Risk Factors

Traded as : 7537 (TYO)

Business Risk

The major factors that could have significant effects on investors’ decisions related to the Group’s business risk include the following:

Effects of Trends in Demand for Semiconductors and in Capital Expenditure

The Group is a trading company whose main business is buying and selling electronics in Japan and overseas, including semiconductors, electronic components, and applied electronic devices. The Group sells electronics mainly to electronics manufacturers that develop and manufacture communication equipment, consumer equipment, personal computer peripherals, in-vehicle electronics, and industrial equipment, among other electronics. The products that the Group sells are embedded in the end products of electronics manufacturers or are used as part of equipment that develop or manufacture end products.
The Company works to maintain and expand stable business. However, significant changes in trends in demand for developed end products and in capital expenditure by customers could have adverse effects on the Group’s results.

Reaction to Technological Innovation and Customer Needs

In the electronics industry, where the Group is positioned, the speed of technological innovation and changes in the business environment are very high, and the functions that customers need from the Group are becoming more diverse and more complicated with each year.
To respond to changes in the business environment, the Group is pursuing a number of initiatives, including the expansion of its product lineup, the enhancement of its technical support capabilities, and the development of its global support system. However, the obsolescence of products in association with technological innovation, delays in responding to customer needs, and the worsening of relations with business partners could have adverse effects on the Group’s results. Any failures of goods or services provided by the Group could result in compensation and other additional costs, which in turn could have adverse effects on the Group’s results.

Price Competition

In the electronics industry, there is fierce price competition. A fall in the price of an end product could put downward pressure on the sales prices of semiconductors and electronic components used in the product, which in turn could have an adverse effect on the Group’s results. The Group always watches trends in demand from customers and in supply from product sources and manages inventory so that there will be no slow moving inventory. However, a difference between expected requirements and actual requirements caused by a change in the market condition could cause a loss on the valuation of inventory or a loss on the abandonment of inventory, which in turn could have an adverse effect on the Group’s results.

Effects of Changes in Exchange Rates and Interest Rates

The Group imports and exports goods in foreign currencies. With the economic globalization, domestic transactions in foreign currencies are not unusual. The Group hedges the risk of exchange fluctuations associated with transactions in foreign currencies by allocating proceeds from foreign currency sales to the payment of foreign currencies purchased (“marrying”) or by using exchange forward contracts. However, the Group cannot completely avoid the risk, and significant changes in exchange rates could have adverse effects on the Group’s business results and financial position. Exchange rate fluctuations also affect the conversion of the financial statements of consolidated subsidiaries overseas to financial statements in yen.
The Group raises working capital needed for business operations mainly by borrowing money from financial institutions.
The Group works to mitigate the risk caused by interest-rate fluctuations by diversifying financing methods and using interest swap transactions and by other means. However, a rise in interest rates could have an adverse effect on the Group’s results and financial position.

High Dependence on Specific Product Sources

The Group’s main product sources are Avago Technologies International Sales Pte.Limited, Texas Instruments Japan Limited, and Samsung Japan Corporation, which accounted for 25.9%, 17.1%, and 10.3%, respectively, of the Group’s total purchases in the fiscal year ended March 31, 2017.
The Group has concluded a distributor agreement with each of those companies and maintains close relationships with them. However, any changes in the agreements, trends in demand for their products, and supplies from them could have adverse effects on the Group’s results.
In principle, the distributor agreements that the Company has concluded with the main product sources and other product sources are renewed every year, and any changes in the agreements could have adverse effects on the Group’s results.
Any changes in the Group’s commercial rights resulting from product sources’ reviews of their distributor policies, reorganizations of manufacturers supplying products to the Group through M&A, and business restructuring at manufacturers that are customers of the Group could have adverse effects on the Group’s results.

Investment and Loan Risk

The Group may make investments in suppliers or extend money as development funds to them in order to obtain the right to sell a new commercial product or strengthen a relationship. Depending on the investment or loan amount, the decision on whether to make an investment or extend a loan will be determined after a review by the Board of Directors. The Group also periodically monitors the business conditions and the progress of the business operations of the companies in which investments are made or loans are extended. However, due to the deterioration of market conditions and the weakened financial performance of these companies, the asset value may decline. If there is a need for a write down for impairment or if it is deemed difficult to collect the loans, there is a risk that the Group’s business performance could suffer a negative impact.

Securing Excellent Human Resources

The Group believes that to maintain and enhance its competitiveness, it is important to secure and cultivate excellent human resources. In addition to new graduates, the Company hires people with experience throughout the year. The Company cultivates its employees through Company-wide education and training and-on-the job training. The Company puts the right people in the right jobs, considering each employee’s capabilities. However, any failure to secure and cultivate the necessary human resources or to maintain their employment could have an adverse effect on the Group’s future results.

Retirement Benefit Obligations

Retirement benefit expenses and pension obligations are calculated based on assumptions, including discount rates, set for actuarial calculation and the expected rate of return of pension assets. Any decline in the actual investment yield of pension assets or changes in the assumptions of actuarial calculation could have an adverse effect on the Group’s results and financial position.

Legal Restrictions

The Group operates under laws and regulations, including regulations related to national security and export and import, product liability law, antimonopoly law, patents, and environmental regulations in Japan and foreign countries where the Group operates. Any failure to comply with those laws and regulations could restrict the Group’s activities, which in turn could have an adverse effect on the Group’s results.

Natural Disasters

The Company’s mission-critical computer system is in Tokyo, and its distribution base is in Sanbu-gun, Chiba Prefecture. Any serious damage to the Company’s facilities caused by earthquakes or other natural disasters in those areas could have adverse effects on the Group’s results and financial position.
Any IT system failures caused by fire and other accidents, significant suspensions or restrictions of power supply, unauthorized access and cyber-attacks, and infection with computer viruses, among other causes, and the suspension of all or part of business operations due to epidemics of infectious diseases such as virulent strains of influenza, among other causes, could have an adverse effect on the Group’s results and financial position.