Business and Other Risks
Among all the issues related to business operations and accounting noted in the securities report, the business risks that could affect the G-TEKT Group's financial condition and management results are outlined here. We recognize that these risks may have significant influence on investor decisions.
Changes in the Market Environment
The G-TEKT Group has business operations in a number of countries around the world, including Japan, China, and other parts of Asia, as well as North America, South America, and Europe, supplying products to local automakers and related auto parts manufacturers. Slow personal consumption due to an economic downturn or a decline in the willingness of consumers to make purchases due to the tax system in these markets could result in fewer automobile sales, which could affect the business performance of the G-TEKT Group.
High Dependency on Specific Customers
Honda Motor Co., Ltd. owns more than 30% of the voting rights of the G-TEKT Group and qualifies as one of G-TEKT's “other affiliates.” Honda and associated Group companies account for around 70% of G-TEKT's consolidated sales. G-TEKT maintains a capital relationship as well as an ongoing and stable business relationship with Honda. The production and sales trends of the Honda Group, in and outside Japan, along with their business strategy and purchasing policy may have a significant effect on the business performance of the G-TEKT Group.
Supplementary Item (Impact of Honda discontinuing production in Europe)
On February 19, 2019, Honda announced that it has begun restructuring its manufacturing network and plans to close the Swindon vehicle manufacturing plant in the United Kingdom in 2021. Since venturing into the UK in 1997, G-TEKT has had an ongoing business relationship with Honda there. The withdrawal of Honda could have a material impact on the Company’s business in the UK. G-TEKT is promoting growth of the sales channels outside of Honda and will continue production in the UK based on a forecast of further growth going forward.
The G-TEKT Group is ramping up business operations outside of Japan. Countries and regions are subject to various risks: the unforeseen enacting or changes to laws and regulations; differences in the legal system, laws, and regulations of every country in such areas as intellectual property; the implementation of government policies such as foreign currency restrictions, investment and tariff policies; changes in the political or economic circumstances; and difficulties in securing human resources due to factors such as changes in the social or labor environment, including rising wages. All of these risks could affect the business performance of the G-TEKT Group, if they cannot be dealt with effectively.
The G-TEKT Group is focusing on the research and development of new technologies that can help increase orders from automakers. However, in the event the Company lags behind in acquiring the rights to these technologies, such as when another company acquires intellectual property rights ahead of us for a technology that we are currently developing, we may be unable to commercialize this technology and additional costs may be incurred. As well, in the event that we are unable to predict changes in customer needs or to develop new and appealing products or to supply them quickly enough, or if demand does not increase as expected, these could negatively affect growth and profitability and additional investments could affect the financial condition and business performance of the G-TEKT Group.
Also, if the use of new materials spreads in the fields where the G-TEKT Group is active, these new materials could compete with the G-TEKT Group's products and could in turn affect the business performance of the G-TEKT Group.
Competitors and Price Competition
The G-TEKT Group's business operations are exposed to market and price competition with many other companies. The G-TEKT Group strives to increase competitiveness by accurately identifying the different customer needs for each region, by proposing price-competitive developments, and by always supplying customers with the products they require. However, there is no guarantee that in the future the G-TEKT Group will be able to maintain or increase market share.
In addition, the Company is currently competing with automakers as well as new entrants into the automotive industry, which is now undergoing a transformation thought to occur only once every 100 years. If the G-TEKT Group is unable to effectively deal with changes to the market share of sales to automakers, this could affect the business performance of the Group.
Violation of Laws and Internal Regulations
The G-TEKT Group, when conducting business, obeys extensive laws and regulations in Japan and overseas. For example, we created a system to ensure compliance with laws and internal regulations that includes formulating a basic policy for the Group for preventing both unfair competition and corruption, among other items, and we distributed this information to all employees. If a law or a regulation is broken by an executive officer or an employee, any settlement or legal action taken by regulatory authorities could affect the performance of the G-TEKT Group.
The G-TEKT Group designs and manufactures in ways that comply with laws and regulations and that follow international standards for quality control, while striving to continually improve quality by maintaining a rigorous quality control system. However, in the event that an unforeseen issue with quality emerges, the G-TEKT Group may incur costs or suffer serious impact to the business reputation, which could affect the financial condition and performance of the G-TEKT Group.
Procuring Parts and Purchasing Products
The G-TEKT Group relies on specific suppliers inside and outside the Group for the procurement of mainstay components and purchased products. If these materials cannot be procured because of the shutdown of operations at these suppliers, the G-TEKT Group's business performance could be affected as a result.
Foreign Exchange Rate Volatility
The G-TEKT Group conducts business operations around the world, and as a result, fluctuations in foreign exchange rates impact the Group’s performance. Some 80% of the G-TEKT Group’s consolidated sales are accounted for by local production at overseas subsidiaries, so changes in exchange rates can affect the financial position and business results due to differences arising from the conversion to Japanese yen.
In addition, certain products and components are exported, including the sale of manufacturing equipment such as dies and jigs, to customers outside of Japan. Although we strive to mitigate foreign exchange risk by using foreign exchange forward contracts and other means, sudden or significant volatility in currency exchange rates could affect the business performance of the G-TEKT Group.
Impact of Disasters, War, Terrorism, Strikes, and Restrictions on Electricity Use, etc.
The G-TEKT Group has set up plants inside and outside of Japan where manufacturing equipment is used, such as press and welding machines, and hires employees locally to manufacture and sell automotive components. These activities may be affected by natural disasters such as a major earthquake, flood, tsunami or tornado, etc.; the outbreak of infectious diseases; warfare and terrorism; mass movements; labor issues including strikes involving local employees; and restrictions on the use of electricity or power. If these were to occur, the procurement, production, and sale of raw materials and components could be delayed or stopped, which could affect the business performance of the G-TEKT Group.