NS TOOL CO.,LTD.

Because production and development sites are concentrated in the Sendai Hokubu Chuukaku Industrial Park in Miyagi Prefecture, the entire production and development system could be affected in the event of a major earthquake or other disaster, potentially disrupting product supply to the market. In the earthquakes of February 2021 and March 2022, which registered a seismic intensity of 6-upper, production was restored within one to two days. The Company has implemented multiple measures, including the adoption of an all-round seismic isolation mechanism and the establishment of a distributed production system at the Niigata Plant.

If employees are unable to commute to work due to a large-scale disaster, energy supply-demand tightness, a new infectious disease, or other events, this could lead to a suspension of product shipments from inventory and affect the production system. As countermeasures, the Company is promoting the establishment of distributed and telework arrangements through team divisions, distributed inventory holdings across Sendai, Tokyo, and two overseas subsidiaries, and a distributed production system through capacity expansion at the Niigata Plant.

Because management resources are concentrated on small-diameter cutting tools, mainly carbide small-diameter end mills, if substitution progresses toward other material products or new processing methods (such as laser processing machines including 3D printers), this could have a material impact on the business. In response, the Company develops and manufactures products using materials other than cemented carbide, such as cBN and PCD, while emphasizing the comparative advantages of cutting processing in terms of precision and cost.

Major domestic tool manufacturers and carbide manufacturers are strengthening their production and sales systems in the small-diameter cutting tool market, and competition is intensifying in the Chinese market due to the increase in domestically produced Chinese products. The Group differentiates itself by achieving both high precision, long tool life, and quality stability as well as cost competitiveness, based on its proprietary in-house developed dedicated processing machines and unique manufacturing processes.

China supplies more than 80% of the world's tungsten concentrate production, the raw material for cemented carbide, the Group's key material, and there is a risk that prices and supply volumes could fluctuate significantly due to global supply-demand conditions and the policies of producing countries; this risk has in fact materialized recently. In response, the Company is working to reduce costs through process efficiency improvements and manufacturing expense reductions, pass on price increases to products, build up inventories of materials, strengthen cooperation with major suppliers, and diversify procurement sources to ensure stable supply.

Cobalt, used as a binder in cemented carbide, is also used in smartphone and EV batteries, and expanding demand could lead to tight supply-demand conditions. Along with tungsten, cobalt is also associated with human rights issues as a "conflict mineral," and the Company thoroughly manages traceability by obtaining certificates from suppliers and receiving explanations of raw material procurement methods, working to exclude the inclusion of conflict minerals.

Because the majority of cemented carbide is procured from a specific supplier and part of the coating process is outsourced to a specific partner company, an unforeseen event affecting such business partners could disrupt the supply chain. In response, the Company is strengthening its stable product supply system by building up safety stock, increasing the in-house coating ratio through equipment expansion, and maintaining close cooperation with major suppliers.

Because the production lines consist of a unique process using proprietary in-house developed dedicated machines, they cannot be substituted with commercially available equipment, requiring the Company to maintain and ensure quality entirely on its own without relying on external parties. In addition to quality and environmental management based on ISO9001 and ISO14001, employees continuously review and improve the in-house developed machines and manufacturing processes based on the Company's own "Manufacturing Code of Conduct."

There is a risk that technological innovations, such as metal additive manufacturing (sintering) using 3D printers, could lead to the development of new precision and micro-machining technologies that affect demand for end mills, potentially substituting demand for cutting processing. The Group aims to maintain its competitiveness by appealing to the comparative advantages of cutting processing in terms of precision and cost, while providing high-performance, high-precision, long-life, and environmentally conscious small-diameter tools at reasonable prices.

Stakeholder demands for environmental consideration, such as GHG emission reductions, the 3Rs of resources, and the use of renewable energy, are increasing, and if the Company fails to meet the expectations of customers, suppliers, shareholders, and others, this could affect its corporate social credibility and business growth. In 2021, the Company established a Sustainability Committee and developed a deliberation system at the Board of Directors, while also implementing information disclosure based on the TCFD (disclosure of Scope 1 and 2 emissions) and incorporating environmental targets into KPIs for each department.