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Business Related and Other Risks

Risks that may affect the business results and financial position of the azbil Group are summarized below. These risks are discussed by the azbil Group Comprehensive Risk Committee and the Board of Directors, and are addressed by our comprehensive risk management system. We also take measures to mitigate and respond to risks in the related business departments. Information contained in the table that pertains to the future is deemed valid by the Company as of March 31, 2020.

1. Risk related to the Business Environment

Risk awareness

  • Risk that changing market conditions in specific regions and key business sectors, including construction and manufacturing, may have an impact on capital investments which, together with major economic recession, could have an adverse impact on the Group’s operations, business results, or financial position

Responses and Mitigation Measures

  • Aim for growth in life-cycle business, demand for which is relatively resilient to economic fluctuations, to reduce their impact

2. Risk related to Growth in a Competitive Environent

Risk awareness

  • Risk that inadequate responses to business opportunities that may arise from changes in societal conditions, technological innovations, and the like could lead to the loss of competitive advantage
  • Risk that the loss of competitiveness—caused by misreading of technological trends, slow R&D progress, or failure to respond to open innovation and technological developments, as well as delays in launching new products, sluggish sales, and the like—could affect the Group’s operations or business results

Responses and Mitigation Measures

  • Recognize new risks, develop new subscription models, and the like, and engage in strategic collaborations
  • Emphasize business development by forming alliances with other companies, including M&As
  • Make appropriate technology R&D investments and build a new organizational structure dedicated to specialized fields, such as IT solutions and cloud services; take action to verify new business models; use the in-house educational organization (Azbil Academy) to help employees change jobs and establish an education-oriented system; continue pursuing M&A opportunities; update and strengthen core information system and roll out across Group; and take other measures to avoid delays in addressing changes in the environment and competitive disadvantages

3. Risk related to Product Quality

Risk awareness

  • Risk that costs incurred by defective products, systems, or services and the resulting damage to our corporate reputation could affect the Group’s operations, business results, or financial position

Responses and Mitigation Measures

  • Use a dedicated organization to check quality at the product development and manufacturing stages
  • Apply production line management and improvement activities to maintain proper inspection work processes; check legal compliance status related to factory operation; strengthen quality control support such as construction management and the like
  • In addition to checking at the design and production stages, conduct inspections using a dedicated organization that specializes in safety

4. Risk related to Global Operations

Risk awareness

  • Risk that unforeseen situations, such as regional political and economic upheaval, changes to laws, and terrorism, as well as differences in business practices and the like, could have an effect on the Group’s operations, business results, or financial position
  • Risk that delays in planned business expansion due to regional peculiarities and the like could affect the Building Automation (BA) business
  • Risk that sharp foreign exchange fluctuations may impact net sales, prices of raw materials and parts, SG&A expenses, and the like

Responses and Mitigation Measures

  • Make preparations using BCP and other tools
  • In the BA business, establish bases mainly in Southeast Asia and China; secure in-house engineers and partner companies to establish a robust business execution system; start providing services aimed at launching life-cycle business overseas
  • Appropriately hedge against foreign exchange fluctuations and expand overseas production to mitigate risk

5. Risk related to Securing and Developing Human Resources

Risk awareness

  • Risk that obstacles to securing, educating, and smoothly deploying human resources needed to address business structural changes could lead to declines in productivity or other performance indicators
  • Risk that delays in securing, educating, or deploying personnel needed for overseas business development may inhibit achievement of business growth targets

Responses and Mitigation Measures

  • Secure and allocate human resources necessary to address changes in business structure
  • Take steps to establish a new personnel system
  • Implement measures related to securing and training human resources for overseas business development
  • Strengthen bases and engage in other initiatives

6. Risk related to Information leaks and IT Security

Risk awareness

  • Risk that leaking of confidential business information or personal information due to unforeseen circumstances could affect the Group’s business performance or financial position, or cause damage to its corporate reputation
  • Risk that terrorist events or unexpected cyber-attacks could affect the Group’s business operations

Responses and Mitigation Measures

  • Ensure confidentiality of important information and comply with laws on personal information protection (establish and implement internal regulations and education for employees)
  • Develop a strong IT environment and implement employee education and the like
  • Establish a new inspection department that specializes in information security

7. Risk related to the Environment, Climate Change, and Natural Disasters

Risk awareness

  • Risk of damage to production and supply of products and services stemming from large-scale disasters or other unforeseen events
  • Risk that events beyond those assumed in the BCP will have a negative impact on business continuation, which could have a major effect on the Group’s business results or financial position
  • Risk that climate change could lead to long-term market structural changes and impact the Group’s core businesses
  • Risk that long-term market structural changes or decline in sales generated by customers in core businesses could affect the Group’s business results

Responses and Mitigation Measures

  • Decentralize the production network to reduce risk of concentration
  • Verify business continuity period (without limiting to specific events); prepare necessary funds, inventories of products and materials, personnel, production equipment, and the like
  • Formulate a long-term vision to reduce greenhouse gases associated with business activities to “net zero emissions” by 2050, and reduce our environmental impacts
  • Identify various events that may be caused by climate change, as well as the content of such risks and potential impacts on operations; undertake scenario analysis and respond accordingly

8. Risk related to Compliance

Risk awareness

  • Risk that violations of laws (antitrust laws, construction industry regulations, labor standards, bribery laws, and the like), including violations resulting from failure to address characteristics of newly entered regions and industries and delays in responding to new laws and revisions of existing laws, may result in administrative penalties and fines; risk that inappropriate acts by the Company and/or its business partners will lead to harmful rumors and damage the Group’s reputation

Responses and Mitigation Measures

  • Conduct regular monitoring in Japan and overseas to confirm compliance with laws and internal rules; engage in rigorous compliance education activities
  • Placing top priority on compliance, conduct regular monitoring in Japan and overseas to check compliance; strengthen system for concluding contracts; disseminate to and educate all employees