Business Risk Factors
The following is an overview of major business and other risks faced by the Sanden Group that may significantly affect investors' decisions. Based on the full recognition of the potential for the eventuation of such risks, the Sanden Group takes measures to avoid risks as well as to minimize the impact of risks that actually eventuate.
Forward-looking statements in the overview are the Group's judgments as of the end of the most-recent fiscal year.
Matters described below are based on Sanden's judgment based on information available at the time of the submission of the Company's most-recent Securities Report (Yuka Shoken Hokoku-sho) (June 19, 2015).
Risks Stemming from Fluctuations in Economic Conditions
The Sanden Group sells its principal products—automotive air-conditioning systems and automotive air-conditioner compressors as well as the vending machines and refrigerated showcases of its Commercial Store Systems Business—throughout the world. Demand for these products is affected by economic conditions in the various countries and regions in which these products are sold. In particular, automobile market trends in North America, Europe, and Asia—the primary areas in which the Automotive Systems Business is developing its operations—may affect the Group's business results and financial position.
Risks Stemming from Fluctuations in Currency Exchange Rates
The Sanden Group's development of global operations—including Automotive Systems Business—involves transactions in numerous currencies. In particular, there is a possibility that exchange rate fluctuations in the Group's major transaction currencies—the U.S. dollar and the euro—and currency fluctuations in China and other parts of Asia may affect the Group's business results and financial position. In addition, the currencies stated in the financial statements of consolidated subsidiaries and companies accounted for by the equity method based outside Japan have been translated into Japanese yen and incorporated into Sanden's consolidated financial statements. Therefore, there is a possibility that the foreign exchange rate at the time of these translations may affect net income and stockholders' equity as accounted for in the consolidated financial statements.
Risks Stemming from Changes in Raw Materials Market Conditions
Operations of the Automotive Systems Business and the Commercial Store Systems Business primarily involve the manufacture and supply of products and systems. As these operations involve the procurement of raw materials, there is a possibility that upswings in markets for raw materials, components, and other items resulting in higher manufacturing costs may affect the Group's business results and financial position.
Risks Stemming from Natural Disasters
In the case that earthquakes or other natural disasters were to cause considerable damage to the Group's manufacturing bases, marketing bases, and other facilities, there is a possibility that such disruptions as manufacturing suspensions and shipment delays may affect the Group's business results and financial position.
Risks Stemming from New Product Development
The operations of the Group's Automotive Systems Business and Commercial Store Systems Business extend throughout the world and encompass the development of cutting-edge technologies and the application of those technologies to products. However, in the case that the Group is not able to fully predict or respond to market trends and changes and that product development and market introduction do not proceed smoothly, there is a possibility that this may affect the Group's business results and financial position.
Potential Risks Stemming from International Operations and Entry into Overseas Markets
The operations of the Group's Automotive Systems Business and Commercial Store Systems Business encompass development, manufacturing, and sales bases located in 23 countries and regions in North America, Europe, and Asia. Business activities in these countries and regions are subject to the risks associated with the situations listed below, and, in the case that such situations occur, there is a possibility that this may affect the Group's business results and financial position.
(Situations with respect to each of the countries in which the Group operates, including changes in and revisions to laws and regulations, changes in political and economic situations, social disruption caused by war or other uncertainties, labor disputes, marine transport strikes, etc.)
Risks Stemming from Price Competition
The Group's operating environment is characterized by increasingly harsh price competition in the automobile as well as the vending machine industry, and demands from automobile and beverage manufacturers for lower prices intensify every year.
The Group believes that its products possess a competitive advantage in terms of quality, cost, technology, and other factors. However, in the aforementioned difficult business environment, there is no guarantee of maintaining such advantages regarding factors that include materials and parts supplies, and there is a possibility that this may affect the Group's business results and financial position.
Risks Stemming from Reliance on Customer Performance
The Sanden Group sells products to automobile and beverage manufacturers throughout the world. Therefore, there is a possibility that the performance of those customers and other factors that are beyond the control of the Group's management may affect the Group's business results and financial position.
Risks Stemming from Limitations on Intellectual Property Protection
Since its establishment, the Group has developed proprietary technologies and accumulated know-how. With respect to such exclusive technologies and know-how, there is a possibility that legal restrictions in certain regions may prevent the Group from completely protecting its intellectual property, and there is a possibility that the Group may be unable to completely prevent third parties from manufacturing imitations of the Group's products through the use of the Group's intellectual property.
Risks Stemming from Product Liability
The Group has continuously implemented quality management measures based on the implementation of the unique Sanden Total Quality Management (STQM) System. However, in the case that unexpected defects or other problems related to items manufactured by the Group in the past, currently, or in the future were to give rise to product liability claims, there is a possibility that this could affect the Group's business results and financial position.
Risks Stemming from Laws, Regulations, Etc.
In the countries and regions where it operates, the Group is subject to various government regulations, including those related to business investment permits, export restrictions, customs duties, and environmental protection. In the case of changes to existing regulations and the introduction of new regulations, there is a possibility that such changes could affect the Group's business results and financial position.
Risks Stemming from Financial Covenants Related to Fund Procurement
To promote stable fund procurement, Sanden has entered syndicated-loan contracts with several financial institutions that include some financial covenants. In the case of the Company not complying with these provisions, there is a possibility that the loss of time-period benefits, the demand for lump-sum repayment, or other situations could affect the Group's business results and financial position. As described in the notes to Sanden's consolidated financial statements, the Company had fully complied with these provisions at the end of March 2015.