The following provides an overview of risks concerning the state of business and financial information described in this Annual Securities Report that may have a bearing on investors’ decisions. The Group is aware of these risks, and systematic efforts are made to prevent or minimize the impact of related adverse events on operations.
Nonetheless, the potential exists for unforeseen or unpredictable risks other than those described below to negatively affect the operations, business results, and financial position of the Group.
All references to possible future developments in the text are as of March 23, 2022, the filing date of this Annual Securities Report.
(Processes for evaluating and managing risks)
Every year, the Group evaluates and identifies risks faced by various regions and the Group as a whole in terms of their potential impact and likelihood of occurrence. By allowing management to be conducted in an autonomous and continuous manner through clarifying who is responsible for managing the risk, not only for the Group as a whole, but also for every business, Strategic Business Unit (SBU), and division, our Group’s risk evaluation and management system is able to deal with serious management risks under the direct supervision of the Global CEO.
(1) Risks related to demand and macroeconomic conditions
The Group conducts research and development (R&D), procurement, production, logistics, sales and other business activities on a global scale. Operating results and financial position are thus subject to trends in demand, interest rates, exchange rates, share prices, and other economic variables in the countries and regions where we operate. In the fiscal year under review, the Group’s revenue by region was 46% from operations in the Americas; 23% from Europe, Russia, Middle East, India and Africa; 17% from Japan; and 14% from China and the Asia-Pacific region. An economic downturn in any of these regions could exert a major adverse effect on the operating results and financial position of the Group.
The Group’s business is closely tied to the automobile industry, therefore, the operating results and financial position of the Group are strongly affected by business conditions in the global automobile industry. Demand for replacement tires in each country where the Group operates depends on national trends in consumer spending, automotive fuel prices, and a range of other local market variables. Any combination of trends that might cause demand for replacement tires to decline, or to grow at a slower rate, could adversely affect the operating results and financial position of the Group.
Furthermore, some of the Group’s products, such as hydraulic hoses and large and ultra-large off-the-road radial tires for construction and mining vehicles, are affected by business conditions in the resources industry and the civil engineering and construction industries. If these factors reduce demand or slow its projected rise, the Group’s operating results and financial position may be adversely affected.
Moreover, demand for winter tires (which make a sizable contribution to sales in regions such as Japan, Europe, and North America) is closely related to seasonal weather trends. A mild winter and a decline in demand in these regions could adversely affect, to some extent, the operating results and financial position of the Group.
(2) Legal, regulatory, and litigation risk
The Group’s operations around the world are subject to diverse national (and, in Europe, supranational) laws and regulations, including trade, investment, foreign exchange transactions, taxation systems (including transfer pricing), anticompetitive practices, environmental protection, and protection of personal information. Laws and regulations that affect the Group’s business activities have been established and introduced. These include labeling systems and regulations regarding tire performance and regulations regarding chemicals in Japan and overseas. Accordingly, new or revised laws and regulations could limit the scope of business activities, raise operating costs, or otherwise adversely affect the operating results and financial position of the Group.
The Group could be subject to lawsuits or to investigations by governmental authorities with regard to its business activities in Japan or in overseas markets. In the event that an important lawsuit is filed or investigation by governmental authorities has commenced, the Group’s operating results and financial position could be affected.
(3) Risks related to operational disruption
・Natural disasters, wars, terrorist actions, civil strife, and social and political unrest
Globally dispersed operations expose the Group to a broad range of natural and man-made risks that could constitute force majeure, including natural disasters, such as earthquakes and floods, wars, terrorist actions, civil strife, boycotts, epidemics, energy supply problems, and general social or political unrest. Such events have the potential to adversely affect the operating results and financial position of the Group. Also, factors such as abrupt, substantial fluctuations in political or economic matters in Japan or overseas could hinder the continuation of the Group’s business activities. Such events have the potential to affect the Group’s operating results and financial position.
The risk of earthquakes is particularly high in Japan where the Group has numerous key facilities. Management systematically promotes the seismic reinforcement of the Group’s facilities in Japan based on an order of priority determined from the results of site analyses using seismic diagnostics. In addition, a business continuity plan (hereinafter “BCP”) has been created in order to facilitate a swift response in event of an earthquake and the quick restoration of operations. Operation of this BCP is subject to regular review and improvement. The Group has also formulated a BCP designed to prioritize the wellbeing and safety of employees, families, and all related parties while minimizing the Group’s losses stemming from the spread of H1N1 influenza, COVID-19, and other diseases caused by unknown pathogens. The content of this BCP is continuously expanded based on feedback from its implementation. Despite the preventive measures, such serious risks could disrupt or reduce the scale of operations or cause damage to facilities, necessitating expensive repairs or restoration work. The costs involved could adversely affect the Group’s operating results and financial position.
Operational disruptions at those plants where the production of certain products or materials is concentrated have the potential to cause greater problems due to the increased possibility of a supply interruption, which could result in claims for compensation based on breach of supply contracts, or in an erosion of customer confidence in the Group as a reliable source of supply. Any such developments could have a significantly adverse impact on the operating results and financial position of the Group.
・Information technology (IT) systems failures
With the drastic rise in the importance of information systems in the Group’s business activities, the Group is striving to protect systems and data through advancing security and other measures. However, failure of such information systems due to external causes, such as natural disasters and cyberattacks, or through human error, could result in the halt of major operations and services and theft or leakage of confidential or personal information and data, with the possibility of hindering further business activities. Such incidents bear the potential to damage the Group’s brand image and lower social trust, adversely affecting its operating results and financial position.
Prolonged strikes or other industrial action due to unfruitful labor-management negotiation could cause operational disruptions, and thereby adversely affect the operating results and financial position of the Group. Management strives to minimize the risk of labor unrest by fostering good labor-management relations throughout global operations.
(4) Risks related to climate change
Amid growing global interest in climate change and an accelerated move toward a decarbonized society as represented by the Paris Agreement, the Group recognizes the risks and opportunities related to climate change and reflects them in its business strategy. The main risks we identify in this category are “physical risks due to climate change” and “risks associated with the transition to a decarbonized society.” Physical risks due to climate change include the risk of business activity interruption from stronger typhoons and increased frequency of flooding and drought, risks related to the procurement raw materials from poor harvests of natural rubber due to changes in rainfall patterns, and the risk that less snowfall will reduce demand for winter tires. Risks associated with the transition to a decarbonized society in Japan and overseas in response to climate change involve the introduction of systems and regulations related to carbon taxes, reduction obligations for CO2 emissions, emissions trading schemes, fuel-efficient tires, and the recycling of used tires. If the R&D expenses required to meet the changing needs of society and customers do not produce sufficient results, there is a risk that the Group’s operating results and financial position may be adversely affected in ways that include limitations on business activities and increased costs. On the other hand, we also see these changes in society and customer needs as new opportunities for growth.
Based on the Group’s awareness of the risks associated with the transition to a decarbonized society, the Company has set a long-term goal for 2050 of becoming carbon neutral, with targets set for 2030 to 1) reduce absolute CO2 emissions (Scope 1 and 2) by 50% compared with 2011 levels and 2) contribute to global CO2 emissions reductions across the lifecycles and value chains (Scope 3) of the Group’s products and services that exceeds five times the amount of CO2 emissions (Scope 1 and 2) generated by the Group’s operations by 2030 compared with 2020 levels. The Group is working to meet these targets with efforts that include developing new technology that helps reduce CO2 emissions, reducing emissions at production bases, promoting the development and sales of fuel-efficient tires, and expanding our retread tire business. In making investment decisions, we take into account the cost of CO2 emissions and the benefits of reduction on internal carbon pricing so that we can evaluate the risks associated with the transition to a decarbonized society and assess opportunities. We are also working to reduce CO2 emissions across the value chain through efforts to build a recycling business that converts used tires back into raw materials.
Concerning physical risks due to climate change and their associated opportunities, in line with our BCP, we continue to set up systems to ensure an appropriate response should a crisis occur, as well as support for resumption of business activities. We are also working to diversify our sources of natural rubber through efforts to commercialize guayule, a rubber-producing plant that grows in arid regions.
(5) Risks related to corporate and brand image
The Group strives to enhance its corporate and brand image consistently through global business activities. Systematic efforts are made to ensure compliance with all applicable laws and regulations and to promote the highest ethical standards. Programs are in place across the Group to prevent industrial incidents, particularly fires and any accidents that could cause occupational injuries, and to respond immediately to any accidents that occur. Despite such preventive measures, serious ethical lapses or industrial accidents, which are by their nature unpredictable, have the potential to adversely affect the operating results and financial position of the Group by damaging the image and reputation of the Group, diminishing the general public’s confidence in the Group, or leading to a drop in share price.
(6) Currency risk
The global distribution of the Group’s R&D, production, logistics, procurement of raw materials and sales activities requires business transactions in numerous currencies. The Group employs foreign currency forward contracts to hedge foreign currency-denominated trade receivables and payables, and currency swaps to hedge foreign currency-denominated loans and borrowings in an effort to minimize the effects of short-term exposure to exchange rate fluctuations. However, hedging cannot insulate the Group’s operations completely from foreign exchange market trends since these operations include extensive import and export activities worldwide. Fluctuations in exchange rates can thus have an adverse effect on the operating results and financial position of the Group. Exchange rate fluctuations also affect the consolidated performance of the Group because results are reported in yen. Changes in exchange rates affect the values recorded for revenue, expenses, assets, and liabilities in all countries outside Japan when translated into yen. In general terms, yen appreciation against other leading currencies tends to depress the financial results, while yen depreciation tends to have a favorable impact.
(7) Risks related to competition
The Group encounters numerous competitors across its entire product lineup. Competitive price pressures have the potential to adversely affect the operating results and financial position of the Group. In addition, the Group faces a constant risk of demands for price reductions from large corporate clients. The Group strives to maintain profitability in the face of downward price pressures by continually seeking to reduce the cost, raise productivity, enhance brand image, develop new markets, and launch new products that provide greater value to customers. However, management cannot guarantee that such efforts will always be sufficient to offset the effects of competition.
The Group’s strategy is based on maintaining a highly competitive technological edge. The Group targets the development and introduction of products equipped with new and advanced technologies, and then aims to persuade customers of the value inherent in such technical advances to secure prices sufficient to ensure that profits fully offset the costs of development. Fierce competition in various fields can sometimes prevent the Group from recovering development costs through pricing, which can also have an adverse effect on operating results and financial position.
(8) Risks related to product defects
The Group holds customer safety as its highest priority. The Group invests considerable resources in establishing and maintaining high quality standards for all products manufactured and sold. Management is particularly sensitive to the importance of quality assurance in tires and other products closely associated with human safety. The Group has honed its quality assurance capabilities by upgrading information systems related to product performance, collecting pertinent market information, and establishing systems to provide early warning of any potential safety issues that may arise before they become problems. Nonetheless, such efforts cannot guarantee the complete prevention of product defects or eliminate the chance of an extensive product recall because product defects could occur due to unpredictable factors. Any such defects or recalls could result in customer claims for damages, as well as associated litigation costs, replacement costs, and damage to the Group’s reputation. Product liability claims, class-action lawsuits, and other litigation pose a particular risk in the U.S.
(9) Risks related to raw materials procurement
Disruption of supplies of raw materials has the potential to affect performance adversely. The Group uses large quantities of natural rubber in tires and other rubber products, most of which are supplied from Southeast Asia. The availability of natural rubber supplies in quantities sufficient for manufacturing purposes is subject to disruption due to natural disasters, wars, terrorist actions, civil strife, other social or political unrest, and strikes in addition to the threat of poor harvests.
Supply shortages due to tight supply of raw materials or capacity constraints are also potential problems with other basic raw materials, and could adversely affect the Group’s operating results and financial position.
The Group relies on in-house upstream raw materials operations and on third-party suppliers for important raw materials. Any disruption of activity to those operations or suppliers and any other events that impede the Group’s plants that use those raw materials could adversely affect the Group’s operating results and financial position.
Increases in the costs of raw materials due to tight supply, trade for speculative purposes, and other reasons are also potentially detrimental to the operating results and financial position of the Group. Management cannot guarantee that price rises can always be passed on to customers or that ongoing efforts to raise productivity will be sufficient to compensate for any sharp increases in raw materials costs.
(10) Risks related to pension costs and obligations
Pension-related costs and obligations are reliant on actuarial assumptions concerning discount rates and a number of other variables. If these assumptions were to change significantly as a result of changes in interest rates or the fair value of plan assets (including pension assets), or other factors were to necessitate a change in the underlying assumptions, there could be an increase in pension-related costs and obligations, as well as a material impact on the operating results and financial position of the Group.
(11) Risks related to intellectual property
The Group treats intellectual property as an important business resource. Systematic efforts are made to employ intellectual property effectively in improving the competitive position of the Group, to protect intellectual property rights from infringement, and to avoid infringing the intellectual property rights of other parties. Despite such safeguards, any actual or alleged infringement of third-party intellectual property rights by the Group could have a negative impact on the use of certain materials or technologies by the Group, and could potentially also trigger the payment of compensatory damages. Any such outcome could have a negative effect on the operating results and financial position of the Group. Conversely, if claims by the Group of intellectual property rights infringement against third parties are not upheld, the Group could also suffer direct or indirect losses through the diminished differentiation or competitiveness of its products in global markets.