Business and Other Risks

Major risk factors that may significantly affect the financial condition, business performance and cash flows of the Taikisha Group, as recognized by senior management, are noted below.

Note that the future-related matters referred to in the text were determined by the Taikisha Group as of the end of the current consolidated fiscal year (March 2023 term).

(1) Risk of Changes in Private Capital Investment

Changes in the environment for receiving new orders may significantly affect sales and profit in the Taikisha Group's businesses. In the Green Technology System Business, orders received have been on the decline due to a decrease in overseas investments by Japanese companies and in the Paint Finishing System Business because of the continuing curtailment of domestic production by domestic automobile manufacturers, the scaling-down of economic activities imposed by the prolonged crisis in Ukraine, and a decrease in new capital investments resulting from the global-scale shortage of semiconductors. These circumstances may have an adverse effect on the Taikisha Group’s operating results.In addition, if the Taikisha Group fails to keep up with the change of production facility of automobile manufacturers aiming at attaining carbon neutrality, the Taikisha Group may lose customers so that the business performance and other results may also be affected.

In response, Green Technology System Division will work overseas to strengthen its sales structure targeting local companies, and promote initiatives to increase orders from Japanese manufacturers in collaboration with sales team in Japan. Paint Finishing System Division will accelerate the development of the Company’s technology that changes the production facility of customers aiming at attaining carbon neutrality, and will leverage automation technology to enlarge the field from the conventional 4-wheel and 2-wheel vehicle markets into other industries, aiming to expand its automation business.

(2) Risk Associated with Large-Scale Disasters

The Taikisha Group's business performance and other results may be affected by losses sustained due to natural disasters, such as earthquakes, tsunamis, wind or water damage, or a global spread of infections and other diseases in regions where the Taikisha Group does business. Furthermore, in the case of large-scale, widespread natural disasters, the Taikisha Group's business performance and other results may be affected not only by the direct damage to property and people, but also by the long-term impact on customers' business activities and the larger economic climate.

In order to prepare for the possible occurrence of unforeseen disasters, accidents or events in Japan or overseas, the Taikisha Group has established a basic policy for crisis management and constructed a crisis management system. Should a crisis occur, it will be classified into one of three levels depending on its impact on personal safety and business continuity. Crisis countermeasures will be implemented based on these levels.

(3) Risk Associated with the Spread of COVID-19

There is a risk that the Taikisha Group's business performance and other results may be affected by the impact of damages to employees, as well as delays in the procurement of construction materials and stoppages to construction works due to the spread of COVID-19 that first became apparent in early 2020.

Crisis countermeasures of the highest level have been implemented in response to COVID-19, a crisis task force has been established headed by the President and Representative Director, and composed of Chief General Managers and Chief Executives, and measures are carried out to respond to the crisis for the entire Taikisha Group, such as recommendation of work at home, staggered working hours, introduction of commute by cars which lowers risk while commuting, reconsideration of company events and business activities in order to prevent infections, and appropriate correspondence for infected people. We will determine what actions to take in response to the future spread of COVID-19.

(4) Risk Associated with Overseas Business and the Management and Control of Overseas Subsidiaries and Associates

Unforeseen changes in laws and regulations, political instability and other factors in the overseas regions where the Taikisha Group operates could affect its business results. The Taikisha Group may sustain losses due to fluctuations in exchange rates pertaining to the payments and collections for foreign currency construction contracts. In addition, exchange rates could affect the Taikisha Group's business performance and other results because the financial statements of overseas subsidiaries and associates are translated into Japanese yen in preparing the consolidated financial statements. Furthermore, the Taikisha Group's business performance and other results may be affected by a deterioration in the results of overseas subsidiaries and associates, such as the failure to achieve business plan targets, due to bad debt because of bankruptcy of customers, the occurrence of problems that could not be predicted, or for which risk countermeasures that could not be implemented and so on.

In response, the Taikisha Group collects information on political, economic and statutory changes in the overseas regions in which it operates, and strives to control country risks and overseas legal and regulatory risks. The Taikisha Group implements forward exchange contracts and other instruments to hedge currency risks arising from payments and collections for foreign currency construction contracts, strengthens credit control before receiving orders to reduce the risk of receivables to become uncollectible, and avoids such kinds of risks as much as possible. It will also continue to enhance the governance structure of its overseas subsidiaries and associates.

(5) Risk Associated with Technological Development

Should the Taikisha Group experience delays in the development of systems to meet increasing customer needs, such as carbon neutrality, energy saving, enhanced environmental measures and automation, its technological differentiation from competitors cannot be generated. This may result in the loss of opportunities to receive orders, as well as deterioration in customer trust and corporate reputation, and its business performance and other results may be affected.

In response, the Taikisha Group endeavors to solve social issues through the development and demonstration of technologies aimed at reducing environmental impact to deal with decarbonization business in order to realize carbon neutrality, as well as automation technologies which is the strength of the Company. To this end, in April 2023, we opened the R&D satellite facility Taikisha Innovation Gate Shinjuku at our Shinjuku head office. We will expand the breadth of our communication, integrate internal and external solutions, and discover innovations. We will also use digital technology to step up cross-cutting activities in the Taikisha Group and promote innovative technology development through collaboration with academic institutions and start-up companies, thereby addressing themes that anticipate the needs of society.

(6) Human Resource-related Risks in Project Execution

Construction and equipment installation work, the Taikisha Group's business field, is heavily reliant on human resources. In Japan, there are concerns about the decline in the number and quality of skilled and experienced engineers and technicians due to the aging of the population and delays in the development of engineers. In addition, in April 2024, an upper limit regulation for overtime work will be imposed on the construction industry, which is expected to result in a decrease in the total working hours of engineering employees. If we cannot establish a construction system for achieving the medium- to long-term plan, there is a possibility that our business results will be affected. Overseas, long-term business development may also be affected if the core human resources necessary to guide the localization of the Taikisha Group's businesses cannot be secured, due to factors such as delays in the development of local staff and employee turnover.

In response, the Taikisha Group will work to enhance employees’ technical skills and develop human resources, by improving their basic technical capabilities through training, as well as on-site practical instruction. At the same time, it will endeavor to secure human resources, leveraging digital technology to increase productivity, promote work style reforms, and create attractive workplaces.

Overseas, the Taikisha Group will strive to secure and develop core human resources, and promote localization, through the introduction of a global personnel system.

In order to maintain and promote sound mental and physical health among our employees, we announced our Declaration on Health Management in 2020. This policy clarifies the health management promotion system with the President and Representative Director serving as the health management officer. We will plan and implement various employee health measures and verify their effects so we can continuously improve them.

(7) Legal and Regulatory Compliance Risk

The Taikisha Group's business fields are subject to a range of legal restrictions, including the Construction Business Act, the Antimonopoly Act, and the Labor Standards Act. The Taikisha Group's business performance and other results may be affected by restrictions placed upon its business activities, if any of these laws and regulations are violated by the actions of its officers or employees.

In response, the Taikisha Group will endeavor to create a corporate culture and mechanisms to prevent rule violations. It will engage in continuing implementation and follow-ups of its compliance education program such as e-learning, as well as conducting survey of compliance attitude which leads to inspect the effectiveness of compliance activities and reflect to improvement process, in order to maintain and enhance employee awareness of legal and regulatory compliance.

(8) Risk of Serious Accidents and Quality Defects

In the event of serious accidents during construction, or serious contract nonconformity due to such as quality defects, the Taikisha Group's social credit would be damaged, and its business results may be affected. The Taikisha Group takes contract conformity responsibility with customers guaranteeing construction against defects for fixed period of time after completion of construction. The Taikisha Group allocates a provision for warranties for completed construction to cover repair costs based on previous warranty experience. However, these costs still could potentially exceed the balance of the provision, affecting the Taikisha Group's business performance and other results.

To address this, the Taikisha Group is committed to improving safety awareness and the safety level by providing guidance in the conventional preparation of detailed work procedures conducted for subcontractors in review meetings of the utilization of digital signage and other digital technologies, striving to strengthen our safety management system, and taking thorough measures for safety and health management on construction work sites. We are also working to prevent quality defects by reviewing construction management systems, promoting the digitization of construction management, and strengthening our system to ensure technical quality company-wide.

(9) Risk of Changes in Material Prices and Unit Labor Costs

Sharp rises in material prices due to the shortage of semiconductors and the rise of fuel prices and so on, and sharp rises in unit labor costs due to declining birthrate and aging population as well as lack of successors, could affect the Taikisha Group's business performance and other results if the Taikisha Group is unable to reflect them to contract prices.

In response, the Taikisha Group endeavors to control the risk of changes in material prices and unit labor costs through measures such as identifying reasonable costs for each region when it receives orders, and hedging the risk of price fluctuations in contracts.

(10) Risk Associated with the Leakage of Confidential Information

Cyber-attacks are getting sophisticated, diverse, and devious each year. If confidential information, such as personal information or customer information, is leaked through these cyber-attacks, the intentional, dishonest actions of an employee, or other means, the Taikisha Group's business performance and other results may be affected. Should the incident occur, it may lead to loss of credit and liability for compensation payments.

In response, the Taikisha Group is working to prevent the leakage of confidential information by strengthening IT security after grasping vulnerability using an IT security diagnosis, by enhancing internal rules, and by conducting thorough employee education.

(11) Climate Change-related Risks

As we move to a decarbonized society, there will be changes in policies, laws, technologies, and markets, which may have a variety of impacts on corporate finances and reputations. This transition and the accompanying physical risks may also affect the Taikisha Group's operating results because of factors including the loss of customers who are unable to adapt to climate change, a decline in competitiveness due to delays in the development of technologies for carbon neutrality, cost increases in response to the introduction of carbon taxes, lower labor productivity due to the rise in average temperatures, and the cancellation of construction works due to the increase of extremely hot days.

To counteract this, we will strive to develop low-carbon construction technologies and systems, such as equipment downsizing and energy saving; to expand the construction of energy saving-equipment, such as shifting plants to ZEB; and to promote mechanization and automation in construction.