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Business Risks

The ESPEC Group set up the Risk Management Committee in 2006 to identify and evaluate risks related to businesses. Since 2007, the Group has worked to rigorously conduct risk management through unified operation of the Risk Management Committee and the Internal Control Committee (currently, the Internal Control System Committee). 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, 2021.

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. The Company's business performance and financial position may be adversely impacted by competition with European and U.S. environmental testing equipment manufacturers with large market shares and Chinese and Taiwanese manufacturers entering the market with low prices. 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 Other Such Circumstances

The ratio of sales from outside Japan for the ESPEC Group accounted for a high 46.1% of Group total sales on a consolidated basis in the fiscal 2020 ended March 31, 2021. 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, 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 a Steep Rise in Raw Material Costs

The ESPEC Group procures a variety of parts and materials from several different 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. In the event of a sudden steep rise in raw materials prices, there is a possibility that the Group's business performance and financial position will be adversely affected. The Group implements strict transaction party controls for suppliers and third-party processing companies, evaluates their quality assurance programs and production and environmental management systems, and provides guidance where necessary, 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.