DIAMOND ELECTRIC HOLDINGS Co., Ltd.

The global shift toward automotive electrification is increasing the risk of decline in the market for ignition coils, the Company's core product. Intensifying price competition and rising new product development costs associated with globalization are compounding this risk, and gaps in product competitiveness directly affect business performance. As countermeasures, the Company is pursuing the acquisition of survivor profits by securing the global No.1 share, developing next-generation fuel ignition combustion technology, and deepening CO2 reduction technology through multi-ignition and improved energy conversion efficiency.

The concentration of sales to the top 10 customer groups has reached 63.1%, meaning that deterioration in the business performance of major customers or policy changes such as shifts in overseas production could directly affect the Group's business performance. Although efforts are being made to expand the customer base, reducing this dependency is not easy. Changes in customer trends constitute a structural risk that could significantly affect earnings.

The performance of the Energy Solutions Business is affected by overall government energy policy, including the feed-in tariff system for renewable energy. Policy revisions or regulatory changes could cause sudden shifts in demand for solar power generation-related products. As a countermeasure, the Company is strengthening its expansion into energy storage systems and developing V2H/V2G technology to reduce dependence on policy.

For key raw materials such as metals, resins, and parts, soaring international prices of crude oil, iron, copper, etc., delivery delays due to insufficient production capacity at specific suppliers, and shortages of semiconductors and other components could lead to increased production costs and delays or halts in production. As countermeasures, the Company is reviewing its cost structure and passing on price increases to final products, reducing logistics costs through global procurement, securing second sources for dedicated components such as semiconductors, and strengthening supply chain resilience.

The overseas sales ratio for the fiscal year under review reached 59.1%, and foreign exchange fluctuation risk associated with foreign currency-denominated transactions and the revaluation of foreign currency-denominated assets affects business performance. In the short term, the Company utilizes forward foreign exchange contracts, and in the medium to long term, it is developing local procurement systems; however, it remains difficult to completely eliminate this risk at present. In a yen depreciation phase, the return of production from overseas bases to domestic bases in the Electronic Equipment Business also becomes a challenge.

The Company has production bases in the United States, India, China, Mexico, and other countries, and faces risks specific to overseas operations, including fluctuations in political and economic conditions, changes in laws and tax systems, and difficulties in securing human resources. Heightened geopolitical risks, such as the continuation of Russia's invasion of Ukraine and issues in the Middle East, could affect the supply chain and operations at each base. As countermeasures, the Company is reconsidering optimal production locations, thoroughly implementing exchange rate risk management across the Group, and promoting compliance education at overseas bases.

Fires, power supply interruptions, and other consequences of natural disasters could halt production activities and affect business performance. Social disruption caused by epidemics and supply chain stagnation pose similar risks. As countermeasures, the Company is formulating a BCP, conducting regular inspections of production capacity, and promoting the building of strong trust relationships with suppliers (strengthening All Diamonds), but there is no guarantee of complete prevention or mitigation.

If unexpected quality defects occur in products such as automotive ignition coils, recalls or quality-related claims from customers may arise, potentially having a material impact on business performance. Under the quality policy of "Customer Required Quality First," the Company implements immediate responses by top management when abnormalities occur and continuous quality improvement activities; however, there is no guarantee that recalls will not occur for any product in the future.

The Company is subject to laws and regulations in various countries and regions, including intellectual property protection, environmental regulations, import/export regulations, and fair competition laws, and changes in regulations or fines imposed due to violations could affect business performance and financial condition. In the past, the Company entered into a plea agreement with the U.S. Department of Justice for violation of U.S. antitrust law, resulting in the payment of a litigation loss provision of ¥796 million and the recording of a settlement payment of ¥74 million in FY2022 (ended March 2022). As countermeasures, the Company promotes thorough verification at the time of contracting and the sharing of compliance awareness across the entire company.

Some of the loan agreements entered into by the Group contain financial covenants, and a breach of these covenants could result in a demand for lump-sum repayment. If lump-sum repayment were demanded, it could have a material impact on the Group's financial condition and business performance. Although the securities report does not describe specific countermeasures, maintaining financial soundness remains an important challenge.