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Business Risks

1.Business practices in customers' industries

The TAIYO YUDEN Group has direct dealings with many electronic device manufacturers, including the world's leading manufacturers. Competition in the electronic device market is fierce, technological change is rapid, products are clearly divided into hit products and unsuccessful products, and product life cycles have dramatically shortened compared to the past. For these reasons, customer inventories and production plans fluctuate sharply, and the Group's orders may be substantially affected by those fluctuations.

2.Decline in electronic component prices

Competition in the electronic device market is fierce, and in the electronic component market as well prices of electronic components are trending down due to price reduction requests from set manufacturers and competition among components manufacturers. Although the Group is engaged in cost reduction and production process improvement, price decline exceeding the impact of those measures may occur due to supply and demand fluctuation in the electronic component market.

3.Quality-related impact

The TAIYO YUDEN Group actively develops excellent leading-edge technologies, applies them in new products, and promptly introduces them to the market and simultaneously strives for the establishment of quality assurance systems and the establishment of a sophisticated service structure, including acquisition of ISO9001 certification. As a result, the Group's products are adopted by many customers. Nevertheless, for reasons including the fact that the Group's products are leading-edge technology products, many as yet unknown development technologies exist, and the occurrence of unforeseen defects may affect the Group's business performance.

4.Research and development

The TAIYO YUDEN Group continuously makes active R&D investments and engages in R&D activities related to leading-edge technologies such as ceramic technologies based on material technologies, multilayer technologies, circuit design technologies, software technologies, production system technologies, and evaluation and simulation technologies. The Group creates leading-edge elemental technologies through R&D and has achieved superior market share and high profitability by promptly introducing on the market new products incorporating those technologies. However, the timing of new product introductions may affect the Group's business performance.

5.Risks in connection with overseas business

The TAIYO YUDEN Group has deployed a global divisional structure and considers its overseas sales companies as customer sales bases for each geographical area and its overseas production companies as optimized production bases. Bases for the conduct of the Group's business are located worldwide, including in politically and economically unstable areas. The outbreak of terrorism, wars, epidemics, or other social turmoil or the occurrence of unexpected events such as strikes or power outages due to inadequate public infrastructure may obstruct the Group's business activities. In addition, the occurrence of these events at the Group's customers may affect the Group's business activities.

6.Risks associated with China

The TAIYO YUDEN Group operates production and sales bases in China, a country achieving striking economic development. Many of the Group's customers also operate production bases in China, and their business operation may be affected by China's economic growth. The rapid development of China's economy and the many economic reforms being implemented by the government of China, in addition to the risks mentioned in "Risks in connection with overseas business" above, may affect the Group's business activities due to unpredictable events such as revisions to laws and regulations, slowing of economic growth, currency exchange rates, and electric power supply.

7.Currency exchange risks

The TAIYO YUDEN Group's ratio of sales to overseas markets is increasing due to active overseas business development. As a rule, intra-group transactions are denominated in U.S. dollars, and the Group strives to mitigate risk of exchange fluctuations by taking out exchange contracts for a portion of these transactions. Nevertheless, in overseas business activities foreign currency-denominated transactions and many foreign-currency assets exist, and the Group is exposed to market risks having to do with sharp exchange rate, stock price, or interest rate fluctuations. Major fluctuations in the market may affect the Group's business performance.

8.Statutory regulation, etc.

The TAIYO YUDEN Group is subject to the application of government regulation in the countries in which it does business, including authorization of business and investment, tax systems, and export restrictions for national security purposes, and is subject to statutory regulation related to trade, antitrust, and the environment and recycling. Although the Group complies with these regulations in the course of business, drastic changes in regulations may affect the Group’s business performance.

9.Risks associated with environmental regulation

The TAIYO YUDEN Group is subject to various environment-related laws and regulations concerning harmful substances in products, the disposal of industrial waste, and the prevention of water, air, and soil pollution in the countries in which it does business. To comply with these regulations, the Group has implemented measures including abolition of the use of harmful substances and the introduction of treatment facilities. Nevertheless, regulations are becoming stricter year by year and may lead to issues such as higher environmental compliance investment and restrictions on business activities.

10.Intellectual property rights

Since the TAIYO YUDEN Group's products are leading-edge technology products and competition in the electronic device market is fierce, the Company considers the procurement of patents and other intellectual property rights an extremely important matter that affects competitive strength. However, in some countries intellectual property may not be completely protected. In such countries, other companies may sell imitations of the Group's products, and the loss of sales opportunities for the Group's products and imitations of inferior quality may weaken trust in the Group's products. In addition, the Group's products or technologies may be deemed to infringe the intellectual property rights of other companies.

11.Risks related to personnel recruitment and retention

The TAIYO YUDEN Group's business performance depends heavily on the contributions of talented human resources in R&D, production, sales, business administration, and other fields. The competition to secure talented human resources is fierce, and the Group may be unable to prevent the outflow of current personnel or be unable to recruit new personnel. Inability to recruit and retain talented personnel may result in inefficient management and a decline in product competitiveness.

12.Risks in connection with the occurrence of natural disasters or accidents

The TAIYO YUDEN Group may suffer suspension of operation or incur extensive damage to manufacturing facilities due to the occurrence of earthquakes, typhoons, flooding, and other natural disasters, strikes or other labor disputes, or accidents. Although the Group obtains insurance to provide against these disasters and accidents, insurance may not compensate for all damages incurred. In addition, damage incurred by the Group's customers or suppliers due to disasters and accidents may affect the Group's business performance.

13.Risks associated with profit improvement measures

To respond to the current and future business environment, the TAIYO YUDEN Group implements measures consisting of structural reforms and growth strategies. In structural reforms in particular, the Group has set forth fixed cost reduction measures centered on increased utilization of overseas business bases, the withdrawal of unprofitable products, reorganization of domestic and overseas business sites, and personnel reductions. Failure to make progress according to plan, inability to obtain the expected benefits and results, or the occurrence of unforeseen problems in connection with the implementation of these measures may affect the Group's business performance.