The azbil Group’s business performance and financial condition may be affected by the following risks: Of the 119 risk events that were comprehensively identified, 16 were determined to be major risks. These risks are discussed by the azbil Group General Risk Committee and the Board of Directors, and we strive to promote a comprehensive risk management system. We also implement measures to reduce risks in the relevant departments and to respond when risks occur. The following major risk items and specific risk events have been determined by the company as of the end of the fiscal year 2023.

1. Risks related to quality

Risk awareness

If insufficient quality assurance in product design or manufacturing, or inadequate training or lack of awareness in the mass production process leads to incomplete data or nonconforming products, a product recall may become necessary. The significant costs could adversely affect our business performance and financial condition. Moreover, because our business strength lies in high quality, such events could lead to a decline in customer evaluations and trust, and the impact could be severe or long-lasting. With the widespread use of social media in recent years, rumors, including those about quality issues, can easily spread, making the impact and likelihood of such risks greater than ever before. As such, we recognize the need for management to always be as prepared as possible.

Countermeasures

The azbil Group is implementing various measures to ensure the design and manufacturing quality of our products. These include implementing standards related to the development process and safety design, as well as formulating and implementing standard procedures at each stage of the production process to "1) not introduce, 2) not create, and 3) not deliver" nonconforming products. We also have review systems in place to ensure the provision of safe products, manage and improve production lines to maintain appropriate inspection procedures, and conduct inspections of business processes across the azbil Group. Additionally, to respond to changes in laws and regulations, we are standardizing the confirmation processes during product development and mass production stages. This includes tightening procedures regarding restrictions on chemical substances contained in products and for laws, regulations, and standards related to product safety.

If a serious problem regarding product quality occurs, it is immediately communicated to the quality officer and business manager as market quality information. The information is then shared with relevant departments so that necessary measures can be implemented swiftly, along with any required information disclosure. Moreover, when quality issues do occur, we analyze the causes, implement countermeasures, and incorporate them into our technology and evaluation standards while registering them in our design knowledge database to prevent recurrence. Furthermore, concerning damages arising from product liability and defects, we are strengthening our preparedness for any issues by measures such as obtaining insurance.

We strive to ensure that information related to quality control responses is shared and made visible in meetings such as those of the Quality Assurance Committee, chaired by the azbil Group quality assurance officer.

2. Risks related to information security

Risk awareness

The azbil Group holds important business information as well as personal information and confidential information of customers, business partners, and affiliates obtained during business activities. Recently, laws and regulations focusing on the protection of various types of information, primarily personal data, have been enacted both in Japan and overseas, exemplified by the General Data Protection Regulation (GDPR) in the EU. Compliance with these laws, along with the development of rules and the strengthening of information systems, is required. The risks associated with these include:

1. The risk of confidential information received from customers or personal information of employees being leaked due to the erroneous sending of e-mails or faxes, loss of computers or documents, etc.
2. The risk of disclosing or providing inappropriate information when sharing information via APIs between cloud services
3. The risk of using or providing data in a way that identifies customers (companies) or individuals in data services

Consequently, there is a possibility that the azbil Group may be required to pay damages or suffer a decline in social trust, which could have an adverse effect on its business performance and financial condition.

Regarding information security, the Cyber Security Office is focused on consistent management and countermeasures covering everything from products and services to business systems. However, in the current environment where new methods of cyberattack are constantly emerging, we believe it is difficult to completely prevent the following risks from unexpected attacks:

1. The risk of confidential information of customers and the company being leaked due to cyberattacks such as ransomware and targeted attacks
2. The risk that the cloud service products that the azbil Group provides to its customers could be subjected to cyberattacks, leading to service disruptions or the leakage of customers’ confidential information

Consequently, the azbil Group’s business performance and financial condition could be significantly impacted by the payment for damages and loss of trust from customers and society. Our Group takes the computer virus infection incident that occurred in fiscal 2020 very seriously and will continue to work hard to improve our information security measures in response to the ever-changing situation.

Countermeasures

To maintain the confidentiality of important business information and comply with laws and regulations regarding the protection of personal information, we are developing and implementing internal regulations and are educating our employees accordingly. Specific measures we are taking:

1. PC storage encryption
2. Installing add-in software to prevent emails from being sent to the wrong address
3. Reducing the risk of information leakage by restricting internet access to external sites within the company
4. Raising awareness through azbil Group information security education (precautions to prevent erroneous transmission, what to do if information is lost, etc.)
5. Establishing a Group-wide emergency response system to minimize impact through quick response

Furthermore, in preparation for increasingly severe cyberattacks, such as computer viruses, the azbil Group continues to develop a more robust IT environment and provide regular education to employees to improve their information literacy (the ability to use information). In addition, we are implementing the following measures against various cyberattacks:

●System measures

1. Monitoring and defense of network paths
2. Separating production equipment and office networks
3. Anti-malware measures for systems and PCs (enhanced security with the introduction of new EDR^※1)

●Structure and operation

1. Data loss prevention through proper backups
2. Raising awareness and training through azbil Group information security education (how to respond when malware infection is suspected, etc.)
3. Cyberattack response training
4. Accelerating initial responses by establishing a CSIRT^※2

Furthermore, to ensure product security, we have a specialized security organization conduct cybersecurity reviews before products are released to prevent security incidents from occurring. Even after release, we continue to collect new vulnerability information, and if a vulnerability is discovered, we investigate the impact it may have on the product and implement countermeasures.

We will address the above-mentioned information security risks in accordance with the azbil Group Basic Policy on Information Security.

*1. Endpoint detection and response (EDR): A general term for products and services that monitor devices connected to a network, such as PCs and servers, and provide real-time notifications if suspicious behavior is detected.

*2. Computer security incident response team (CSIRT): Our company’s security incident response team.

3. Risks related to technology and product development

Risk awareness

In recent years, an inability to keep up with the latest technological innovations, such as cutting-edge trends in DX, such as the metaverse^*³, Web 3.0^*⁴, and generative AI^*⁵, or an inability to keep up with international standard trends, could not only adversely affect business but could also prevent market expansion. Specifically, there is a risk that products will become obsolete and customers will abandon the company, forcing it to withdraw from the market. There is also a risk that the company’s business area will not expand, leading to a shrinking equilibrium and preventing growth. Regarding research and development investment, we are currently investing human and financial resources in technology and product development projects based on appropriate theme setting. However, if we are unable to take sufficient measures to continuously secure development themes, we may run into a shortage of them in the medium to long term, which could result in a shortage of upgraded and new products and failure to achieve our medium- to long-term targets. Additionally, even if we are advancing the research and development of new products and technologies, improper management of the research and development process, a lack of resources, or a decline in development capabilities could lead to delays in the launch of new products or failure in the development itself, potentially resulting in a decline in market share and adversely affecting our business performance and financial condition.

*3. Metaverse: A single virtual space where services and content from various fields are provided from producers to consumers.

*4. Web 3.0: A world where individuals own and manage their own data, and can freely connect, interact, and transact freely without central authority, based on mutual authentication by blockchain, uniqueness and authenticity of data, and robustness against tampering.

*5. Generative AI: An artificial intelligence algorithm that generates or creates output such as text, photos, videos, code, data, and 3D images based on the data used to train it.

Countermeasures

Regarding technological innovation, our development and marketing organizations continuously monitor trends in related technologies, competitors, and international standards. Additionally, we strive to capture information and identify issues at the product enhancement meeting, which is held across company-wide marketing and development departments and chaired by the officer in charge of technology development. At the company-wide development review meeting, we confirm the status of initiatives on more specific themes, such as AI, cloud computing, communications, and custom ICs.

To extract specific themes in technology and product development, we are strengthening and promoting theme creation activities, integrating marketing and development efforts through needs-seeds matching activities*⁶, among others. To address the need to respond to changes in the external environment, we are also working to build an ecosystem by collaborating with overseas technology development partners, particularly through our overseas development bases, Azbil North America Research and Development, Inc. and the Strategic Planning & Development Office for Southeast Asia. Furthermore, to strengthen our product proposal capabilities with the aim of “creating value at worksites,” we have formed a task force to examine the azbil Group’s system and product business portfolio and are making progress in our efforts. Specific measures include reorganizing the Technology Development Headquarters in the areas of sensing devices centered on MEMS, actuators, and cloud computing, to enhance the competitive advantage of our technologies, and establishing the Actuator Development Headquarters. In addition, we have expanded the range of product areas covered by the spiral business development*⁷ department, which was established last year to strengthen our product business. To bolster our system business, we have established an organization to oversee cloud services and, in fiscal 2024, created a new aG Cloud Development Department to enhance our application development structure and improve product capabilities.

In response to development delays due to inadequate management of the R&D process, we are improving our development process standards. This includes setting up processes for extracting risk factors, introducing management techniques for risk verification to prevent setbacks and preemptively address delay risks, and documenting technical elements that should be passed on. We are also securing resources by enhancing company-wide development collaboration and adjusting human resource allocation through the Technology Committee, chaired by the officer in charge of technology development.

To improve development capabilities over the medium to long term, it is essential to cultivate development personnel (including management and specialists) who will be the foundation for advancing development projects. We are strengthening our efforts through initiatives such as introducing and operating a talent management system by the Development Human Resources Specialist Subcommittee under the Technology Committee, which plans and implements measures for the optimal placement, training, and mobility of development personnel. Additionally, to promote a culture that fosters innovation, we are further strengthening our collaborative activities by expanding external collaborations both domestically and overseas (with universities, startups, etc.) and by establishing a collaborative area in the newly constructed laboratory building at the Fujisawa Technology Center, which serves as the core R&D hub for the entire company.

*6. Needs-seeds matching activities: Activities to promote the matching of needs (what consumers want) with seeds (special technologies and materials owned by manufacturers).

*7. Spiral business development: A business development approach that aims to leverage the company's unique technologies and strengths in specific areas. It involves advancing development in collaboration with stakeholders, including customers, to achieve quicker market launches and subsequent maintenance and renewal.

4. Risks related to responding to changes in the international situation

Risk Awareness

As our global business expands, there is an increased risk of encountering unforeseen circumstances, such as changes in the political and economic situation in the countries where we operate, amendments to local laws and regulations, natural disasters, terrorism, strikes, wars, the spread of infectious diseases, and increased geopolitical risks due to conflicts and political tensions worldwide. In such circumstances, if an unexpected war were to break out or conflicts intensify due to economic measures taken by major countries, leading to sanctions by various countries, the safety of azbil Group company employees could be compromised. In addition, it could impact our business performance and financial condition, including our business operations and credit management.

Additionally, due to changes in the international environment, there is a risk that the azbil Group may face unexpected and sudden changes in domestic and international export control-related laws, regulations, or approval procedures.

Moreover, sudden, or significant fluctuations in exchange rates could affect sales, the prices of raw materials and components, and selling, general, and administrative expenses, potentially having an impact on the azbil Group’s business performance and financial condition.

Countermeasures

The azbil Group closely monitors changes in geopolitical risks in each country and region in which it operates and constantly strives to gather information. We then assess the risks for each country and, when necessary, implement measures that put human lives first based on safety manuals and other guidelines. Additionally, regarding risks to business continuity, we are developing business continuity plans (BCPs) that consider changes in the international situation. We are also focusing on critical events that could have a fatal impact on the azbil Group, such as gathering information and implementing safety measures in specific regions. Furthermore, for existing projects, we monitor the situation on a case-by-case basis and respond appropriately.

Regarding export control-related laws and regulations, we pay close attention to changes in international conditions and related domestic and international laws and regulations, and we are constantly striving to gather information. If there are any changes to laws and regulations, we adjust our internal operational systems, for example by making export transaction screening more careful, to ensure that we carry out appropriate export management. Such changes in laws and regulations and reviews of operational systems are thoroughly communicated throughout the azbil Group and are also reported and discussed at various meetings.

Regarding exchange rate fluctuations, we take appropriate financial measures to hedge against foreign exchange risks while also working to reduce risks by expanding overseas production.

5. Risks related to natural disasters

Risk awareness

In the event of natural disasters such as earthquakes, tsunamis, or volcanic eruptions, or unforeseen incidents such as fires or explosions, recovery costs may be required due to damage to buildings, production equipment and machinery, or products prior to shipment. This applies to our domestic production bases for the BA and AA businesses, including manufacturing subsidiaries, as well as the Shonan Factory, which serves as the mother factory and central hub for production activities, and our overseas production bases. In addition, if social infrastructure or suppliers are affected alongside our own production lines, the resulting halt in factory production and business activities could impact our performance and financial condition.

Countermeasures

The azbil Group is preparing for the necessary responses involving personnel and production equipment to minimize damage in the event of natural disasters such as earthquakes. Specifically, we are making important facilities and buildings, like factories, earthquake-resistant, establishing emergency power supplies and communication networks, and stockpiling disaster supplies. Additionally, we have introduced a system for confirming the safety of employees, created initial response guidelines to ensure safety at each site, and conduct regular disaster and fire response drills.

In addition, we are formulating a BCP to address business interruptions and disruptions and are continuously making improvements to ensure its effectiveness. In response to business interruptions due to a disaster, we verify the feasible duration for business continuity and ensure the necessary funds and inventory of products and parts. We also establish alternative sites and systems to continue priority operations. To mitigate the risks associated with concentration at a single location, we have set up an alternative base in the Kansai region for headquarters functions and established an inter-site support system for service and engineering functions. Additionally, we are reorganizing both the production and the research and development departments and transferring major production items to other regions in Japan, as well as to overseas factories in China and Thailand, to diversify production sites. Furthermore, we have formulated a production response plan in anticipation of a situation equivalent to a lockdown, such as a restriction on activity in the Tokyo metropolitan area.

6. Risks related to securing and developing human resources

Risk awareness

In response to changes in business structure triggered by future technological advances and new social developments, there is a growing need for flexible and appropriate personnel allocation that is not constrained by existing personnel systems.

Furthermore, changes in worker attitudes and numbers are occurring due to factors such as a declining birth rate, an aging population, increasing diversity, and the implementation of new labor laws, including work style reforms. If we continue with our current recruitment strategy, this may lead to a medium- to long-term personnel shortage and a chronic decline in business performance.

In addition, the growth of the Group relies on the development and expansion of overseas and new businesses. If we do not smoothly secure the right personnel and provide skills training, it could hinder the achievement of our business growth targets.

Countermeasures

Our Group is implementing various personnel policies under the slogan "Health and well-being management," based on the universal belief that employees are an important asset and the source of the creation of new corporate culture and corporate value.

In response to changes to our business structure, since fiscal 2012, we have been working to secure employees with the ability to adapt flexibly to environmental changes by reallocating personnel and reskilling them with the skills and knowledge necessary in new departments. In fiscal 2023, more than 10% of all employees were reassigned, and approximately 60% of employees reported experiencing personal growth.

Furthermore, since fiscal 2018, we have implemented new human resource systems, including a survey of all employees’ relocation preferences and an open challenge system (a system for transferring to departments of choice), to systematically advance the placement of the right people in the right positions. In addition, for veteran employees with particularly high levels of skill and knowledge who are specialists, we are developing and executing individual successor development plans to ensure the transfer of their skills and know-how.

In response to changes in the hiring environment, we are enhancing recruitment activities based on personnel plans that integrate the business side and human resources departments. Additionally, we are improving productivity through business reforms enabled by digital transformation, appropriate workload distribution using outsourcing, extending employment for those over 65 years old, reskilling veteran employees, and introducing systems for reduced working days and hours.

In securing the talent needed for the expansion of overseas and new businesses, we are effectively utilizing methods such as employee referrals and re-employment of experienced individuals, in addition to traditional new graduate and mid-career hiring. We are also implementing measures such as ensuring that more than 10% of new graduate hires are from overseas. Additionally, as part of strengthening recruitment strategies for overseas subsidiaries, we are gradually deploying the recruitment methods and know-how from our headquarters to each of our overseas subsidiaries. As part of this effort, we are actively accepting internship students from overseas universities and sending students from domestic universities to overseas subsidiaries.