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.
This section contains forward-looking statements, and these statements are based on our judgments as of the filing date of the securities report. (June 17, 2021)
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 in the aspects of capital investment decisions, appropriate personnel assignment, expense management, etc.
Changes in the Automotive Market
The automotive industry is at a major inflection point: there are both rapid technological innovations, driven by the shift to EVs, including autonomous driving, and new market entrants from different industries. In addition, even more stringent global environmental regulations are being developed to address global warming and climate change.
The G-TEKT Group’s business operations are exposed to market and price competition from many other companies, but with an increase in market entrants from other industries, there is no guarantee that the Group will be able to maintain or increase our market share going forward. Moreover, we assume that the environmental standards applied to our products will become increasingly important for winning orders.
In the event that G-TEKT is unable to respond effectively to changes in market share or the need to conform to environmental standards, we could fail to win orders, which would affect the business performance of the Group.
On the assumption that OEMs (original equipment manufacturers) in the automotive industry will at some point need to decarbonize the entire supply chain, G-TEKT has declared the goal of achieving carbon neutrality by 2050. For that purpose, we established the GX (green transformation) project, with the intent to have zero emissions from business operations.
We are also implementing initiatives for our EV-related business, especially by developing dedicated EV platforms, battery housings that can be customized to meet customer needs, and components for electric powertrains.
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.
To fully understand market needs, we share the information gathered by our R&D centers in North America, Europe, and China with G-TEKT TOKYO LAB (GTL), the Group’s core R&D center in Japan. We are also collaborating with an engineering service provider (ESP) in Europe, primarily via GTL, on research and development of new technology.
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.
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.
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’s design and manufacturing comply with all applicable laws and regulations, and we follow international standards for quality control. We strive to improve quality by maintaining a rigorous system of quality assurance. We are also working to improve quality and resulting reliability through camera imaging and image analysis technologies and by carefully inspecting precision and quality on our manufacturing lines.
Further, through the newly launched DX (digital transformation) project we will monitor and visualize the quality information of the Group on a global level, with the aim of managing through prediction and prevention.
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 respond to the disruption to the supply chain 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
Due to the global spread of COVID-19, G-TEKT temporarily suspended operations at local manufacturing plants because of production being shut down at customers’ operations. These suspensions had an impact on business performance. G-TEKT’s production is recovering, but there is still the concern that climate change and globalization could result in the spread of new diseases, so the situation going forward requires continued caution. A resurgence of COVID-19 could materially affect the business performance of the Group.
Labor and other fixed costs continue to be incurred at sites even when we suspend operations due to the spread of infectious diseases. We are currently procuring funds from financial institutions in Japan, the United States, and elsewhere, and the Group as a whole has secured adequate liquidity. We have attained a credit rating of A- from Rating and Investment Information, Inc. (R&I), and are considering new ways to further diversify our funding sources.
Over the medium and long term, in addition to reducing the risk of infection by automating production and reconfiguring factory and office layouts, we are re-envisioning our approach to back office operations by introducing a remote work program and by implementing other initiatives to improve productivity and profitability.
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.