Hitachi Construction Machinery Co., Ltd.

Construction machinery demand, which is highly dependent on trends in public and private capital investment, carries the risk of significant downturns due to abrupt economic fluctuations or geopolitical changes (such as the situation in the Middle East). A decline in demand deteriorates earnings through lower factory utilization rates, inventory imbalances, and price declines caused by intensified competition. As a countermeasure, the Company collects future outlook information from local sites each month and has built a system for rapid production and shipment response in coordination with production plants.

Sales denominated in foreign currencies and raw material procurement costs are affected by exchange rate fluctuations, and the yen-converted amounts in the financial statements of overseas consolidated subsidiaries are also impacted. A strong yen has a negative impact on financial position and business results. The Company utilizes hedging measures such as local production promotion and forward foreign exchange contracts, but complete avoidance is difficult.

Since the Company holds interest-bearing debt, a rise in market interest rates carries the risk of squeezing profits through increased interest payments. In addition, in the management of pension assets, changes in the fair value of marketable securities and interest rate fluctuations may adversely affect financial position and business results. The Company addresses this through mitigating interest rate fluctuation risk via fixed-rate financing and continuous monitoring of pension asset management conditions.

Parts and materials account for a large proportion of product costs, and sharp increases in raw material prices such as steel lead to higher manufacturing costs. Shortages of parts and materials make timely procurement and production difficult, lowering production efficiency, while rising supply chain costs such as tariffs and ocean freight also squeeze profits. The Company addresses this through cost reduction via VEC activities, productivity improvement through automation and digital technology utilization, and ensuring appropriate sales prices.

The Company conducts sales financing such as installment sales and finance leases for construction machinery, carrying the risk that bad debts arising from deterioration in customers' financial condition could impact earnings. A dedicated department has been established to thoroughly manage credit and delinquent receivables, thereby maintaining a system that avoids extreme concentration of receivables.

In each country where the Company operates, it is subject to laws and regulations concerning import/export controls, intellectual property, environment/recycling, labor conditions, taxation, and other matters. Strengthening or changes to regulations carry the risk of impacting earnings through increased compliance costs and tax payments. The Legal Department coordinates with each department and group companies to investigate regulatory trends in each country, and has established a system to provide information to relevant departments when impacts are detected.

Construction machinery is required to comply with environmental regulations concerning CO2 reduction, exhaust gas, noise, and other matters, creating a risk of significant financial impact from development investment and the establishment of service, production, and procurement systems. Under governance common to TCFD/TNFD, the Company has introduced risk assessment and management processes, and strives to level out financial impacts by planning advance research into advanced environmental response technologies and mid- to long-term plans for securing personnel and facilities.

The Company holds customer information, personal information, and confidential business and technical information, carrying the risk of reputational and credibility damage in the event of an information leak. The risk of damage from cyberattacks, which have been increasing in recent years, is also rising. In July 2023, Hitachi Construction Machinery established a CSIRT placed directly under the Information Security Committee, and is promoting organized global cyber risk response through server hardening, factory network separation, and development of IT-BCP.

Security trade control laws and international regulations apply to domestic and international transactions, and if laws and regulations related to products, technology, customers, or usage are changed, there is a risk that transactions could become impossible to continue, impacting business results. The Company addresses this by continuously gathering information on trends in legal and regulatory changes, disseminating it within the group, and establishing a system for ensuring reliable compliance and risk management.

Since the Company operates development, production, and sales sites in many countries, the occurrence of natural disasters such as earthquakes and floods, infectious disease outbreaks, wars, terrorism, and similar events carries the risk of disrupting the procurement of materials and parts, production activities, and sales and service activities. When impacts are detected in advance or actually occur, the Company builds a system in coordination with group companies and business partners to minimize delays and interruptions, responding with the highest priority placed on ensuring employee safety.