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 30, 2022).

Natural disasters

The Group is developing business in 48 bases in 23 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.

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.

In particular, automotive market trends in North America, Europe, Asia, and China, where we operate the Automotive Systems Business, may affect the Sanden Group’s business results and financial position.

Fluctuations in exchange rates

The Sanden Group’s global operations involve foreign currency transactions. In particular, exchange rate fluctuations in the Sanden 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 Sanden Group’s business results and financial position.

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.

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, may result in higher manufacturing costs, and supply shortages may affect the Sanden Group’s business results and financial position.

Price competition

The Sanden Group’s operating conditions are marked by increasingly fierce price competition and intensifying demands from automobile manufacturers to 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 automobile makers worldwide. We consider that it reduces the risk of dependence on specific buyers. However, factors that are beyond the Group’s control, such as declined business performance of our customers, especially caused by the prolonged COVID-19 pandemic and the semiconductor procurement issue that has not been solved since last year, may affect the Group’s business results and financial position.

Potential risks associated with international operations and entry into overseas markets

The Group’s Business encompasses development, manufacturing, and sales bases located in 23 countries and regions in North America, Europe, Asia, and China. 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. We have established risk management regulations and monitor transactions involving country risk as one of the risk management items.

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

The Sanden Group conducts R&D activities at bases located throughout the world in order to create new values such as integrated thermal management systems through proactive collaborative creation with other companies in relation to our key technologies of “cooling and heating.” Our R&D activities also aim to achieve a “comfortable space that enriches people’s lives.” If, however, we fail to forecast and respond to rapid changes in the diverse national markets all over the world in an adequate manner and are unable to smoothly develop and launch new products, this may affect the Group’s 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

The Sanden Group is continuing quality control initiatives based on its Sanden Total Quality Management (STQM).

In addition, we mitigate the risks of large-scale recalls caused by unpredictable defaults in products or large amounts of product liability through the purchase of insurance policies, among other measures.

If, however, any case that cannot be covered by these measures occurs due to the greater customer demand for quality, this may affect 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.

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.

If, however, our services are disrupted or our data is destroyed or lost due to cyber attacks, unauthorized access, computer virus attacks, or large-scale blackouts or fires, 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.