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Business and Operational Risks

Akebono identifies the followings as matters that could have potentially serious impact on the business and operational risks to the Akebono Group and gives full attention to these issues in its operations. When matters relating to the future are mentioned on this website, they reflect the Akebono Group's judgments that were current as of the release date of the Annual Securities Report dated on June 17, 2015.

1) Technological Innovation and New Product Development

Amidst the trend of globalization, close cooperation between the development and the production departments and "differentiation of future technologies" are important parts of our strategy in maintaining growth of our business as an independent automobile parts manufacturer. To promote the development of new products and technologies, the Akebono Group invests considerable resources to strengthen this cooperation and fund the strategic skill development of our employees. Nevertheless, we identify a potential negative effect on the Group's operating results and financial position if we are unable to develop new products and new technologies to meet our customer's demands due to discrepancies between our forecast and market conditions, customer needs or a sudden change in technologies used by the industry.

2) Overseas Business Development

The manufacturing and sales activities of the Akebono Group are not limited to only Japan, but also include North America, Europe, and various parts of Asia. Furthermore, overseas sales account for about 70% of our consolidated annual revenue. The manufacturing and sales activities of the Akebono Group are developing in regions such as North America, Europe, and Asia. Our advancement in these overseas markets entails the risks listed below. We identify a potential negative effect on the Group's operating results and financial position if any of these contingencies occurs in a way that causes delays or stoppages of manufacturing or sales operations of the product.

  • (1) Unexpected enactment of laws and regulations or disadvantageous changes to the tax system and regulation
  • (2) Occurrence of political or economic factors disadvantageous to business
  • (3) Difficulty in hiring and retaining personnel or the occurrence of labor disputes
  • (4) Inadequate technological infrastructure
  • (5) Societal turmoil such as terrorist attacks, wars, strikes, etc.
  • (6) Large scale natural disaster or the occurrence of a contagious disease pandemic

3) Production Technology and Facilities

In order to meet the needs of its customers such as the establishment of global platforms , the Akebono Brake Group recognizes the need to globally share its manufacturing engineering (monozukuri). To further improve quality and efficiency and reduce costs, we proactively invest in production technological development and production facilities. However, in the event that we are unable to implement these investments in an effective and timely fashion, or in the event that the Company's strategies are discrepant to market needs, we may be unable to recover these investments and the business could be lost. Such an outcome could detrimentally impact the operations, business performance, and financial position of the Akebono Brake Group.

4) Information Management

We have established the Information Security Committee to maintain information security and protect personal information and take steps to ensure the thoroughness of the Akebono Group's information management to prevent leaks etc., by putting in place the appropriate facilities as well as complying with established rules and conducting thorough activities to raise awareness. However, we identify a potential negative effect on the Group's operating results and financial position if the trust that society has in us is damaged due to a leak of confidential information or personal information held by the Group. Moreover, we identify potential negative effects of unanticipated natural disasters, system malfunctions resulting from viruses or unauthorized access, and the increasing complication of systems as all of the activities of our group rely upon the support of information systems.

5) Product Quality

We consider product quality to be crucial for the safety and reliability of products in the Akebono Group, and we constantly strive to develop more advanced quality assurance systems. Throughout the Group, we promote activities such as independent quality assurance at each process and failure recurrence prevention by learning from past faults, striving to realize product production under the safest possible system. However, considering that Akebono's products are directly related to safety, we identify a potential negative effect on the Group's operating results and financial position if a product defect occurred that was not prevented prior to reaching the customer, which would cause enormous expense and diminish the trust that society has in the company.

6) Development and Securing of Human Resources

We consider our human resources to be the foundation for the operations of the Akebono Group. To ensure our competitive strength endures and improves, we believe it is important to recruit competent individuals, including experts in high-tech fields and personnel with strong managerial capabilities, and strategically train and develop our employees to ensure the transition to the younger generation of the technology possessed by our senior employees. In recent years, there has been an urgent need to secure and cultivate human resources who can function effectively in a global environment due to the increased promotion of business activities on a global basis. Consequently, we are promoting aggressive hiring, training and education of staff, and implementing measures to prevent turnover of core human resources. However, we identify a potential negative effect on the Group's operating results and financial position in the long-term if the Group's personnel training and placement of appropriate personnel in the appropriate positions do not proceed according to plan.

7) Market Fluctuation

Operating revenue of the Akebono Group is impacted by the economic conditions of the countries or regions where the Group manufactures or sells its products. We identify a potential negative impact on the Group's operating results and financial position if there is economic recession in the major markets of the Group, including Japan, North America, Europe, and Asia, or unexpected shrinkage of demand in those markets. In particular, Europe is in a situation where sovereign debt problems of certain countries have spread to the real economy, causing economic stagnation. Should this debt crisis were to further spread to other countries, the impact on the global economy and financial system would be immense due to the large consumer market affected. A large component of the operating revenue of the Group is dependent on OEM products. Therefore, we identify the potential for a substantial negative effect on the Group's operating results and financial position should the automobile manufacturers or Tier 1 manufacturers (primary suppliers to automobile manufacturers) were to experience a deterioration in operating results, unexpectedly cancel contracts, engage in price discounting or change their procurement policy. Moreover, our Group's businesses, earnings and financial position could be profoundly influenced by large fluctuations in product pricing and sales volumes due to intensified competition with other companies both inside and outside of Japan.

8) Environmental Responsiveness

The Akebono Group recognizes its important social responsibility to address environmental issues from the perspective of global environmental conservation. We have established the Global Environment Committee and are promoting numerous environmental measures, such as the development of environmentally sound products and CO2 emission reductions. Moreover, investments to resolve various technical issues are expected to grow in response to the trend for stricter laws and regulations regarding automobile safety and environmental protection to be implemented in the various countries where we conduct our businesses. However, we identify a potential negative influence on the Group's operating results and financial position if we find it difficult to comply with environmental regulations and the trust that society has in us diminishes. In response to the problem of asbestos, which in the past Akebono used as an ingredient, we have established the Asbestos Special Committee to take a proactive stance in providing health checks and a hotline for employees and local residents. However, we identify a potential negative effect on the Group's operating results and financial position if a lawsuit or cost burden occurs in relation to health damage of employees who handled products containing asbestos or residents living near manufacturing plants.

9) Disasters

The Akebono Group maintains numerous facilities both within Japan and in overseas markets. Also, our Company establishes crisis management projects to prepare for various contingencies involving the unavoidable stoppage of operations including natural disasters such as earthquakes and typhoons, and disease outbreaks such as new types of influenza. We have in place various countermeasures such as employee safety measures, disaster prevention, early recovery measures, earthquake-proofing buildings of the Group and its suppliers, measures to prevent equipment from toppling over, business continuity plans, preparation of crisis management manuals, and the practice of disaster prevention drills. However, we recognize potential negative influence on some or all of our Group's business activities should production be halted due to damage or collapse of buildings or equipment of an unexpected scale, the severing of lifelines, transportation routes or information infrastructure, and interruption of manufacturing caused by critical factors influencing human resources, which could result in delays of products supplies to customers. Consequently, our business, earnings and financial position may be negatively influenced.

10) Compliance

The Akebono Group has implemented various measures to ensure that its directors and employees are well-versed in how to act in accordance with laws, societal norms and ethics, and to raise their awareness of compliance issues by establishing "Code of Conduct" and "Conduct Standards" on a global basis, distributed "Compliance Manuals," provided various educational programs, established a consultation desk internally to help prevent problems from occurring and define problems at an early stage. Furthermore, we have established a "Compliance Committee" which is responsible for ensuring that strict adherence to compliance guidelines is maintained. Despite these efforts, we cannot guarantee that our goals of attaining complete adherence to compliance will be achieved, and the occurrence of any violations of laws and other compliance issues could negatively impact our business, earnings and financial position.

11) Intellectual Property

The Akebono Group possesses technology and know-how that allows differentiation from the products of competitors. As this technology and know-how is essential for the future growth of the Group, we take great effort to enhance the protection of our intellectual property. Nevertheless, in specific regions the protection of intellectual property may be inadequate or limited. As a result, the potential that we find it impossible to prevent third parties from manufacturing similar products by using the Group's intellectual property exists. Also, we recognize the potential for negative impact upon our Group's operating results and financial position should this situation occur. In addition, our Group may be faced with lawsuits brought against us by third parties, or we may need to pursue litigation in order to protect our intellectual properties. In the event of either of these situations, significant litigation fees may result, our Group may be prevented from using specific technologies, and we may be forced to pay large sums of compensation in the event we are found to be responsible for violations of intellectual property rights. Consequently, our business, earnings and financial position may be negatively influenced in the event that important litigation issues regarding intellectual properties arise.

12) Procurement Environment of Parts, Materials and Components

The Akebono Group procures raw materials, ferrous materials, components, etc. from numerous external suppliers. We identify a potential negative effect on the Group's operating results and financial position if there is trouble concerning procurement of any of these raw materials, ferrous materials, components, etc. causing an increase in the Group's cost of goods sold; for example, soaring prices or unavailability due to market change, delivery delays due to insufficient supplier production capacity as a result of dependence on specific suppliers, defects of supplier-manufactured products, deterioration of business circumstances of suppliers, unforeseen accidents, natural disasters, etc.

13) Fluctuation of Exchange Rates

As part of everyday business, the Akebono Group imports raw materials and components and exports finished products etc., with such transactions involving various geographical regions. Although the Group executes hedging mechanisms such as forward contracts on currency exchange to minimize exchange rate risk, it is difficult to hedge all such risks, and the fluctuation in exchange rates has the potential to create an impact on the operating results and financial position of the Group. Further, the financial statements of Akebono's overseas affiliates are prepared in the local currency. However, when these operating results are included in the consolidated financial statements, the Japanese yen equivalent value is calculated. As a result, cases where the local currency amounts do not change but the amounts on the consolidated financial statements are affected by the foreign exchange rates at the time of conversion. In addition, volatility in interest rates and securities markets may have a profound influence upon our Group's business, earnings, and financial position.

14) Important notes regarding going concern assumptions

The inability of the 100% owned consolidated subsidiary Akebono Brake Corporation (Headquarters: Michigan, United States) to respond to dramatic increases in demand of the North American automobile market from fiscal year 2014 and subsequent increase in labor expenses arising from higher personnel and overtime, and expenses for expedited shipments of parts from other production facilities to maintain delivery schedules caused this subsidiary to realize operating losses for two consecutive terms. Furthermore, large losses arising from impairment accounting introduced for North American manufacturing facilities during fiscal year 2015 necessitated Akebono Brake Industry Co., Ltd. to assume loans and commitment lines from banks, which infringed upon conditions defined by the subsidiary's financial covenants. (However, Akebono Brake Industry Co., Ltd. deliberated with its banks to be exempted from implementation of these financial covenants and has continued to receive both loans and commitment lines from its transacting banks).
While these conditions are identified as grounds for the declaration of important issues related to going concern assumptions, Akebono Brake has disclosed measures to resolve these important going concern assumptions regarding its North American operations as described in "Part 2: Financial Conditions, Section 7: Measures to Resolve Important Going Concern Assumptions Identified within Business Risks and Based upon Analysis of Consolidated Balance Sheets, Statements of Income, and Statements of Cash Flows (5)" of the Securities Reports for the 121st Fiscal Year. Also, Akebono Brake has been able to maintain highly favorable relationships with and has received agreement for new long term financial support from its banks. In light of these conditions, it is deemed that there are no "important uncertainties regarding going concern assumptions".