(1) Economic Conditions in Countries, Regions and Industries
The NSK Group manufactures and sells products to the automotive and other diverse industries in countries all across the globe. As a result, the business performance and financial position of the Group could be adversely affected by changes in the economic environments of those specific countries and regions in which it operates.
(2) Market Changes and Competition
Volatile market conditions attributable to such factors as increasingly intense competition within the corporate sector and global business expansion by business partners are affecting product sales.
The appearance of local bearing manufacturers in China, for example, has driven down the price of general-purpose items, affecting the market for standard ball bearings in the industrial machinery business. The NSK Group is working to create a competitive advantage beyond pricing, by expanding its business in the field of high-quality bearings and improving its technical services. Nevertheless, the business performance and financial position of the NSK Group could be adversely affected by the rapid expansion of low-priced products from Chinese and other bearing manufacturers.
In the automotive business, it is now often a business requirement to have global supply locations in order to support customers' global production expansion and the standardization of models and parts specifications around the world. Despite the Group's efforts to enhance its competitive advantage outside Japan by expanding production early on, the business performance and financial position of the NSK Group could be adversely affected by the loss of sales opportunities due to delays in entering markets outside Japan or a failure to respond quickly enough to demand fluctuations in certain business segments and regions.
(3) Reliance on Specific Industries
Specific fields on which the NSK Group is heavily dependent include automotive bearings and automotive products, which account for some 70% of its sales; in precision machinery, the sales ratio is high for semiconductor production and machine tool industry products. For industrial machinery bearings and precision machinery products, NSK strives to increase the relative sales ratio of the broader general machinery field and aftermarket to mitigate the impact from downward fluctuations in those fields upon which NSK is highly dependent. Nonetheless, there is a risk that the business performance and financial position of the Group could be adversely affected by sudden declines in demand from the aforementioned industries.
(4) Credit Risks
The NSK Group sells a high percentage of its products to large and relatively stable customers, and recoverability risk relating to notes and accounts receivable and other claims is considered negligible. Doubtful claims are covered by reserves based on the likelihood of recovery.
Although the Group systematically monitors the credit status of customers on a day-to-day basis, there is a possibility that unforeseen changes in the business environment and other factors could trigger a recoverability risk relating to notes and accounts receivable and other claims. In the event of a decline in the credit standing of a business partner, a debt default, or other such circumstance, it is possible that the NSK Group's business performance and financial position could be adversely affected.
(5) Business Alliance Risks
The NSK Group works diligently to create global business alliance benefits with multiple companies in a variety of ways including the mutually effective use of management resources, technology development, and production activities. However, in the event that the benefits of a business alliance fail to materialize in accordance with expectations, due to such factors as a change in the management strategies of an alliance partner or deterioration in a partner's financial condition, the business performance and financial position of the NSK Group could be adversely affected.
(6) Reliance on Specific Suppliers
The NSK Group's basic strategy is to avoid reliance on a single supplier by procuring components and materials from multiple sources. However, the Group could become unable to source necessary items due to the inability of some suppliers to meet technical requirements, or a supplier's lack of production capacity, poor-quality products, natural disasters including fires and earthquakes, bankruptcy, or other reasons, which could in turn impede the Group's ability to supply products to customers. Such a contingency could adversely affect the business performance and financial position of the NSK Group.
(7) Rising Prices of Raw Materials
Fluctuations in the international economy or in demand trends might substantially affect the prices of such raw materials as iron ore, coking coal, scrap, and crude oil; an increase in these raw material prices could drive up the cost of materials and parts used in the products of the NSK Group. The Group is working to reduce costs by procuring items from outside Japan, and conducting Value Analysis (VA) and Value Engineering (VE) campaigns while also reflecting cost increases in higher product prices. However, there is a risk that the NSK Group might not be able to recover cost increases fully and that business performance could be adversely affected as a result.
(8) Quality Risks
The NSK Group's products are used in a broad range of industries and end-user products, and high-precision performance is essential for parts used in automobiles, rolling stock, airplanes, and other end-user products where safety is paramount. The NSK Group recognizes the importance of quality, and has put in place a high quality assurance system. However, in the event of a product defect leading to large-scale recalls or product liability lawsuits, the business performance and financial position of the Group could be adversely affected by substantial costs and reputational damage.
Although the NSK Group has obtained global product liability insurance, and recall insurance for some products, there is a risk that this might not be sufficient to cover all compensation payments and other losses.
(9) Product Development Risks
The purpose of new product development is to bring new products to the market, which is an important priority from the viewpoint of income expansion. Product development needs in the market for the NSK Group's products are diversifying; the pace of change in these needs has also accelerated.
New product development does not contribute to income until the market values a product and it begins to sell, but product development comes with a range of risks, including those given below. If not avoided, these risks could adversely affect the business performance and financial position of the NSK Group.
- i) sales of newly developed products might be weaker than anticipated due to the Group misjudging market needs;
- ii) sales of products might decrease due to delays in product development and mass production;
- iii) newly developed products might inadvertently infringe on the intellectual property rights of a competitor's products and technologies; and
- iv) other companies might introduce new products or new technologies that could be used as alternatives to those developed by the Group.
(10) Intellectual Property Risks
The NSK Group believes in the importance of filing patents on the technologies it develops, and otherwise protecting its intellectual property rights. The NSK Group obtains intellectual property rights in Japan and abroad to sustain and improve the competitiveness of its businesses.
However, with intellectual property increasing in importance, it is not possible to entirely eliminate the prospect that the business performance of the NSK Group could be adversely affected by the following risks:
- i) the risk of invalidation claims concerning the intellectual property of the NSK Group;
- ii) the risk that royalty payments might arise regarding the use of the intellectual property rights of a third party for the Group's business, or the risk that the Group might not be able to obtain permission to use the intellectual property of other parties;
- iii) the risk of intellectual property infringement by third parties; and
- iv) the risk that the NSK Group might not be able to eliminate counterfeit products effectively in certain countries or regions due to inadequacies in legal frameworks.
(11) Global Expansion Risks
The NSK Group conducts business worldwide, and in the fiscal year under review, sales outside Japan accounted for more than 60% of consolidated net sales. The Group's businesses outside Japan share the following common risks related to global expansion.
- 1) Unforeseen changes in local government laws and regulations
- 2) Changes in social, political, and economic conditions, or a deterioration in public safety
- 3) Transportation delays or damage to electrical power and other infrastructure
- 4) Foreign exchange restrictions and exchange rate fluctuations
- 5) Unfavorable changes in tax systems or taxation
- 6) Invocation of protective trade restrictions
- 7) Credit risk in business partners due to differing business practices
- 8) Unfamiliar employment systems and social insurance systems
- 9) Changes in labor conditions and difficulty in hiring personnel
- 10) Outbreak of contagious diseases
(12) Disaster and Terrorism Risks
The production and sales activities of the NSK Group could be adversely affected in the event that its business sites or those of its suppliers and customers are hit by earthquake, flood, fire, heavy snow, nuclear incident, the outbreak of a new infectious disease, terrorist attack, or damage or injury resulting from social unrest caused by changes in political conditions.
Furthermore, insurance does not completely cover all damage resulting from fire, natural disasters, and the like. The Group's response to natural disasters and terrorism is a key management issue, and the Group will do its utmost in this regard, including taking precautionary measures to minimize damage and ensure that the NSK Group can continue operations. However, the Group cannot completely eliminate such risks.
(13) Compliance Risks
To ensure full compliance with laws, regulations and ethical standards, the NSK Group has established the NSK Code of Corporate Ethics. The Group views the 16 policies on corporate conduct outlined below as the most important aspects of compliance, and details of this code are posted on various media, including the Company's intranet, and distributed to all employees. At the same time, the NSK Group works diligently to promote compliance and to reduce associated risks by providing online education and group training for all directors and employees. Despite these measures, however, there is still a risk of individual employees committing compliance violations, whether by error or misjudgment, and such actions could lead to criminal prosecutions, civil suits, or administrative actions against the NSK Group, resulting in reputational damage or economic losses.
- 1) Compliance with Competition Laws
- 2) Compliance with Import- and Export-Related Laws
- 3) Prohibition of Commercial Bribery (handling of entertainment, gifts, etc.)
- 4) Transactions with Public Institutions and Handling of Political Donations
- 5) Accurate Recording and Processing
- 6) Prohibition of Insider Trading
- 7) Handling of Intellectual Property Rights
- 8) Prohibition of Illegal and Criminal Conduct
- 9) Protection of Corporate Assets
- 10) Handling of Confidential and Personal Information
- 11) Relations with Customers
- 12) Relations with Suppliers
- 13) Prohibition of Acts Discrediting Competitors
- 14) Prohibition of Discrimination and Cultivation of a Sound Workplace
- 15) Respect of Fundamental Rights at Work
- 16) Global Environmental Protection
NSK and some of its subsidiaries are under investigation by relevant authorities outside Japan on suspicion of violations of competition law in product transactions. The NSK Group is cooperating fully with all relevant authorities in their respective investigations.
As a result of the above investigations, there is a possibility of future surcharge payments, or other financial losses; however, it is difficult to provide a reasonable estimate of the amount of such losses at this time, and their impact on NSK's operational results, etc., is uncertain.
In March 2013, the Japan Fair Trade Commission issued a cease and desist order and a surcharge payment order to NSK in regards to transactions involving bearings. NSK appealed the surcharge payment order in May 2013, but in March of this year the Japan Fair Trade Commission rejected this appeal. The Company decided not to pursue the case further, and the order was finalized. NSK already recognized the amount of the surcharge payment as an extraordinary loss in FY 2012, and there will be no future impact on business performance.
(14) Litigation Risks
The NSK Group is in the manufacturing industry, and most past and current litigation is related to product transactions. NSK particularly faces the risk of lawsuits for product liability.
The NSK Group has product liability insurance that covers alleged claims in litigation for product liability. This insurance will apply in some cases, but it does not provide unlimited and unconditional coverage for claims against the NSK Group for product liability.
Plaintiffs in the United States and Canada, including representatives of purchasers of bearings and other products, have filed class actions against certain parties, including NSK and some of its subsidiaries in Japan, the United States, Canada and Europe. The plaintiffs allege, among other things, that the defendants conspired with each other to restrict competition in sales of bearings and other products in these countries, and seek damages, injunctions, and other legal remedies against the defendants. NSK and some of its subsidiaries in Japan and the United States have agreed on a settlement with indirect purchasers and some other plaintiffs in the class actions in the United States. Furthermore, in the United Kingdom, plaintiffs, including some Group customers, have filed a claim against defendants including NSK and some of its subsidiaries in Europe, for damages related to the past violation of European competition law.
NSK, its subsidiaries or its affiliated companies could face additional future actions similar to the above; the NSK Group will manage these actions appropriately. Furthermore, as cases proceed, the NSK Group will consider the possibility of reaching settlements with such plaintiffs.
(15) Information System Risks
The NSK Group uses a variety of networks and systems to manage and support its diverse business operations, including sales, production, logistics, R&D, and accounting. Sufficient safety measures have been put in place in these systems, but there is a possibility that system restoration could require a substantial amount of time in the event of a cyberattack by hackers, a service outage by an outside systems provider, or failure due to natural disaster, etc. There is a risk that such a situation could impede production operations, warehouse management and sales activities, and that the disruption of product shipments could affect customers' production plans, potentially leading to compensation claims and loss of customer confidence in the NSK Group.
(16) Information Management Risks
The NSK Group follows appropriate procedures in obtaining and handling substantial amounts of important data and personal information. The Group has adopted an information security policy designed to prevent external disclosure of this information or its use for unauthorized purposes, and works to disseminate and effectively administer this policy; nonetheless, the possibility of leaks resulting from cyberattacks or other unforeseen circumstances cannot be ruled out. There is a risk of important work being suspended, of legal claims, of damage to the NSK Group's reputation, and of substantial costs being incurred in such an event. The NSK Group's brand image, management, financial position, and cash flow could be adversely affected as a result.
(17) Information Disclosure and Shareholder Income Risks
The NSK Group has established timely disclosure systems and strives to ensure the fair disclosure of corporate information and the accuracy of financial data. However, if the Group is unable to adapt its systems effectively to reflect the enactment or amendment of laws and regulations, or changes in Financial Instruments Exchange rules, there is a possibility that its information disclosure might be inadequate. This could cause a decline in the market price of its shares and adversely affect the interests of shareholders.
There is also a possibility that assessments or audits of the effectiveness of internal controls over financial reporting under the Financial Instruments and Exchange Act could lead to the identification of major errors or deficiencies.
(18) Environmental Risks
The NSK Group's business operations are subject to wide-ranging environmental laws and regulations, covering air pollution, water pollution, environmentally harmful substances, waste disposal, prevention of climate change, energy, and more. The NSK Group has identified environmental protection activities as an important aspect of its management policies and has worked to improve its environmental management systems. To date, the Group has had no major environmental problems. However, there is a risk that environmental problems could occur in the future, leading to costs relating to compensation payments, product recalls, the suspension of production, and clean-up operations, as well as fines and other official penalties, and reputational damage. The introduction of new regulations could also result in substantial costs being incurred.
(19) Recruitment Risks
The NSK Group recognizes that to stay competitive, it needs to continuously recruit, hire and train talented people. Competition for talent in the Group's business fields is growing increasingly fierce, and if the NSK Group is unable to recruit and train personnel, it could impair business expansion and have an adverse effect on operations.
(20) Labor Dispute Risks and the Labor Environment
The NSK Group strives to establish and maintain stable labor relations. The Group considers that there is little risk of deterioration in labor relations in Japan because it holds labor management council meetings regularly to discuss improving the labor environment and labor conditions. However, there is a risk that labor relations outside Japan could deteriorate due to differing labor practices, or such unforeseeable contingencies as changes in the legal, economic or social environment, leading to labor disputes and other problems. In such cases, there is a possibility that the Group's business operations might be curtailed.
The NSK Group is taking initiatives to provide a safe and comfortable labor environment, but there is also a risk of industrial accidents caused by malfunctioning equipment or improper operation by workers. A particularly serious industrial accident could adversely affect the Group's operations.
(21) Foreign Exchange and Interest Rate Risks
The NSK Group conducts sales, production, and other business operations around the globe, and is exposed to fluctuations in foreign exchange rates and losses arising from commercial transactions and investment activities denominated in foreign currencies. NSK also focuses on reducing interest-bearing debt in its efforts to strengthen its financial position, and a rise in interest rates would increase the amount of interest being paid, with possible repercussions on the NSK Group's business performance and financial position. The Group seeks to reduce the effects of exchange rate and interest rate fluctuations by balancing its foreign currency credits and debts and by using hedging when required, as stipulated in internal regulations. However, the risk of adverse effects cannot be entirely eliminated.
Fluctuations in foreign exchange rates could also have a detrimental effect on sales and production costs due to higher prices for materials and parts supplies.
The financial statements of affiliates outside Japan are mainly given in the local currency and translated into yen when producing consolidated financial statements. Even where the stated values do not change in the local currency, changes in foreign exchange rates might affect the amounts for assets, liabilities, income, and expenses after they are converted into yen.
(22) Projected pension obligations (Liability for retirement benefits)
NSK and its subsidiaries in Japan have pension schemes, including defined benefit corporate pension schemes, and lump-sum payment plans to provide retirement benefits for employees. Some subsidiaries in the United Kingdom and other locations also have defined benefit pension schemes.
The retirement benefit costs, retirement benefit liabilities, and pension funds of the NSK Group are calculated using discount rates and other actuarial assumptions. Accordingly, there is a risk that the business performance and financial position of the NSK Group could be adversely affected by retirement benefit costs and liabilities if there are changes in the assumptions on which pensions are based, a decline in returns on the investment of pension funds, a fall in the value of shares held in trust, or changes in accounting standards.