The management performance of the Furukawa Electric Group is affected by the economic conditions in the various markets in which the group sells products and provides services.
The risks that have the potential to impact the group’s financial results, share price and fiscal situation include the following. Also, as indication the company recognizes the risks to group management, the risk items and details are being revised starting from the previous consolidated fiscal year with consideration for better aligning them with the group’s materiality and ESG management.
Forward-looking statements reflect judgments made by the Furukawa Electric Group as of March 31, 2021.

Management strategy
(Business portfolio and business reorganization)

Details
  • Risk of impact on the group’s business performance due to an inability of the business structure to respond to changes in the economic trends or market environment
  • Risk of impact on the group’s business performance due to an inability to generate the expected profit or benefits as a result of deteriorating market conditions following the conclusion of an M&A or external partnership
Main initiatives taken in response

Create new businesses and revise the portfolio in order to expand the businesses

  • Set internal criteria for business downsizing or withdrawal
  • Clarify the objective of the acquisition or partnership and grasp the asset details and risks in advance
  • Make acquisitions at appropriate prices based on the risks and profits
  • Quickly recover the investment after the acquisition or partnership

Climate change

Details
  • Soaring raw material costs and manufacturing costs due to carbon taxes enacted in line with government policies or GHG emissions targets in each country
  • Suspension of manufacturing operations due to a natural disaster arising from increasingly severe abnormal weather
  • Exclusion from the supply chain or market due to an insufficient response to climate change
Main initiatives taken in response
  • Established the Environmental Vision 2050 in March 2021 and set a challenge target of achieving zero GHG emissions
  • Declare support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and conduct scenario analysis
  • In addition to the use of hydroelectric power in the Nikko area, install solar power and switch to procuring renewable energy in Japan and overseas
  • Grasp the risk of natural disasters linked to climate change and formulate responses

Human resources and organizations

Details
  • Poor work engagement among employees, the driving force of sustainable corporate growth, results in insufficient corporate value growth
  • Shortage of personnel due to a net outflow of employees, inability to hire new employees or insufficient training
Main initiatives taken in response
  • Prepare an environment for supporting individual growth and securing diverse personnel who will drive the growth of the group directed at achieving the Furukawa Electric Group Vision 2030 (diversify the forms of employment and introduce/ revise the various systems)
  • Through the group’s “work style reform activities”, promote new work styles that are not limited to designated places or times
  • Continue and enhance the initiatives to strengthen the ability of individuals and the organization to execute, such as Furukawa Seven aimed at transforming leadership

Human rights

Details
  • Exclusion from the market due to a potential or actual negative impact on human rights resulting from an inability to fulfill the corporate responsibility to respect human rights
Main initiatives taken in response
  • Express support for the 10 Principles of the UN Global Compact, which includes principles concerning human rights
  • Establish a human rights policy for the group that specifies respect for the human rights of all people involved in the business activities
  • Revise the CSR procurement guidelines to include a response to human rights risks in the supply chain

Governance

Details
  • Insufficient sustainable growth and corporate value improvement due to decreased functioning of corporate governance or group governance
  • Risk of a conflict of interest between the company and minority shareholders of listed subsidiaries
Main initiatives taken in response
  • Focus on strengthening corporate governance with the aim of achieving sustainable growth or higher medium- to long-term corporate value
  • Expand the personnel with different knowledge and experience within the overall Board of Directors and Audit & Supervisory Board
  • Make the group’s risk assessments more sophisticated, and strengthen group governance
  • At listed subsidiaries, increase the ratio of independent directors on the Board of Directors to more than one-third of board members, and establish a Conflicts of Interest Management Committee comprising a majority of independent directors as the organization for assessing the rationality and fairness of transactions with the parent company

Impact of disasters or infectious disease

Details
  • Disruption of a customer or supplier supply chain due to a large-scale earthquake, tsunami, fire, typhoon, flood, other natural disaster, infectious disease, war or act of terrorism
  • Suspension of business operations due to a natural disaster, accident or infectious disease at an overseas site
  • Suspension of business operations due to a large cluster of infections among employees
Main initiatives taken in response
  • Promote business continuity management (BCM) in accordance with ISO22301
  • Ensure employee safety by designating and revising a business continuity plan and safety confirmation system
  • Establish data centers in earthquake resistant facilities with a stable communications environment
  • Diversify the supply chain
  • Prepare and revise business continuity plans for the overseas locations

    [Response to COVID-19]

  • Utilize remote operations and work to maintain and increase customer trust
  • Conduct credit investigations and manufacturing sites surveys of customers and suppliers
  • Permit employees to work from home and utilize remote meetings and events
  • Designate guidelines for customer visits and business meals, and formulate management and reporting criteria in the event of becoming sick, such as a fever

Information security

Details
  • Unauthorized use or system failure resulting from a data leak caused by an external or human factor, such as a cyberattack or unauthorized access
  • Increased security risks due to the use of legacy systems
Main initiatives taken in response
  • Based on the information security basic policy, strengthen security governance, provide education and conduct support activities for the group
  • Protect information assets through measures such as enhancing network security from a zero trust perspective
  • Implement medium-term initiatives to update the legacy systems

Employee health and safety

Details
  • An employee suffers death, inability to work, permanent disability, long-term leave of absence or health impairment due to an occupational accident, traffic accident or illness
Main initiatives taken in response
  • Firmly implement the three pillars of the safety promotion activity (impart and implement safety related knowledge through safety personnel training, make the facilities safer through activities to promote true safety and establish a safety-oriented organization by improving the level of safety management)
  • Maintain the occupational healthcare system centered on the occupational physician, and implement measures to improve employee health literacy through follow-up on the health checkup results, instruction and education
  • Implement measures for smoking, metabolic syndrome, mental health, improved physical function and heat stroke through the health management policy set forth every year based on the medium-term occupational healthcare plan
  • Thoroughly enforce the measures to prevent infectious diseases and respond to persons who are sick, such as a fever, through diagnosis by the occupational physician

Raw material procurement

Details
  • Supply delay or shortage due to a natural disaster or accident
  • Supply shortage or stoppage due to reliance on particular suppliers
Main initiatives taken in response
  • Purchase from multiple suppliers and decentralize manufacturing
  • Optimize inventory levels
  • Stable procurement through long-term contracts

Product defects

Details
  • Risk of unexpected damage compensation claims in the future due to a defect (in particular, for products related to power cable, telecommunication cable and automotive products, significant costs may be incurred depending on the nature of the defect)
Main initiatives taken in response
  • Along with aiming to realize the quality expected by customers and striving to prevent potential problems, continue the activities to improve the problem solving ability
  • Create quality control guidelines and strengthen the quality management system based on those guidelines
  • In preparation for damage compensation claims, enroll in product liability insurance and product recall insurance

Deteriorated project profitability

Details
  • Design change after the project has commenced, or higher construction material and labor costs
  • Occurrence of additional expenses during a submarine cable laying project due to the impact of weather events such as typhoons or the ocean conditions
  • Payment of repair costs or damage compensation and long-term extension of the defect warranty in the event of the occurrence of a severe defect, accident, or following project delay
  • Change to a law or regulation, change in the situation of the contractor, political instability, disaster, infectious disease or exchange rate fluctuation in the country in which the overseas project is located
  • Deterioration in the yen conversion of foreign currency denominated contracts
Main initiatives taken in response
  • Strictly identify the scope of the warranty, specifications and breakdown of responsibility for the items and construction work, analyze the inherent project risks and formulate a policy for estimates. At the same time, strengthen the activities aimed at concluding agreements with rational terms and conditions
  • Mitigate the risks by appropriately monitoring the project progress and profitability status during the execution phase
  • Hedge the risks through builder’s risk insurance

Environmental pollution and environmental regulations

Details
  • Occurrence of a problem in relation to environmental conservation due to the leak of toxic substances during the manufacturing process, and new capital expenditures or costs following a revision to an environmental law or regulation
  • Restrictions on the use or disposal of land
  • Additional costs following the enactment of stricter regulations concerning the handling of soil contamination and toxic substances such as asbestos and PCBs that occurred during past manufacturing activities
  • Risk of losses and expenses for a product recall or suspended production and sales due to a violation of a country’s regulation concerning the content of chemical substances in products, such as the RoHS Directive and REACH regulation
Main initiatives taken in response
  • At the group’s manufacturing sites, based on the environmental management system (ISO14001), thoroughly comply with the various environmental regulations related to the business activities and implement conservation measures
  • Concerning the regulations for chemical substance contents in products, issue green procurement guidelines and apply them to business partners, and conduct regular checks within the group in response to the enactment of stricter regulations

Asset impairment

Details
  • Impairment of an asset due to decreased profitability caused by deteriorated market conditions or business environment
Main initiatives taken in response
  • Appropriate deliberation of the investment plan by the Investment Committee and at the Management Meeting
  • Regular monitoring and follow-up after making the investment

Intellectual property

Details
  • Risk of direct damage and lost opportunities in relation to a business due to a legal dispute with a third party following conclusion of an insufficient technology agreement or a legal dispute or negotiations regarding the violation of a third party’s intellectual property rights
  • Risk of decreased corporate competitive advantages due to the leak of technology and know-how or imitation products
Main initiatives taken in response
  • Conduct sufficient investigations and confirmation of technology agreements to ensure a third party’s rights are not violated
  • Maintain the confidentiality of technology in the development and production workplaces, protect information through the use of time stamps and check external announcements including press releases
  • Provide ongoing education regarding legal compliance to the group and regularly provide information on lowering intellectual property risks

Legal violations(Note)

Details
  • Establishment and maintenance of a compliance system
  • Increased costs and business restrictions due to stricter interpretation of existing laws and new regulations by the regulatory authorities in the countries in which the group operates
  • Following the occurrence of a legal violation, administrative actions or sanctions are levied by the regulatory authority, claim for damage compensation is received from an affiliated party such as a business partner or there is a negative impact on the company’s social reputation
  • Risk of administrative action after exporting to an embargoed country, violation of the foreign exchange law or application of export control regulations or laws outside the region in the United States or China due to the deteriorating relationship between the United States and China
  • Compliance violation concerning a law or regulation in a particular country
  • Improper accounting or accounting fraud at an overseas site
Main initiatives taken in response
  • Along with conducting a compliance self-check every year, hold compliance seminars in Japan and overseas and provide education within the group including from the perspective of competition laws and preventing bribes
  • Conduct internal audits and provide education regarding export controls and tariffs. Coordinate with a specialist attorney for overseas export control laws
  • Through the regional headquarters in Southeast Asia and China, start integrating procurement, accounting and HR operations at the locations in each region
  • Conduct oversight through financial analysis using data analytics

(Note) The company is currently under investigation by the competition authority of Brazil in regards to an automotive products cartel. Also, the company and its consolidated subsidiaries have been named as the defendant in a class action lawsuit filed in the United States seeking damages in relation to a series of automotive product cartels and lawsuits filed by judiciary authorities in several states in the United States. In addition to these lawsuits, the company and its affiliates may pay civil damages, including the damages currently being claimed by customers including automotive manufacturers, in relation to past violations of competition laws, including automotive product cartels.

Raw material and fuel price fluctuations

Details
  • Rapid fluctuations in the price of non-ferrous metals such as copper and aluminum, plastics such as polyethylene and fuels such as heavy fuel oil, LPG and LNG due to changes in the supply and demand balance, speculative transactions and global affairs
Main initiatives taken in response
  • Reflect the market prices for raw materials in the product sales price
  • Hedges using futures contracts
  • Reduce costs and conserve energy during production activities
  • Disperse the risk of price fluctuations through procurement from multiple sources

Exchange rate, interest rate and share price fluctuations

Details
  • Fluctuations in the yen-denominated value of overseas import and export transactions and receivables and debt denominated in foreign currency
  • Fluctuations in the yen-denominated balances in the non-consolidated financial statements prepared in the local currency at overseas consolidated subsidiaries (Annual profit is expected to decrease by JPY 0.3-0.4 billion for every 1 yen appreciation in the JPY/USD exchange rate)
  • Higher capital procurement costs due to rising interest rates
    (Interest-bearing debt as of the end of the current consolidated fiscal year is JPY 290.6 billion)
  • Increased retirement benefit costs and additional capital infusions from the company due to lower market value of the pension assets
Main initiatives taken in response
  • Utilize forward exchange contracts
  • Properly balance the transaction amounts denominated in a foreign currency
  • Limit the rise in capital procurement costs from higher interest rates by procuring capital mainly under long-term fixed rate terms
  • Reduce interest-bearing debt based on the financial structure improvement policy and improvement of capital efficiency through the cash management system (CMS)
  • Structure the asset management portfolio to reduce management risk

Capital procurement

Details
  • Poor terms and conditions or potential inability to procure capital due to a deteriorating financial market environment
  • Poor terms and conditions or potential restrictions on capital procurement due to decreased credit standing following deterioration in the financial situation of the company
Main initiatives taken in response
  • Secure multiple means of capital procurement and spread out the repayment timing
  • Establish commitment lines and secure a certain level of capital on hand
  • While balancing with lower capital procurement costs, increase the ratio of long-term borrowing
  • Improve the financial position of the company

Credit management

Details
  • Occurrence of bad debt due to an inability to collect accounts receivable after a business partner goes bankrupt
Main initiatives taken in response
  • Regularly monitor business partner information and delinquent accounts
  • Credit protection by setting collateral

Tax compliance

Details
  • Taxes are incurred as a result of the transfer pricing tax system or revisions to tax schemes in each country and in relation to international transactions
  • Additional taxes are incurred due to differences of opinion with the tax authorities in each country
Main initiatives taken in response
  • Increase awareness of tax accounting compliance by setting forth a basic policy for tax accounting
  • Implement responses to tax law compliance, changes to tax schemes and tax administration in each country