SMC CORPORATION

With the expansion of overseas business, there is a risk that exchange rate fluctuations may affect business performance and financial condition when translating foreign-currency-denominated transactions and assets into yen, and based on past experience, it is assumed that relatively significant impacts occur roughly once every two to three years. Fluctuations toward yen appreciation reduce foreign-currency-denominated sales and profits, and also generate translation losses on foreign-currency-denominated assets. As countermeasures, the Group is expanding foreign-currency-denominated procurement and reducing emerging-market-currency-denominated assets by reviewing the allocation of cash within the Group, but there are limits to what can be achieved given that the Group's manufacturing base is in Japan.

Business activities overall are highly dependent on information networks and systems, and there is a risk that increasingly sophisticated cyberattacks, system failures, or unauthorized access could lead to leakage of important information or suspension of operations. Should such risk materialize, serious disruptions could occur across business activities overall, including the suspension of production, shipment, and payment, and severe impacts could also be expected from leakage of customer and business partner information, including damages, loss of social credibility, and decreased sales. As a countermeasure, a specialized team oversees and manages comprehensive measures based on the NIST Cybersecurity Framework across the entire Group.

There is a risk that overseas production and sales bases, centered on China and Vietnam, may experience drastic changes in political systems, sudden changes in legal and tax systems, deterioration of labor environments, or social disruption due to terrorism, war, or infectious diseases. Should such risks materialize, the safety of local employees and assets could be jeopardized, and serious disruptions could occur in the global product supply system. As a countermeasure, the Group has established a production base in Vietnam comparable in scale to that in China, and has built a BCP framework that secures a certain level of supply capacity domestically as well.

If defects occur in products, primarily pneumatic equipment, there is a risk that product liability may be pursued and damages may be incurred. Litigation risk is also increasing with the expansion into new fields such as medical devices, and should such risk materialize, it could adversely affect the entire business, including lost orders due to loss of customer trust and damage to image. The Group has taken out product liability insurance, but there is no guarantee that insurance proceeds will cover the full amount of damages, and the Group strives to reduce risk through strict quality control.