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Business Related and Other Risks

(1) Risks Related to the Business Environment and Business Activities

1. Effect of Economic Downturn or Stagnation

Structural factors make the demand for the azbil Group’s products and services susceptible to fluctuations in the economy and their effects on markets related to the Group, including the construction, manufacturing, and equipment manufacture markets. A large-scale downturn in business conditions in the regions where we do business and a decrease in demand from these markets could have an adverse impact on the Group’s operations, business results, and financial position.

2. Risks Related to Competition

Competition is becoming severe in the azbil Group’s business segments, which are the Building Automation (BA) business, Advanced Automation (AA) business, and Life Automation (LA) business. Under the circumstances, the azbil Group believes that its products and services offer high added value superior to other companies in terms of technology, quality, and cost. While the Group is taking measures to prepare for situations such as intensifying competition or the entry of new competitors, unexpected changes in relationships among competitors could have an impact on the Group’s business results and financial position.

3. Risks Related to the Group’s Product Quality

The azbil Group’s products, systems, and services are used for vital measurement and control related to safety and quality in a variety of plants and buildings. The Group has established a committee to oversee quality assurance and has enhanced its quality control system through sharing and transparency of quality information. To ensure that we are prepared in the event of problems related to damages arising from product liability, we have taken out insurance policies, as well as enhancing our other precautions. However, an incident caused by defects in the Group’s products, systems, or services could result in substantial costs and severely damage the Group’s credibility with customers. This in turn could have an impact on the Group’s operations, business results, and financial position.

4. Risks Related to R&D Activities

The azbil Group has positioned the management of research and development activities focused on the development of next-generation products that will maintain their technological superiority on an ongoing basis as one of its top priorities. Based on the Group philosophy of “human-centered automation,” the Group is carrying out research and development activities aimed at the conservation of resources, energy and labor; safety; environmental preservation; and the realization of comfortable environments. The azbil Group is strengthening its efforts to deliver appealing products and services to its customers in a timely fashion based on an accurate perception of their needs. However, a misreading of these needs or technological trends, postponement of research and development, insufficient technological capabilities, or other factors could delay the market launch of new products and have an adverse impact on the Group’s operations, business results, and financial position.

5. Risks Related to Global Operations

The azbil Group conducts business overseas, mainly in Asia, through more than 50 local subsidiaries and 2 branches. The Group has also established manufacturing bases in Thailand and Saudi Arabia in addition to Dalian and Shenzhen. In addition, Azbil VorTek, LLC, produces vortex flowmeters. In the LA business, Azbil Telstar, S.L.U. has subsidiaries mainly in Europe and also in North America, South America, China, and India. In its European and Chinese locations it carries out manufacturing as well as other business operations. The Group continues to expand its business globally, with a view to distributing country risk, but delays in its expansion plans, unexpected changes in the political and economic conditions, currency fluctuations, local legal, regulatory, and other reforms, natural disasters, terrorism, strikes, and other developments in countries where it has advanced could have an impact on the Group’s manufacturing and procurement activities in whole or in part and thus impact the Group’s business results and financial position.

6. Risks Related to Exchange Rate Fluctuations

The azbil Group is endeavoring to mitigate risk resulting from exchange rate fluctuations by expanding its overseas production, but sudden fluctuations affect net sales, the prices of raw materials and components, and sales and administrative costs, so they have the potential to have an adverse impact on the Group’s business results and financial situation.



(2) Other Risks

1. Risks Related to Securing and Developing Human Resources

Since its founding, the azbil Group has focused on developing human resources based on the view that its employees are a valued asset, the source of corporate cultural renewal, and the creative source of its corporate value. However, possible future issues such as ensuring the safety and health of employees, measures to deal with the aging of the workforce, the handing down of technologies, expertise, and know-how, cross-training for multifunctional workers, and the retention and development of human resources for domestic and international business expansion could have an impact on the Group’s business results and financial position.

2. Risks Related to Information Leakage

The azbil Group possesses critical information on businesses and confidential information including personal information and information on business partners that is obtained in the course of business. The Group is taking measures to strengthen its handling and management of information and increase employees’ informational literacy. However, leakage of this type of information due to unforeseen reasons could have an impact on the Group’s business results and financial position.

3. Risks Related to Disasters

Two of the six domestic production bases (including manufacturing subsidiaries) of the azbil Group’s BA and AA businesses are concentrated in Kanagawa Prefecture. In addition, four of the seven domestic production bases of Azbil Kimmon Co., Ltd., involved in the LA business are concentrated in Fukushima Prefecture. The Group has taken actions as necessary including implementing safety precautions, taking out insurance, and establishing a business continuity plan (BCP) to maintain operations and/or quickly return operations to normal. However, any direct or indirect effect due to a large-scale disaster or other incident in these areas could have an impact on the Group’s business results and financial position.

4. Risks Related to Laws and Regulations

The azbil Group is subject to laws and regulations in the countries where it operates, including licensing for operations and investment, environmental and safety standards, and product standards. Unexpected changes in these laws or regulations, or the establishment of new laws or regulations, could have an impact on the Group’s business results and financial position. In particular, although the azbil Group is proceeding with a variety of measures to reduce its environmental impact, in part to comply with stricter environmental regulations, difficulty in complying with environmental regulations may result in the cessation of certain business activities or damage to the trust placed in the Group. This could have an impact on the Group’s business results and financial position.

5. Risks Related to Intellectual Property Rights

The azbil Group accumulates unique technologies and knowhow in the development of products and services within the Group and works to protect its intellectual property rights, in order to ensure and maintain its competitive edge. In addition, the Group works to secure licensing rights from third parties where necessary in product development and production. However, inadequate execution of these processes could have an impact on the Group’s business results and financial position.