Business and other risks

Market- and business-related risks

In addition to appointment the Representative Director of a Risk Management Officer to coordinate risk management overall, the TS TECH Group has established the Global Risk Management Committee to advise the Executive Committee. In these ways, we strive to identify, assess, and prevent various potential risks in business management.
Major risks recognized by management as having the potential to cause major impacts on the financial standing, business results, and cash flow of consolidated Group companies from among the matters related to business, accounting, and other conditions covered in the Securities Report are described below.
Except as noted otherwise, forward-looking statements in the text below reflect the TS TECH Group's as of the end of the current consolidated fiscal year.

(1) Risks related to product manufacture and sale

(i) Dependency on sales to Honda Motor Co., Ltd. and its group companies

Honda Motor Co., Ltd. and its affiliates ("Honda Group" hereinafter) account for 89.0% of the TS TECH Group's consolidated revenues (revenues from final sales to the Honda Group, including sales to its suppliers, account for a share of 92.2%). Accordingly, there is a risk that the TS TECH Group's business results could be impacted by developments such as changes to the Honda Group's business strategies or procurement policies, adjustments to its production, relocation of production facilities of certain of its models, reorganization of its production facilities, changes in the timing of introduction of models using TS TECH Group products or trends in their sales, or impacts on sales trends of recalls or other major issues affecting the Honda Group or its business partners.

Together with maintaining and growing its businesses with the Honda Group through means such as increasing customer satisfaction by creating even more attractive products and cocreation of products with the Honda Group from the initial stages of development, the TS TECH Group aims for further business growth while lessening this risk through efforts to secure new customers and grow new commercial rights by deploying strategic sales activities targeting customers worldwide, under the leadership of the New Business Management Division, which was established to secure customers outside of the Honda Group.

(ii) Competitive conditions

The automobile seats that constitute the TS TECH Group's main product line are made of raw materials such as steel, plastic, urethane, and leather as well as structural components and other purchased parts. There is a risk that Group business results could be affected by developments such as supply-chain disruptions or sudden price hikes due to short supplies of raw materials or chips and other parts that TS TECH cannot absorb or adapt to, resulting from causes such as changes in related regulations, reduced production by suppliers, or market price fluctuations.

(iii) Supplier credit risk

Due to the structure of its major products, the TS TECH Group procures raw materials and parts from numerous suppliers. There is a risk that developments such as worsening of suppliers' financial standings or supplier bankruptcies could cause delays or stoppages in manufacture of products by interrupting the supply chain.

To address this risk, in addition to checking regularly on suppliers' business conditions and working together with them to strengthen their financial makeups, we also strive to minimize risk through means such as identifying parts for which we are highly dependent on specific suppliers and formulating emergency alternatives in advance.

(iv) Responding to product defects

Since the TS TECH Group manufactures auto parts that come into direct contact with passengers and play important roles in keeping them safe, there is a risk that a product recall or similar incident could have effects such as incurring considerable costs for compensation, recording reserves for product warrantees, or loss of trust.

Together with ensuring specification quality from the development stage and building QA systems within production processes, the TS TECH Group also works to prevent defects through means including use of quality management systems based on international standards such as ISO 9001 and IATF 16949. We also have adopted traceability systems to identify swiftly the extent of the impact of any product defect that could lead to producer liability, among other efforts to enhance our quality control structures to enable swift responses.

(v) Business impacts of disasters, accidents, infectious diseases, wars, strikes, etc.

The occurrence at a TS TECH Group location of an incident interrupting business activities, such as a major earthquake or other natural disaster, an outbreak of infectious disease, a war, terrorism, or a strike, resulting in harm to property or people and interruption of infrastructure services, could impact the TS TECH Group's business performance.

Each company in the TS TECH Group assesses the risks of business interruptions and takes measures such as preparing response manuals and training to enable swift recovery of business operations. In addition, we strive to maintain funds management structures to enable smooth business operation and maintenance of employment even in emergencies, through Groupwide application of Safety Funding Guidelines under which we maintain working capital needed to enable continuous business operations in the event of the manifestation of a risk event.

There also is a risk that the business results of the TS TECH Group could be impacted by challenges to smooth business operation expected due to factors such as the continued spread of COVID-19 and the widening effects of worsening of the Ukrainian situation.

(2) Risks related to the external business environment, such as the international situation and economic trends

(i) Changing market environments

The TS TECH Group does business in Japan, China, other Asian markets, North America, South America, and Europe. There is a risk that Group business results could be affected by reduced sales of motorcycles and automobiles in these markets due to economic downturns, lower consumer demand due to prices and other trends, or other causes.

Together with targeting more diverse customers, the Group strives to improve efficiency and cut costs from various approaches including more efficient development, automated production, and enhanced management systems, to build structures that will generate high levels of revenues.

(ii) Impact of fluctuations in market conditions for raw materials, parts purchased, etc.

The automobile seats that constitute the TS TECH Group's main product line are made of raw materials such as steel, plastic, urethane, and leather as well as structural components and other purchased parts. There is a risk that Group business results could be affected by developments such as supply-chain disruptions or sudden price hikes due to short supplies of raw materials or chips and other parts that TS TECH cannot absorb or adapt to, resulting from causes such as changes in related regulations, reduced production by suppliers, or market price fluctuations.

Together with striving toward stable procurement based on basic transaction agreements with suppliers in procurement of raw materials and components, the Group also adopts flexible forms of transactions that make it possible to reflect the effects of market-price fluctuations in transaction prices.

(iii) Impact of exchange-rate fluctuations

In doing business globally, the TS TECH Group is impacted by exchange-rate fluctuations in foreign-currency transactions conducted for purposes such as mutual supplementation of components between individual countries.

The Group engages in foreign-exchange futures and other forex hedge transactions between major currencies to minimize the risk of exchange-rate fluctuations on foreign-currency transactions. Average exchange rates for the U.S. dollar and the Chinese renminbi, which are major currencies for the TS TECH Group, are shown under "3. Management's Analysis of Financial Standing, Business Results, and Cash Flow: (1) Business Results."

(3) Risks associated with laws, regulations, and litigation

(i) Protecting intellectual property

While the TS TECH Group has built up technologies and expertise related to the products it manufactures, there is a risk that it might not be able to put intellectual property (IP) to effective use in the future. There also is a risk that Group business activities could be affected by unlawful infringement on IP. Furthermore, Group business results could be impacted if it were determined that a product or technology it developed infringed on another party's IP.

The Group strives to prevent outflows of its expertise and grow its businesses and revenues by making decisions on matters such as exclusive retention and licensing of individual IP based on medium- to long-term IP strategies. In addition, its IP sections analyze the structures of other companies' products regularly to check for any infringements on TS TECH's IP as well as taking care to prevent infringement by TS TECH on other companies' IP through means such as prior review during development of products and technologies.

(ii) Responding to litigation etc.

The TS TECH Group's business operations involve a wide range of transactions including procurement of raw materials and parts and sale of products to customers. There is a risk that ligation or other legal proceedings arising from doubts regarding transaction conditions could impact the Group's business results in the event of a contrary ruling.

To address such risks, in addition to striving to ascertain and respond in a timely manner to information on establishment and amendment of business-related laws and regulations, we strive to prevent any problems through means such as maintenance of review structures for conclusion of contracts and cooperation with attorneys and other specialists.

(iii) Potential risks of international activities

The TS TECH Group has production subsidiaries in North America, South America, China and other Asian markets, and Europe. We actively engage in business on a global scale, and international transactions among these facilities grow increasingly complex and diverse from year to year. There is a risk that the Group's business results could be impacted by factors such as unanticipated establishment or amendment of laws or regulations, differences of understanding with authorities concerning transfer-price taxation or other matters, or strengthening of tariffs and export/import regulations.

In response to such risks, TS TECH communicates to Group companies information on establishment or amendment of important laws and regulations and Group companies actively strive to collect information from local related agencies and adapt smoothly to regulatory changes. In addition, under the transfer pricing taxation system we employ an APA prior approval system with tax authorities in Japan and the U.S. regarding matters such as setting transaction prices within the TS TECH Group for internal transactions between the two countries, which involve large transaction amounts.

(iv) Laws and regulations on products

The TS TECH Group is subject to a wide range of laws and regulations on matters such as vehicle safety and the environment in the countries in which it does business. There is a risk that failure to comply with increasingly strict laws and regulations or newly established ones could restrict the TS TECH Group's business activities. In addition, stricter laws and regulations or newly established ones also could lead to higher costs.

The TS TECH Group constantly ascertains the latest information on laws and regulations concerning vehicles and other aspects of its business and does business in compliance with them. It also maintains development structures capable of paying close attention to the latest legal and regulatory trends in the industry and adapting to future laws and regulations, with a focus especially on Europe and North America.

(4) Other risks

(i) Sustainability initiatives

To ensure the continued growth of the TS TECH Group, it is essential to fulfill our corporate social responsibility actively and to address society's challenges through our business activities. In addition, there is a risk that delays or mistakes in sustainability initiatives could lead to lower stock prices or missed business opportunities by worsening the TS TECH Group's reputation through souring relations with local communities and causing loss of trust from the markets.

To maximize corporate value while meeting society's everchanging expectations, the TS TECH Group carries out management reflecting environmental, social, and governance (ESG) perspectives, as well as contributing to a sustainable society through our sustainability initiatives. Under "Realizing ESG Management," the 15th Medium-Term Management Plan identifies priorities and material topics for addressing them, based on their importance to both the TS TECH Group and our stakeholders. Under this plan, we are accelerating various measures to achieve our 2030 targets.

(ii) Risks of information leaks

The TS TECH Group possesses a wide range of important information, including technical information as well as personal information on employees and information from customers. There is a risk that loss or damage or such information or its unauthorized alteration or leakage due to an unforeseen situation could lead to results such as harming our corporate value, loss of society's trust, and liability for damages.

The TS TECH Group strives to manage information thoroughly through means such as maintenance of internal rules and regulations, thorough employee training, and enhancement of security systems and network monitoring systems, to prevent external leaks of such information.

(iii) Retirement benefit obligations

The TS TECH Group calculates employees' retirement benefit costs and obligations in line with certain assumptions, including the discount rate. Accordingly, should actual results differ from these assumptions, or the assumptions themselves change, there is a risk that Group business results and financial standing could be impacted.

In investing employees' pension assets, each Group company takes measures such as seeking the opinions of outside experts as appropriate and setting up review committees and other organizations to review such investments closely.