Business and Other Risks
The following examples of risks represent those matters related to business and finance as disclosed in our annual securities report which may impact OMRON Group operating results and financial condition (including stock price). We believe the following are matters that may have a material impact on investor decisions.
Matters discussed here that are not historical fact reflect the judgment of OMRON Group management as of the date of submission of this annual securities report (June 24, 2020).
The rapid worldwide spread of COVID-19 has had a major impact on OMRON Group business activities, which we conduct on a global scale. In late January 2020, the OMRON Group acted quickly in response to the spread of COVID-19 for the sake of employee safety and business continuity, launching a PandemicTask Force. Led by our CEO, the Pandemic Task Force has since been working closely with each OMRON Group company around the world, prioritizing the health and safety of our employees and the prevention of the spread of infection in regions where we operate. At the same time, we are working to arrange delivery of support materials to employees working in regulated areas, to expand options for telecommuting by providing improved IT environments, and to provide support via other measures. Assuming the future will be a With-COVID-19 business environment, we will continue to ensure the safety and security of our employees and to prevent the spread of infection in these regions. In this way, we will accomplish our responsibility to supply our customers and meet our role in social responsibility. While we suspended operations at some OMRON Group production centers temporarily beginning in January 2020, we restored operations to near pre-pandemic levels by the end of May. On the other hand, demand continues to decline due to the suspension of customer business activities, stagnant capital investment, and sluggish private consumption. In order to prepare for slowing business due to decreased sales, the OMRON Group began operations in April intending to reduce annual fixed costs on the order of ¥20.0 billion in Fiscal 2020, while retaining an appropriate level of cash on hand. We took these actions to secure liquidity and ensure stable business operations in the event of an emergency. At the same time, we are accelerating efforts to link business opportunities to new social issues arising in the post-COVID-19 world.
(2) Economic Conditions
The OMRON Group conducts business globally. Accordingly, trends in related markets and/or macro scale developments in various countries and regions may have a negative impact on OMRON Group operating results or financial condition. The OMRON Group strives to build a business structure supporting profitability and competitiveness to better withstand changes in the external environment. We do so by generating growth businesses that address social issues and by continuing to engage in ROIC management. Specifically, we are optimizing our business portfolio, focusing our management resources in factory automation, healthcare, and social solutions businesses and in the devices and modules that support these businesses.
(3) Exchange Rate Fluctuations
As the OMRON Group is engaged in active business development in overseas markets, we anticipate overseas businesses to represent an even greater share of our total business in the future.
Dramatic long-term foreign exchange rate fluctuations in the Japanese yen versus major currencies such as the US dollar, the euro, the Chinese yuan, or the currencies of emerging economies could have a negative impact on OMRON Group operating results or financial condition.
Accordingly, the OMRON Group is building an earnings structure with greater resiliency in the face of foreign exchange rate fluctuations. These measures include improving the balance of foreign currency denominated transactions by increasing expenditures in foreign currencies (expanding our production bases overseas, increasing local procurement, etc. in the near term). We also engage in foreign currency hedges over the short term through forward exchange contracts with financial institutions.
(4) Capital Procurement
The OMRON Group procures capital required for capital investment, M&A, or other circumstances in consideration of prevailing interest rates, the external macroeconomic environment, and other OMRON Group circumstances. Accordingly, instability in the financial markets could result in limitations on capital procurement and an increase in the cost of capital. Such events could have a negative impact on OMRON Group operating results or financial status.
Therefore, the OMRON Group secures cash on hand in accordance with economic and financial market conditions and establishes liquidity by entering into commitment line agreements with financial institutions. In addition, we have obtained a long-term credit rating of stable from a rating agency, maintaining a strong ability to procure funds. By conducting group finance on a global basis, we are building a flexible cross-region funding supply system to respond to the global funding needs of each company in the OMRON Group.
(5) Business Continuity Risks Associated with Natural Disasters and Infectious Disease Outbreaks
The OMRON Group operates production centers in China, Asia, and other regions around the world. We deliver products to our clients globally through sales centers in these countries and regions. As well, the OMRON Group receives parts and other items from suppliers located across the world. In this way, the OMRON Group conducts business activities through a global supply chain. Considering the recent increase in the scale of disasters associated with climate change and the outbreak of unprecedented infectious diseases, it is conceivable that unexpected disasters and infectious diseases could lead to widespread suspensions of social functions. Unexpected disasters (natural disasters, fires at business partner locations, etc.) and infectious diseases could interfere with our ability to procure components from suppliers or supply products to customers. It is difficult to completely avoid the risks associated with natural disasters, infectious diseases, and other such events. If the business activities of the OMRON Group are partially suspended or curtailed, such events could have a negative impact on OMRON Group operating results or financial condition.
Therefore, the OMRON Group has devised business continuity planning for our supply chain, including production, purchasing and procurement, logistics, and IT. These measures provide necessary safety measures, business continuity, and rapid recovery in response to infectious diseases (pandemic influenza, COVID-19, etc.), large-scale earthquakes (major earthquakes along the Nankai Trough, earthquakes centered directly below Tokyo, etc.), and other disasters. We also conduct simulations and training for emergency scenarios, raising crisis awareness among executives and employees. We update business continuity plans to ensure their effectiveness. Further, we have established a system to centrally manage information related to production areas of components and quickly identify supply risks related to these components in the wake of a disaster or outbreak of infectious disease. In the event of a disaster or outbreak of infectious disease, purchasing and procurement departments are able to check immediately for any obstacles impeding component procurement and take necessary measures. In addition, we maintain inventories of components at certain levels according to the importance of the part in question.
(6) Information Security
The OMRON Group possesses important business information, as well as personal or confidential information obtained from business partners during the course of business. This information is subject to a number of potential risks, including misuse by a third party through theft, loss, etc., violation of laws and regulations, cyberattacks greater in degree than anticipated, or other unforeseen circumstances. These circumstances may cause destruction, alteration of important information, information leakage, or may even lead to system interruptions. These threats grow in intensity by the year. The result of such events could have a negative impact on OMRON Group operating results or financial condition.
Therefore, the OMRON Group takes action to respond to stricter laws and regulations related to protection of personal information, including establishing a management system and rules for information security, conducting employee education to enhance information literacy, monitoring information handling (including among subcontractors), and analyzing risk cases. Further, we take action to strengthen technological measures, evolve cyberattack response, and bolster IT governance.
OMRON Group products may be used in a variety of unforeseen environments. We cannot guarantee that all products will be completely free of defects, nor can we guarantee there will be no product recalls. The country of Japan requires ever-higher levels of consumer protection measures, while interest in quality continues to rise overseas. Accordingly, we may experience large-scale recalls due to product defects or loss of trust, brand value, or sales due to errors in initial risk response. The result of such events could have a negative impact on OMRON Group operating results or financial condition, as well as on our reputation in society.
The OMRON Group has established quality assurance systems certified under the international ISO9001 standard. We develop and manufacture products and services according to these standards, subject to a system of quality checks. The group strives to improve product and service quality continuously, including the performance of quality audits. Through these efforts, we aim to maximize customer satisfaction and provide better products and services in our pursuit of a quality first policy.
(8) Laws and Regulations
As the OMRON Group conducts global business activities, we are subject to a variety of laws and regulations, including those related to labor, personal information protection, security export control, anticorruption, antitrust, and more. As new regulations and laws are passed, revised, or become subject to stricter interpretation each year, the OMRON Group may be deemed to have violated laws and regulations by a governing agency. In this case, the group may be subject to fines or other administrative penalties, criminal punishment, or litigation for damages, which could have a negative impact on the OMRON Group reputation in society, as well as on our operating results or financial condition.
Therefore, we emphasize corporate ethics and compliance as one of the most important issues with respect to our corporate management activities and our responsibilities to society. We place particular priority on preventing anti-competitive behavior (cartels, etc.), bribery, and other important risks. Specifically, we have established the OMRON Group Management Policy and the OMRON Group Rules for Ethical Conduct. These policies are behavioral guidelines for executives and employees to practice corporate management in accomplishing the OMRON Group's responsibilities to society. We work to communicate these policies and to ensure rigorous legal compliance. Further, we have appointed a corporate ethics and compliance promotion manager and we have established the Corporate Ethics and Risk Management Committee to promote corporate ethics and compliance. Our CEO regularly issues directives related to rigorous corporate ethics and compliance. These communications provide further opportunities to emphasize our policies. We conduct regular training for executives and employees related to anti-competitive behavior (cartels, etc.), bribery, and other corporate ethics and compliance topics. In addition, we have set up internal and external whistleblowing hotlines to receive reports about acts that violate the OMRON Group Rules for Ethical Conduct, work rules, or laws and regulations, or other actions that may lead to such violations. The details of these reports are kept confidential in keeping with laws, regulations, and internal rules. Persons issuing reports using hotlines are never penalized in reprisal for their reports. The OMRON basic policy for exclusion of anti-social forces is specified in the OMRON Group Management Policy and the OMRON Group Rules for Ethical Conduct.
(9) Geopolitical Risks
The OMRON Group has production centers in China, Asia, and other regions around the world. We deliver products to our clients globally through sales centers in these countries and regions. International relations are changing more, including bilateral relations, such as the United States and China, and multilateral relations, such as the British exit from the EU. Changes in policies and laws, increased tariffs, or limitations on product and technology export by countries of interest could limit production, logistics, and sales activities. These developments could impede the delivery of products to our customers, having a negative impact on OMRON Group operating results or financial condition.
Therefore, the OMRON Group regularly monitors global political and economic conditions and trends in laws and regulations, implementing measures in response to the latest developments. Specifically, we analyze and evaluate policies such as tariff increases in major countries, export restrictions, and emerging technology trading restrictions based on security export controls. We review transaction formats and supply chains as necessary, working to reduce the impact on our business. We also strive to diversify risks by manufacturing products in parallel at multiple locations.
(10) Labor Safety
An occupational accident could occur in connection with the business activities of the OMRON Group due to an unforeseen circumstance that impacts employees and/or facilities. Such events could have a negative impact on OMRON Group operating results or financial condition if the accident impedes our ability to provide products or services to our customers. In addition, inconsistencies in occupational safety and health management could have a negative impact on the OMRON Group reputation in society.
Therefore, we pursue third-party certification under ISO45001 and other international standards to ensure labor conditions and work environments where employees can work in safety and good health. We also formulate annual activity plans for the OMRON Group as part of our efforts toward occupational safety and health management on a global basis. Other measures include audits for site compliance with laws and regulations related to occupational safety and health, assigning personnel to manage occupational safety and health, and analyzing occupational accident data.
(11) Environmental Preservation
The OMRON Group is subject to a variety of environmental laws and regulations related to climate change, air pollution, water pollution, toxic substances, waste, product recycling, soil pollution, and ground water pollution. These laws and regulations are becoming stricter every year in the countries where the OMRON Group is active. Compliance with future environmental laws and regulations, obligations to add initiatives for environmental improvement, or response to environmental regulations may become exceedingly difficult. Further, we may incur increasing environmental costs due to unforeseen circumstances, experience business interruptions of business due to violations of environmental regulations, or lose customers due to non-compliance with environmental regulations. The result of such events could have a negative impact on OMRON Group operating results or financial condition, as well as on our reputation in society.
Therefore, the OMRON Group has established an environmental management system based on ISO14001 and other international standards. Our system has received third-party certification and we are conducting initiatives to comply with environmental laws and regulations. To achieve the OMRON Group long-term vision, we have established the OMRON Group Environmental Policy. Under this policy, we strive to reduce our environmental burden stemming from our product lifecycle across the entire value chain, from product planning to development, design, procurement, manufacturing, distribution, sales, maintenance service, resource recovery and reuse, and disposal.
(12) Component Procurement
The OMRON Group procures components from suppliers through a global supply chain. If inconsistencies in supplier management result in a poor state of management that leads to stoppages in component supply or impedes the delivery of products to our customers, such events could have a negative impact on OMRON Group operating results or financial condition. Further, the OMRON Group is experiencing increasing social demands related to ESG throughout our entire supply chain. These demands include our response to conflict minerals, our environmental footprint, and more. If inconsistencies in responses by component suppliers impacts component procurement or product sales, such events could have a negative impact on OMRON Group operating results or financial condition. These developments could also negatively impact the OMRON Group reputation in society.
Therefore, the OMRON Group utilizes third-party organizations to regularly evaluate management risks related to suppliers, including the financial information of suppliers, and takes action according to risk levels identified. In addition, we have established and operate a mechanism whereby we provide suppliers sustainable procurement guidelines. We regularly check supplier compliance with these guidelines (e.g., through assessments at procurement sites) and request improvement in the case of any inconsistencies. For example, conflict minerals have come under increased societal scrutiny in recent years. Here, we conduct annual surveys, disclose our efforts on our website, and disclose these survey results in response to customer requests.
(13) Intellectual Property Rights
As the OMRON Group conducts business activities, we may be subject to claims that we are in violation of the intellectual property rights of a third party, resulting in a dispute. Further, disputes related to awards for inventions may occur between the OMRON Group and the inventor. Third parties may make unauthorized use of OMRON Group brand names or may manufacture and sell products resembling OMRON Group products, damaging our organization. Furthermore, it is a difficult task to find and deal with all unauthorized uses of domain names. Accordingly, the use by another party of an identical or similar domain name may result in commercial transactions that damage trust in the OMRON Group. A major dispute of this kind related to intellectual property could have a negative impact on OMRON Group operating results or financial condition.
Accordingly, we survey the intellectual property rights of third parties in connection with our own research and development and design. In addition, we have established a merit system and take appropriate measures with respect to employees who have created inventions. Conversely, we regularly carry out counterfeit product detection activities on e-commerce websites and in other markets in response to the unauthorized use of OMRON Group brand names by third parties. Such unauthorized use has been increasing overseas in recent years. We take steps to prevent the malicious acquisition of trademark rights identical or similar to OMRON Group brand names. If a domain name similar to the OMRON Group's brand names is in use and the content of said domain's website infringes on our trademark rights, we take measured deemed necessary, including filing an injunction against the use of the domain.
(14) Crisis Response Measures
The OMRON Group maintains locations and business partnerships across a variety of regions around the world. We have built a global supply chain through which we conduct our business activities. Latent risks in our operations are always in a state of flux and if any risks arise, such could result in a crisis for the OMRON Group. Failure to respond to such a crisis could lead to an increased scope of damage within the OMRON Group. Advancements in IT technology mean that an inappropriate disclosure of information could spread immediately throughout society via social media and other channels. Such inappropriate disclosure could lead to a negative impact on the OMRON Group reputation in society and on our operating results or financial condition.
Therefore, the OMRON Group has defined crisis response policies, systems, and procedures under the OMRON Group Rules for Integrated Risk Management. In accordance with the procedures stipulated in these group rules, we report and communicate information, forming response teams as necessary in the event of a crisis. To carry out crisis response or other risk management measures appropriately and on a global basis, we have assigned risk managers to head efforts at each site. Matters critical for crisis preparation are deliberated in the Corporate Ethics & Risk Management Committee. We also carry out crisis response drills and conduct other training to respond promptly and appropriately in the event of a crisis. To respond to crises properly, we strive to understand trends in traditional media, social media, and other channels so we can disclose information in a timely and appropriate manner.