Business Risks and Uncertainties

The Company establishes the Risk Management Committee supervising the risks of the business activities of our group and builds and operates the risk management system in accordance with the Regulations for Risk Management. Our group identifies major matters that we think may become potential risk factors in operating the businesses and have an impact on operating results and financial positions as follows. These risks do not include all risks, and our group may be affected in future by unexpected risks and other risks whose impact is considered immaterial as of now. Our group identifies the potential for the occurrence of these risks, and avoids the occurrence and takes the appropriate responses at the time of occurrence. Matters about the future among descriptions were determined at the end of the current consolidated fiscal year by our group.

1. Risk on changes in market environment and competitive situation

There is the possibility that capital investments in flat knitting machines are largely weak in Japanese and overseas knitted product manufacturers, our major customers, as a result of changes in lifestyles and consumption patterns of consumers, increasing environmental awareness like the response to sustainability, weakness in economic activities, and unseasonable weather, including a mild winter.
 In the businesses that the Company group operates, competitors constantly advance technical innovation as customers’ needs change daily. More details are stated in the (ix) “Risks including natural disasters, global conflicts, accidents, and spread of infections,” (2) “Impact on production.”
In addition to the above, there is the possibility that the procurement of materials has an impact on business results and the financial position of the Company group because of confusion in the supply chain arising from global trade issues and the pandemic infection and the increasing cost of fuel. the patents of other companies arising from differences of opinion and leakage of confidential.
Additionally, during an increase in significant contracts with customers and clients, violations of the patents of other companies arising from differences of opinion and leakage of confidential information develop into the compensation issues, which have an impact on business results and the financial position. (This is detailed in (v) “Problems on the strategy for protection of intellectual property” and (viii) “Risk on information security.”)
If the Company fails to appropriately respond to these environmental changes and loses its competitive advantage, business results and the financial position of the Company group could be significantly damaged. To prepare for these business risks, the Company group daily increases the attractiveness of products and services, such as proactive proposals of timely and appropriate manufacturing responses to demand movement in consuming regions based on the use of WHOLEGARMENT flat knitting machines and design systems. Additionally, the Company group generates new business value and business fields, including the establishment of a new business model solving the challenges in the apparel and fashion industry and the promotion of knitting in non-apparel industries by closely communicating with customers and clients and appropriately understanding potential needs.
Under a daily changing business environment, furthermore, the Company group implements sustainable growth in its enterprise value by fundamentally reviewing the management base and internal structure and maintaining and strengthening an appropriate risk management system on a company-wide basis.

2.Impact of changes in social systems in areas where businesses are operated
The supply chain has been globalized in the apparel industry according to the advancement of globalization of the economy. In the case that trade friction between consuming countries and producing countries evolved into trade issues, the trend in capital investment is also significantly affected. The Company pays close attention to and appropriately deals with trends in economic measures, including the rise in reciprocal tariffs and restrictions on the export of technologies triggered by trade friction between the U.S. and China. The introduction and changes in regulations imposed by the central government and international frameworks could have impact on operating results and the financial conditions of the Company group. Therefore, the Company is building a system to understand local developments early and immediately take action, using the network of local subsidiaries and distribution agents located in countries across the world.
3.Fluctuations in exchange rates

In our group, the ratio of overseas sales remains at around 80% and transactions are made in JPY and foreign currencies. Therefore, rapid fluctuations in exchange rates could have an impact on operating results and financial positions of our group.
Accordingly, our group hedges risks on trade accounts receivable in foreign currencies among trade accounts receivable with forward exchange contracts as described in the notes to the consolidated financial statements (derivative transactions).

4.Risks on recovery of credits and trade accounts receivable

Trade accounts receivable consist mostly of those related to the flat knitting machine business. It takes a long time for many users to purchase materials and eventually sell products, and so it also takes a long time to recover trades receivable. This is a business practice peculiar to the industry. Therefore, our group directly strengthens the management of credit to users in the main regions. In the Asian market, both wheels of global apparel and knitted product manufacturers have performed large-scale production in recent years, and the transaction amount per company also shows an upward trend. To reduce the risk on recovery, our group executes liquidation of receivables, setting the collateral, promotes lease transactions, and purchases trade insurance policies. Additionally, the group builds a system to promote payments by the due date by installing PMS (password management system) in flat knitting machines. Our group also takes countermeasures for any delay in recovery, if such were to occur, including conservative posting of the provision for reserves based on the actual recovery rate and the recoverability of individual cases.

5.Problems on the strategy for protection of intellectual property

For some of our group’s own technologies and expertise, it may be impossible to gain complete protection based on intellectual property rights or it may gain limited protection mainly because of a lack of awareness of compliance by overseas competitors. Our group’s products, WHOLEGARMENT flat knitting machines, in particular, are a block of advanced technologies. Our group established the Intellectual Property Development Team at the Development Headquarters to protect a wide range of technologies, including mechanics and control of flat knitting machines, knitting technologies, and design system-related technologies with intellectual property rights and differentiates itself from other companies. If counterfeit products were traded due to infringement of patents, company’s businesses would be significantly affected. On the other hand, the Company group develops products without violations of the rights of other companies, but there is the possibility that it could be deemed to have violated the intellectual property rights of other companies, and this brings about obstacles to the development and sale of products and for which the group bears huge compensation liability. Additionally, there is the possibility that future prohibition of the use of a third party’s intellectual property rights currently licensed to the Company group or changes in the terms and conditions would disadvantage the Company group and have an impact on business results and the financial position of our group.
Therefore, the Company group builds a system to constantly monitor violations of patents by other companies and effectively uses information from local subsidiaries and agencies in countries to call attention and initiate legal proceedings. In addition, the group exercises careful investigations and confirmations of the intellectual properties of other companies in the product development phases. To prepare for the contingency that other companies might insist on a violation of intellectual property rights of the group because of a difference of opinion and changes in licensing terms and conditions, the group allocates talent to engage in insisting on non-violations and engaging in negotiations and lawsuits on licensing terms and conditions in the internal legal department while it builds the system to cooperate with experienced lawyers and appropriately handle cases according to the details.

6.Risk on talents

Since the start of business, the Company has been appreciated in the industry by creating things that do not exist in the world and offering products with the most advanced technologies at the most affordable prices. This is supported by talent with a high degree of expertise, creativity, and uniqueness. We strive to continuously secure and develop talent. The ability to develop products and product quality would be weakened if talent keeping and succeeding to technologies were not secured/developed as planned or the talent left us due to retirement. Consequently, this could reduce business competitiveness and have an impact on operating results and the financial positions of our group. Therefore, we proactively execute the succession of technologies, including an improvement in in-house training for junior employees, recommendations for taking skill examinations, and the expansion of OJT with experienced employees.

7.Risk on product liability

Our group establishes the basic policy for a quality environment and executes professional committee activities to increase product quality and customer satisfaction under the SHIMA SEIKI Spirit of developing the most advanced technology and keeping it most affordable. Defects in products could have an impact on operating results and financial positions of our group because of compensation for damage and the cost of correcting defects. Our group purchases an insurance policy in preparation for product liability to reduce the risk.

8.Risk on information security

The information system is one of significant factors for our group. Human error, failures of devices, defects in services provided by third parties, including telecommunication carriers, as well as outside attack on servers, unauthorized access, and infection by a computer virus could cause problems and reveal flaws in the IT system resulting in failures, such as errors and delays in processing of transactions and data leakage, which would have an impact on operating results and the financial positions of our group. Our group established an information security policy to draft a code of conduct concerning the treatment of information for all officers and employees. In addition, it continuously provides awareness activities about physical and technical countermeasures for information security through the Information Security Committee.

9.Risk on natural disasters, global conflicts, accidents, and spread of infection

Natural disasters, including earthquakes, typhoons, and tsunami, global conflicts, fires, blackouts, spread of infections (pandemic), and other events could have an impact on the business of the Company.

(1) Impact on sales

Increasing risks in the major buyer Asia (China, ASEAN member states including Vietnam, and Bangladesh), European market mainly in Italy, and the Middle East market mainly in Turkey would cause failures in ordinary sales activities, and prolonged failures would increase the impact on the operating results of the Company. This would also have impact on the production activities of users, and then the risk of collection of trade receivables could be higher due to deteriorated cash management by users. More details are available in the (iv) “Risk of collection of credits and trade receivables.”

(2) Impact on production

In terms of production, it is assumed that the prolonged shutdown of suppliers would cause a shortage of components and enforce us to reduce production. This would have significant impact on operating results and the financial condition of the Company. Therefore, our group implements measures, including the securing of stock in an emergency and the construction of the system to stably provide components through purchases from several suppliers.

10.Overconcentration of production base

The Company manufactures products and establishes an integrated system ranging from development to manufacturing in Wakayama Prefecture, where the headquarters is located, to increase efficiency and cut costs. Therefore, natural disasters in the suburbs of Wakayama Prefecture, including large-scale earthquakes and wind and flood damage, accidental fires in the plants of the Company, and the spread of infection in the Company could result in the long-term shutdown of manufacturing lines.For general-purpose products, stock for net sales for about a month is generally kept in storage. The negative impact on storage conditions of the stock and the impact resulting from suspended logistics exceeding the stock would have a direct link to the sales of our business. The Company establishes a daily production system, and so continuing any suspension of production would increase the impact. Therefore, the Company purchases insurance policies and develops the business continuity plan so that any suspension period of operations can be minimized. Additionally, we implement countermeasures, such as seismic constructions for buildings, practice for emergencies, and introduction of safety confirmation system to establish the system for early recovery. Disasters with damage exceeding estimates could have an impact on continuing business as a result of suspension of functions/destruction of equipment, suspended offering of infrastructures, and suspension of traffic and communication tools.

11.Risks related to epidemics such as infectious diseases

If there is a spread of infection in the Company due to the global spread (pandemic) of COVID-19, the suspension of business activities that the temporary suspension of plant operation could have an impact on operating results and the financial positions of our group. Our group established the Crisis Management Headquarters, which the president leads as general manager, to implement a countermeasure to the spread of infection. Our group have put in place a system that put a priority on the securing of safety of employees and minimize the impact on business through the prohibition of non-essential meetings and business trips, suspension of acceptance of factory tours, strengthening of preventive measures (such as daily temperature checks and wearing of masks and firm sterilization of hands), telework, and workplace vaccination.

12.Risk on compliance

In performing business activities, our group is subject to a wide variety of laws and regulations and rules. Material compliance violations that include fraud (including unintended violations) could deteriorate the public reputation of our group and have a significant impact on business, including damage from suspension of transactions and lawsuits.
Our group establishes and complies with the SHIMA SEIKI Group Code of Conduct while it sets up a compliance committee for strengthening the compliance system and a corporate ethics helpline as a window for whistleblowing and consultation regarding compliance and corporate ethics to prevent the impact of compliance violations from expanding.

13.Risk concerning sustainability issues

Stakeholders become more interested in ESG-focused management and SDGs every year, and measures for realization of a sustainable society will become more significant in future. In terms of the environment, the entire society, in addition to customers and suppliers, also asks us to reduce emissions of greenhouse effect gases toward a decarbonized society from the perspective of global climate control and to offer environmental-conscious products and services. The Company complies with the requirements of environment-related regulations while it designs and develops products and services under an awareness of environmental load reduction by customers based on the operation of the environment management system. In developing products, the Company reduces power usage, advances reductions in emissions and the recycling of waste, and effectively uses resources in order to control and reduce emissions of CO2. Amendments to or establishment of laws and regulations could increase expenses for compliance, and this could have impact on operating results and the financial condition of the Company. People are increasingly conscious of business and human rights by companies operating global businesses. These companies are required to react to requests from stakeholders of responding to human rights and conflict minerals and forced labor in the supply chain. The Company established a human right policy and respects the intrinsic diversity of everyone, while respecting the human rights of all persons involved in business activities toward the realization of a workplace desirable for everyone. If the Company and the supply chain did not implement adequate measures, operating results and the financial condition of the Company could be affected by the suspension of transactions, administrative penalties, and the loss of social credibility and business opportunities. The Company will propose sustainable product development through products and services and solve social issues through corporate activities.

page top