The Resonac Group faces risks that could adversely affect our future performance, financial position, and cash flows, and we are working to put in place an improved risk management system to minimize these risks. The details will be explained in the next paragraphs. Although the following details have been partially updated as of the end of the first quarter of the current fiscal year (March 31, 2023), they do not cover all risks associated with our group.
1. Risk management initiatives
(1) Risk manegement system
The Group has established a risk management system following the ISO31000 guidelines to clarify the risks and their impact on business management and for the effective allocation of management resources. The Risk Management Committee, chaired by the CEO, is established to conduct cross-functional deliberations by top management, including the risk management system and the Group’s important risks and countermeasures. The items discussed by the Risk Management Committee are deliberated on and approved by the Management Committee, and then reported to the Board of Directors, where directors assess the appropriateness and effectiveness of the risk management system and supervise the progress of its implementation. Risk owners, risk officers, and risk managers who are responsible for identifying risks in each division as well as for promoting our response to risk are assigned to domestic business divisions, business offices, and major group companies. At the same time, each organization under CXO (Chief X Officer) reviews and supports risk assessment and response measures for each division from a bird’s-eye view across the entire company, and has established a system to promote integrated risk management through collaboration between management and employees in the field.
(2) Definition of risk
Risk can be divided into strategic risk, operational risk, and hazard risk. And strategic risk can be further divided into two categories: the risk of changes in planning assumptions and the risk that the strategy developed will not be implemented. In order to achieve sustainable growth in corporate value, we need not only traditional defensive risk management, which emphasizes safety and compliance, but also aggressive risk management, which encourages appropriate risk-taking.
(3) Risk identification and assessment
Once a year, organizational units, such as divisions and groups, conduct comprehensive risk identification and assessment, including potential risks from business activities. The results are reviewed by the top management at each business unit, office, and group company, then registered in the system. We classify the registered risks based on frequency of occurrence and degree of impact, then rank highly significant and high-priority risks as important risks, report these to the Risk Management Committee, and discuss the important risks for the Group and their countermeasures.
2. Substantial fluctuations in the performances of individual businesses
The Group manufactures and sells a range of products in these categories: electronics, device solutions, mobility, ceramics, functional chemicals, aluminum specialty components, coating materials, petrochemicals, graphite, basic chemicals, and life sciences.
(1) Semiconductor and Electronic Materials
The Group’s products in the Semiconductor and Electronic Materials segment are used in mobile devices, data centers, power modules, IT infrastructure, electric vehicles and vehicles with advanced driver assistance systems. The demand for these products is significantly affected by changes in demand for end-products based on global macroeconomic and industry trends. Moreover, these markets have highly competitive businesses that are affected by rapid technological changes and price declines due to the deteriorating functionality of products. Further, the global supply chain network has been prepared to develop and provide products that meet market needs quickly and effectively but there is a possibility that the cost of raw materials, energy, and logistics will rise due to geopolitical risks, etc., and that the supply chain will be disrupted. As a consequence, the Group’s operating results and financial condition could be affected by significant variations in demand and competitive conditions, fluctuations in foreign exchange rates, or the occurrence of significant risks in the supply chain. For this reason, we strive to identify customer needs and market trends, develop new products and technologies, and improve manufacturing processes, while continually working to strengthen our supply chain management system to detect risks early on and to ensure a stable supply of products to our customers.
The Group is influenced by trends in the global mobility market, such as stricter regulations on fuel economy and CO2 emissions to protect the global environment as well as technological advances for CASE (Connected, Autonomous, Shared and Service, and Electric) vehicles. Its market is promising which is expected to grow over the medium to long term because the realization of carbon neutrality and the advancement of CASE vehicles require the development of products for electrification, weight reduction, and improvements in safety and comfort for automobiles. On the other hand, the business environment with competitors and new entrants is also intensifying. Other risks include the risk of delay in responding to changes in the level and needs of customers—such as the development of new technologies and products and the shortening of development lead times—so new technologies and products could make existing businesses obsolete, impact market competitiveness, and could require lower sales prices. There is also a risk that the profitability of existing businesses will decline as the internal combustion engine vehicle market shrinks due to the shift to EV. Consequently, the Group’s operating results and financial condition could be affected by significant fluctuations in demand and by the competitive environment. Therefore, in order to capture new technological needs coming from the progress of CASE, the Group will further promote the growth of adoption of new models among existing customers and the development of new customers by providing solutions related to materials and modularization, such as weight reduction and miniaturization, batteries related to electrification, as well as the control of heat, sound, and electromagnetic waves.
(3) Innovation enabling materials
The Group imports a large amount of aluminum metal from overseas sources. When the aluminum ingot price rises due to higher London Metal Exchange (LME) prices, a rise in the premiums on aluminum, or a weaker yen, and when we cannot absorb the manufacturing cost increase in the form of higher product prices, the Group’s performance and financial position can be affected. Furthermore, most of our products are sold as materials and components for the automobile, electric appliance, and electronics sectors. Trends in those industries, which are beyond our control, can substantially affect our businesses. In response, the Group hedges against the risk of fluctuations in aluminum raw material prices by hedging on the LME and other currency exchanges, and we are working to build a more stable revenue structure by reducing costs and by taking other steps.
Petrochemicals The Group purchases and imports a large amount of feedstock, including naphtha. When the price of naphtha or other types of feedstock fluctuates due to a change in crude oil prices, a change in the supply-demand balance, or a currency fluctuation, and when we cannot secure sufficient spreads between the manufacturing cost and selling prices of products, the Group’s performance and financial position can be affected. Furthermore, earnings from petrochemicals largely depend on the supply-demand balance. Construction of large plants by competitors and the resultant oversupply as well as a sharp decrease in demand due to unfavorable changes in the Japanese or world economies can affect the Group’s performance and financial position. In addition, the amount of investment and expenditure necessary for the Group to cope with global movement toward carbon neutrality that aims to mitigate climate change may be affected if there is any change in the schedule for implementation of necessary countermeasures. To deal with these risks, the Group is stabilizing revenue, including by reviewing sales methods and by working to reduce costs. Graphite The Group produces graphite electrodes in Asia, North America, and Europe, and sells those products globally. When the demand for graphite electrodes suddenly decreases due to unfavorable changes in the Japanese or world economies, deterioration in supply demand balance may not allow us to secure sufficient spreads between the manufacturing cost and selling prices of products, and can affect the Group’s performance and financial position. In response to these risks, the Group is working to strengthen the revenue base through such initiatives as maintaining inventory at levels appropriate to market conditions and by further reducing costs.
(5) Global operations
The Group is producing and selling in Asia, North America, and Europe. Operations overseas involve such special risks as unexpected changes in laws and regulations, deterioration in political/economic situations, and social disorder due to war and terrorism. As the impact of the situation in Ukraine becomes more apparent, there is a risk that the impact will stretch out into the future, and spread to other regions, leading to further increases in raw fuel prices and logistics costs, as well as the possibility of supply chain disruptions due to changes in the international situation surrounding economic security. Such risks can become real and affect our overseas operations, resulting in an adverse impact on the Group’s performance and financial position.
(6) Mergers, acquisitions, capital tie-ups, business reorganization and restructuring
The Group implements mergers, acquisitions, capital tie-ups, business reorganization and restructuring at home and overseas to expand the scope of businesses and improve profitability. The Group undertakes careful due diligence for companies being considered as acquisition targets, and scrupulously verifies post-merger plans to mitigate risk. However, if changes in the business environment for the Group or companies that the Group invests in effectively prevent the desired results from being achieved, this could have a negative impact on the Group’s performance and financial position. The Group’s performance and financial position could also be affected if the Group restructures businesses, such as withdrawing from unprofitable businesses or reorganizing affiliated companies.
3. Unexpected fluctuations in financial position and cash flows
(1) Substantial fluctuations in exchange rates
For foreign-currency-based transactions centering on exports/imports, the Group makes best efforts to minimize exchange rate fluctuation risks, mainly through exchange contracts. In particular, a sharp appreciation of the yen against the US dollar and other currencies could weaken the price competitiveness of products exported from Japan to overseas markets, while a weaker yen could increase the price of raw materials that are imported. Both of these currency fluctuations could have a negative impact on the Group’s business performance. Exchange rate fluctuations can also affect the Group’s performance and financial position through the conversion of overseas subsidiaries’ financial statements into yen.
(2) Trends in financial markets and changes in the fund-raising environment
The trends in the financial markets and deterioration in the Group’s financial indexes can affect the Group’s fund-raising and interest expenses: for example, in the form of prompt repayment of a loan owing to the terms of financial covenants. In that event, the Group’s performance and financial position could be affected. In the event that the financial results, financial position, and financial indicators, etc. originally expected are not achieved, credit ratings may be reduced, which could in turn negatively affect the refinancing of existing debt and the terms for new borrowing. In response to these risks, we are working to strengthen the Group’s financial standing, as well as to secure liquidity through commitment lines and other agreements with financial institutions, to smooth out fluctuations in repayments and redemptions, and to take an effective approach to fundraising that balances fixed and variable interest rates, among other factors.
(3) Employees' severance indemnities
The Group’s employees’ severance indemnities and expenses are calculated based on various basic rates and the yield of pension assets used in pension calculations. Fluctuations in the current price of pension assets, trends in interest rates, and changes in the retirement benefit/pension systems can affect the Group’s performance and financial position.
(4) Accounting for impairment of fixed assets
The Group may incur additional losses from the impairment of fixed assets including goodwill, intangible assets, and land, due to lower profitability resulting from aggravation in the business environment, due to a considerable reduction in the current prices of land and other fixed assets. These losses can affect the Group’s performance and financial position. Further, the takeover of Hitachi Chemical Company, Ltd. led to an increase in the amount of goodwill and intangible assets. When the Group’s performance deteriorates, an impairment loss could occur and the Group’s operating results and financial condition could be affected.
(5) Deferred tax assets
The Group’s financial statements include deferred tax assets in relation to temporary differences (differences between the assets/liabilities on the consolidated financial statements and the assets/liabilities in calculation of taxable income). The calculation of deferred tax assets is based on various projections for future taxable income. Thus, when actual taxable income differs from the projections or in case of a revision of the taxation system (including tax rates), it becomes necessary to revise deferred tax assets. That situation could affect the Group’s performance and financial position.
4. Specific regulations
The Group’s businesses are subject to various restrictions as required by laws and regulations. The restrictions relate to industrial safety (such as the Law for Prevention of Disasters at Petroleum Complexes, Etc.; the Fire Service Law; and the High Pressure Gas Safety Law) and the environment and chemical substances (such as the Basic Environment Law; the Air Pollution Control Law; and the Law concerning the Examination and Regulation of Manufacture, Etc. of Chemical Substances). The Group observes these laws and regulations when conducting business. The Group shares information on laws and regulations that relate to manufacturing plants, and confirms the state of compliance when updating existing plants or building new ones. Nevertheless, in the event that the Group fails to observe any of the laws and regulations, the Group’s activities could be restricted. In case stricter regulations are introduced, resulting in higher costs, the Group’s performance and financial position can be affected.
5. Important lawsuits
While the Group makes best efforts to observe laws and agreements, the Group may be sued when conducting a wide range of businesses.
As a hybrid advanced material company combining midstream materials technology and downstream application technology, the Group focuses on achieving innovation through integration. The Group will continue to provide a broad range of solutions to the market, while focusing on research and development that strengthens existing businesses and creates new businesses. This will be accomplished by integrating three specific technologies: chemistry to synthesize for midstream materials, chemistry to formulate for downstream applications, and chemistry to think for evaluation/simulation, structural analysis, and computational science. However, in case the actual results materially differ from original plans, the Group’s performance and financial position could be affected.
(2) Intellectual property
The Group is making best efforts to obtain, use, and protect intellectual property, such as industrial property rights and know-how, in recognition of the ability to make the Group’s businesses more competitive. The Group also respects other companies’ rights. However, in the event of failure to duly obtain or use the rights, infringement by a third party, or if the Group is considered to have infringed a third party’s intellectual property, or in the event that know-how, etc. owned by the Group is leaked unlawfully to a third party, the Group’s operations can be hindered and the Group’s performance and financial position could be affected.
(3) Quality assurance and product liability
The Group has established internal rules on quality assurance and quality control, as well as organizations for managing and promoting quality assurance. Furthermore, the Group has obtained certification under ISO 9001 standards to ensure strict quality control. However, in the event of a serious quality defect or being sued for product liability, the Group’s reputation could be damaged and the Group may be forced to pay compensation to customers. This could affect the Group’s performance and financial position. In response to these risks, the Group implements procedures, such as maintaining facilities for reliable process management, installing measuring equipment, providing operating manuals, and training employees. In addition to building a system to prevent defective goods from being shipped, the Group maintains manufactured goods liability insurance policies both in Japan and overseas.
(4) Accidents and disasters
The Group is committed to securing steady and safe operations. The Group conducts regular inspections of all manufacturing facilities in an effort to minimize any risk factors pertaining to the suspension of operations or accidents due to problems with manufacturing facilities. In the event of injury or damage to property due to an accident, a large-scale natural disaster, a cyberattack, etc., the Group’s reputation could be damaged. The Group may incur substantial costs in dealing with the situation and may lose business opportunities due to the suspension of production. This could affect the Group’s performance and financial position. To mitigate these risks, effective risk management, including risk assessment, is implemented to prevent and minimize damage from an accident.
(5) Impact on environment
The Group is committed to the principles of Responsible Care, which means that we are working to ensure the health and safety of everyone and to protect the environment from harm caused by chemical substances throughout their life cycles, namely, the development, production, distribution, use, and disposal. In the event of causing impact on the environment, the Group’s reputation can be damaged. The Group may incur costs, including compensation, lose business opportunities due to the suspension of production, and/or pay compensation to customers. These factors can affect the Group’s performance and financial position. In response to these risks, the Group has implemented environmental risk evaluations after performing exhaustive risk assessments at every business location, and we are promoting safety at environmental sites. In addition, we have implemented a systematic program of inspections and repairs to prevent environmental pollution caused by age-related deterioration. Moreover, the need to respond to the demands of society in relation to environmental issues, which has been increasing steadily in recent years, as well as strengthened environmental laws and regulations could have a negative impact on the Group’s results of operations and financial position.
(6) Infectious disease pandemics
In the event of a global outbreak of emerging infectious diseases, the operating results and financial position of the Group could be affected by suspended production at manufacturing plants and suspended activity at sales offices, etc. In response to a global outbreak of infectious diseases, the health of all employees of our Group and its partner companies is given the highest priority, and the CHRO division, which is in charger of planning and implementing measures for health management and occupational health, takes into account the opinion of the supervising industrial physician and coordinates with the Risk Management Department to alert employees and instruct them on infection prevetion measures. At the same time, in order to fulfill our social responsibility to supply products that are essential for social life, we have prepared a Business Continuity Plan manual and selected important products to minimize the impact on our business activities. The Group will continue to pursue initiatives aimed at balancing the health of our employees and our business activities, including basic measures against infectious diseases.
(7) Impact of climate change
The Group is making every effort to become carbon neutral by 2050. The Group uses petrochemical materials and fuels to make products, and production emits greenhouse gases (GHGs), so we are taking appropriate measures to reduce our 2030 GHG emissions by 30% from the 2013 level (Scope 1 and 2). Achieving carbon neutrality through cocreation with customers is also becoming increasingly important in business transactions, so we are incorporating into our business and technology strategies more efficiency improvements and the development of products that contribute to energy conservation and the carbon cycle. As well, we are calculating the carbon footprint of every major product at the technology development stage. In terms of risks, there are risks during a shift toward carbon neutrality, such as the response to increasingly severe laws and regulations in each country in addition to customer requirements as well as associated capital investment and external purchases of renewable energy. Also, we are expecting more assessments of physical risk responses, including preparedness for large natural disasters, and our costs for responding are expected to rise. In 2019, we agreed to the guidelines set by the Task Force on Climate-related Financial Disclosures (TCFD), especially the response to climate change, as an important management issue for both risk and opportunity. Through scenario analyses, we assess the risks and opportunities to our company from addressing climate change. We then consider and implement countermeasures, and, in order to boost resilience, we are working in sequence through every business, and we then disclose information. For climate change initiatives, company-wide carbon neutrality projects are regularly discussed by the Sustainability Promotion Council, comprising the Chief X Officers (CXOs), including the CEO, and the head of each business unit. Important issues are discussed and decided on by the Management Council and reported to the Board of Directors.
(8) Respect for human rights
In 2021, the Group formulated our Human Rights Policy based on international norms, declaring respect for human rights as the foundation for business activities in all countries and regions where we operate. Understanding that the business of the Group and all of our business partners, including suppliers, can directly or indirectly affect human rights for each “link” in the value chain—from product development through purchasing, manufacturing, distribution, use and final consumption to disposal—the Group has incorporated this policy into Our Code of Conduct (revised in 2022). We are making Our Code of Conduct the standard for all employees and have begun to lobby all business partners, including suppliers, to comply with this policy through Sustainable Procurement Guidelines (revised in 2022). Recognizing the need to reexamine the human rights risks associated with the new organizational operations (after our company’s integration), we are continuing and deepening human rights due diligence within our own group and in our supply chain. Further, we are working to identify risks and provide remedial measures by establishing a reporting channel that is available not only to employees but also to all stakeholders, among all business partners, including suppliers and local communities. For human rights initiatives, company-wide human rights projects are regularly discussed by the Sustainability Promotion Council, which includes the Chief X Officers (CXOs), among them the CEO, and the heads of every business unit. Important issues are discussed and decided on by the Management Council and reported to the Board of Directors.
(9) Human resources
One of our company’s material issues, with an eye on 2030, is to foster a corporate culture that nurtures autonomy and creativity. The development of talented employees to carry out reforms of our portfolio is essential as we change into a top-level global functional chemical company. To achieve these developments, sustainable growth of people and organizations is the key component, and we believe it is important to recruit, retain, and develop co-creative human resources with excellent management or technical skills while the competition is intensifying. In order to recruit, retain, and develop professional human resources, we will focus on diversifying recruitment methods, expanding education and training programs, and improving talent management and fast track programs, as well as enhancing engagement, providing workplaces with high psychological safety, and fostering a culture of co-creation. We will foster a culture of co-creation while enhancing employee engagement based on purpose and values. Specifically, we will establish the following 4 materialities for our human resources strategy: Hire & Develop talent for the business, Become an Employer of choice, Develop self-driven professionals, Cultivate corporate culture conducive to co-creation. Looking ahead to 2030, we will set KGI and KPI for achieving this goal and conduct regular monitoring.
(10) Supply chain
A good business relationship with suppliers is essential for the Group to achieve stable purchasing in order to continue doing business. However, due to illegal and antisocial activities, including a lack of respect for human rights and environmental protection, etc., at suppliers, it is anticipated that unfavorable situations could arise not only in our company but also in society. With the aim of reducing the occurrence of these situations and fulfilling our social responsibilities with others, we have prepared and published the Sustainable Procurement Guidelines, and we are asking suppliers to comply with these guidelines and use regular questionnaires and door-to-door surveys to assess their compliance. In addition, our company’s business activities could be affected by the suspension of suppliers’ operations or a disruption of distribution networks due to natural disasters, accidents, infectious diseases, etc. To minimize these impacts, the Procurement Division has developed a manual that specifies procedures for gathering information on the state of supplier damage in the event of an emergency and grasping the impact on our company’s business activities. Training for BCPs (business continuity plans) is based on this manual.
If there were damage or information leaks due to cyberattacks on the Group’s internal systems or manufacturing facilities, the Group’s operating results and financial condition could be affected due to a decline in social credibility, the cost of countermeasures, and any suspension of production. To help prevent and mitigate these risks, we have implemented global standard security solutions that provide a defense network against cyber risks, which are becoming more sophisticated. At the same time, we have established the Group’s global standard operations for information security and have implemented improvements through education and monitoring to ensure complete information management and to take actions that minimize the impact of any incident.