Listed below are items that, among those relating to “Review of operations” and “Consolidated Financial Statements and Notes to Consolidated Financial Statements” stated in the Annual Securities Report, may significantly influence investor decisions. The following risks include forward-looking statements based on judgments current as of the filing date of the Annual Securities Report on June 23, 2020. However, it is difficult to reasonably predict when each risk will materialize if at all.
- Risks concerning changes in economic trends
- Risks concerning fluctuations in currency exchange
- Risks concerning interest rate fluctuation
- Risks concerning natural disasters, electricity supply and pandemics
- Risks in international business activities
- Risks concerning corporate social responsibility
- Risks of taxation
- Risks concerning technological innovation and new product development
- Risks concerning price competition
- Risks concerning raw material procurement
- Risks concerning customer performance and management policy changes
- Risks concerning Compliance
- Risks concerning product quality
- Risks concerning intellectual property
- Risks concerning information security
- Risks concerning securing personnel and training personnel
- Risks concerning M&A
- Risks of impairment of fixed asset and goodwill
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 yen in our consolidated financial statements. We estimate that appreciation of one yen against the U.S. dollar and euro would push down TDK group’s annual operating profit by about 1.2 billion yen and 200 million yen respectively. 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 infection outbreak. 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.
In order to cope with the pandemic of COVID-19, TDK established a Crisis Management Corporate Headquarters headed by the president in January of this year and is working on measures to reduce the risk of its employees being infected. Examples of such measures include securing hygiene products such as masks and disinfectants, education for employees about hygiene management such as thorough hand washing and proper wearing of masks, securing social distance in factories, and promotion of work from home. While implementing these measures, we are working closely with local governments to continue production activities while ensuring the health and safety of employees.
Regarding the impact of COVID-19 on the economy and our business performance, we have made and announced the business performance projections for the fiscal year ending March 31, 2021 on the assumption that the global real GDP growth rate in 2020 will be -4%. However, if the economic recovery is delayed due to the further spread of infection, or if our business sites are closed or the supply chain is disrupted, it may have a significant impact on our business performance.
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, our group's sales to China exceed 50% of total sales on a consolidated basis. In order to establish a system for supplying both local customers and foreign-owned companies that have been setting up operations in China, we have many factories in China. As a result, our tangible fixed assets in China are 268.7 billion yen, and the amount of production at our Chinese factories exceeds 50% of the total amount of production of entire Group. 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 factors, there could be a significant effect on business results. While most production is in the areas of demand, we are appropriately reviewing the location of factories, taking into account country risks and other factors.
Risks concerning corporate social responsibility
TDK has, for the sustainable development of society, recognized corporate social responsibility, such as care for the global environment, improvement of the 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 example of care for the global environment, and as part of TDK’s climate change strategy, we set a target in 2015 to reduce CO2 emissions basic-unit in a life-cycle perspective by half by 2035.
However, in case there are problems related to environmental pollution, industrial health and safety such as industrial accident, child labor, forced labor, or human right such as discrimination to foreign workers despite of our efforts, decline of social trust in TDK, suspension of business transactions, or withdrawal of partial business may have a significant effect on our business results.
In case related laws, regulations, international initiatives’ standards, or customer requirements for CO2 reduction, etc., are materially tightened, expenses to adapt to such tightening may become unexpectedly high, or a part of business may be withdrawn. This could have a significant effect on our business results.
On the other hand, TDK manufactures and sells many products that contribute to creating renewable energy or reducing energy consumption in the final products. We believe that the increasing of public awareness of climate change risk is an opportunity to expand the demand for these products.
Risks of taxation
TDK has manufacturing bases and sales entities throughout the world, and we conduct a lot of international transactions between group companies. We pay close attentions to make transaction prices appropriate from the perspective of transfer pricing taxation and customs laws in each applicable country. 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 enforcement, introduction, amendment or abolition of tax laws or their interpretations and operations around the world, we may incur an increase of tax burden.
With respect to deferred tax assets, we have periodically evaluated their 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 the enforcement, introduction, amendment or abolition of tax laws or their interpretations and operations, 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. We believe 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. 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 transaction 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 customers’ poor business performance, increased discounting pressure from customers due to changes in their purchasing policies and practices, 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 results, including a marked decline in orders or the cancellation of all business transactions.
There was one customer group that accounted for more than 10 percent of the consolidated net sales for the year ended March 31, 2020. The sales to the customer group was approximately 160.7 billion yen (11.8% of the consolidated net sales). These sales were mainly booked in the Energy Application Products segment.
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, patents, product liability, the environment and taxation.
TDK has appointed a Global Chief Compliance Officer and Regional Chief Compliance Officers for Japan and four other regions to oversee compliance-related initiatives including risk assessment and mitigation, education, and training in order to minimize the risk of non-compliance throughout the TDK Group including its corporate officers and employees. 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, conflict with these regulations and wrongdoing by corporate officers or employees may not be avoidable.
In the event of such, the social credibility of the TDK Group may decline, and customers may cease business with TDK. This could have a significant adverse effect on business results.
In the event that laws and regulations become more stringent in the future, a large charge related to such regulations or a partial withdrawal from the particular business when compliance with 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 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 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 contain substances that may be prohibited by applicable regulations) 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 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 payments to the parties suffering damage, and suspend its operations. 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 who can act independently and globally, and to pass on the “DNA” of our manufacturing as well as values and knowledge of the TDK Group. These 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 they are 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 is prior research or prior consideration, tumultuous changes in the market and competitive environment after M&A could occur, the acquired business could fail to develop as planned, or the investment cannot be recovered or additional expenses are incurred. If that were to happen, 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.” Goodwill of 160.9 billion yen was booked on the consolidated balance sheet as of the end of March 31, 2020, of which 97.0 billion yen related to InvenSense, Inc., acquired in May 2017.
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.