Business & Other Risks
Of the matters regarding business and accounting situations, etc. described in the financial statements in security reports, the main risks that the operator recognizes as having the possibility of significantly impacting the financial condition, business performance, or cash flow condition of consolidated companies are as follows. The forward-looking statements herein reflect the Group’s own judgements as of December 31, 2022.
1. Risk related to the spread of the COVID-19 coronavirus
To respond to the COVID-19 pandemic, our Group has endeavored to continually provide products and services that fulfill the needs of society and our customers and taken measures to minimize the impact of COVID-19 on our business performance, while putting the health and safety of Group employees, their families, and other stakeholders first, in accordance with our emergency response regulations.
If the COVID-19 pandemic continues and causes problems in our production systems, logistics systems, and sales activities associated with our business activities or its impact on human lives expands, it may significantly affect the performance of the Group. To minimize this risk's impact on the group and to ensure the safety of our employees and other stakeholders, we are take thorough measure daily to prevent infection, such as body temperature checks and other health monitoring, hand-washing, web meetings, the restriction of non-essential business trips, staggered commuting, working from home in response to the requests from national and local governments, and promoting the establishment of a teleworking environment and a remote product development system to mitigate the impact of the pandemic on our business activities.
2. Risk dependent on market circumstances surrounding the digital camera industry
Amid the worldwide growth of the smartphone market due to the enhanced performance of smartphone cameras and the ease of taking photos with them, the digital camera market continues to shrink and, accordingly, so does the interchangeable lens market, mainstay products of the Company. If digital cameras fail to convince the market of their superiority over smartphone cameras, the market contraction will continue and, as a result, may significantly affect the Group’s business results. To minimize the possibility of this risk occurring, we are actively introducing new interchangeable lenses for mirrorless cameras, in consideration of the market environment's shift toward mirrorless cameras.
3. Risk from an inability to adjust production and sales to meet demand
Product supply in excess of actual demand could result in excessive stock and subsequent price drops, a decline in capital efficiency and a plunge in earnings. Meanwhile, actual product demand surpassing the Company’s supply would mean that it would not be able to meet all the orders and consequently miss sales opportunities. That may significantly affect the Group’s business results. To minimize the possibility of this risk occurring, we are striving to control inventory properly by regularly holding meetings regarding the company-wide inventory status and forecasts.
4. Risks from natural and other disasters
In the event of a major earthquake, fire, flood or other natural disaster, the Group’s development and manufacturing bases and suppliers may suffer devastating damage, suspend operations, and delay their production and shipments. If that leads to a sales decline or huge expenses for the restoration of business, it may significantly affect the Group’s business results. To minimize the possibility of these risks occurring and mitigating their impact, we are taking actions inside and outside Japan in accordance with the Business Continuity Plan (BCP) while continuously improving it.
5. Risks relating to climate change
Climate change is an issue that affects the world beyond national and regional borders. As its activities extend globally, the Group regards this problem as significant and takes actions in response. The inadequacy of these actions or delays in their implementation could bring about the realization of two different risks mentioned below.
(Risk related to social change)
Increased costs due to carbon tax burden and purchase of renewable energy and failure to adapt to an unexpected rapid shift to a carbon-free society would ruin the Group’s corporate brand and lower its corporate value.
(Risk related to supply)
Delays in a response to soaring raw material prices or other adverse impacts following weather abnormalities could lead to the suspension of factory operations or the severance of supply chains and a resulting disruption of the supply of products and services. This may significantly affect the Group’s business results.
To minimize the possibility of this risk occurring, we have established Environment Vision 2050, which established the goal of CO2 emission zero by 2050, and we are taking measures to address climate change.
6. Risk from dependence on the photographic lens business
The Group’s photographic lens business accounted for approximately 72% of net sales for the fiscal year ended December 31, 2022. Fluctuations in the market of interchangeable lenses for digital cameras have a huge impact on business results. In particular, the current shrinking of the digital camera market and the market of interchangeable lenses for digital cameras may significantly affect the Group’s business results. To minimize the possibility of this risk occurring, we are expanding our business into industrial fields such as surveillance cameras and automotive lenses and cameras and deploying businesses in new fields such as health care.
7. Risk from dependence on specific customers
Sales to Sony group companies comprised approximately 20% of the Group’s consolidated net sales for the fiscal year ended December 31, 2022. As a result, changes in their strategies, policies and business relationships may significantly affect the Group’s business results. To minimize the possibility of this impacting us if it occurs, we are strengthening partnerships with other customers and cultivating new customers.
8. Risk from dependence on specific suppliers
The Group procures raw materials, components and other items from numerous external suppliers. For the procurement of glass materials in particular, it relies on limited supply sources. If these raw materials, components and other items are not available in the quantity or at the price that the Group has planned for any reason, and if the Group is consequently unable to produce products in the planned quantity, it will fail to carry out its delivery responsibilities to customers, and this may significantly affect its business results. To minimize the possibility of this risk occurring, we are taking measures such as the identification of multiple suppliers and alternative supplier candidates and the prompt implementation of alternative measures through design changes, etc.
9. Risk from occurrence of malfunctions due to incompatibility with cameras
The Company carries out full quality assurance tests on its interchangeable lenses for digital cameras before they are shipped, but some camera function may not work due to changes in specifications incorporated into new camera product models by their respective manufacturers. In this event, the Company offers free firmware updates for shipped products etc. Delays in the release of firmware updates or a long period of time required for a release could increase the number of customers who give up on purchasing the product and result in a loss of sales opportunities. This is a factor that may possibly cause fluctuations in the Group’s business results. In this case, there is an increase of customers who refrain from purchasing which leads to an opportunity loss of sales, which may cause the Group's performance to fluctuate. To minimize the possibility of this risk occurring, we are improving quality assurance inspections and, for already shipped products, providing services for upgrading firmware, etc. free of charge.
10. Risk concerning new businesses
It is the Group’s policy to foster and expand new businesses. In the event that the Group decides to scale back or withdraw from any new business due to intensifying price competition, rapid technological innovation, drastic changes in market needs or other concerns, the Group’s business results may be significantly affected. To minimize the possibility of this risk occurring, we are flexibly shifting internal resources and effectively using external resources.
11. Risk from the impact of technological innovation and others
In the business domains concerned with the Group, new optical technologies are rapidly advancing. Continuous efforts toward technological innovation and the application of these innovations to products are essential to its growth. Research and development efforts for this purpose require enormous efforts. If the Group’s development of cutting-edge technologies and their application to products fail to proceed as planned, its business results may be significantly affected. To minimize the possibility of this risk occurring, we are developing technology based on a medium- and long-term technological roadmap and promoting open innovation, etc.
12. Risk related to business partnerships and corporate acquisitions
The Group forms business partnerships and many other types of partnerships with other companies as measures to aid its growth. In addition, it considers corporate acquisitions aimed at business expansion. However, business expansion may not be achieved as expected for reason of an economic downturn or poor performance on the part of partners. The discontinuation of partnerships with any leading partner could cause trouble to the business plan, delay investment recovery and overshadow the potential for investment recovery. This may significantly affect the Group’s business results and financial standing. To minimize the possibility of this risk occurring, we are verifying the consistency and validity of strategies and business plans before entering into a business alliance, etc. as well and verifying the details and potential risks, etc., of investments from multiple perspectives. Also, after implementation, we strive to manage their progress by regularly evaluating them and solving problems at an early stage.
13. Risk from product defects
The Group has developed advanced quality assurance systems. In the unlikely event of the occurrence of a defect in its products that may lead to large-scale product liability, the Group may incur significant expenses, lose public confidence, or face other negative impacts, and any of these may significantly affect its business results. To minimize the possibility of this risk occurring, we are continuously strengthening the quality assurance system and taking thorough measures to prevent quality failures and their outflow.
14. Risk concerning the acquisition and retention of competent personnel and the loss of key knowledge
The Group is supported by its employees who hold special skills in lens processing and other advanced techniques and capabilities. These significant personnel may leave the Group and their knowledge and expertise may flow out of the Group to outsiders. The Group understands that the recruitment and development of competent personnel and the retention of capable employees will impact its future business results. If it fails to hire or develop such personnel or if skilled workers leave the Group, development or production activities may be delayed and there may arise a risk of the loss of key knowledge and expertise. Consequently, the Group’s business results and financial standing may be significantly affected. To minimize the possibility of this risk occurring, we are improving our personnel systems, including by establishing an employment system by job type, a Post Qualification System, and an internal job posting system, by establishing an ideal working environment through the promotion of work-life balance and diversity, and by promoting health management, etc.
15. Risk from information leakage
The Group holds technical and other important information, corporate information of business partners and personal information concerning many customers and other stakeholders. It works to heighten the level of security surrounding such information, formulates and improves internal rules on information and provides education to its staff. Despite information security efforts, personal or technical information leakage may occur due to attacks by hackers or computer viruses, infrastructure failure, natural disasters and other concerns. Any situation like this may damage the corporate value of the Group. If corporate or personal information leaks out, the Group may not only have its credibility damaged but also face damage claims from business partners, employees or other stakeholders affected by the leakage, which may necessitate payments for damages to the companies and individual concerned and the taking of measures to prevent recurrence. This can entail huge costs and significantly affect the Group’s revenue and financial standing. To minimize the possibility of this risk occurring, we are establishing an information security system and managing information based on information security policies.
16. Risk from fluctuations in foreign exchange rates
The Group conducts transactions with overseas subsidiaries in foreign currencies, and some of its transactions with international and domestic business partners are in foreign currencies. Accordingly, fluctuations in exchange rates may significantly affect the competitiveness of the Group’s products in overseas markets, its export profit, business results and others. To minimize the possibility of this risk occurring, we are hedging our risks through exchange contracts, etc.
17. Risk related to intellectual properties
The Group carries out investigations, negotiations and applications, and also takes other necessary steps to secure and protect its rights related to intellectual property rights and avoid any related issues. In the event of a dispute over intellectual properties occurring between the Group and a third party, the Group’s business results may be significantly affected. To minimize the possibility of this risk occurring, we are taking the actions necessary for investigations, negotiations, and applications to secure rights and avoid problems related to intellectual property rights.
18. Risk related to laws and regulations
The Group’s operations are subject to different laws and ordinances inside and outside the country and with administrative licenses, permissions and regulations, and the Group therefore strives to comply with them. In the event of a violation of laws or regulations or the filing of a suit due to unintended reasons, the Group’s business results may be significantly affected. To minimize the possibility of this risk occurring, we strive to comply with laws and regulations through the Compliance Committee's establishment and promotion, etc. of policies.
19. Risk related to impairment losses
In cases where the market value of the Group’s assets declines significantly or where the profitability of its business deteriorates, impairment losses will be recorded according to the accounting standards for impairment of assets, and this may significantly affect the Group’s business results. To minimize the possibility of this risk occurring, regarding tangible and intangible assets, we are developing and operating procedures to assess signs of impairment and identify and measure loss from impairment. We strive to identify signs of impairment loss at an early stage through the verification of investment recovery, etc. and regular monitoring after an investment is made.
20. Other risks
In addition to the above risks, since our Group conducts many business activities outside of Japan, if an unexpected adverse political or economic factor occurs, there is a change in taxation or tax rate that adversely impacts the group, or a social dislocation or other event caused by terrorism, war, natural disaster, contagious disease, or other reasons occurs in countries or regions where we operate our businesses, the performance of our Group may be significantly affected. To minimize the possibility of these risks occurring, we monitor political, social, and economic conditions globally and strive to identify and analyze their impact on our business activities.