The Hanshin Diesel Works,Ltd.

The number of operating coastal vessels stands at approximately 5,150, showing a slight downward trend, and against a market of fewer than 100 vessels built annually, five domestic marine 4-cycle engine manufacturers compete, intensifying order competition. If the decline in vessel numbers continues due to the aging and shortage of crew members, this could lead to a decrease in Main Engines (Marine Diesel Engines) orders. As a countermeasure, the company is focusing on developing overseas markets, primarily in Southeast Asia.

If the competitive advantage of the company's core product, low-speed 4-cycle diesel engines, becomes harder to sustain, or if stricter environmental regulations lead to an increase in the construction of electric propulsion or battery propulsion vessels, there is a risk of decreased orders. As countermeasures, the company is pursuing continuous performance improvements of existing engines, enhancement of the engine monitoring system HANASYS 5EX (Advanced Vessel Safety Management System), plans for dual-fuel (DF) conversion of methanol fuel engines, and R&D toward decarbonization.

Compliance is required with IMO regulations such as NOx Tier III, SOx regulations, EEDI regulations, EEXI regulations, and onboard noise regulations. In particular, if the company is unable to develop engines or technologies compliant with NOx Tier III regulations, this could have a significant impact on business results and financial condition. As a countermeasure, the company has completed the development of gas engines compliant with NOx Tier III regulations and has a track record with SCR-equipped vessels. If countermeasure technologies are not developed by related companies, this could put a brake on new vessel construction and affect Main Engines (Marine Diesel Engines) orders.

If prices of raw materials and parts rise due to soaring raw material and energy costs, yen depreciation, and other factors, there may be cases where it is difficult to reflect such fluctuations in selling prices, potentially affecting business performance and financial condition. The company is working to develop new procurement sources and reduce procurement costs, but depending on market conditions, there remains a risk that sufficient price pass-through may not be achieved.

Due to the declining birthrate and aging population, it has become difficult to fulfill new graduate recruitment plans. If this situation continues, the internal transfer of technology and know-how may be hindered, potentially causing the loss of business opportunities and having a significant impact on business results and financial condition. As countermeasures, the company is implementing individual contact with universities, opening up year-round and mid-career hiring, raising starting salaries, utilizing social media, and utilizing referral hiring and job change websites.

Russia's invasion of Ukraine and wars and conflicts in the Middle East have led to soaring energy and raw material prices and supply chain disruptions, which could squeeze profits through secondary increases in the prices of metal materials and parts. Sales to Russia have been suspended since March 2022, so the direct impact is minor, but the Middle East is a major supply region for crude oil and other resources, making the company susceptible to fluctuations in resource prices. As a countermeasure, the company is working to stabilize its supply chain by securing multiple procurement sources for key materials such as heavy oil A, paint, and thinner.

If the core system is subjected to a ransomware attack, it could cause a system failure leading to operational suspension, which could have a significant impact on business results. There is also a risk that the period before an attack is detected could become prolonged, expanding the damage from encryption. As countermeasures, in addition to introducing security visualization software, browsing restriction software, and firewalls, the company has taken out cyber risk insurance and built an offline backup system.

The estimates for product warranty provisions and provisions for losses on order backlogs involve uncertainty, and estimated costs may fluctuate due to unexpected events such as changes in forecasts of future defect occurrences or delays in work processes. Such changes in circumstances pose a risk of having a material impact on the financial statements for the following fiscal year.

Contribution to the SDGs is required as part of corporate social responsibility, and insufficient response poses a risk of losing trust within business society. Under the current medium-term management plan, the company has positioned contribution to the SDGs as a core pillar and is proceeding with its response by setting concrete medium-term targets.