TAIYO YUDEN

Business Risks

(1) Risks associated with the novel coronavirus (COVID-19) pandemic

An upsurge in the spread of the novel coronavirus (COVID-19) could result in new restrictions being imposed on economic activity and cause the global economy to slow down rapidly, which could have a significant impact on orders received by the TAIYO YUDEN Group. In addition, there is the possibility of an impact on production due to restrictions on activities by government authorities in various countries, positive COVID-19 cases among TAIYO YUDEN Group employees, and stagnation in the supply chain including logistics. As such, with regard to the outlook of the crisis brought about by COVID-19, it remains unclear when the pandemic will be brought under control. In accordance with its Business Continuity Plan (BCP), however, the TAIYO YUDEN Group has implemented a variety of measures to fulfill its supply responsibilities while giving top priority to ensuring the health and safety of employees, business partners, and other stakeholders.

(i) Production aspect

The TAIYO YUDEN Group has been working to reduce risks by diversifying its production bases and ensuring sufficient inventory. However, if the Group’s production and operation are restricted in the future due to stricter activity restriction measures by local authorities, there is a possibility that the Group’s business performance will be affected. In addition, the launch of some facilities has been delayed due to travel restrictions between countries, but the Group will strive to minimize the impact by launching the facilities through remote operations.

(ii) Sales aspect

If economic activities are restricted due to the impact of COVID-19 and such effects are prolonged, the business performance of the TAIYO YUDEN Group may be affected. The Group will closely monitor its customers' production trends and the final demand for each device, and build a system that can supply the necessary items in a timely manner.

(iii) Logistics aspect

There have been longer logistics lead times and higher logistics costs due to fewer flights, and if such impact is prolonged, it may affect the business performance of the TAIYO YUDEN Group. The Group will try to minimize the impact through transportation using alternative flights and routes.

(2) 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.

(3) 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.

(4) 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.
Meanwhile, the Group has production and sales bases in China, where economic development has been remarkable. Many of the Group's business partners also have production bases in China, and their business operations may be affected by any decline in China's economic growth. The rapid development of the Chinese economy and the many economic reforms being promoted by the Chinese government may affect the business performance of the TAIYO YUDEN Group due to unforeseen events such as revisions to laws and regulations, slowing economic growth, exchange rates, and power supply.

(5) Credit risks of customers

The TAIYO YUDEN Group deals mainly with electronic device manufacturers around the world. However, in the electronic device market, the business environment changes rapidly, and if the business performance of customers deteriorates, the collection of trade receivables may be affected. The Group will strive to reduce the risk of collection of trade receivables by periodically confirming the status of trade receivables and customers' financial conditions, and by setting transaction terms and conditions in accordance with customers' credit risks at the time of new transactions.

(6) Risks associated with material procurement

The TAIYO YUDEN Group promotes the purchases of raw materials from multiple suppliers to ensure stable procurement and to reduce costs. However, the Group depends on procurement of some raw materials from specific suppliers, and if such procurement becomes difficult, supply may become difficult. For some raw materials for which procurement is highly dependent on specific suppliers, the Group will establish a system to ensure stable supply through long-term supply agreements with the suppliers.
However, there is a possibility that the business performance of the Group will be affected if supply shortages occur due to the deterioration in social conditions of the relevant country or imposition of export or import restrictions, or if raw material prices rise due to increased demand.

(7) 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.

(8) 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.

(9) Risks associated with financing

The TAIYO YUDEN Group is considering various financing methods in light of financial market conditions, but at the present time, it procures business funds mainly by borrowing from financial institutions. A rise in interest rates due to the destabilization of financial markets or a downgrade of the Company's credit rating could affect the Group’s business operations and business performance.
To prepare for unforeseen circumstances, the Group has secured liquidity on hand and concluded commitment line agreements with multiple financial institutions totaling 30.0 billion yen.

(10) 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.

(11) Risks related to taxation

The TAIYO YUDEN Group is actively expanding its businesses overseas, and as a result, cross-border transactions have increased. The Group has established a tax administration division to collect tax-related information from each Group company, while endeavoring to identify and reduce risks through examination by external experts. In addition, the Group manages the appropriate distribution of profits in each country through inter-group transactions, and uses a prior confirmation system with the tax authorities as necessary. However, there is a possibility that the business performance of the Group may be affected if tax risks are actualized due to differences in views with tax authorities in various countries or revisions to tax laws.

(12) 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.

(13) 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.

(14) Risks associated with environmental

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.

(15) Risks associated with climate change

The TAIYO YUDEN Group is working to reduce greenhouse gas (hereinafter, “GHG”) emissions from its business activities by appropriately monitoring GHG emissions and implementing ongoing energy-saving measures through the achievement of medium-term environmental targets. However, if stakeholders such as customers and business partners demand a level of climate change response that is difficult to achieve, there is a risk that the cost of countermeasures may exceed expectations due to the introduction and procurement of renewable energy and capital investment. In addition, there is a risk of loss of opportunity due to not meeting the required level, which may affect the Group’s business performance.

(16) 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.

(17) Risks associated with information security

The TAIYO YUDEN Group holds a variety of confidential information (customer information, personal information, trade secret information, etc.) for the purpose of operating its businesses. The Group is working to strengthen the security management system for the entire Group, provide regular employee education, and implement security measures using software and devices in order to prevent the leakage and falsification of such information due to threats such as cyber attacks and internal negligence, and to prevent business activities from being suspended. However, there is a possibility that unexpected cyber attacks or unexpected misconduct may result in the leakage of such information or the suspension of important operations. As a result, the social credibility and business performance of the Group may be affected.

(18) 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.