Investor Relations | Management Policy

Operational Risks

Listed below are items that, among those relating to the review of operations and accounting, etc. stated in the Annual Securities Report, may significantly influence investor decisions. The following includes forward-looking statements based on judgments current as of the filing date of the Annual Securities Report on June 27, 2019.

Risks concerning changes in economic trends

The electronics industry, TDK’s field of operations, is highly susceptible to social and economic trends in the U.S., Europe, Asia, particularly China and Japan, which are the main markets for end products. In addition, markets in these countries and regions are constantly exposed to various risk factors such as political issues, international issues, and economic fluctuations. Although TDK monitors such world risk trends and takes timely measures in response to them, there is no guarantee that adequate and timely measures can always be taken. And, if changes beyond our expectations occur in such business environments, such changes could significantly affect business results.

Risks concerning fluctuations in currency exchange

TDK conducts business activities globally. Indeed, more than 90% of net consolidated sales are accounted for by overseas sales, and many transactions are conducted in currencies other than the yen, such as the U.S. dollar or euro. A sudden appreciation of the yen against these currencies could affect earnings such as by reducing net sales and operating income. In order to mitigate these risks, TDK is working to purchase more raw materials in foreign currencies and increase the local procurement of supplies consumed overseas. Foreign currency fluctuations also give rise to conversion differences with respect to our investments in overseas assets and liabilities, which are converted into Japanese yen in our consolidated financial statements. Measures are taken against fluctuations in foreign currency exchange rates, including procuring foreign currency-denominated funds and concluding forward foreign exchange contracts; however, sudden or significant fluctuations in exchange rates could have a significant adverse effect on TDK's financial position and business results.

Risks concerning interest rate fluctuation

TDK, as necessary, has financial assets, such as cash deposits and government bonds, and financial liabilities such as loans from banks, corporate bonds, and lease obligations. Fluctuations in interest rates over such assets and debts could affect the interest income, and interest expense, and the value of financial assets and liabilities, which could have a significant effect on TDK’s financial position and business results.

Risks concerning natural disasters, electricity supply and pandemics

TDK has many production factories and research and development facilities in Japan and overseas. These facilities and plants have taken disaster-protection and infection-control measures and purchased their own power generation facilities to cope with electricity shortages in preparation for unexpected natural disasters and infection outbreaks. However, significant damage could be incurred at these facilities and plants due to an event beyond business continuity planning (BCP) assumptions, such as a large earthquake, tsunami, typhoon, flood or volcanic eruption; a large-scale blackout or electricity shortages caused by them; or an outbreak of an unknown infectious disease such as a new strain of influenza. In the event of interruption to manufacturing, disruption of transportation routes, damage to or disconnection of information and communications infrastructure, impairment of central functions, or significant damage to our customers themselves due to the impact of such occurrences, orders and supply could be affected for a long period of time. This situation could have a significant effect on business results.

Risks in international business activities

TDK conducts operations globally, and its overseas sales accounts for more than 90% of total sales on a consolidated basis.

In many of our target markets and emerging countries that are expected to see economic development going forward, TDK may be exposed to international political risks such as war, terrorism or other events, domestic political and economic risks such as fluctuations in currency exchange, Tariff raising, Import/Export restrictions, and social risks including labor problems stemming from differences in cultures and customs, and diseases. There may be unknown risks in building relationships with trading partners due to differences in commercial and business customs. If these risks materialize, they could reduce or halt manufacturing activities, force the stagnation of sales activities and in turn have a significant adverse effect on business results.

In particular, TDK has many manufacturing bases in China and has established a system for supplying both customers and local companies that have been setting up operations in China. If problematic events occur in China due to above-mentioned political factors (such as changes in laws and regulations), economic factors (such as the continuity of high growth and status of infrastructure development such as electric power supply) or social environment, there could be a significant effect on business results.

Risks concerning corporate social responsibility

TDK has, for the sustainable development of society, recognized corporate social responsibility such as care to global environment, improvement of working environment, and respect for human rights as important management issues and has been working to realize it in the business operation including supply chain management. As one of examples of care to the global environment, we have set target which is to halve CO2 emissions basic-unit in a life-cycle perspective by 2035 from the fiscal year ended March 31, 2015 for climate change strategy, and implement emissions reduction to achieve the target.

However, in case there are environmental pollution, problem related to industrial health and safety such as industrial accident, child labor, forced labor, or problem related to human right such as discrimination to foreign workers happen despite of our effort, decline of social trust in TDK, suspension of business transaction, or withdrawal of partial business may have a significant effect on our business result.

In case related laws, regulations, international initiatives’ standards or customer requirements for CO2 reduction etc. are strictly tighten, expenses to adapt to such tightening situation may become unexpectedly high, or a part of business may be withdrawn. This could have a significant effect on our business result.

Risks of taxation

TDK has manufacturing bases and sales entities throughout the world, and we conduct a lot of international transaction between group companies. We pay close attentions to make transaction price appropriate from the perspective of Transfer pricing taxation and customs laws in each applicable countries. However, due to the difference in opinion with tax authorities or customs authorities, we may incur additional tax burden as a result of indication that the transaction price is inappropriate. And, due to the new introduction or change of tax laws and its interpretation in various countries, we may incur an increase of tax burden.

With respect to deferred tax asset, we have periodically evaluated the feasibility according to the prospect of future taxable income and the profit plan to be realizable by tax. When the future profit plan cannot be realized, or when the evaluation of feasibility is reviewed due to new introduction or changes of tax laws or tax execution, we have to increase the valuation allowance of deferred tax assets.

When such events occur, that could have a significant effect on business results.

Risks concerning technological innovation and new product development

In TDK, the launch of new products imbuing value on a timely basis helps boost our profitability. We also believe ongoing new product development is key to our survival. The Group believes that our ability to increase sales by developing appealing, innovative products has an important role to play in our growth. We are therefore engaged in new product development as an important element of our management strategies. However, it is extremely difficult to precisely predict future demand in the rapidly changing electronics industry. TDK may fail to continue to develop and supply, in a timely manner, attractive and new products with innovative technologies for this industry and our markets. Research and development divisions in TDK continuously reshape the framework based on analysis of market trends, along with conducting development management to promote the prioritization of development themes. Nevertheless, there is a risk that a loss of sales opportunities could result in the loss of future markets, as well as existing markets. This may have a significant adverse effect on business results and growth prospects.

Risks concerning price competition

TDK supplies electronic components in a broad range of fields in an electronics industry where competition is intensifying. These fields include ICT represented by smartphones, the automobiles field, where use of onboard electronics is increasing, and energy related fields such as solar and wind power generation. Price is one of the main competitive factors differentiating us from other companies in the industry in which leading Japanese companies and international companies in South Korea, Taiwan and China have fueled intense price competition.

TDK is working to promote ongoing cost-cutting initiatives and increase profitability to counter this market competition. However, such price trends could have a significant effect on business results.

Risks concerning raw material procurement

TDK’s manufacturing system is premised on securing raw materials and other supplies in adequate quality and quantity in a timely manner from multiple external suppliers. However, for major raw materials, we may rely on a limited number of difficult-to-replace suppliers. Because of this, there may be cases where supplies of raw materials and other products to us are interrupted by a disaster, an accident or some other event at a supplier, supply is suspended due to quality or other issues, or there is a shortage of supply due to an increase in demand for finished products. Moreover, there may be cases where local procurement necessitated by increased overseas production is negatively affected by overseas circumstances. If any of these situations becomes protracted, it could have a significant, adverse effect on production and prevent us from fulfilling our responsibilities to supply products to our customers. If the supply-demand balance in the market is disrupted, it may considerably increase costs of manufacturing through run-ups in the prices we pay for raw materials and rises in fuel prices, including oil. However, when such cases occur, there could be a significant effect on business results.

Risks concerning customer performance and management policy changes

TDK is developing business-to-business transactions on a global scale, whereby we supply electronic components to customers in the electronics and automotive markets.

We work to reduce risk by conducting transactions with a variety of customers and take measures such as setting transactions terms and conditions based on our evaluation of a customer’s credit risk. However, our business may be significantly affected by various factors that are beyond our control, such as changes in each customer’s business results and management strategies. In addition, a decline in purchasing demand due to a customer`s poor business results, increase discounting pressure from customers due to changes in their purchasing policies and policies, the unexpected termination of contracts or other occurrences could result in excess inventory or a reduction in profit margins.

In the event that our customers go through reorganizations caused by mergers and acquisitions effected by enterprises of different business types or by competitors domestically or abroad, this situation could have a significant effect on TDK’s business result, including a marked decline in orders or the cancellation of all business transactions.

Risks concerning Compliance

TDK is subject to and required to comply with various regulations in Japan and other countries where we conduct business. These regulations are related to business and investments, the safety of electric and electronic products, national security between nations, export/import, commercial, antitrust, patens, product liability, environmental and taxation.

TDK has appointed a Chief Compliance Officer and has been promoting the establishment of organization and system for TDK Group, its corporate officers and employees to take action in line with compliance and global norm. And, we have established a Corporate Code of Ethics and have been striving to foster a sincere, fair, and transparent corporate culture. However, despite of above measures, confliction to related-regulation and wrong-doing by corporate officers or employees may not be avoidable.

In the event of such, a social credibility of TDK Group may decline, and customer may cease business with TDK. Then, a large amount of charges or damages could have a significant adverse effect on business results.

In the event that laws and regulations become more strengthened in the future, a large amount of charge to correspond to the regulation or a partial withdraw of the particular business, when adaption to the regulation is difficult, could have a significant adverse effect on business results.

Risks concerning product quality

TDK conducts quality control of various products at domestic and overseas manufacturing bases in accordance with International Quality Management Standards (valid version of ISO 9001, IATF16949, and/or applicable other standards) and the strict standards required by customers in the remarkably technologically innovative electronics industry. Furthermore, TDK utilizes proprietary quality technologies and past data concerning quality issues to create a quality assurance system for building in quality from the earliest development stage so as to ensure that reliability and safety. This is achieved through design inspections, internal quality audits, supplier surveys and guidance, process management and in other ways at each product stage including planning, design, prototyping and manufacturing.

However, TDK cannot be fully certain that defects in quality (including cases where products contained restricted substances) and recalls due to those defects will not occur. Should a recall or a product liability claim against us occur, it could result in recall costs or damage claims and lower sales. Furthermore, it is assumed that a defect in quality in one of TDK’s name-bearing products would have a negative impact on our reputation and brand, and endanger the continued existence of the company. In such a way, a major quality problem could have a significant effect on business results.

Risks concerning intellectual property

TDK is working hard to strengthen and utilize its patent portfolio by managing and acquiring the portfolio, licenses and other intellectual property rights covering TDK’s products’ functions, designs and so forth (hereinafter “intellectual property rights”), as a strategic intellectual property activity that contributes to business earnings.

However, there are cases where our intellectual property rights cannot be fully protected in a particular region for reasons unique to that region. We may suffer damages resulting from the manufacture by a third party of similar products to our own with the unauthorized use of our intellectual property rights.

There may be cases where it is alleged that our products or processes infringe on the intellectual property rights of third parties that may sue for damages as a result of such alleged infringement. This would require either legal processes or settlement negotiations and expenses as a part of that activity. If our defenses against such claims are not accepted in such disputes, we may have to pay damages and royalties and suffer losses such as the loss of markets.

Such disputes over intellectual property rights could have a significant effect on business development and business results.

Risks concerning information security

As part of its business operations, TDK holds confidential information and personal information relating to customers and trading partners as well as confidential information of the Group and personal information. We have constructed a group-wide control system to prevent this information from being leaked to outside parties, falsified, otherwise manipulated, or being destroyed. Moreover, we execute measures to ensure thorough management and IT security, improved facility security and employee training. However, there are still risks that such information could be leaked, destroyed, or falsified or that information systems are shut down through hacking, internal negligence, theft or other causes.

In such an event, TDK could suffer a lowering of credibility, be liable for costs relating to the compensation payment to the parties suffering damage, and suspend its operation. That could also have an effect on business results.

Risks concerning securing personnel and training personnel

TDK pursues business operations in more than 30 countries and regions around the world, and more than 90% of TDK employees are based outside of Japan. In order to continuously develop business in the fast-changing electronics industry, we believe that we must continuously promote efforts to acquire and develop various personnel who possess advanced technical skills and personnel with excellent management capabilities such as those necessary for formulating strategy and managing organizations globally. TDK therefore actively hires university graduates and employs experienced people throughout the year.

Moreover, we are working to retain and develop personnel by putting in place frameworks for increasing their motivation. This includes enhancing fair evaluation and remuneration systems based on a target-based management system. We improve and extend various training programs to develop employees that can act independently and globally, and to pass on the “DNA” of our manufacturing as well as values and knowledge of TDK Group. These trainings also include different management trainings tailored to our hierarchy levels, so we develop our future management talents as well as our existing global key personnel.

However, competition to continuously recruit the necessary employees is intense. Moreover, in Japan, the employment environment is changing rapidly because of the falling birthrate, the aging population, and the declining workforce. A similar change is occurring at our overseas bases in China and other countries. The inability to recruit and train personnel as planned could have a significant effect on business development, business results and growth from a long-term perspective.

Risks concerning M&A

In the increasingly competitive electronics field, for necessary technologies and other elements which increase corporate value, we conduct M&As as necessity if it is an effective means to accelerate business growth or major synergies can be expected in terms of establishing a competitive edge in the market.

When conducting M&As, we take sufficiently into account market trends, customer needs, the business results, financial position, technological advantage and market competitiveness of the target company, TDK’s business portfolio, risk analysis associated with the M&A, and other factors.

However, even in case there are prior research or prior consideration, tumultuous changes in the market and competitive environment after M&A, the acquired business fails to develop as planned, and the investment cannot be recovered or additional expenses are incurred, TDK’s business results, growth and business development among others could be significantly affected.

Risks of impairment of fixed asset and goodwill

TDK has continuously invested on capital expenses such as manufacturing facilities to improve production capacity, quality, or productivity. And, if necessary, we have implemented M&A to accelerate the growth of business. As a result of these investments, we own a large amount of assets such as “property, plant and equipment”, “intangible fixed asset with certain recognizable amortization period”, and “goodwill and other intangible asset”.

With respect to “property, plant and equipment” and “intangible fixed asset with certain recognizable amortization period”, we conduct an impairment test if there is an indication that we are not able to collect the carrying amount of the assets. With respect to “goodwill and other intangible asset”, we conduct an impairment test at least once a year or more often in case there is an indication of impairment. In the event that the impairment test judges that these assets no longer create enough cash flow in the future, there may be a necessity to recognize an impairment.

When we recognize a large amount of impairment, it could have a significant effect on business results.