KYOWA LEATHER CLOTH CO., LTD.

For vehicle interior synthetic leather materials (PVC-based, olefin-based, and urethane-based), which account for the majority of sales, timely response to market needs across price, performance, and design is required. If development is delayed, orders may decrease due to replacement by competing products, potentially adversely affecting business results and financial condition. Continuous efforts toward product development tailored to the market needs of each product group are required.

Domestically, compliance with VOC emission regulations under the Air Pollution Control Act was completed by the end of March 2010, but future regulatory reviews may increase compliance costs. Similar regulatory tightening is progressing overseas as well, creating a risk of additional costs or reduced production capacity. In addition, if raw materials currently used become prohibited under regulations in various countries, costs for developing alternative products, capital expenditures, and raw material switching costs may increase.

Although regular disaster-prevention inspections and checks are conducted at production facilities, there is no guarantee that operational interruptions caused by large-scale earthquakes or other events can be completely prevented or mitigated. If operations are interrupted, production capacity for each product may be significantly reduced. Efforts continue to minimize the potential negative impact of production line interruptions.

If the automotive market or housing market deteriorates due to a large-scale outbreak of infectious disease, this may adversely affect business results and financial condition. There is a risk of significantly reduced production capacity if operations are partially or fully interrupted due to employee infections, or if raw material shortages occur due to production disruptions at raw material suppliers. Since the company conducts business activities both domestically and internationally, the scope of impact could extend widely.

Sales destinations for vehicle interior materials are mainly the Toyota Group, and the proportion of net sales attributable to this group in the fiscal year under review reached approximately 50%. Toyota Motor Corporation's direct voting rights ownership ratio is 35.1%, creating a structure in which the group's automobile production and sales trends have a direct impact on the company's business performance. If the group's production and sales deteriorate, this may adversely affect business results and financial condition.

Since the main raw materials are petroleum-related, fluctuations in crude oil and naphtha prices and supply-demand conditions may affect business results and financial condition. Although basic transaction agreements have been concluded with multiple suppliers to ensure stable procurement, raw material shortages may occur due to global supply tightness, accidents at suppliers, or damage to facilities and logistics disruptions caused by natural disasters. If a raw material shortage occurs, there is a risk of production delays and cost increases.

Since the company has a business structure that includes production and sales of products overseas, significant fluctuations in exchange rates may affect business results and financial condition. Generally, appreciation of the yen against local currencies has an adverse effect on the business, while depreciation of the yen has a favorable effect. The annual securities report does not explicitly describe specific hedging measures against exchange rate fluctuation risk.

If the expected recovery period for capital expenditures already made becomes prolonged due to subsequent changes in the market environment or other factors, there is a risk of recording impairment losses. Changes in the market environment are difficult to predict, and the risk of equipment obsolescence may increase, particularly amid ongoing structural changes in the automotive market. Recording impairment losses would have a direct adverse effect on financial condition.

The company conducts business activities in various countries both domestically and internationally, and implements credit management based on the collection of customer information; however, bad debt losses may occur due to unexpected business failures of customers. If bad debt losses occur, this poses a risk of adversely affecting business results and financial condition. While efforts are made to reduce credit risk through thorough credit management, complete avoidance is difficult.

Although crisis management measures that take cybersecurity risk into account are implemented in the construction and operation of information systems, the risk of leakage of confidential information or personal information due to unauthorized external access or computer virus intrusion cannot be completely avoided. There is also a risk of information system or manufacturing shutdowns due to equipment damage or communication line troubles. Depending on the scale of damage, this may affect business results and financial condition.