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. Laws and regulations
In the course of conducting its businesses on a global basis, the IHI Group is subject to restrictions and it endeavors to comply with under a variety of laws and regulations, governmental permits and licenses, and regulatory restrictions, not only in Japan, but in each country and region of operation. If these laws and regulations are strengthened or revised, the cost of compliance with such changes may adversely affect the Group's operation results and financial position. However, the Group could be judged to have violated such laws or regulations if, for instance, it fails to understand them adequately or is unable to respond appropriately to unforeseen legislative changes. This could result in financial losses due to fines or surcharges, or administrative disposition such as mandatory business suspension that could lead to the Group suffering loss of opportunities or consequent deterioration of its reputation within society. Such eventualities could adversely affect the Group’s operating results and financial position.
Of the legal proceedings under way, except for the item stated in the other risk, there is no case recognized that has the potential to exert a significant adverse effect on the operation of the Group. However, unanticipated legal proceedings of which the Group is currently unaware could arise. If this risk materializes, the Group’s operating results and financial position could be adversely affected.
b. 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 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.
c. 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.
d. Human rights
In accordance with international standards and IHI Group Human Rights Policy, the IHI Group promotes initiatives to respect human rights throughout its business activities, including its supply chains. Specifically, the Group conducts human rights due diligence to identify and assess risks related to human rights and to verify and improve the results of its measures. The Group also fulfills its responsibility and work with business partners for CSR procurement in its supply chain that gives due consideration to human rights, labor conditions, occupational health and safety, the environment, and information management. However, if a violation of human rights or an event that disrespects human rights were to occur in the Group’s business activities, the Group's operating results and financial position could be adversely affected due to loss of public trust, suspension of transactions with customers, or liability for damages.
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 takes out 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 make insurance claims 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 Policies 2023,” the IHI Group is promoting initiatives to achieve sustainable high growth even in a social environment where instability is the norm.
However, the Group's products and services' superiority over competitors in the market may be rapidly lost due to fluctuations in the market environment caused by trends in air passenger demand, automobile production volume, other consumption and capital investment trends, resource and energy prices, materials and equipment prices and transportation costs in the supply chain, and labor costs. In such cases, the Group's operating results and financial position may be adversely affected.
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.
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 (BCPs).
The Group’s perception is that the importance of this item is rising, due to increasing uncertainty such as the impact of the situation involving Russia and Ukraine, political changes in Myanmar, political conflicts between U.S. and China, and expanding impact of economic security issues etc.
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 IHI Group’s production, procurement, export, and other business activities are constrained by changes in the policies of various countries without resolving these issues, the Group’s operating results and financial position could be adversely affected.
e. Natural disasters, disease, conflict, terrorism
Situations that could prevent the execution of business operations include the worldwide spread of an infectious disease like COVID-19, severe disasters such as an earthquake or flood, a criminal act such as terrorism, or a computer system failure. The Group has taken measures to minimize any impact even if such an event should occur by revising policies and place business continuity plan (BCPs) and conducting drills and other training to prepare for any emergency situation. However, a disaster or system failure 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 & Business Operations
a. Securing human resources
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 Failure to secure key personnel, the Group’s future growth, operating results and financial position could be adversely affected.
b. 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.
c. 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.
d. 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.
e. 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.
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.
g. 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 we participate through an international joint venture company for civil aero engines may become uncollectible. In response to this matter, the Group is considering the enhancement of debt management in order to reduce the risk of debt collection.
h. Information security
The IHI Group takes appropriate information security measures when using technical information, administrative information, and information systems for processing such information in its business, and is also strengthening measures in consideration of the increasing sophistication of cyber-attacks and the increase in teleworking, and thoroughly educating employees on information security. However, cyber attacks, loss or theft of information equipment and documents, hardware failures, and software inadequacies could result in information leaks or business stoppages caused by system failures, which could adversely affect the Group's operating results and financial position.
i. Research and development
Due to the nature of the Group’s business, the IHI Group’s 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.
j. 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.
k. Technology license contracts
The IHI Group handles a broad range of products and services both in Japan and overseas, and it therefore often executes contracts relating to technology licensing out to or in from other companies. Before executing such contracts, the Group endeavors to conduct full internal reviews to check whether any of the contract terms are disadvantageous, or impossible to perform, as well as to ensure that no necessary terms have been omitted, among other matters. However, inadequate prior investigation, inadequate understanding of the contract terms, or other omissions may result in the Group incurring liability for guarantees, compensation, or penalties beyond the plan, or becoming subject to operational or other restrictions. Such eventualities could lead to deterioration in the Group’s operating results and financial position.
l. Project management
The IHI Group often manufactures its products after executing individual order contracts with its customers, and for construction work involving large contract amounts, the Group conducts internal reviews from multiple perspectives before executing contracts. 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.
With regard to project monitoring, the IHI Group is working on maintaining and strengthening monitoring at a group-wide level, and reinforcing the use of risk reviews by experts. The Group will continue to reinforce thorough project managements.
m. Procurement & 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 of special steel and others, 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 the spread of COVID-19, 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.
n. Production and manufacturing
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 BCPs, 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.