Business Risks

1. Custom order products and dependency on specific markets

Over half of Shindengen groups' operating revenue is made up of custom order products from specific client businesses, and Shindengen group's business performance can be significantly impacted by fluctuations in demand from the client businesses. The relevant custom order products require client business authorization for standards and specifications, and the products cannot be sold to other companies without the client business' approval.
Shindengen group also provides products for many other markets which require power electronics, however products aimed at the automotive market (including Motorcycles), new energy market, industrial device market, consumer electronics market, and information communications market with a focus on communications infrastructure and information devices are an important part of our operating revenue. As a result, in addition to trends in the standard domestic and global economy and in the global semiconductor market, our performance is also greatly impacted by demand trends in the above-noted markets.

2. Dependency on specific external suppliers

While Shindengen group manufacturers the semiconductors which are the base components for our power supply circuit products in-house, other important components and semiconductor raw materials are dependent on supply from several external companies. Shindengen group maintains generally good cooperative working relationships with each of the suppliers and also carries out bulk purchasing in order to reduce supply risks, however general economic trends and individual supplier issues can result in sudden and drastic demand fluctuations and price increases, hindering acquisition of the required components and materials, which could potentially result in Shindengen group being unable to fulfill our responsibility of supplying products to client businesses or needing to increases price as a result of increased component and material costs, which could have a negative impact on business performance and financial conditions.

3. Global activities and overseas expansion

Shindengen group carries out production and sales activities not just within Japan but also in various countries and regions in Asia, North America, and Europe, and also sells products to other regions through a variety of sales channels. The relative importance of Shindengen group's overseas production and sales has continually increased in recent years. As a result, any unforeseen changes or revisions to laws, regulations, etc., changes in political or economic conditions, labor disputes or sudden changes in employment conditions, natural disasters or fires, wars or terrorism, spread of infectious diseases or other changes in the social circumstances in the applicable regions could limit Shindengen group's business activities or impede the supply system for Shindengen group's products.

4. Exchange rate fluctuation

Shindengen group carries out sales and procurement activities not only in Japanese Yen currency, but also in U.S. Dollars, Euros, various Asian currencies, and other currencies, and in principal overseas production and sales bases produce financial states in the currency for the relative country or region in which they are located, with consolidated financial statements then being created by converting these amounts to Japanese yen using the current exchange rates of the end of the term of the overseas affiliate companies. As such, any fluctuation in exchange rates will have an impact on the business performance and financial conditions of Shindengen group, with a strong yen having a negative impact on Shindengen group's business performance and a weak yen having a positive impact.
While Shindengen group carries out exchange contract, currency option and other transactions, we also strive to minimize the negative impact of exchange rate fluctuations through promotion of local procurement of materials. However, exchange rate fluctuations can still negatively impact business performance and financial conditions in some situations.

5. Demand fluctuation

There are fixed fluctuation factors for demand fluctuation in some markets for Shindengen group's client businesses. In addition, changes in industry structure and changes in client business and Shindengen group's competitive environments may also impact Shindengen group's business performance and financial conditions.
In recent years there has been an increasing demand for shorter delivery times from client businesses and Shindengen group has striven to reduce lead time in response, and this requires that some materials must be procured in advance in order to reduce supply risks, however any stock which is procured for these purposes based on Shindengen group's own independent decision may need to be disposed of at Shindengen's responsibility in the event of any subsequent client demand fluctuations.

6. Price competition

Competition is intense in the electronics components industry with which Shindengen group is affiliated, and requests for lowered prices from client businesses, offensive moves from competitor companies, and other factors have resulted in an increased daily pressure to lower prices. Domestic and overseas competition with competing companies is becoming especially fierce for diodes in particular, which are one of Shindengen group's core products. In addition, reduction of market scale for rectifiers for our core communications infrastructure market has also resulted in an even greater level of price competition.
Shindengen group focuses on development of new products to further differentiate ourselves from competition, as well as working to reduce costs and improve productivity in concert with suppliers; however there is a risk that we will not be able to maintain competitive pricing in the future. If this occurs, Shindengen group may suffer worse business performance and financial conditions as a result of lower of sales share.

7. Technology patents and other intellectual property rights

Shindengen group carried out production and sales of a variety of products based on original and proprietary semiconductor technologies and circuit technologies, however it is impossible to fully protect intellectual property rights in some specific countries and regions. As a result, there is a risk that situations may occur where we are unable to prevent a third party from utilizing Shindengen group's intellectual property to produce similar products.
In addition, although Shindengen group also strives to determine trends and developments related to patents held or claimed by other companies, this is no guarantee that the technologies used by Shindengen group do not in any way conflict with patents or other technology rights held by other companies.
Further, Shindengen group has currently concluded technology introduction and licensing agreements with multiple other companies, however there is no guarantee that these agreements will continue to be maintained in the future.

8. Product defects

Shindengen group carries out product production in accordance with globally recognized quality management standards at all of our production bases, however there is no guarantee that all products are completely free from defects or that there will be no recalls or claims from client businesses or other related issues in the future.
In addition, although Shindengen group is enrolled in product liability compensation insurance, there is no guarantee that this insurance will completely or sufficiently cover any final compensation amounts.
In the event a serious product defect occurs which leads to a large scale recall or product liability compensation, in addition to expenses for compensation to client businesses and countermeasure expenses, a loss of faith in the marketplace may also negatively impact Shindengen group's business performance and financial conditions.

9. New product development capabilities

Shindengen group continually strives to carry out development of products and component technologies which satisfy client business and market needs, and we believe that the success of the results of these research and development activities are the key to Shindengen group's future growth. However, needs are becoming ever more diverse and technology and product cycles ever shorter in the electronics industry. In the event that Shindengen group is unable to provide products which satisfy client business and market needs in a timely manner, or a competing business begins providing such products before us, Shindengen group may suffer from restriction or even loss of sales opportunities, making it difficult to recover research and development investments, or otherwise negatively impacting Shindengen group's business performance and financial conditions.
In addition, the effect of the competing standards which have become more prominent in the electronics industry in recent years, and the potential for the technologies which Shindengen group and client businesses build upon not becoming the mainstream for the industry, may result in Shindengen group losing business opportunities.

10. Securing and cultivating human resources

The sources of Shindengen group's competitive capabilities are our technology development capabilities, productivity, quality, sales and marketing capabilities, efficient management knowhow, etc.; and the securing and cultivation of human resources who are capable of maintaining the above while also continually developing and growing is one vitally important element in determining the future prospects for Shindengen group. As such, if the relevant human resources, especially engineers and specified certified individuals, are not secured and cultivated, it may have a negative impact on our company group's future growth, business performance, and financial conditions.

11. Facility investment

Shindengen group continually makes facility investments in order to maintain and increase our production and research and development capabilities, however the amounts of this facility investment may change based on future demand trends, and may have a serious impact on financial conditions and cash flow. In addition, it is also possible that the improvements resulting from facility investment may not always directly contribute to business performance, and in some cases financial condition and other limitations may result in an inability to make the investments necessary to maintain competitive strength in a timely manner.
Shindengen group strives to maintain cost competitiveness and efficiency production activities, and focuses our production bases for semiconductor and IC product early processes in the Tohoku region of Japan. We implement the measures required to fulfill our supply responsibility such as OEM supply by other company groups and maintaining a constant level of inventory, and also implement measures required for daily safety management and risk management at the relevant production bases, however in the event any unforeseen natural disasters, disasters, power outages or other conditions occurs, it may not be possible to completely prevent or lessen the impact of said occurrences.

12. Official regulations, etc.

Shindengen group is subject to a variety of government regulations including business and investment approval, national security and other export restrictions, and customs and other export and import restrictions in each of the countries and regions in which we conduct business. We are also subject to a variety of commerce, antimonopoly, patent, consumer, tax, exchange control, environmental, and recycling related laws and regulations. Shindengen group carefully abides by all of these regulations when carrying out our business activities, however there is a risk that Shindengen group's activities could be restricted if we fail to observe any of these regulations, and in addition it is possible that any penalties or other costs incurred could negatively impact Shindengen group's business performance and financial conditions.
When carrying out business, Shindengen group and Shindengen group's client businesses are subject to a variety of different regulations related to environmental issues in various countries and regions, including but not limited to the EU (European Union) RoHS Directive (Restriction of Hazardous Substances Directive). Shindengen group proactively implements measures to comply with these type of regulations in order to secure business opportunities, however technical and other limitations may make it impossible to comply with some regulations. If it is not possible to comply with regulations, Shindengen group may be subject to restrictions on our sales activities, or lose business opportunities which could negatively impact business performance. In addition, the costs incurred to comply with regulations may also put pressure on business performance and financial conditions.

13. Disasters and other risks

In the event damage to Shindengen group buildings, facilities, employees, etc. occurs as a result of earthquakes, typhoons, or other large scale natural disasters, fires or other accidents or disasters, new strains of influenza or other infectious disease pandemics, it may have an impact on business performance and financial conditions.
Shindengen group has established a BCP (Business Continuity Plan) in preparation for any of the above such occurrences in order to minimize the impact of any disasters, etc. and improve our risk resistance.

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