants in the energy sector, desalination plants, and water treatment systems in a variety of industries. The Group’s performance may be affected if plant construction or customers’ procuring parts schedules are delayed due to soaring material prices or supply shortages or if the availability of raw materials is limited due to soaring raw material prices.
In order to create a business structure that is resilient against the impact of market conditions, we are bolstering efforts to develop new markets and launch new products as quickly as possible. In the area of raw material procurement, we will strive to utilize multiple suppliers and review our sales prices.
The Personal Care Materials business offers hygiene materials, primarily diaper materials. The concern in this business is changes in the external environment, such as rising energy costs and price increases due to inflation.
The Group aims to further improve profitability by creating new products and developing eco-friendly products through efforts to improve cost competitiveness and anticipate customer needs while maintaining strong customer relationships.

i. Other business
The Group’s performance may be adversely affected if new businesses are not launched as planned.
The Group strives to conduct sound business operations by regularly assessing the alignment of the Group’s position with that of relevant markets and customers.

(Additional item) M&As The Group engages in mergers and acquisitions, business alliances, and strategic investments as necessary when such actions provide an effective means of acquiring technologies to enhance corporate value, expanding into new business areas, or accelerating business growth.
However, if the Group is unable to achieve the results or synergies that it initially envisioned due to significant changes in the market or competitive environment, or if acquired businesses are unable to secure revenue as planned, there is a possibility that the Group’s performance may be affected by impairment of goodwill and fixed assets.
When forming partnerships with other companies, the Group bases its decisions on due consideration of market trends, customer needs, the business conditions of the counterpart company, and competitive advantage in the market.

(2) Operational risks

a. Product safety
The Group manufactures and supplies products, primarily intermediate materials, to our customers in accordance with strict quality control standards as quality requirements in the industry grow increasingly diverse and sophisticated.
In the event that a defect in product or service occurs, the Group may be held liable for compensation for such defects, which may affect the Group’s performance.
The Group strives to make continuous improvements by obtaining certification of strict international quality management systems in line with those required by each industry.
We are also considering an alternative product for PFAS, which is expected to be a stricter regulation, and working to strengthen the management system for bisphenols and vinyl chloride.

b. Environment (CO2 emissions)
The Group is working to reduce CO2 emissions in its manufacturing operations as climate change and natural disasters grow increasingly severe.
A sharp rise in renewable energy prices, carbon taxes, or emissions trading prices could lead to an unavoidable increase in production costs, which could adversely affect the Group’s performance.
In addition to complying with more stringent related laws and regulations, we are also working to reduce our customers’ CO2 emissions through our products and solutions by reducing energy consumption and introducing renewable energy in our manufacturing processes to meet societal demands for lower CO2 emissions.

b. Environment (conservation and recycling)
In response to the global environmental crisis, including depletion of resources and marine pollution caused by plastics, the Group is working to reduce plastics, organic solvents, and other waste, primarily used in its manufacturing processes.
In the event that the Group faces a refusal to collect plastics, organic solvents, and other waste or a sharp rise in prices for collection of such waste, its production activities slow down due to difficulties in disposing of waste, which could adversely affect the Group’s performance. In addition, improper disposal of products or waste may lead to a loss of public trust and damage to the company’s brand image, which could adversely affect the Group’s performance.
In addition to ensuring compliance with relevant laws and regulations, the Group is working to establish a resource-recycling society by promoting the effective use of resources and recycling throughout its supply chain.

b. Environment (pollution and hazardous substance)
The Group is striving to reduce emissions of pollutants and hazardous substances used in its manufacturing processes in order to minimize the loss of biodiversity, which can lead to the destruction of ecosystems and the reduction of natural resources.
The release of volatile organic compounds into the atmosphere or rivers due to equipment malfunction or other causes could cause pollution of the local environment, resulting in loss of public trust and damage to the company’s brand image, which could adversely affect the Group’s performance.
In addition to ensuring compliance with relevant laws and regulations, we have established our own stringent management standards to control pollutants and hazardous substances, and are working to reduce the amount of such substances used.

c. Information security
Information systems play a crucial role in every aspect of the Group’s business activities. At the same time, sophisticated cyberterrorism attacks and other forms of human-caused risk are growing.
In the event that the Group’s information systems suffer a malfunction, or leakage or unauthorized use of information such as technical, customer, transaction, or personal information occurs, regardless of intent or negligence, the Group’s performance may be adversely affected.
The Group implements a range of information security measures against cyberterrorism from both a hardware and software perspective, including implementing multilayered protection and deploying CSIRT, a rapid detection and response system. In addition, we implement a variety of measures to prevent leakage and unauthorized use of information due to negligence or error, including providing officers and employees with annual training on the importance of information security and targeted e-mail attack preparedness drills to increase awareness.

d. Changes in laws, regulations and compliance
The Group promotes compliance not only with laws, regulations, and internal rules, but also with social norms and ethics. Moreover, the Group operates in 28 countries and regions, each with its own laws and regulations, social norms, and ethical standards, which makes compliance a multifaceted issue.
Compliance violations by a company not only impact its corporate value, but can also affect its stakeholders, including its customers’ procurement and consumption, its suppliers’ production, and the livelihood of local residents.
We have translated the “Nitto Group Business Conduct Guidelines,” which underpin our commitment to compliance, into 17 languages and thoroughly communicated them to all officers and employees of the Group. In addition, we have established and operate a whistle-blowing system, which allows employees to report any violation of the Guidelines not only to the Group, but also to independent organizations. In the fiscal year 2022, following the revision of the Whistleblower Protection Act, we established a system with dedicated staff in Japan.

e. Governance of overseas group companies
The Group conducts business on a global scale across a wide range of fields and maintains operations in 28 countries and regions worldwide, including Nitto Denko Corporation and its 98 subsidiaries and four affiliates.
Improper actions, business transactions or decisions made by officers or employees of these companies that are not in accordance with the Group’s management policies could result in a failure of governance and internal control functions, which could incur losses to the Group and affect its performance.
The Group operates a matrix-based management approach, in which three axes complement and support each other: the business axis, which consists of five business execution departments (from the current fiscal year, Functional Base Products, Information Fine Materials, Information and Communication Technology, Human Life Solutions, and Advanced Film Solutions), etc.; the regional axis, which divides global operations into seven regions; and the functional axis, which consists of special function departments such as human resources and accounting. The business axis establishes governance and internal control systems, while the regional and functional axes audit and monitor their status appropriately. We are working to conduct thorough governance and strengthen internal controls by detecting and reporting operational risks and issues and implementing necessary improvements in these areas.

f. Natural disasters and climate change
The Group operates a global business and thus has a number of production sites and sales sites in Japan and overseas.
Natural disasters such as typhoons, which are becoming more severe due to climate change, or earthquakes in any of these locations could damage these sites and their facilities. Moreover, such an event could damage power, gas or other infrastructure, eventually cutting off our supply chain extensively, which could seriously impact our financial results. Such events could also cause considerable damage to our customers or suppliers, stalling orders or supply for an extended period and seriously impacting our financial results.
Following our Corporate Philosophy “We place safety before everything else,” we have implemented disaster drills and decision-making drills when setting up the Emergency Headquarters at each site to prepare for accidents and disasters and have prepared a business continuity plan (BCP) as a measure for preventing disruptions to business functions, and we periodically update the BCP and ensure its effective implementation.

g. Infectious disease
The spread of the COVID-19 pandemic has had a major impact on the countries in which the Group operates.
The Group temporarily suspended operations due to a sharp increase in COVID-19 cases and a government directive during the fiscal year 2022. Nonetheless, we responded with preventive measures and alternative production based on the BCP, minimizing the impact on production.
As COVID-19 restrictions are being lifted in each country, the Group will ease some preventive measures. Meanwhile, as preventive measures for highly infectious variants and emerging infectious diseases, we continue to strive to prevent the spread of infection by establishing procedures to control and prevent further spread of infection and formulating the BCP.

h. Retention of human resources
In order to promote the business activities of the Group, it is necessary to recruit and train personnel in a variety of fields, including research and development, manufacturing, sales, and administration. It is vital to foster a corporate culture where every employee can take on new challenges with motivation and promote DE&I (diversity, equity, and inclusion) to enable the Group to respond to rapid changes in the business environment. In addition, as hiring necessary personnel becomes increasingly competitive in the global market, reviewing personnel systems and compensation levels is an ongoing challenge.
Failure to continually hire necessary personnel or to prevent the drain of talent could negatively affect the performance of the Group.
In addition to conducting initiatives to increase employee engagement, the Group is working to create an environment that allows employees to take on challenges in a variety of fields, and recruit and develop diverse human resources by enhancing its internship initiatives, conducting a trainee program (open-participation training programs) in which trainees are sent from Japan to other country’s sites, and putting out job postings (open-participation job transfer programs). We are also providing wage increases and other benefits to ensure competitive compensation.

i. Occupational safety and health
Aiming to achieve “zero accidents and injuries,” the Group places safety before everything else in its manufacturing.
The occurrence of an injury or illness resulting in death or permanent disability or a similar injury or illness, or a fire that affects production, could result in a loss of public trust, suspension of operations, or suspension of transactions by customers, which could negatively affect the Group’s performance.
In order to reduce risks that could lead to injury, illness, or fire, the Group is working to mitigate risks by thoroughly identifying foreseeable risks and to implement maintenance management measures such as compliance with rules.

j. Human rights
Stakeholders focus on companies’ human rights initiatives has been growing in recent years. The Guiding Principles on Business and Human Rights, approved by the United Nations Human Rights Council in 2011, stipulates that companies are responsible for and must commit to protecting and respecting human rights, and remedying human rights violations. The scope of corporate responsibility is not only within its own company but also throughout its supply chain.
Customers and suppliers are increasingly reluctant to continue doing business with companies without mechanisms in place to address human rights issues such as child labor, forced labor, and discrimination against foreign workers, and the stock market is increasingly reluctant to invest in such companies.
The Group communicates its policy on respect for human rights to its stakeholders through disclosure of the Nitto Group Basic Policy on Human Rights in Japanese, English, Chinese, Korean, Portuguese, Spanish, French, Italian, Russian, and Turkish. Also, the Human Rights Promotion Committee has been reorganized into the Human Rights, Labor Relations, and Corporate Ethics Council to work on promotion and risk reduction activities.
Meanwhile, we conduct an annual CSR Procurement Survey with suppliers under the CSR-Based Procurement Guidelines, which describe rules we expect our suppliers to follow, including respect for the human rights of workers. Based on the survey findings, we assess their risk, suggest improvements to those whose risk is deemed high, and follow up on their improvement efforts. For suppliers that handle raw materials with high risks of human rights violations, we ask them to survey the place of origin and answer the questionnaire on human rights policy to raise their awareness and cooperation in human rights in raw material procurement.

k. Defined benefit liability
The Group’s defined benefit liabilities are calculated on the basis of various assumptions used in actuarial calculations and investment yields of pension assets. As such, fluctuations in the market value of pension assets, interest rate behaviors, and changes in retirement allowance systems and pension plans can affect the amount of such liabilities that are recognized and reported, thereby having an impact on the performance of the Group.
When managing pension assets affected by market fluctuations, the Group aims to achieve stable returns by setting long-term policy asset mix based on factors such as pension asset liability management (ALM) analysis, diversifying investments, and considering downside risks. In implementing the above, the Group has established an appropriate operation and management system by designating members from its finance and human resources departments as well as members with asset management experience as fund managers, in addition to engaging external consultants. When considering changes to retirement benefits and pension plans, such as reducing the risk of additional contributions by, for example, introducing defined contribution pension plans in certain cases, due consideration is given to the impact on retirement benefit obligations.

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