DAIHATSU INFINEARTH MFG.CO.,LTD.

Toward international shipping's goal of net-zero GHG emissions by 2050, development of engines compatible with next-generation fuels (methanol, ammonia, etc.) is required, but views are divided on which fuel will become mainstream. Depending on the allocation and timing of development resources, R&D themes may not reach practical application, potentially leading to reduced competitiveness and deteriorating business performance. In response, the Company is proceeding with area expansion and capital investment at the Himeji Plant, while promoting appropriate allocation of research resources and the narrowing down and prioritization of development themes through collaboration among industry, government, and academia.

As Chinese shipyards rapidly expand their global share, the Company has maintained technical partnerships with two Chinese licensees for over 40 years. However, if a sudden change in market conditions or unforeseen circumstances causes the China market to contract or licensee engine production to sharply decline, this could create a mismatch with the Company's growth strategy. In response, the Company continues to secure orders from major shipyards and related shipowners, discuss licensed models and the approach to technology licensing, and provide cost reduction support.

A slowdown in maritime cargo movement is anticipated due to the impact of U.S. trade policy, which could lead shipowners to cut maintenance spending budgets and curb new vessel orders or postpone construction timing, potentially affecting the Company's maintenance sales and engine sales activities. However, the number of vessels currently in operation equipped with the Company's engines is approximately 9,000 (mainly bulk carriers, etc.), and the impact is expected to be limited. The Company aims to build a production system that can flexibly respond to changes in the composition of large and small-medium engine orders, and to achieve year-on-year increases in the number of vessels in operation.

Development and production of the Company's products depend on the supply of materials and services from suppliers. If a supply delay, stoppage, or cost increase occurs due to natural disasters, accidents, deterioration in suppliers' business conditions, or business closures, this could adversely affect business performance and financial condition. In response, the Company secures multiple suppliers, maintains necessary inventory, and conducts regular business continuity reviews, while also considering in-house versus outsourced production with a view to capturing added value.

Some key components depend on specific suppliers with advanced technology. Supply shortages, delivery delays leading to lost sales opportunities, difficulty maintaining appropriate inventory levels, and price increase requests for specific materials could adversely affect business performance and financial condition. In response, the Company is investing in in-house production of core components, expanding production capacity, and diversifying suppliers to stabilize procurement, while also aiming to secure in-house ownership of key technologies based on its IP strategy in the development of Next-Generation Fuel-Compatible Engines.

It may be difficult to prevent unauthorized use of the Company's intellectual property rights by third parties. In addition, unintended infringement of other companies' intellectual property could result in lawsuits, product injunctions, or damages claims, and there is a risk that use of third-party intellectual property currently licensed to the Company could be enjoined or subject to unfavorable changes in terms. In response, the Company has established a dedicated intellectual property department, mandated investigation of potential infringement of other companies' rights when developing new products, and is strengthening its IP strategy based on patent mapping while reviewing outsourcing contracts in the development of next-generation fuel-compatible technologies.

Translation gains and losses in the consolidated financial statements and exchange rate fluctuations in foreign currency-denominated product sales and material procurement may affect the Company's financial position and business results, with the impact on material costs, etc., potentially expanding due to increased overseas procurement. In response, the Company primarily conducts transactions in yen, and for foreign currency-denominated transactions, combines natural hedging, setting forward exchange contract limits by currency, and reducing risk through domestic procurement and in-house production investment.

If trade secrets and personal information of customers and business partners, as well as the Company's own confidential information, are leaked, tampered with, or rendered unusable due to cyberattacks, misconduct, or negligence, this could adversely affect business performance and financial condition through liability for damages, incident response costs, and damage to social credibility. In response, the Company has established a Confidential Information Management Committee and an Information Security Committee, maintains continuous monitoring for unauthorized external access and a system for rapid initial response, and thoroughly implements confidentiality management training for officers, employees, and business partners.

Products, after-sales parts and services, and joint or contracted development may become subject to the list-based controls or catch-all controls under the Foreign Exchange and Foreign Trade Act, and violations could result in damage to social credibility and adverse effects on business, business performance, and financial condition. In response, the Company conducts regular audits and monitoring through its Trade Management Committee and Export Control Secretariat, operates a dedicated export control system, provides regular training to related personnel, and utilizes the CISTEC proficiency examination, among other measures.

Employees with specialized knowledge and skills in research, development, engineering, manufacturing, and administration underpin the competitiveness of the Company's group, but intensifying global competition for talent acquisition and the departure of existing employees could adversely affect future business performance and financial condition. In response, the Company is promoting the hiring of diverse, highly specialized personnel, revising personnel systems, introducing performance-linked bonuses, investing in reskilling, strengthening the executive talent development process, and implementing measures to improve employee engagement.