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 could have a significant influence on investment decisions.
Changes in the Economic Environment
The G-TEKT Group has business operations in countries around the world, including Japan, China, and other parts of Asia, as well as North America, South America, and Europe. We supply products to local automakers and related auto parts manufacturers in those locations. Slow personal consumption due to an economic downturn or the reluctance 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.
The G-TEKT Group is closely monitoring market trends in the countries where we operate, and we are working hard to respond swiftly and carefully to those trends.
Changes in the Automotive Market
The automotive industry is currently facing a major turning point, a once-in-a-century situation, driven by the concept of CASE, or connected cars, autonomous driving, and shared and electric vehicles. For shared vehicles, mobility-as-a-service (MaaS) is shaking the foundations of automobile companies and is expected to have a major impact on future demand trends. In addition, demand for electric vehicles (EVs) is on the rise due to the tightening of global environmental regulations, while automotive components are required to be lighter and more rigid than ever.
The G-TEKT Group's business operations are exposed to market and price competition from many companies. In addition, an increasing number of new entrants from other industries are entering the market. There is no guarantee that, in the future, the G-TEKT Group will be able to maintain or increase market share. If the G-TEKT Group is unable to effectively deal with changes in market share, this could affect the business performance of the Group.
The G-TEKT Group is striving to improve competitiveness by accurately identifying varied customer needs, by proposing price-competitive development, and by always supplying customers with the products they need. Specifically, we aim to accelerate the automation of our production lines, to improve operational efficiency by using digital technology, to reduce costs by boosting productivity, to increase sales per unit of popular models, and to secure new orders. In addition, we are promoting a project to improve productivity and reliability as well as reduce costs in several ways, including automation using digital and image analysis technologies.
In addition to collaborating with an engineering service provider (ESP) in Europe on the development of a new battery case for electric vehicles, we are challenging body in white development aimed at competitive next-generation lightweight, highly rigid car bodies.
If we lag behind in acquiring the rights to technology, 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 could be incurred. Also, if we are unable to predict changes in customer requirements or to develop new and appealing products or to supply them quickly enough, or if demand does not increase as expected, these factors could negatively affect growth and profitability, As well, any additional investments could affect the financial condition and business performance of the G-TEKT Group.
In addition, if adopting new materials spreads in the fields where the G-TEKT Group is active, these new materials could compete with existing Group products, and could, in turn, affect the business performance of the G-TEKT Group.
The G-TEKT Group has a department specializing in managing intellectual property (IP) based on an IP strategy.
To clearly grasp market needs, we are relaying the information gathered by our R&D centers in North America, Europe, and China to G-TEKT TOKYO LAB (GTL), the Group’s core R&D center in Japan.
We are also conducting research into multi-materials, led by GTL, and have already established production technology for aluminum materials. As well, we have shifted to mass production at our plant in Slovakia, among other achievements.
The G-TEKT Group is ramping up business operations outside of Japan. Countries and regions are subject to various risks: new unforeseen laws or changes to existing laws and regulations; differences in legal systems, laws, and regulations in every country in such areas as intellectual property; government policies such as foreign currency restrictions as well as 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 these risks could affect the business performance of the G-TEKT Group if not handled effectively.
Aware of the importance of risk management to the entire G-TEKT Group, we have created a risk map for each country where we operate. Based on these maps, our overseas subsidiaries are identifying priority issues and effective countermeasures.
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 Honda Group companies account for over 60% 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, could affect the business performance of the G-TEKT Group.
In addition, Honda plans to discontinue production at their Swindon plant in the United Kingdom in 2021. Since venturing into the UK in 1997, G-TEKT had a business relationship there with Honda. The withdrawal of Honda could affect the Company’s business in the UK.
We share production and sales outlooks as well as future directions for business strategies and purchasing policies between the G-TEKT Group and customer groups. These close, long-term relationships enable us to use the information we gather to make decisions on investments and business strategies.
Also, to increase interaction with new business partners, we have developed a sales strategy based on price-competitive development proposals, in this way reducing the risk of being too dependent on the same customers.
In response to the closure of Honda’s plant in the UK, we are looking to expand our sales channels to other companies and we will continue production in the UK based on a forecast of higher growth going forward.
If an unforeseen issue with quality emerges for a G-TEKT Group product, the Group may incur costs or suffer a serious impact to our business reputation, which could affect the financial condition and business performance of the Group.
The G-TEKT Group designs and manufactures in ways that comply with all applicable laws and regulations, and we follow international standards for quality control, while striving to continually improve quality by maintaining a rigorous quality control system. We are also working to improve quality and the resulting reliability, For this goal, we promote quality assurance using camera imaging and image analysis technologies, and by closely checking precision and quality on our manufacturing lines.
The G-TEKT Group relies on specific suppliers inside and outside the Group for purchasing mainstay components and other products. If these materials cannot be purchased because of a shutdown of operations at these suppliers due to the spread of an infectious disease or a natural disaster such as a flood, the G-TEKT Group's business performance could be affected as a result.
The steel used as a raw material in our products is supplied from blast furnace mills. Although we also outsource die production, we responded to the disruption to the supply chain caused by the recent lockdown of Wuhan City in China by shortening manufacturing lead times and dispersing production to ensure supply and to minimize risk and enable a speedy recovery. In addition, we outsource, through subcontracts with affiliated manufacturers, the processing of mass-produced products. To further mitigate risk, we create hazard maps and secure alternative manufacturers.
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 our financial position and business results due to differences in converting to yen.
In addition, certain products and components are exported, including manufacturing equipment such as dies and jigs, to customers outside of Japan. Sudden or significant volatility in currency exchange rates could affect the business performance of the G-TEKT Group.
The G-TEKT Group mitigates foreign exchange risk and reduces the impact of foreign currency fluctuations on exports of products and components in several ways, including forward exchange contracts.
The G-TEKT Group, when conducting business, obeys all laws and regulations in Japan and overseas. If a law or a regulation is broken by an executive officer or employee, any settlement or legal action taken by regulatory authorities could affect the business performance of the G-TEKT Group.
In the G-TEKT Group, the Compliance Sub-Committee chaired by the Compliance Officer takes the lead in promoting self-inspections, compliance training, raising in-house awareness, and reviewing proposals to improve corporate ethics. 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.
Infectious Diseases and Natural Disasters, etc.
Outbreaks of new infectious diseases, such as the novel coronavirus
The G-TEKT Group has business operations in countries around the world and supplies products to local automakers. The global spread of the coronavirus, or COVID-19, has affected both supply and demand in the automotive industry worldwide. The suspension of production by our customers has led to the temporary halt to operations at some local production plants. There are concerns that a second wave of the virus will slow demand and therefore production, or that a new infectious disease could spread alongside climate change and globalization, all of which could significantly affect the business performance of the Group.
The following four points outline our response to mitigate the impact of any infectious diseases in the future.
・Further strengthen the financial structure.
・Improve our ability to deal with crises in the field through regular drills based on our business continuity plan (BCP).
・Engrain in our employees the concept of remote work and purchase online for our supply chain in response to restrictions on contacts with others.
・Stockpile facemasks and other supplies needed to counter an infectious disease.
Natural Disasters, etc.
The G-TEKT Group has set up plants inside and outside of Japan where manufacturing equipment is used, such as press and welding process 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 tropical storm, etc.; the outbreak of infectious diseases; warfare and terrorism; social protest movements; labor issues including strikes involving local employees; and restrictions on the use of electricity or power. If these were to occur, the purchasing, production, and sales of raw materials and components could be delayed or stopped, which could affect the business performance of the G-TEKT Group.
In the G-TEKT Group, the Risk Management Sub-Committee, chaired by the Risk Management Officer, takes the initiative for continually identifying risk, implementing countermeasures, and minimizing damage. Specifically, we are working to improve our supply chain management in several ways, such as examining alternative suppliers in case of an emergency.