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Business Risks

The ESPEC Group set up the Risk Management Committee and through unified operation of this Committee and the Internal Control System Committee—as well as in cooperation with the Sustainability Management Headquarters—the Group has worked to conduct rigorous risk management. The Risk Management Committee classifies and evaluates risks in four quadrants according to the degree of effects and the countermeasure status. A response policy is decided for each quadrant, and is applied to the activities of the division in charge. The Annual Securities Report contains information about the status of business, financial condition and other matters. Matters set forth in the Annual Securities Report that could affect the Group’s business performance and financial condition are set forth below. Forward-looking statements in this section were determined based on information available as of March 31, 2024.

1. Risk of Fluctuation in Business Performance

The ESPEC Group's main customers are manufacturers in the electronic components, electronic devices, and automotive sectors. Consequently, the Group's business performance is strongly affected by trends in business and capital investment in these industries. These efforts notwithstanding, lower levels of capital investment among the Group's main customers due to protracted economic weakness and other factors may adversely impact the business performance and financial position of the ESPEC Group.
Furthermore, although the ESPEC Group commands a high market share in Japan, the Japanese market is also a maturing one. As such, the Group is reliant on overseas markets for growth in this business. Competition with European and American environmental test chamber manufacturers that control large market shares, and with Chinese and Taiwanese manufacturers that are aiming to leverage their low prices as they enter the market, may have adverse impacts on the Company’s business performance and financial position. The ESPEC Group strives to mitigate these risks of fluctuations in its business performance and advance to the next stage of growth. For this, the ESPEC Group is working to expand overseas markets further and to develop new businesses that will serve as a new earnings base pursuant to its medium-term management plan.

2. Risk Associated with Natural Disasters, Outbreaks of Infectious Diseases and War Other Such Circumstances

The ratio of sales from outside Japan for the ESPEC Group accounted for a high 53.1% of Group total sales on a consolidated basis in the fiscal 2023 ended March 31, 2024. Moreover, this percentage is expected to rise further in the future. The ESPEC Group may face circumstances in which a number of factors may result in social turmoil that is difficult to foresee in the countries or regions where it operates. These factors include, but are not limited to, large-scale natural disasters, outbreaks of serious infectious diseases, war, terrorism, and political instability. Such circumstances, should they arise, could adversely impact the Group’s business performance and financial position. Furthermore, The ESPEC Group's key manufacturing and R&D facilities are located in Japan. If these key facilities were to suffer major damage from an earthquake, typhoon or other natural disaster, it would not only interfere with the Group's ability to operate, but could potentially require huge sums for repairs or rebuilding. Even in cases in which the Company itself is not directly damaged, business activities could be severely undermined by secondary damage, such as limitations on the supply of electric power and other infrastructure, and the inability to procure necessary components and materials from suppliers. If an emergency should occur or is expected to occur, the Group will rapidly communicate information, take appropriate measures and respond in good faith to minimize any losses to the Group and its related parties in accordance with the Group’s crisis management regulations.

3. Risk Associated with Export Regulations

The export of the ESPEC Group’s products and supply of technologies are subject to laws and regulations governing export controls in Japan and overseas, such as the Foreign Exchange and Foreign Trade Act of Japan and the Export Administration Regulations (EAR) of the United States. Moreover, there is a possibility that the buyer or other parties may transfer the products or technologies to countries and users of concern who might repurpose them for the manufacture of weapons of mass destruction or conventional armaments. Consequently, the use of the Group’s products and technologies by unanticipated third parties in applications for which they were not intended could ultimately have an adverse effect on the Group’s business performance and financial position. The Group makes every effort to ensure compliance with the latest laws and regulations. To this end, the Export Control Headquarters takes the lead in monitoring matters such as product specifications, export destinations, buyers, uses and transaction channels.

4. Risks Associated with Dependency on Suppliers and Procurement and Rising Costs of Raw Materials

The ESPEC Group procures a variety of parts and materials from numerous suppliers.
Similarly, the Group engages several different third-party processing companies as a means of coping with varying manufacturing volumes and efficiently acquiring knowledge of various manufacturing technologies. The Group's own production efforts could become compromised if procurement from these suppliers and third-party processing services is halted due to bankruptcy, an exit from business, or similar factors. In addition, suppliers could provide defective components, leading to serious production delays. In the worst case, this situation could require expensive countermeasures, such as a recall of products already sold. Furthermore, the raw materials for the products manufactured by the ESPEC Group consist primarily of stainless steel, steel, copper and aluminum. Procurement prices of these materials fluctuate in line with movements on international commodity markets. Delays in procurement due to global shortages of semiconductors, electronic components, and other parts, or a sharp rise in raw material prices could affect our business performance and financial position. The Group implements strict transaction party controls for suppliers and third-party processing companies, and evaluates and provides guidance on their quality assurance programs, production control and environmental management systems, and supply chains for stable procurement, in an effort to foster mutual relationships of trust.

5. Risks associated with business alliances and corporate acquisitions

The Company may form business and capital alliances and execute corporate acquisitions to expand its business domain. Should problems unforeseen by the preliminary evaluation arise, or if changes in the business environment and other factors impede realization of the initially projected benefits, they might cause the amortization of goodwill and other obligations to affect the Company's business performance and financial position. In making decisions in this regard, the Company exhaustively reviews the risks by conducting a detailed preliminary evaluation of a target company’s business activities, financial position, and business relationships, among other considerations.

6. Risk Associated with Information Security Incidents

The ESPEC Group may handle personal or confidential information as it conducts business. If an information security incident such as an information leak should occur, there is a possibility that the Group’s social credibility, brand image and other aspects may be diminished. This, among other factors, could have an adverse effect on the Group’s business performance and financial position. The Group rigorously manages information assets in accordance with ISO 27001, an international certification standard for information security management systems.

7. Risks Associated With Environmental Regulations

The environmental test chambers that are our company’s main product emit greenhouse gases as a result of consuming energy during use, and also utilize CFCs as a refrigerant in the refrigerators. With the transition to a decarbonized society, if energy-saving regulations, regulations on the use and emissions of refrigerants that have greenhouse effects, and other environmental regulations are strengthened, there is the possibility that costs for compliance with these regulations will increase. In the event that we are unable to or are delayed in meeting these regulations, there is the possibility of interference with product sales and other adverse impacts on the Company’s business performance and financial position. The Company has positioned global warming countermeasures as a materiality (important issue) and is working to develop and provide energy-saving products and products that use CFC refrigerants with low GWP (Global Warming Potential), as well as to provide commissioned testing services using 100% renewable energy.

8. Risks Associated with Securing and Training Human Resources

In order for the Company to maintain and improve its corporate competitiveness, it must secure and train talented human resources necessary for operating its business. As fluidization of the labor market and the declining working population in Japan continue, competition for acquiring human resources is intensifying. In the event that the Company is unable to secure and train talented human resources, or if it is unable to prevent the outflow of human resources, there is the possibility that business operations may be affected, skills and knowledge may flow out of the company, or there may be other adverse impacts on the Company’s business performance and financial position. The Company actively conducts recruiting activities aimed at acquiring diverse human resources. It has also taken steps such as improving the corporate culture, offering a wide range of growth support and opportunities for empowerment, and preparing an environment that supports diverse working styles, aiming to improve employee engagement.

9. Risks Associated With Group Governance and Compliance

The Company has multiple subsidiaries in Japan and overseas, and operates a global business. In the event that controls within the Group do not function fully, and compliance violations, ethics violations, or other violations are caused by officials or employees, there is the possibility of diminished social trust and brand image, demands for payment of compensation, or there may be other adverse impacts on the Company’s business performance and financial position. The Company has prepared internal controls within the Group, and endeavors to conduct training and ensure complete observance of the ESPEC Code of Conduct & Behavior Guidelines by all officials and employees of the ESPEC Group. We also conduct various compliance training, have established and operate compliance reporting desks (inside and outside the company), and take other steps to continually strengthen compliance.