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) (March 28, 2024).

Natural disasters

The Group operates its businesses through 46 bases in 22 countries and regions around the world. There is a risk of unforeseen circumstances, including harm to employees, and damage to offices and production facilities due to natural disasters such as unforeseen large-scale earthquakes, heavy rains, floods and the spread of infectious diseases; an accident during product transportation or storage at an external warehouse; and the suspension of operations due to a significant drop in the employee attendance rate.

These events may adversely affect the Group's business performance and financial position due to them hindering factory operations and supply to customers. Furthermore, by hindering the product supply to customers it may lead to a decline in the social evaluation of the Group.

We have adopted measures such as preparing an initial response plan for disasters, formulating standards for supply chain business continuity management, establishing an employee safety confirmation system, taking earthquake resistance measures, and conducting disaster prevention drills. For the spread of infectious diseases such as COVID-19, we have created a system that can respond promptly on a global basis, together with rigorous infection prevention measures and regular PCR tests, placing the highest priority on the health and safety of all stakeholders and on efforts to prevent the spread of infections, while continuing our business activities. It is, however, not possible to eliminate damage caused by natural disasters, infectious diseases, etc. that are beyond our expectations, and such events may adversely affect the Group's business performance and social evaluation.

Climate change-related risks

The Sanden Group operates its businesses in 23 countries or regions in the world through its 48 bases. Climate change is one of the most critical social challenges faced by the global community.

Environmental problems such as climate change are aggravating in the world. Japan is also under the material impact of large-scale natural disasters caused by extreme climate events. We recognize that a four-degree Celsius rise in the average temperature in the world caused by climate change will have a tremendous impact on society and consider it important that we make contribution to controlling the temperature rise at or below 1.5 degrees Celsius. Climate change-related risks may negatively affect the Group’s consolidated business results and financial position. As we make a transition to a decarbonized society, delayed responses to regulations on fuel efficiency and gas emissions as well as electrification in relation to climate change may result in the loss of sales opportunities and commercial rights.

We will therefore accelerate our research and development to cope with new fuel efficiency regulations and electrification, and enhance supply chain risk management by, for instance, procuring parts from multiple suppliers as our measures against meteorological disasters which cause physical damage. In addition, we will disclose climate-related data on four disclosure items recommended by the Task Force on Climate-related Financial Disclosures, namely Governance, Risk Management, Strategy, and Metrics and Targets.

On CO2 emissions reduction, we will proactively promote the production and procurement of green electricity to achieve zero Scope 2 emissions by 2030 and carbon neutrality by 2039.

Economic conditions

The Sanden Group mainly sells automotive air-conditioning systems, and air-conditioner compressors throughout the world. Demand for these products is affected by economic conditions in the various countries and regions in which these products are sold.

We are therefore improving our productivity and reducing fixed and variable expenses to establish an earnings base that is impervious to the impact of changes in the business environment. As we operate our automotive systems business mainly in North America, Europe, Asia, and China, however, conditions of the car market in respective regions may affect our business results and financial position.

Fluctuations in exchange rates

The Sanden Group’s global operations involve foreign currency transactions. In addition, the currencies stated in the financial statements of consolidated overseas subsidiaries and companies accounted for by the equity method have been translated into Japanese yen and recorded in the Company’s consolidated financial statements. Therefore, the translation rate may affect the value of the assets that make up the financial statements.

To address short-term foreign exchange rate fluctuations, the Group is taking measures such as hedging and endeavoring to reduce risks associated with foreign exchanges. If, however, US dollar and Euro, which are our main transaction currencies, fluctuate or currencies fluctuate in Asia and China, it may impact the Group’s business results and financial position.

Changes in raw material and parts market conditions

The Sanden Group engages in the manufacture and sale of products and systems. Although we promote bulk purchases of parts and materials to control rising costs and avoid supply shortages, rises in market prices of raw materials and parts, including aluminum, copper, resin, and electronic parts,and logistics costs,may result in higher manufacturing costs, and supply shortages may affect the Sanden Group’s business results and financial position.

Price competition

Price competition in the business environment surrounding the Sanden Group is becoming extremely severe. Due to an increase in companies entering the automotive thermal management system market and air-conditioning electric compressor market and huge investments made by car makers in electric vehicles and driverless technologies, auto makers are increasingly demanding lower prices.

In addition, quality competition among local competitors is escalating each year in some geographic areas, which is leading to severer cost competition.

We believe that the Group’s products possess competitive advantages in terms of quality, cost, and technology. However, there is no guarantee that the Group can maintain such advantages given competition intensified by the market entries of new competitors, especially that in the market of the Integrated Thermal Management System (ITMS) market, which improves drive efficiency of electric vehicles, and this may affect the Company’s business results and financial position.

Dependence on sales performance

The Sanden Group sells its products to car makers worldwide and we consider that this reduces the risk of dependence on specific buyers.

However, factors that are beyond our control, such as the impact of recent geopolitical risks (including the Russia-Ukraine conflict, Israel-Palestinian conflict, and US-China trade frictions) and natural disasters on the vehicle production of certain customers, and the rise of transactions with new companies in addition to the existing car maker customers as the car market shifts toward EVs, may affect our business results and financial position.

Potential risks associated with international operations and entry into overseas markets

The Sanden Group operates its businesses through 46 bases in 22 countries and regions including North America, Europe, Asia and China, and operates its business activities through development, production and sales bases.

Although the Group establishes risk management rules and monitors transactions exposed to country risk as one of risk management items, business activities in these countries and regions are subject to the risks described below.
If any of these risks materializes, it may affect the Sanden Group’s business results and financial position.

Risks: changes in and revisions to national laws and regulations, changes in the political and economic climate, social unrest caused by wars and other factors, labor disputes, and supply chain disruptions

New product development

Given the automotive industry trend of rapidly shifting from gasoline cars to new energy cars including electric vehicles, the Group is concentrating resources in the environmental products field and promoting active collaboration with other companies and universities. As part of these efforts, we are conducting R&D activities on new products including the Integrated Thermal Management System (ITMS) adapted to next-generation eco-friendly vehicles and electric compressors, among other things, as well as on the elemental technology that becomes the basis for these products.

In addition, we are conducting R&D activities in all our global bases to accurately deliver the values our customers seek in the form of our products in the markets that have been changing and becoming more diverse globally in recent years.

If, however, we fail to keep up with the rapid changes in the markets worldwide and fail to smoothly develop and launch new products, this may affect our business results and financial position.

Limitations on intellectual property protection

Since its founding, the Group has independently developed technology and accumulated it as intellectual property rights and know-how, and has taken measures against intellectual property rights owned by third parties based on its own intellectual property guarantee system. The accumulated intellectual property rights and know-how are subject to the intellectual property system in the countries and regions in which the Group does business, but there is a possibility the Group cannot completely protect them in certain countries or regions due to legal restrictions. This may prevent a third party from completely controlling the manufacture or sale of similar products that use our technology. In addition, the Group is taking measures to deal with intellectual property rights owned by third parties that have used intellectual property information published based on the intellectual property disclosure system of each country. However, there is a possibility that we may not be able to fully grasp the situation with the intellectual property rights of third parties due to environmental constraints for each country and region. As a result, it may not be possible to completely judge whether or not there is a conflict with the intellectual property rights of a third party.

The decrease in sales in the area due to the manufacture and sale of similar products by these third parties and the occurrence of disputes due to allegations of infringement in intellectual property rights of third parties will affect the Group’s business performance and financial condition. To minimize such risks, the Group will strengthen cooperation with the law and patent offices of each country to form an intellectual property portfolio of our own technological strengths, while we will continue to expand our capabilities to collect information on the intellectual property held by third parties in our company.

Risk concerning quality

Under our unique quality policy, the Group is conducting activities to improve our product quality based on the customer first and quality first principles and developing and manufacturing our products according to the quality control standard required by the automotive industry’s international quality management system.

In addition, in case the Group is required to pay compensation based on product liability arising from unforeseen product faults and so on, the Group has purchased insurance policies. However, there is no guarantee that such insurance policies can cover compensations the Group may need to pay for all product faults. If any large-scale recall or compensation for product liability materializes, a large sum of expenses may be incurred and our sales may decline due to the loss of confidence in our products. This may have a negative impact on the Group’s business results and financial position.

Legal and regulatory risks

The Sanden Group is subject to various laws and regulations in the countries and regions in which it operates, including permits and licenses relating to businesses and investments, export restrictions, taxation, the environment, antitrust laws, and competition laws. If any laws and regulations applicable to the Group’s business activities are introduced, or if the Group’s business activities violate any of applicable laws and regulations, our business activities may be restricted, or the Group may receive a criminal or administrative punishment, and lose the trust of society. This may affect the Group’s business results and financial position.

By appointing legal personnel to major overseas bases, the Group endeavors to accurately understand the laws and regulations related to the Group and any revisions to these laws and regulations. In addition, the Group takes necessary measures such as establishing internal regulations and providing employee training to ensure that our business activities comply with all laws and regulations.

In addition, the Group is currently building an internal structure to address the Corporate Sustainability Reporting Directive (CSRD), a European regulation scheduled to take effect in 2026.

Litigation, etc.

In the event of unfavorable results for the Group in relation to the Group's business activities, by litigation and legal procedures in which the Group is or may become a party, it may affect the Group’s business performance and financial condition.

The Sanden Group endeavors to reduce the risk of disputes and the likelihood of adverse outcome for the Group in the event any dispute occurs through measures such as the preliminary review of contracts before signing and adjustments to their contents. We strive to reduce the risk of dispute escalation by, for instance, requiring group companies to report to the Company any sign of dispute.

In addition, we have established a system to appropriately protect the Company's interests in litigations and so on through everyday collaboration with Japanese and overseas law firms.

Employee compliance

The Group positions compliance as the most important management issue and strives to ensure it. More specifically, we have established a compliance system in each entity appointing the persons responsible for compliance and for its promotion, organized internal regulations that include the separation of duties to enable the appropriate granting of job authorities and mutual checking, and created and operated internal control systems consisting of a compliance education system for employees offering training for each job level, whistle-blowing system, internal audit system, among others. In addition, we strive to eliminate the so-called triangle of misconduct (three factors), namely motivation, opportunity, and justification, by appropriately organizing and operating a fair and well-accepted performance evaluation and personnel evaluation system and a strict disciplinary system, to remove the risk of employee misconduct.

The Group operates in many countries and regions, and it is not impossible for employees of the Group to engage in acts that violate the laws or regulations of any of these countries or regions. If this occurs, the relevant employee will receive a criminal or administrative punishment as a result of his or her misconduct. The damage caused by the employee’s misconduct may also directly, or indirectly through the loss of the Group’s social credibility, affect the Group’s business results and financial position.

Risk related to securing human resources

The Group strives to secure diverse and excellent human resources to achieve its global business goals. On the other hand, with the growth of the digital revolution, the declining birthrate and aging population, and the promotion of ESG, the employment situation and the values of working styles are changing.

If it is not possible to systematically promote the recruitment, development, and allocation of human resources and leaders with the expertise required in each field and the ability to respond to changes in the environment, there is a possibility that business performance may be adversely affected by stagnation of business activities.

Matters related to information security

The Sanden Group uses various information systems and networks for our business activities and products. To protect these information assets, we endeavor to keep enhancing the security of our networks, hardware, software, and various data, pursuant to the Basic IT Security Policy. Furthermore, to raise an information security awareness in workplaces and to ensure that our employees are informed of and familiar with rules, we offer IT security education programs each year to all IT users and conduct regular IT security checks to enhance our IT governance under the information security activity structure we have established for the entire company.

The risk of cyber attacks, however, is growing, and if our information systems are attacked through unauthorized access or computer viruses, we may suffer information leakage, system stoppage, suspension of important operations, or other damage. Such events may adversely affect our image, trust placed by society, or business operations and results.