Business and Other Risks
Regarding a number of items described in the Status of Business and the Status of Accounting of Annual Securities Report filed under the Financial Instruments and Exchange Act of Japan, some items may pose risks and influence the Omron Group's management results and financial condition (including share price), and Omron believes that these items may substantially affect investor decisions. Note that items referring to the future reflect the Omron Group's forecasts and assumptions as of June 22, 2011 (date of submission of the Securities Report).
- (1) Risks Associated with the Great East Japan Earthquake
The Great East Japan Earthquake that struck on March 11, 2011, had an immense impact on the economy of Japan, and has resulted in numerous lingering concerns, such as large aftershocks, electricity supply shortages caused by earthquake damage, the prolongation of the Fukushima nuclear crisis, and widespread radiation contamination.
These factors could lead to supply shortages, such as of raw materials from suppliers, or reduced production volumes caused by power shortages, delays in the recovery of domestic markets, radiation contamination leading to restrictions on exports to foreign countries, or harmful rumors that could result in reduced production capacity utilization rates or a decline in sales for the Group, which could potentially have a negative impact on the Group's operating results and financial condition.
- (2) Economic Conditions
The primary business of the Omron Group is consumer and commercial electronic components used in the manufacture of electrical and electronic equipment, as well as control system equipment used by manufacturing sectors and in capital investment-related areas. Accordingly, demand for Omron Group products is affected by economic conditions in these markets.
Both in Japan and overseas, therefore, market forces affecting the product markets in which the Omron Group conducts business can result in the contraction of demand for our products, thereby possibly having a negative impact on the Group's operating results and financial condition.
- (3) Risks Accompanying Overseas Business Activities
The Omron Group actively conducts business activities such as production and sales in overseas markets. The Group may be subject to operating difficulties in countries outside Japan related to possible social unrest due to factors including differences in culture or religion, political turmoil and uncertainty in economic trends, differences in business customs in areas such as the structure of relationships with local businesses and collection of receivables, specific legal systems and investment regulations, changes in tax systems, labor shortages and problems in the labor management relationship, terrorism, wars, and other political circumstances.
These risks associated with overseas operations may have a negative impact on the Omron Group's operating results and financial condition.
- (4) Exchange Rate Fluctuation
The Omron Group has 115 overseas affiliated companies and continues to reinforce its business operations in overseas markets, such as China, for which major market growth is anticipated in the future. The percentage of consolidated net sales accounted for by overseas sales during fiscal 2010 was 51.4%, and Omron expects further increases in the overseas operations ratio due to factors such as production shifts. The Omron Group seeks to hedge against exchange rate risk, for example by balancing imports and exports denominated in foreign currencies. Exchange rate fluctuations, however, could have a negative impact on the Omron Group's operating results and financial condition.
- (5) Product Defects
The Omron Group seeks to provide "maximum customer satisfaction" by providing the best quality products and services based on its motto of "Quality first." Regarding quality, the Group has established an ISO-certified quality control system, and develops and manufactures its products in accordance with this system. A Group-wide quality check system is in place for the ongoing improvement of the quality of the Group's entire line of products and services.
While Omron takes every precaution against the occurrence of defects, it has become extremely difficult to guarantee that defects will not occur (including defects that arise due to the changing environments in which the products are used) or that recalls will not occur.
Changing conditions in Japan, such as the establishment of the Consumer Affairs Agency, have necessitated corporate responses that pay more attention to consumer protection. Product quality is also increasingly a major issue overseas. For this reason, product defects that require large-scale product recalls or that carry damage beyond the coverage capability of liability insurance could not only incur substantial losses for the Group, but could also seriously damage trust in the Company and the Omron brand. Such a situation could lead to declining sales for the Group and has the potential to negatively impact the Group's financial condition.
The Group also strives to provide "Environmental Assurance Products" that do not include banned substances designated in the Restriction of Hazardous Substances (RoHS) Directive enforced by the European Union in July 2006. The Group is investigating the status of regulated chemical substances in components and materials, and is seeking to use components and materials that do not contain banned substances. Since 2009, the Group adheres to the European Union's Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) Regulation concerning the identification of contained substances. Despite the Group's efforts, the frequent modifications of the regulations on controlled substances complicate the supervisory efforts, and it is possible that infractions could incur, such as from failure to comply with modified regulations.
- (6) Research and Development Activities
The Omron Group invests aggressively in R&D as part of its technology-centered business operations for the realization of sustainable growth. As a result, the R&D expenses ratio remains at approximately 7%.
The Omron Group strives to increase the new product contribution ratio by reflecting such considerations as market needs in its R&D projects and goals. However, factors such as delays in R&D or insufficient technological capabilities that result in a decrease in the R&D new product contribution ratio could have a negative impact on the Omron Group's operating results and financial condition.
- (7) Information Leakage
The Omron Group acquires personal information and classified customer information through its business processes and acquires important information in the course of business. The Omron Group is taking steps to reinforce control over the information the Group handles and to further improve employees' information literacy, with the goal of preventing external entry into its internal information systems and misappropriation by third parties resulting from theft or loss of that information. Unanticipated leakage of internal information, however, due for example to invasion of internal information systems using technology exceeding implemented security levels, could exert a negative impact on the Omron Group's operating results and financial condition.
- (8) Risks Associated with Patent Rights and Other
Intellectual Property Rights The Omron Group conducts research on technology developed by other companies and in the public domain in the course of its R&D and design activities. A very large number of intellectual property rights exist within the Group's range of business and products, and new intellectual property rights are declared on a daily basis. The potential therefore exists that a third party could present a claim regarding one of the Group's specific products or components, which could have a negative impact on the Group's operating results and financial condition.
When exercising our intellectual property rights during efforts to resolve issues related to the intellectual property rights of the Group, disputes with third parties could arise, such as oppositional tactics from the third party subject to the exercise of rights.
The Omron Group takes appropriate measures to recognize and compensate employees for inventions, such as through the Employee Invention Compensation Program and the Invention Commendation Program. Disputes regarding the value of an invention can arise with inventors, including inventors who have retired from the Group.
The Omron Group has accumulated technology and expertise allowing it to differentiate its products from those of its competitors. However, the ever-increasing sophistication of counterfeit product manufacturing and sales methods and other factors make it virtually impossible to completely protect all of the Group's proprietary technology and expertise in certain regions, including China. The Group implements strategic measures to protect its intellectual property rights, but the circulation of low-quality counterfeit items fraudulently bearing the Omron brand has the potential to damage the trust in the Group's products and the Group's brand image and could have a negative impact on the Group's operating activities.
Omron has focused on brand management since its inception and in recent years has initiated prompt and appropriate countermeasures to the use of domain names similar to "Omron" that have appeared overseas. Identifying and taking action against all such fraudulent domain names that have been registered is virtually impossible. The danger exists that the same or a similar name to "Omron" could be used in a fraudulent business transaction that could damage the trust in the Group.
- (9) Natural Disasters
The Omron Group has implemented the necessary safety measures and taken steps to facilitate the continuity and early restoration of business operations in the case of a natural disaster, fire, or other calamity, including a large-scale earthquake in Japan's Tokai, Tonankai, or Tokyo metropolitan areas, and has implemented preventive measures for other types of emergency situations, such as a worldwide outbreak of a new form of influenza virus.
The Group and its business clients maintain operating bases in Japan and around the world, making it virtually impossible to completely avoid the risks that would arise from an unforeseen natural disaster, fire, or other calamity. A major event of an unforeseen scale could impact Group operations, such as limiting its ability to carry out production and business activities. Events such as the above could have a negative impact on the Group's operating results and financial condition.