Annual Report 2007

The business performance and financial position of the NSK Group could be adversely affected by deterioration in the economic environment resulting from fluctuations in economic conditions in the specific countries and regions in which we sell and manufacture products, or from fluctuations in business conditions in the industries to which its customers and suppliers belong.

Competition for sales is intensifying on a global scale. There is a risk of increasing price competition resulting from rapid growth in sales of low-priced products made by manufacturers in emerging economies, and of a loss of sales opportunities if the NSK Group lags behind in the establishment of offshore production operations with global expansion by its customers, especially those in automobile-related industries.

There is a risk that the business performance and financial position of the NSK Group could be adversely affected by sudden declines in demand in the industries on which it is heavily reliant, especially the automotive sector, which accounts for over one-half of its sales, as well as the semiconductor industry and machine tools industry, which are key markets for its precision machinery and parts.

Though most of the NSK Group’s customers are believed to be companies with relatively low credit risk, it is always possible that a customer’s capital position may be weakened by an economic recession or escalating competition in global markets. There is a risk that this could result in unexpected bad debts.

There is a risk that a dispute with a partner could prevent an alliance from yielding the anticipated benefits.

Steel balls, which are key components for bearings, are manufactured within the NSK Group. However, the range of suppliers for materials and other parts may be limited because of the characteristics of some products. There are also risks of supply problems or cost increases if a supplier suffers from insufficient production capacity, quality problems, fire, disaster, or bankruptcy.

Amid the trend for raw materials (including steel and crude oil) prices to rise and stay high, there is concern about price hikes of materials and parts used in the NSK Group’s products. The NSK Group is striving to reduce costs, and pass on price hikes to product prices, but if its product prices fail to fully absorb these price hikes, they might hurt performance.

There is a risk of substantial costs and a loss of public reputation resulting from the consequences of a failure to detect a serious product defect, including a serious accident, product recall or interruption of a customer’s production operations. The NSK Group has obtained global product liability insurance, as well as product recall insurance for some items. However, this cover may not be sufficient to cover losses, including compensation for damages.

In its product development activities, the NSK Group is exposed to various risks, including the risks that new products may not be embraced by the market, that competitors may develop similar products faster than the NSK Group, or that other companies may introduce products that supersede new products developed by the NSK Group.

There is a risk that the NSK Group will not be able to establish intellectual property rights or obtain permission to use the intellectual property rights of third parties, that the NSK Group will be accused of infringing the property rights of third parties, or that it may not be possible to eliminate counterfeit products effectively in certain regions.

There is a risk that the NSK Group will not be able to recover its investment in overseas operations as planned, that regional factors may prevent the start-up of new production sites according to plan, or that it will become necessary to relocate or close production operations. There are also unavoidable risks relating to business conditions and regulatory systems specific to countries or regions in which the NSK Group has established business operations.

The production and sales activities of the NSK Group could be adversely affected if the Group or its customers or suppliers suffer material losses or human casualties as a result of earthquakes, floods, fires or other disasters, or riots, terrorist incidents or anti-Japanese activities.

The NSK Group has established a code of business ethics and is working to ensure compliance with laws and regulations. However, there remains the risk that violations of laws and regulations could adversely affect the Group’s public reputation and result in the imposition of economic penalties.

Though the NSK Group has obtained insurance cover against product liability suits resulting from product defects, such insurance does not provide unlimited indemnity for compensation costs incurred by the Group. There is also a risk of litigation other than product liability suits.

The NSK Group handles substantial amounts of important business information and personal information in the course of its business activities and cannot rule out the possibility of unforeseeable situations leading to the leakage of such information. There is a risk that such a situation would result in a loss of public reputation, and that substantial costs would be incurred.

The NSK Group has established timely disclosure systems and strives to ensure the fair and timely disclosure of company data and the reliability of its financial reports. However, there is a risk that shareholder value in the market may be reduced, and that shareholder interests may be adversely affected if the NSK Group is unable to adjust appropriately to the establishment or amendment of laws, regulations, notifications or other requirements, changes in stock exchange rules, or environmental changes, or if inadequate checking of operational processes relating to financial reporting results in inaccuracies in the information disclosed.

There is a risk that the NSK Group’s business activities may result in environmental problems, such as emissions of substances that cause environmental loads or soil contamination. The Group allocates a cost related to environmental safety measures in its accounts to provide for expenditure on countermeasures, removal measures or other requirements concerning substances that are currently subject to usage restrictions, such as asbestos. However, there is a risk that other environmental problems may arise, with consequences that may include the payment of compensation for damages, product recall, suspension of production, clean-up expenses, or administrative action such as the imposition of fines. There is also a risk that the establishment of new regulations will result in a substantial cost burden.

The NSK Group uses on-line systems and networks in operations relating to its supply chain, including production, sales and logistics. There is a possibility that these systems could fail, and that the restoration of services would require a substantial period of time. There is also the possibility of disruption resulting from delays in the improvement of existing systems, or from the development and introduction of new systems. Such problems could hinder production and sales activities and impact the production plans of customers and suppliers, exposing the NSK Group to the risk of claims for compensation and a loss of reputation.

The NSK Group recognizes that the recruitment and training of human resources with excellent abilities and technical knowledge are essential to maintaining competitiveness. Because of imbalances in the age mix of its workforce, the Group anticipates a sharp increase in the number of workers retiring in the next few years. However, there is growing competition for workers with skills in the NSK Group’s fields of activity, and if the Group is unable to secure sufficient new workers, its operations could be adversely affected by a failure to pass on skills.

There is a risk that differences in labor practices in overseas countries and regions, or unforeseeable contingencies, such as changes in the legal environment or economic environment, may cause labor relations to deteriorate, leading to labor disputes and other problems.

The NSK Group employs hedging, in accordance with internal guidelines, against exchange rate fluctuations affecting trading transactions, investments and other transactions denominated in foreign currencies, and against fluctuations in interest rates payable on its interest-bearing debts. However, the risk of adverse effects on the Group’s business performance or financial position cannot be entirely eliminated.

NSK Ltd., its subsidiaries in Japan and some overseas subsidiaries have established defined-benefit pension plans and unfunded lump-sum payment plans. There is a risk that the business performance and financial position of the NSK Group may be adversely affected by related factors, such as changes in assumptions concerning retirement benefits and obligations, or deterioration in returns from the investment of pension assets.