Business Risks

Described below are risks that the management has identified as significant. These risks are associated with Kokuyo’s financial or operational performance or its cash flow. They have been disclosed in Kokuyo’s Annual Securities Report under the section on business and corporate conditions.
 All forward-looking statements are based on assumptions that the management considered reasonable in light of information available as of the end of the consolidated fiscal year under review.

 Risks related to Covid-19

 The Covid-19 pandemic has severely impacted economic activities, despite the efforts of governments to curb the spread of infections. The crisis has dramatically altered the business landscape for Kokuyo and has significantly affected the company’s activities. The economic outlook is opaque, and there is a possibility of protracted global recession. At an early stage in the crisis, Kokuyo established a taskforce headed by the representative director. The taskforce immediately began working to prioritize the safety of customers, employees, and partners, and to cooperate with authorities in curbing the spread of infections. Alongside these efforts, Kokuyo has helped ensure economic stability amid the pandemic.

 Kokuyo provides a manual outlining safety checks, and it flexibly utilizes workplaces and communication methods to ensure an appropriate level of in-person attendance in compliance with government requests and societal expectations. Kokuyo also encourages its businesses to adopt a staggered hours system. Kokuyo’s offices rigorously apply anti-infection measures, including social distancing, daily cleaning, disinfection, and use of face masks. To protect the safety of customers, Kokuyo has adopted a hybrid approach to customer-facing events, combining in-person and virtual experiences. The pandemic has accelerated changes in people’s lifestyles, including the way they work and learn. To capture these changing needs, Kokuyo’s Spatial Value Domain is broadening its focus from the traditional workspace (a company’s main office) to home office workspaces and decentralized workspaces (co-working spaces, suburban satellite offices, workcation spaces). Similarly, Kokuyo’s Business Supplies Domain is broadening its focus from traditional office clients to individual consumers working from home.
 In these ways, Kokuyo aims to strike a balance amid the pandemic: While continuing to prioritize the safety of customers, employees, and partners, it maintains stable operations and business continuity, thereby providing social infrastructure and contributing toward economic stabilization.

(1) Economic Risks

Since Kokuyo operates primarily in Japan, its operational and financial performance is vulnerable to economic conditions in the country, particularly conditions related to corporate earnings, capital expenditure, and public investment. Economic impacts vary by industrial sector. Kokuyo operates in multiple business domains as part of its portfolio management, and it monitors industrial trends and business conditions and is ready to shift resources as and when necessary. Some of Kokuyo’s business operations (sales, production, purchasing) are based overseas (in Asia and elsewhere), and there are plans to further globalize business operations. As such, Kokuyo’s operational and financial performance is vulnerable to economic, sociopolitical, or regulatory developments in these countries, and to general trends in ESG management. To address this risk, Kokuyo works with overseas subsidiaries to ascertain local political and economic developments and to ensure an effective response. Kokuyo has committed to further strengthening the way it responds to such changes.

(2) Market Risks

Kokuyo offers value-added products and services. The markets for these products and services are vulnerable to economic changes and consumers’ purchasing preferences. These markets are also increasingly crowded amid the trend of diversification and digitalization. If, as a result of these factors, Kokuyo fails to maintain or improve its market position, its operational and financial performance may be adversely impacted.
 To mitigate this risk, Kokuyo, as part of its portfolio management, operates in multiple business domains and allocates its resources optimally, according to industrial trends and business conditions. While fierce competition is clearly a risk, it also presents an opportunity; it provides an impetus to cast aside old habits and to reshape the organization with a more far-sighted strategic vision that will deliver higher growth.

(3) Compliance and Regulatory Risks

Compliance Risk:
Kokuyo makes every effort to comply with legal and regulatory requirements, as well as with social norms, concerning quality, fair trading, environment, workers’ rights, health and safety, accounting, and tax. Despite these efforts, there is always a risk that Kokuyo may fail in its commitment to compliance. Such failure would adversely impact Kokuyo’s operational and financial performance.

Regulatory Risk:
Kokuyo’s compliance requirements may increase if regulations change (if a new regulation is introduced or if an existing one is tightened) or if Kokuyo further globalizes its operations or expands its portfolio. Any such additional requirements may increase the costs of Kokuyo’s operations or compel Kokuyo to invest, which may adversely impact Kokuyo’s operational and financial performance.
 To mitigate compliance risk, Kokuyo has published a code of conduct (Kokuyo Group Code of Conduct) to promote a culture of compliance and ethics, and it trains staff in compliance. Kokuyo regularly checks whether its rules and processes are up to date with the latest regulatory developments and whether employees are complying with them. As part of this, Kokuyo conducts surveys among a wide sample of staff to confirm compliance. Employees in domestic and overseas subsidiaries receive regular awareness training to prevent anti-competitive practices (such as bid rigging), prevent bribery, and deter the influence of organized crime. Regarding the organizational framework for compliance, Kokuyo has a risk committee, which is responsible for monitoring compliance across the organization. The committee is chaired by a director. Compliance is also monitored by the boards and risk/compliance committees of each subsidiary or affiliate.

(4) Quality Risk

There is always a possibility that Kokuyo may need to recall a product because it was used in ways that the design team never envisaged. Such cases may adversely impact Kokuyo’s operational and financial performance as well as its brand reputation.
 To mitigate this risk, Kokuyo has established an ISO 9001-compliant quality management system. This system extends throughout the value chain, from design to after-sales services. For cases where, despite all these efforts, a problem arises in a product or service, Kokuyo has product liability insurance to cover recall costs and to protect itself from any claims of damage that may ensue. However, if the insurance fails to provide sufficient cover, Kokuyo’s operational and financial performance would be adversely impacted.

(5) Procurement Risk

Kokuyo sources raw materials (e.g., base paper, resin, steel) from domestic and overseas companies. It therefore faces the risk of unfavorable sales prices for the raw materials or from unfavorable currency trends or supply/demand trends. If unfavorable conditions persist over the long term, Kokuyo’s operational and financial performance may be adversely impacted. Additionally, with the increasing focus on ESG/sustainability, companies are now expected to apply greater supply-chain due diligence to check for human rights violations or ecologically unsustainable practices in their supply chains. If Kokuyo’s suppliers are unable to comply with ESG standards, Kokuyo may be unable to procure the necessary raw materials. This situation would adversely impact Kokuyo’s reputation as well as its operational and financial performance.
 In the immediate term, Kokuyo mitigates the risk of unfavorable supply/demand or currency trends by entering into forward exchange contracts for some of its cross-border transactions. Over the longer term, it does by working toward an optimal percentage of procurement from local suppliers and by diversifying the supply chain. Kokuyo has published a procurement policy (Kokuyo Group Procurement Guidelines) for building trusting and mutually beneficial relationships with suppliers. By working with suppliers, Kokuyo aims to fulfill societal expectations regarding human rights and ecological sustainability and contribute to sustainable development.

(6) Information Risk

Kokuyo has established processes for controlling access to sensitive information, including confidential business information and customers’ personal information. These processes include safeguards against system failure and cyberattacks. However, as rigorous as these security measures are, they may fail to protect against threats from unexpected sources. Cyberattacks are increasingly prevalent, and the rise in working from home and other diversified workstyles has made companies all the more vulnerable. If a data breach does occur, Kokuyo’s operational and financial performance would be adversely impacted.
To mitigate the risk, Kokuyo has established information handling protocols, and it provides training to employees and contractors. As cyber attackers grow increasingly sophisticated, Kokuyo updates and strengthens its cyber defenses accordingly. Kokuyo routinely tests the vulnerability of its information systems to viruses, cyberattacks, and data leakage, and takes measures as necessary.

(7) Investment Risk

Kokuyo invests in companies with a view to sustainably improving its enterprise value. All potential investments are subject to a due diligence process, which examines, among other things, the potential investee’s financial health and the terms and conditions of the contract.
Investments are then subject to regular reviews, which focus on how well the profit plan has progressed and whether the investment still represents value for money. Despite these measures, there remains a risk that changes in the business landscape will cause Kokuyo to lose money on an investment. In such cases, Kokuyo may need to recognize impairment of tangible assets, intangible assets (such as goodwill), or investment securities, which would adversely impact its operational and financial performance.

(8) Changes in Fair Value

Kokuyo invests in securities. As such, Kokuyo is exposed to the risk that an investment’s fair value deteriorates as a result of unfavorable trends in money markets. Such cases would adversely impact Kokuyo’s operational and financial performance.
 To mitigate this risk, Kokuyo regularly appraises its investment securities outside the quarterly fair value measurements and makes selling or purchasing decisions accordingly. Shares held under cross-shareholding arrangements are regularly reviewed to verify their quantitative and qualitative value, and the results are reported to the Board of Directors. If the report suggests that there is little value in continuing to hold the shares, the board may decide to sell off all or some of the shares.

(9) Disaster Risk

Kokuyo's group has workspaces and production sites in Japan and overseas. These assets are vulnerable to emergencies that disrupt social infrastructure across a large region. Such emergencies may include natural disasters, which have become larger and more frequent with climate change. They may also include an unprecedented outbreak of infectious disease. Such risk is hard to avoid. If such a disaster occurs, Kokuyo may be forced to suspended operations, which would adversely impact its operational and financial performance.
 To mitigate the risk, Kokuyo engages in disaster management and business continuity planning to ensure that its businesses continue to function in a range of disaster scenarios and that normal operations resume as soon as possible. Emergency protocols are regularly reviewed and amended as necessary to ensure their effectiveness. For natural disasters, Kokuyo works to preempt the dangers by establishing safety protocols for each workplace. It also stockpiles emergency supplies and subscribes to an appropriate insurance policy to ensure effective response if and when a crisis arises. For disease outbreaks, Kokuyo works to minimize the effects on its business activities while prioritizing the safety of customers and employees.

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