Business Risks

The following are the major risks that we recognize as having the potential to significantly impact the financial condition, business performance, and cash flow situation of the Sansha Electric Manufacturing Group. The future matters mentioned in the text are as of the submission date of the securities report (June 25, 2024) and are based on the judgment of the Sansha Electric Manufacturing Group.Please note that the translation provided above is a direct translation and may not accurately convey the intended meaning.
Additionally, the likelihood and timing of these risks materializing, as well as the potential impact on our business performance if such risks do materialize, are difficult to reasonably predict, and therefore, are not described.

1.Risks due to fluctuations in the economic environment

Under its management philosophy, the Sansha Electric Manufacturing Group focuses and specializes its management resources in the field of power electronics, particularly aiming to reduce the burden on the global environment through the integration of power semiconductor technology and power equipment technology. We are developing products that realize efficient energy use, energy and resource conservation, and the use of clean energy, while working to expand our business foundation.
Although the Sansha Electric Manufacturing Group adopts a sales strategy that does not rely on specific regions or industries, it is greatly affected by trade regulations, pandemics caused by infectious diseases, changes in economic conditions, and trends in private sector capital investment and infrastructure development. A global economic downturn or a decrease in demand could impact the Sansha Electric Manufacturing Group’s order volume and pricing.

2.Business Risks and Strategic Risks

1. Quality Risks (Product Liability)

   The Sansha Electric Manufacturing Group makes every effort to improve product quality at all stages, from development to shipment, in accordance with quality control standards. However, product defects that could lead to recalls or product liability claims may result in significant costs and have a serious impact on the Sansha Electric Manufacturing Group's reputation, which could, in turn, affect our business performance, such as by reducing sales.

2. Product Development Risks

   The Sansha Electric Manufacturing Group is strengthening efforts to accurately capture customer needs and deliver attractive products to them in a timely manner. However, if there are delays in development or we are unable to supply products on time, it may affect our business performance.

3. Risks related to continuity of partnerships with other companies

   In order to expand sales, the Sansha Electric Manufacturing Group engages in joint business activities in some business fields in the form of OEM supply or consignment production for products in which the Sansha Electric Manufacturing Group has an advantage. Although the Sansha Electric Manufacturing Group strives to develop technologies and improve quality in order to meet the needs of the partner companies, there are cases in which the cooperative relationship cannot continue due to factors at the partner companies as a result of changes in the business environment, which may affect business performance.

4. Fluctuations in material prices.

   The power equipment business of the Sansha Electric Manufacturing Group uses a significant amount of components that include materials such as copper, steel, and resin. While the Sansha Electric Manufacturing Group is committed to cost reduction, improving productivity, and expense reduction, rapid fluctuations in the market conditions of these materials could potentially impact the performance. Due to the lead time from inquiry to order and delivery, delays in transferring the increased material costs to product prices may affect the financial performance.

5. Component Procurement Risks

   The products of the Sansha Electric Manufacturing Group incorporate a large number of externally sourced electronic components and other parts. However, there is a possibility that the lead time for procuring electronic components may be prolonged due to increased demand for 5G-related and automotive parts, making timely procurement difficult. Additionally, for certain materials, procurement is done from overseas sources, and there is a potential risk of being unable to procure them depending on the customs policies of each country. Furthermore, there are risks such as operational risks due to terrorism, regional conflicts, deteriorating international relations, security concerns, increased transportation costs due to soaring oil prices, transportation delays and increased costs due to container supply-demand imbalances.
   The Sansha Electric Manufacturing Group is actively exploring alternative sources for key components and working to minimize the risk of supply chain disruptions. However, if the procurement difficulties persist or unforeseen events occur, there is a possibility that it may impact the performance of the Sansha Electric Manufacturing Group.

6. Risks due to fluctuations in the business conditions of production outsourcing partners.

   The Sansha Electric Manufacturing Group may outsource the assembly process of semiconductor products and the production of power equipment products to external partners. However, there is a risk that fluctuations in the business conditions of these production outsourcing partners could lead to increased outsourcing costs and the inability to secure the necessary production quantities for sales. The Sansha Electric Manufacturing Group strives to maintain close collaboration with its production outsourcing partners and proactively monitor changes in their business conditions to minimize risks. However, in the event that these risks materialize or unforeseen circumstances such as the bankruptcy of outsourcing partners occur, there is a possibility of impacting the financial performance of the Sansha Electric Manufacturing Group.

7. Risks Related to International Affairs

   The Sansha Electric Manufacturing Group actively promotes global expansion as one of the themes of its medium-term management plan, establishing sales and production bases overseas.
   The Sansha Electric Manufacturing Group addresses geopolitical risks/country risks by collecting information on geopolitical risks/country risks through its overseas business division and overseas subsidiaries, and implementing avoidance measures for each case. However, in the event of social, political, economic, cultural, religious factors, local laws, regulations, or systems, as well as social disruptions caused by war, riots, terrorism, infectious diseases, or epidemics, and natural disasters such as earthquakes or typhoons, various risks may materialize. These risks could potentially impact the group's performance, including increased transportation costs due to rising oil prices, factory shutdowns, or uncollectible debts.

8. Risks related to competition

   The Sansha Electric Manufacturing Group faces competition from other companies both domestically and internationally. The group continuously invests in research and development, strives for further improvement in product quality, enhances local sourcing of raw materials, reduces production costs, and strengthens its maintenance service capabilities to differentiate itself from competitors. However, there is a possibility that unexpected intense price competition could lead to a decline in sales prices, impacting the group's performance.

9. Risks Related to Information Security

   The Sansha Electric Manufacturing Group may obtain personal and confidential information of customers and business partners through its operations. To prevent unauthorized access, tampering, destruction, loss, or leakage of such information due to cyber attacks or other incidents, the group has implemented security measures, including strengthening security, managing outsourcing partners, and providing employee education. However, there is still a possibility that unforeseen cyber attacks, human errors, theft, or other incidents could lead to the leakage, destruction, tampering, or disruption of information systems, which could impact the group's performance.

10. Securing human resources

    To maintain its competitiveness and continue to grow in the future, the Sansha Electric Manufacturing Group needs to secure talented personnel on an ongoing basis. The group is working to secure and develop human resources through enhanced employment systems and training programs. However, in recent years, competition to acquire capable talent has intensified against the backdrop of Japan's declining working population. If the Sansha Electric Manufacturing Group is unable to secure sufficient personnel, it may hinder business expansion and potentially impact performance.

11. Risks related to intellectual property

    The Sansha Electric Manufacturing Group considers intellectual property to be a source of competitive strength and one of the most important management resources. By securing rights, managing, and utilizing intellectual property, the Group aims to maintain and enhance its corporate and brand value. As the Group expands its business globally, there is a possibility that its intellectual property rights may be infringed, which could affect the Group's business performance and financial condition. To address this, the Group continuously gathers information on counterfeit products and implements appropriate measures.
    Furthermore, the Group is mindful of not infringing upon the intellectual property rights of third parties, and it conducts prior investigations during product development. However, in the event that the Group infringes on a third party’s intellectual property rights, there is a possibility that it could face claims for damages or other legal actions, including payment of compensation, which may impact its business performance and financial condition.

3.Environmental Risks

1. Legal Regulations

   The Sansha Electric Manufacturing Group sells its products overseas through its company, subsidiaries, and agents. In Europe, the Group is subject to regulations such as the RoHS directive (restriction of the use of certain hazardous substances), and in China, to the China RoHS directive, among others. The Group conducts its business activities by implementing quality management based on quality control standards that comply with these regulations and strives to promptly grasp trends in regulatory revisions. However, in the event that unforeseen circumstances prevent compliance with these regulations, or if future legal rules and regulations are amended, leading to increased costs for compliance or inadequate adaptation to such amendments, there is a possibility that these factors may impact the Group's business performance.

2. Chemical Substance Management

   The Sansha Electric Manufacturing Group uses various chemical substances in its production activities. While thorough measures are taken in accordance with standard operating procedures and guidelines for handling these substances, in the event of an accidental release of chemicals outside the company, there could be an impact on business performance due to the loss of social trust, costs related to compensation and countermeasures, and the suspension of production activities.

3. Other environmental regulations and climate change-related matters

   The Sansha Electric Manufacturing Group is subject to environmental regulations, including waste reduction, air pollution prevention, and water quality protection. Furthermore, efforts to reduce greenhouse gas emissions are being strengthened globally. Therefore, the Sansha Electric Manufacturing Group considers the preservation of the global environment as a "responsibility to future generations" and has invested many management resources into reducing environmental impact, making it one of our top priorities. However, in the event of unforeseen environmental pollution due to accidents or natural disasters, or if unexpected regulations are established leading to delays in our response, there may be an impact on the performance of the Sansha Electric Manufacturing Group.

4.Financial Risks

1. Exchange rate fluctuations

   The production, sales, and procurement activities of the Sansha Electric Manufacturing Group target the entire world. Therefore, we strive to balance foreign exchange; however, the foreign currency-denominated receivables and payables that arise as a difference are subject to measures such as foreign exchange reservations to hedge the risks associated with fluctuations in foreign exchange rates.
   While it is possible to mitigate the impact of foreign exchange rate fluctuations through foreign exchange reservations and balancing foreign exchange, it is impossible to eliminate all effects, which may have some impact on our performance.
   Additionally, as we have established sales subsidiaries in each major market, we convert local currency items, including sales, expenses, and assets in each region, into yen for the preparation of consolidated financial statements. The values of these items may be affected by the exchange rate at the time of conversion, even if the local currency's value remains unchanged, thus potentially impacting our performance.

2. Fluctuations in interest rates

   Although the Sansha Electric Manufacturing Group takes measures to avoid the risk of interest rate fluctuations, fluctuations in interest rates may affect the Group's financial results.

3. Decline in stock prices

   The Sansha Electric Manufacturing Group holds stocks, and there is a possibility that a decline in future stock prices may require recognition of valuation losses on the held stocks, which could impact the Group's performance.
   Regarding the continuation or reduction of stock holdings, the Sansha Electric Manufacturing Group has a policy of examining whether it would be beneficial to the Group and deliberating on it at the board of directors' meetings.

5.Treasury Risks

1. mpairment of long-lived assets

   The Sansha Electric Manufacturing Group holds significant long-term assets, such as tangible fixed assets. We regularly assess whether the carrying amount of these long-term assets on the consolidated balance sheet can be recovered based on the future cash flows expected to be generated from these assets.
   If the assets are not expected to generate sufficient cash flows, there is a possibility that impairment losses may need to be recognized.

2. Retirement benefit obligations

   The Sansha Electric Manufacturing Group handles retirement benefit obligations in accordance with Japanese accounting standards. However, if the actual results differ from the assumptions used in calculating retirement benefit expenses and obligations (such as discount rates and long-term expected return on assets), or if there are changes in the underlying assumptions or a deterioration in the investment environment for pension assets in the future, there may be actuarial differences. In such cases, there is a possibility that the occurrence of retirement benefit obligations and the recognition of retirement benefit expenses may be affected, potentially impacting the performance of the Sansha Electric Manufacturing Group.

3. Deferred tax assets

   The Sansha Electric Manufacturing Group carefully assesses the future recoverability of deferred tax assets and recognizes the amount that is deemed recoverable. However, if there are temporary differences that are determined to be unrecoverable due to factors such as a deterioration in the business environment, an increase in taxable income in the future periods when the differences are expected to reverse, the amount of corporate tax adjustments may increase, potentially impacting the performance of the Sansha Electric Manufacturing Group.

4. Changes in accounting and taxation systems

   The Sansha Electric Manufacturing Group may be subject to potential impacts on its performance due to the unexpected introduction or changes in accounting standards or tax regulations. Additionally, there is a possibility of unforeseen tax burdens arising from differences in interpretation with tax authorities during tax filings.
   The Sansha Electric Manufacturing Group is committed to obtaining timely information on regulatory changes from experts and making appropriate responses to ensure compliance.

6.Natural disaster Risks and pandemics

In the event of a natural disaster such as an earthquake or a pandemic caused by infectious diseases, there is a possibility that the manufacturing and sales bases of SanSha Electric Manufacturing Group may suffer significant damage, making normal business operations difficult. Furthermore, even if our group does not directly suffer any damage, there is a possibility that our production, logistics, and sales activities may be hindered due to damages incurred by our customers and business partners.
To ensure prompt initial response and early recovery and continuity of business operations in the event of an earthquake disaster, SanSha Electric Manufacturing Group has implemented a safety confirmation system, conducted disaster prevention training, and formulated a Business Continuity Plan (BCP). However, in the event of an actual occurrence, there is a possibility that the interruption of operations at our production bases, damages to facilities, and substantial recovery costs may impact our performance.

Please refer to this section for "Risk Management"