SHOWA SHINKU CO., LTD.

The Group's Vacuum Technology Application Equipment is production equipment for crystal devices, optical devices, electronic components, etc., and its business performance is affected by capital expenditure trends among device manufacturers and demand fluctuations for smartphones and digital home appliances. A sharp increase in demand risks the loss of order opportunities, while a sharp decrease in demand risks difficulty in securing orders or order cancellations. As a countermeasure, the Group monitors trends in the electronic component market and shares information with device manufacturers, based on which it flexibly adjusts production capacity through personnel arrangement and operating day adjustments.

Due to the acceleration of technological innovation and the shortening of product life cycles among device manufacturers, the needs for development equipment required by the Group have become more sophisticated, higher in precision, and more diverse. Unexpected changes in market and product trends or the emergence of alternative technologies could result in prolonged development periods and increased development costs. As a countermeasure, the Group continues to make ongoing R&D investments, and in fiscal 2019 newly established an R&D building within the Sagamihara Plant to strengthen its system for supporting customers' development activities.

In addition to persistent price-reduction requests in the electronic component market, price competition has intensified due to the rise of Asian electronic component manufacturers, and requests from device manufacturers to lower equipment sales prices have become routine. If further intensification of price competition results in cost reductions and sales expansion being unable to offset price declines, this could adversely affect business performance and financial condition. As a countermeasure, the Group continues to actively pursue cost reductions while working to expand sales and improve profitability.

Since the Group procures all production materials from outside sources, procurement difficulties caused by rising raw material prices, supply-demand tightness, natural disasters, etc., can affect production. Should raw material prices surge sharply or supply conditions deteriorate beyond expectations, this could have a material impact on business performance and financial condition. As a countermeasure, the Group shares information with suppliers, maintains strategic inventories of key materials, diversifies its supplier base, and provides guidance to suppliers as necessary to maintain quality.

Amid growing requests from device manufacturers for shorter delivery times, the Group sometimes procures materials in advance or engages in anticipatory production for projects judged to have a high probability of receiving orders, but such projects do not always ultimately result in orders. As set manufacturers tend to reduce inventories amid an unstable global situation, the risk of losses from such anticipatory production could affect business performance and financial condition. As a countermeasure, the Group mitigates this risk through careful deliberation at management meetings, confirmation of device manufacturers' intentions, and advance procurement focused on components with high potential for alternative use.

The Group has two subsidiaries in China (Shanghai) and conducts business across Asia, primarily China and Taiwan, exposing it to risks from sudden changes in political conditions, exchange rates, legal systems, and import/export regulations. With the recent expansion of emerging markets, sudden changes in politics, economics, conflicts, etc., could affect business performance and financial condition. As a countermeasure, the Group monitors the management conditions of overseas subsidiaries at monthly management meetings and continuously monitors trends in Chinese laws and regulations through a consulting firm.

While the Group holds patents related to thin-film formation equipment applying vacuum technology, there are risks of invalidation by third parties, insufficient protection in certain regions, and imitation. In addition, if the Group infringes on a third party's patents, this could result in restrictions on production and sales of products and payment of damages, potentially affecting business performance and financial condition. As a countermeasure, the Group works to avoid such risks through intellectual property investigations prior to business activities and continuous monitoring of other companies' patent applications and licensing status.

With the overseas sales ratio reaching approximately 47.9% and the Group having overseas subsidiaries, exchange rate fluctuations can affect the yen-converted amounts of revenues, expenses, assets, and liabilities from foreign-currency-denominated transactions, creating a risk of fluctuations in business performance and financial condition. As a countermeasure, the Group in principle conducts transactions in yen, and for exceptional foreign-currency-denominated transactions, adopts a policy of reflecting exchange rate fluctuations in sales prices.

The occurrence of disasters or the spread of infectious diseases at business site locations could lead to suspension of operations, and damage to buildings and equipment or delivery delays to customers caused by production disruptions could affect business performance and financial condition. During the COVID-19 pandemic, delays in material procurement and difficulties in equipment startup work actually occurred due to restrictions on overseas travel. As a countermeasure, the Group has worked on establishing disaster response regulations, thorough hygiene management, implementation of staggered work hours and telework, and the construction of remote support systems.

The Group manages confidential information related to production technology, R&D, procurement, sales, etc., as well as personal information, through its information systems, and failures caused by cyberattacks, disasters, or human factors could result in the suspension of critical operations or leaks of confidential and personal information. Such incidents could disrupt business continuity and affect business performance and financial condition. As a countermeasure, the Group implements security measures on both the hardware and software sides of its information systems, and continuously provides education and awareness activities to improve employees' information literacy.