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 23, 2022)
Business Environment
Changes in the Automotive Market
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 change in these markets could result in fewer automobile sales, which could affect the business performance of the G-TEKT Group.
Risk Countermeasures
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.
Response to climate change and environmental regulations
Global warming due to greenhouse gas emissions and other factors is having a serious impact and global environmental conservation needs to be tackled as an urgent issue.
If we are unable to appropriately respond to strengthening environmental regulations in each country and stakeholders’ requests to contribute to decarbonization through our business, the loss of opportunities due to a downturn in our social reputation could affect the business performance of the G-TEKT Group.
Risk Countermeasures
We are aiming to achieve virtually zero CO2 emissions by FY 2050 for the G-TEKT Group and we are working to reduce CO2 emissions generated during production (Scope 1 + 2) by implementing measures to reduce greenhouse gas emissions and by switching to renewable energy.
A large portion of the emissions generated over the lifecycles of our products (Scope 1-3) are attributed to the sheet steel we procure, so we are considering a switch to using sheet steel that has been produced through more environmentally friendly methods for our products, as well as developing products and establishing production techniques that use aluminum, which offers greater recyclability.
Shift to electric vehicles
In order to realize decarbonization, the auto industry is rapidly shifting from vehicles with internal combustion engines to electric vehicles (EV).
EV differ from conventional vehicles in terms of structure, such as drive systems, and as they become widespread, although it will create opportunities to expand business by entering new markets, it may also lead to significant changes in demand for conventional parts and the way plants operate.
While we are actively working to adapt to this shift to EV, if we are unable to respond appropriately due to delays and setbacks in R&D and plant innovation, it will lead to a loss of orders that could affect the business performance of the G-TEKT Group.
Risk Countermeasures
Establishing an EV-related business is one of our new management strategies. Over the next 10 years, we plan to spend ¥70.0 billion for research and development and capital investment and we are advancing R&D activities with the aim of achieving net sales of over ¥100.0 billion and an operating profit margin of at least 8% in the EV-related business. In the future, we are also aiming to make sales proposals and to receive orders from manufacturers of complete vehicles in areas that are ahead in adopting EV, such as China, Europe, and North America.
We are also advancing activities focused on realizing a smart plant for producing EV parts in the future, such as automating plant facilities and reviewing production line structures.
Business Operations
Technological development based on market needs
Understanding market needs is a crucial factor in determining the allocation of technological development resources. 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 in the future, and this, as well as any additional investments, could affect the financial condition and business performance of the G-TEKT Group.
Risk Countermeasures
In April 2022, we reorganized our development and research centers in North America (Detroit), Europe (Munich), and China (Shanghai) into sales and engineering centers by integrating sales, technical, and development functions. We also strengthened coordination between these centers and G-TEKT TOKYO LAB, the Group’s core R&D and intellectual property center, in order to strengthen efforts to understand market needs, and we are also collaborating with an engineering service provider (ESP) in Europe on the research and development of new technology.
Spread of new materials
If the adoption of 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.
Risk Countermeasures
In addition to conventional sheet steel, the G-TEKT Group is advancing R&D into new materials such as carbon fiber and aluminum, which is currently becoming used mainly in luxury vehicles in Europe.
We have also established mass production technology for the aluminum pressing process, and this is already being used in production in Europe.
Intellectual property rights
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 lose opportunities or additional costs could be incurred, which could affect the business performance of the G-TEKT Group.
Risk Countermeasures
We have established a department that specializes in managing IP, and investigates, acquires, and manages IP rights in accordance with the G-TEKT Group’s IP strategy.
Securing human resources
We recruit personnel and carry out business activities in locations around the world, but there are concerns that factors such as the contraction of labor markets due to various reasons, such as changes in business conditions or low birth rates, or failure to establish and maintain personnel systems will make it difficult to secure talented human resources.
Difficulty of securing human resources or an outflow of personnel would result in the loss of opportunities to cultivate employees and enhance their capabilities, and a labor shortage could potentially impede all business activities, affecting the business performance of the G-TEKT Group.
Risk Countermeasures
In order to retain talent, we are improving employee benefits and conditions for employees by reviewing and enhancing personnel systems and actively developing and implementing measures aimed at reducing employee workloads through the automation of tasks that require physical strength and concentration. We will establish environment in which employees believe that they can continue to work with confidence.
Risk Management Systems
We are ramping up business operations outside of Japan. Each country and region is subject to various risks which are different to other countries and regions. If these risks are not handled appropriately, it could affect the business performance of the G-TEKT Group.
Risk Countermeasures
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. Our head office in Japan regularly monitors the status of these countermeasures and shares information on risk and countermeasures throughout 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 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.
Risk Countermeasures
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.
Quality
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.
Risk Countermeasures
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.
We will monitor and visualize the quality information of the Group on a global level through the DX (Digital Transformation) project, with the aim of managing through prediction and prevention. Furthermore, we are working to establish suitable quality assurance systems in the new business area of EV-related products business.
Supply Chain
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.
Risk Countermeasures
We are countering the risk of a shutdown of operations at our main suppliers by investigating the disaster recovery systems of each company through a survey based on hazard maps and by securing alternative suppliers in readiness for any shutdown of supplier operations due to a disaster or infectious disease.
Within the die manufacturers to which we outsource die production, there are some companies for which it is difficult to secure an alternative supplier, so we are working to reduce the risk of supply chain disruptions and ensure that a quick recovery can be realized through efforts such as shortening die production lead times, dispersing processes, and ensuring distribution can be maintained in times of disaster.
Foreign Exchange
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.
Risk Countermeasures
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.
Compliance
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.
Risk Countermeasures
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.
Cybersecurity
Cyber-attacks are constantly becoming more sophisticated, and the increasing number and diversity of endpoints is broadening the scope that needs to be defended. As the attackers themselves are also changing, new measures that anticipate a security breach are needed. In the unlikely event that the G-TEKT Group becomes the target of an attack, the effects such as disruptions to important operations and leaks of confidential information could affect the business performance and social image of the G-TEKT Group.
Risk Countermeasures
We are implementing efforts, led by the Information Security Division, to review rules related to cyber security and find potential issues at on site.
Furthermore, we have installed an endpoint detection and response (EDR) system at our head office in Japan and through the oversight provided by this system, we have established a framework in which even if there is a security breach, any illegal operations will be swiftly detected and blocked. Going forward, we will implement this framework at subsidiaries outside of Japan.
Infectious diseases, natural disasters, geopolitical risk, etc.
Outbreak of Infectious Diseases
The global economy and the business activities of the Company or its customers and suppliers may stagnate due to requests for restrictions on activities by governments and other organizations in response to outbreaks or global spread of infectious diseases, which could have a significant impact on the business performance of the G-TEKT group.
Risk Countermeasures
Labor and other fixed costs continue to be incurred at sites even when we suspend operations due to the spread of infectious diseases. The head office in Japan etc. procure funds from financial institutions, the Group as a whole has secured adequate liquidity.
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 production and sales activities could be impacted by natural disasters such as major earthquakes, floods, tsunamis, or tornados. If these were to occur, the procurement of raw materials and components, production, and sales could be delayed or stopped, which could affect the business performance of the G-TEKT Group.
Risk Countermeasures
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 making projections of potential damage from natural disasters at each location and then preparing contingencies by establishing an initial response structure and considering recovery plans based on these projections.
Geopolitical Risk
If geopolitical risk, such as political unrest, political tension, war, or conflict between countries, or terrorism were to manifest in or around a countries or regions where the G-TEKT Group is active, it could limit or impede the Group’s business activities, affecting the business performance of the G-TEKT Group.
Risk Countermeasures
We are giving our businesses in each region autonomy regarding aspects such as procurement and we are working to maintain a balanced profit structure.
