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Basic policies for risk management

The IHI Group recognizes that risk management is one of the top business priorities for the Group, and strives to reinforce its overall capabilities in that regard. The basic objectives of risk management are ensuring business continuity, ensuring the safety of executives, employees and their families, protecting management resources, and maintaining public trust in the Group. Also, the Group formulated following action guidelines and performs risk management in accordance with them.

  1. Ensure the continuity of the IHI Group’s business operations
  2. Improve the public reputation of the IHI Group
  3. Protect the IHI Group’s management resources
  4. Avoid jeopardizing stakeholders’ interests
  5. Achieve recovery from damage as soon as possible
  6. Take responsible action when an issue arises
  7. Meet public requirements regarding risks

Risk management system

The IHI Group established the Risk Management Conference chaired by the CEO. The Conference assesses key general risk management matters, and considers policies, annual plans, corrective measures, and other important matters.
The Group has formulated the “IHI Group Key Risk Management Policies” for the risks to be treated on a priority basis, and all parent units and Group companies in Japan and abroad independently pursue risk management in keeping with those policies.
Regarding commonly existing risks in the Group, the Group Risk Management Units, which mainly comprise the Group’s corporate divisions, provide information and education by leveraging their specialties and support risk management activity at each division. Additionally, the Internal Audit Division audits the maintenance and operation status of the Group’s risk management system and makes efforts  to ensure their propriety.

In order to manage risks thoroughly, after clarifying roles and responsibilities of Internal Audit Division, corporate divisions, Business Areas, and business divisions including affiliated companies in risk management, the Group sets a risk management system. Business divisions, including affiliated companies, identify risks and respond to them directly. Business Areas monitor and provide guidance on the risk management activities of the business divisions and detect new risk signs. The corporate divisions evaluate and advise on the risk management activities of the business divisions and Business Areas, issue alerts for unrecognized risks, detect new risk signs, and implement measures against occurred risk items. The Internal Audit Division ensures these risk management functions.

Risk management activities for FY 2024

In terms of major themes on “IHI Group Key Risk Management Policies” for FY2024, the IHI Group will focus on the following matters.

  1. i. Response to risks that hinder the securing of a robust business operation foundation
    • Compliance
    • Quality assurance
    • Economic security
    • Information security
    • Upholding human rights
    • Human resource risks
  2. ii. Response to risks that hinder the execution of business scenarios.

In “response to risks that hinder the securing of a robust business operation foundation”, with regard to compliance and quality assurance system, under the “IHI Group Code of Conduct” and “IHI Group Quality Declaration” that were formulated in FY2019, the IHI Group is working to build a working environment where past lessons would not be forgotten with initiatives related to “Compliance Day” (May 10 every year) on which the entire IHI Group pledge to ensure thorough compliance and creating workplaces where everyone has a voice. On September 12, 2023, our subsidiary's mechanical parking system business was subjected to an on-site inspection by the Japan Fair Trade Commission on suspicion of violation of the Antimonopoly Act.  In addition, on April 24, 2024, it was discovered that inappropriate corrections had been made to the trial operation records of marine and land engines at a subsidiary of our company, and this was announced publicly. the Group takes this situation very seriously and will strive to further improve compliance. Initiatives with respect to economic security, information security, upholding human rights, and securing human resources are stated in “(4) Business risks”. As for “response to risks that hinder the execution of business scenarios”, the Group is prioritizing the management of risks that impair the ability of the four Business Areas to execute their respective strategies in order to respond to them quickly and appropriately, while keenly grasping the drastic changes in the business environment surrounding the Group including the response to the impact of the sudden changes in the prices for material and equipment and sudden changes in the international situation.
In order to systematically check the latent risks in the business plan, the Group are also constantly assessing and confirming the response plans and implementation progress for a wide range of business-related risks and, if needed, executing revision to the response plans including risk assessment.

Business risks

With regard to matters included in the “Overview of business,” “Information about facilities,” and “Financial information” sections in this Annual Securities Report, the items below are some of the main risks that could potentially adverse impact on the operating results and financial position of the IHI Group. Note that forward-looking statements are based on the Group’s judgements as of the end of the current fiscal year (March 31, 2023). In light of the risks described below, the Group has put in place the necessary risk management system, making every possible effort to avoid the occurrence of risks and to minimize the impact when risks do occur.
The Group will build a system that is prepared for any eventuality in light of a social environment in which instability is the norm, including worsening international conditions (such as Russia’s prolonged invasion of Ukraine and the political conflicts between U.S. and China), global inflations, energy shortages, human resource shortages, and frequent catastrophic disasters. the Group will also accelerate our transformation into a corporate structure capable of responding to dramatic changes in the environment.
The Group treats the appropriate identification of “risks” and “opportunities” arising from changes in the business environment as an issue for the entire group, and is working to identify risks that may be latent in business reformation beyond the boundaries of conventional businesses in the changing environment, to determine and analyze significant risks, and to promote flexible risk management.

1. Social responsibility

a. Compliances

The IHI Group believes that in order to achieve sustainable growth together with society and our customers, it is important to meet the expectations of our stakeholders and earn their trust. Based on this belief, the Group has summarized what the Group do in "Basic Code of Conduct for the IHI Group", which the Group expects our officers and employees to follow. In addition, the Group has established the Compliance Committee, a company-wide organization under the Risk Management Conference, to deliberate on and formulate important compliance-related policies and promote activities. Furthermore, the IHI Group operates "IHI Group Compliance Hotline" as an internal reporting system to prevent or promptly identify violations or potential violations of laws, regulations, internal rules, and internal and external rules by all officers and employees, and to take appropriate corrective measures. However, in the event of a violation of laws or regulations by some officers or employees, the Group's business performance and financial position may be adversely affected due to losses resulting from fines, surcharges, or additional taxation, lost opportunities resulting from administrative penalties such as suspension of business, or a decline in social reputation resulting from such violations. On September 12, 2023, our subsidiary's mechanical parking system business was subjected to an on-site inspection by the Japan Fair Trade Commission on suspicion of violation of the Antimonopoly Act. The Group solemnly accepts the fact that The Group was subjected to the on-site inspection and are fully cooperating with the investigation by the Japan Fair Trade Commission. In the event that any administrative action is ordered as a result of the inspection, the Group's business performance may be affected. In addition, on April 24, 2024, it was discovered that inappropriate corrections had been made to the trial operation records of marine and land engines at a subsidiary of our company, and this was announced publicly.  The Group takes the occurrence of this situation very seriously and have established a special investigation committee consisting mainly of outside experts, including lawyers. The entire group will take strict measures based on the findings and recommendations of the special investigative committee.

b. Environmental conservation

Within its manufacturing process, the IHI Group has business offices, subsidiaries, and other entities using substances that could cause adverse effects including pollution of the atmosphere, water, or soil. The Group takes the utmost care in managing these substances, and even in the unlikely event of substances leaking outside the Group’s facilities, the Group has measures in place to minimize their spread. However, an unanticipated situation could arise, leading to deterioration in the Group’s reputation within society, as well as liability for damages. If this risk materializes, the Group’s operating results and financial position could be adversely affected.

c. Human rights and diversity

In order to maintain the IHI Group's business foundation and link it to future growth, the Group respects human rights throughout our business activities (e.g., by establishing a whistleblower contact point as a grievance mechanism for stakeholders in the value chain). The Group strives to foster an organizational culture in which individuals with diverse personalities and values can play an active role. However, if an event that violates or disrespects human rights occurs in the Group's business activities, the Group may lose social credibility or be liable for suspension of transactions with customers or compensation for damages. In addition, a lack of diversity in the decision-making process in management could have a negative impact on the Group's performance and financial position.

d. Control of affiliated companies

The IHI Group is committed to providing high value to its customers through group management. To this end, each company in the Group must not only conduct its business in accordance with the laws and social norms of each country and region but must also promote appropriate group management. However, inappropriate responses or independent management decisions by affiliated companies in response to other risks may cause damage or loss of reputation among customers, resulting in adverse effects on our group's business performance and social credibility.

e. Health and safety

The IHI Group takes all possible measures to manage health and safety at its business offices and construction sites. However, in the unlikely event of an unexpected accident, disaster, or other incident, production activities could be impeded, leading to an adverse effect on the Group’s operating results and financial position.  The Group maintains a range of property and casualty insurance policies, among other measures, but if a major accident or disaster were to occur, the Group may not be able to claim insurance to cover all its losses.

2. Preparing for changes in the external environment

a. Competitive environment and business strategy

Under the medium-term management plan "Group Management Policy 2023," the IHI Group is promoting initiatives to achieve sustainable high growth through a bold shift of management resources to growth and development businesses, even in a social environment where instability is the norm.
In the ammonia value chain business, which The Group is developing as a pillar of our growth businesses, a significant change in the assumed fuel ammonia demand, the timing of its diffusion, and other preconditions could affect our Group's future business portfolio.

b. Partnerships, M&A, and business integration

The IHI Group conducts joint business activities with numerous other companies in the form of joint ventures and cooperation in marketing, technology, and production. The Group also makes effective use of M&A in order to expedite business expansion into growth markets, supplement its underlying technologies, and generate synergies, among other purposes. However, such activities may not deliver the benefits originally expected due to changes in the economic environment, legal regulations, unforeseen cost increases, or other factors. Moreover, if the Group judges that the benefits originally expected cannot be obtained, it may decide to suspend or terminate business integration based on a partnership with another company. The Group’s operating results and financial position could be adversely affected as a result.
In the ongoing additional inspection program for shipped PW1100G-JM engines, The Group, as a participant in the PW1100G-JM engine program with an approximately 15% share, expects to incur compensation costs and additional maintenance costs, etc. The impact of these costs was recorded in the consolidated financial statements in the second quarter of the fiscal year ended March 31, 2024.
The Group will continue its efforts to reduce the burden on airlines and restore the trust of customers.

c. Country risk

The IHI Group conducts its activities including procurement, production, export, sales, and construction on a global basis. If the continuation of business activities or the operation of business sites could become difficult due to political or economic turmoil in each country and region and a resulting freeze on currency exchange transactions, or debt defaults, or seizure of investment assets, occurrence of unforeseen acts of terrorism or labor disputes, political instability, defaults, or other factors, the Group’s operating results and financial position could be adversely affected. Against these risks, the Group endeavors to ensure that it is fully covered by trade insurance, strives to gather information regarding country risks and to raise awareness among Group employees, and strengthens structure such as preparation and review of business continuity plan (BCP).
The Group perceives that increasing uncertainty such as growing tensions in the Middle East, Ukraine, and Taiwan, political conflicts between the U.S. and China, and the expanding impact of economic security issues, among other factors.

d. Economic security

With the recent advance of globalization, deepening economic interdependence among nations has made economic activities and security inseparable. Sudden changes in the international situation, such as Russia’s invasion of Ukraine and the political conflicts between the U.S. and China, have led to changes in the policies and laws and regulations of various countries, including Japan, and have created challenges related to economic security, such as strengthening supply chains and developing cutting-edge key technologies.
If  the Group conducts conduct transactions in violation of these policies or laws and regulations, or if our response to these issues is inadequate, our reputation and social credibility may be damaged, leading to lost sales opportunities or business shutdowns. Furthermore, restrictions on our production, procurement, export, and other business activities could adversely affect the group's performance and financial position.

e. Natural disasters, disease, conflict, terrorism

The IHI Group reviews its regulations and business continuity plan (BCP), conducts emergency drills as necessary, and maintains appropriate insurance to minimize the impact of any event that may disrupt business operations such as the spread of a large-scale infectious disease such as a new coronavirus, an earthquake, flood, or other severe disaster, or a criminal act such as terrorism. However, a disaster on an unanticipated scale could make it impossible to execute business operations appropriately. Such eventualities could adversely affect the Group’s operating results and financial position.

3. Management Resources

a. Human resource risks

In order to maintain the IHI Group's business foundation and link it to future growth, it is necessary to acquire, retain, and develop the human resources required for business operations.  If there is a failure to hire outside personnel or secure key personnel, or a failure to properly assign personnel, the Group’s future growth, operating results and financial position could be adversely affected.

b. Financial activities

(a)Currency movements
Currency movements have impacts on the IHI Group’s operating results and financial position. For example, when the yen appreciates against foreign currencies, the Group’s income from construction work for export denominated in foreign currencies decreases in value after conversion into yen, and when the yen depreciates it leads to increases in the yen values of expenditures for overseas procurement denominated in local currencies. The Group therefore endeavors to hedge against the risk of imbalance in its position with regard to assets and liabilities denominated in foreign currencies by ensuring full use of forward exchange contracts, and marry and netting, based on a set policy. However, exchange rates may fluctuate more than anticipated, and if this risk materializes, the Group’s operating results and financial position could be adversely affected.

(b)Interest rate movements
If interest rates rise, the IHI Group’s interest expenses increase and its financial balance deteriorates. Moreover, the Group may be subject to less favorable financing terms when taking out loans or issuing bonds, adversely affecting its fund procurement. As a consequence, therefore, the Group’s operating results and financial position could also be adversely affected.

(c)Fund procurement and credit ratings
The IHI Group’s loans include syndicated loans with associated financial covenants relating to shareholders’ equity and profits. If the Group were to violate these covenants as a result of deterioration in business performance or any other cause, the terms of the loan in question could be revised, or an obligation to repay the loan before the due date could arise, leading to an adverse effect on the Group’s operating results and financial position.
Moreover, if a credit rating agency downgrades the Group’s credit rating, the Group could be forced to execute its financing transactions under disadvantageous terms, or it could become unable to execute certain transactions, adversely affecting its fund procurement. As a consequence, therefore, the Group’s operating results and financial position could also be adversely affected.

(d)Loan guarantees
The IHI Group issues guarantees and takes other appropriate measures with regard to loans it has confirmed as necessary and rational in order to conduct its business activities. However, if the debtor’s financial position deteriorates as a result of a prolonged downturn in the economic environment or a business failure, the creditors may demand that the Group fulfills these guarantees. Information regarding loan guarantees and related measures is included in Note “40. Contingent liabilities” under “Notes to consolidated financial statements” of the “Financial information” section in this Annual Securities Report.

(e)Taxation
To calculate its deferred tax assets, the IHI Group books or reverses individual assets, including forecasts and assumptions regarding future taxable income. However, if forecasts and assumptions regarding future taxable income change and the Group judges that part or all of the deferred tax assets cannot be recovered, the Group’s deferred tax assets could be decreased. The Group’s operating results and financial position could be adversely affected as a result.
Furthermore, when transaction prices are determined between group companies across national borders, the IHI Group makes every effort to comply with the transfer pricing taxation system that is applicable. However, in the event that the IHI Group receives a statement from a tax authority pointing out that a transaction price is inappropriate, the penalty tax or double taxation that arises could adversely affect the Group’s operating results and financial position.

(f)Management of credit exposure
The IHI Group supplies products and services to customers worldwide, and most of its sales transactions employ credit or promissory notes. With regard to these transactions, the Group as a whole endeavors to bolster its system for management of credit exposure and to ensure rigorous protection of receivables. Despite such measures, however, a key customer could fall into bankruptcy, making it impossible to recover receivables from that customer. If this risk materializes, the Group’s operating results and financial position could be adversely affected.
Due to the filing for bankruptcy by an airline company in May 2023, there is a possibility that a portion of the accounts receivable that the Group indirectly hold in the engine program in which the Group participates through an international joint venture company for civil aero engines may become uncollectible. In response to this matter, the Group is taking steps for the enhancement of debt management in order to reduce the risk of debt collection.

c. Information security

The IHI Group takes appropriate information security measures when using technical and administrative information, as well as information systems for processing such information in its business. The Group is also strengthening these measures in response to the increasing sophistication of cyber-attacks and the rise in teleworking, while thoroughly educating employees on information security. However, cyber-attacks, loss or theft of information equipment and documents, network outages, or inadequate hardware and software could result in information leaks or business stoppages, which could adversely affect the Group's operating results and financial position.

4. Corporate activities and engineering

a. Research and development

Information relating to the IHI Group’s research and development activities is included in “6. Research and development activities” under “Ⅱ. Overview of business” in this Annual Securities Report. Due to the nature of the Group’s business, these research and development activities are characterized by the fact that they require large financial investments and long development periods. Research and development could therefore fail to lead to satisfactory outcomes because opportunities for practical application are lost, timings are inconsistent with the Group’s business strategies or market trends, or for other reasons. Such eventualities could adversely affect the Group’s operating results and financial position.

b. Intellectual property management

The IHI Group endeavors to appropriately safeguard its intellectual property (by obtaining patents, utility models, or rights of prior use). However, the products and services handled by the Group are broad-ranging, and it can sometimes prove difficult to completely prevent attempts by third parties such as imitating or analyzing the Group’s products or services.

Moreover, the products and services the Group is developing for the future could potentially infringe on the intellectual property rights of other companies and organizations, or the Group could fail to handle an employee’s invention appropriately, resulting in a claim for compensation or other redress being made against the Group. Such eventualities could adversely affect the Group’s operating results and financial position.

c. Project management

The IHI Group believes that the success or failure of both large projects and investments significantly depends on initial planning, especially for new projects or those not implemented for some time. In response, the Group has established a risk management system with screening processes before accepting orders or making investments.
In many cases, the Group manufactures products for large projects after concluding individual order contracts with customers and conducts a multifaceted internal review before concluding an order contract. However, such factors as unanticipated changes in the economic environment, inadequate prior investigation, unexpected complications, or a business downturn at a joint venture partner or other partner may cause construction work that exceeds the original estimate, payment of penalties if the Group is unable to achieve the level of performance or delivery date required by the customer, or additional costs. As a result, the Group’s operating results and financial position could be adversely affected.  In addition, the Group makes every possible effort to avoid risks associated with cancellation of an order contract at the request of a customer, including insertion of a penalty clause in the terms of its order contracts, but it may not always be possible to fully recover costs disbursed. As a result, the Group’s performance and financial position could be adversely affected.
For large investments, the Group conducts an internal review of the investment execution plan from the perspective of profitability and risk before the investment is made. However, there is a possibility that the target investment efficiency may not be achieved or losses may be recorded due to changes in the economic environment or market that could not be assumed at the time of investment decision-making, or troubles caused by the company or its partners, which may adversely affect the Group's performance and financial position.
For both large projects and large investments, the Group conducts a multifaceted and complex risk review in collaboration with internal and external experts and the corporate review department in the pre-commitment and pre-investment review process.
After accepting an order or making an investment, the Group strengthens its monitoring of initial plans and responds to new events and risks, in collaboration with each Business Area's risk management departments, to ensure thorough project risk management.

d. Procurement and logistics

Whilst the IHI Group endeavors to manufacture key components within the Group, it also takes delivery of raw materials, components, and services from multiple external suppliers. The Group strives to ensure reliable procurement by working to constantly gather information on market trends for its key raw materials and components. In addition, the Group takes steps to reduce risk, such as rigorously monitoring suppliers’ product quality and delivery dates, and diversifying procurement sources to avoid excessive concentration or dependency on particular suppliers. However, in case of occurrence of such problems as sudden changes in the prices for material and equipment, or in the demand and supply balance, and rise in procurement costs in the process of promoting CSR procurement for the purpose of respecting human rights and realizing sustainable society, as well as in the international situation, in addition to disruption of our supply chain caused by a severe disaster and a spread of infectious diseases, they may cause problems including increased costs or delayed deliveries. These problems could lead to deterioration in the Group’s operating results and financial position.

e. Design and manufacturing

As described in “2. Major facilities” under “Ⅲ. Information about facilities” in this Annual Securities Report, the IHI Group owns production sites in a variety of locations. A severe disaster affecting the Group’s production facilities, production delays/suspension, supply chain disruption, a power outage, inability to obtain materials or equipment, or a power restriction affecting production activities caused from infections including COVID-19 and geopolitical changes such as the situation involving Russia and Ukraine, could occur on a greater scale than anticipated in their business continuity plan (BCP), or adjustment of production capacity may not be able to keep pace if production volume were to fluctuate more suddenly than anticipated. Such eventualities could lead to deterioration in the Group’s operating results and financial position.

f. Quality assurance

The IHI Group establishes quality management system and develops structures and systems to assure quality in order to provide products and services realizing customers’ satisfaction, safely, and security.  This system includes the reflection of necessary requirements including customer demands and responses to risks assumed in the planning stage.
However, an unanticipated situation related to quality assurance could arise, leading to deterioration in customer’s evaluation and the Group’s reputation within society, as well as liability for damages. If this risk materializes, the Group’s operating results and financial position could be adversely affected.

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