DENSO CORPORATION

An economic downturn or contraction in automotive demand in major markets including Japan, North America, Europe, and Asia would directly affect performance. In addition, competitors manufacturing in low-labor-cost regions may intensify price competition, potentially adversely affecting the consolidated companies' sales. The consolidated companies seek to diversify this risk by maintaining a multi-regional production structure.

Appreciation of the yen against major currencies, primarily the US dollar, euro, and yuan, could reduce export competitiveness and diminish sales and profits after conversion into yen. The consolidated companies mitigate short-term fluctuation risk through local production and currency hedging transactions, but may find it difficult to respond to medium- to long-term exchange rate fluctuations. Exchange rate fluctuations may adversely affect business performance and financial condition.

Raw materials and components are procured from multiple suppliers outside the group, but there is a risk of price surges or shortages due to market changes, trade issues, geopolitical factors, or accidents at suppliers. This could lead to increased manufacturing costs or production stoppages, potentially adversely affecting business performance and financial condition. The consolidated companies strive for stable procurement through basic transaction agreements, but complete avoidance cannot be guaranteed.

The consolidated companies invest in research and development at a target of around 9% of revenue, but the development of new products and technologies is complex and uncertain, and there is no guarantee that such investments will succeed. There is a risk that rapid technological advancement or changes in market needs could render products obsolete, or that delays in commercialization could result in failure to keep pace with market demand. If these risks materialize, future growth and profitability may decline.

In the automotive industry, price competition remains extremely severe amid the entry of emerging parts manufacturers, consumer electronics manufacturers, and AI-driven startups, as well as ongoing consolidation among existing competitors. Cost increases from inflation and the impact of US tariffs are also squeezing profits, and a decline in competitive advantage could lead to customer attrition. The consolidated companies are countering this by continuously investing in research and development to offer high-value-added products, but future maintenance of competitiveness is not guaranteed.

Although manufacturing follows global quality control standards, complete elimination of defects across all products or complete prevention of recalls cannot be guaranteed. A large-scale recall or product liability claim could result in substantial cost burdens and a decline in sales due to reputational damage. The company carries product liability insurance, but this may not fully cover the ultimate amount of damages.

Sales to the Toyota Group account for approximately half of the consolidated companies' total sales, meaning that a deterioration in the Toyota Group's business performance or changes in its procurement policy could significantly affect the consolidated companies' results. Requests from customer companies for price reductions could lower profit margins, and unexpected contract terminations could lead to a sharp decline in sales. This high degree of dependence on a specific customer entails risk from external factors that the consolidated companies cannot control.

If current products cannot keep pace with tightening fuel efficiency and emissions regulations or the expansion of electrification amid the transition to a decarbonized society, there is a risk of lost sales opportunities. In addition, the intensification of extreme weather events such as cyclones and floods could cause factory shutdowns or supply chain disruptions, potentially reducing sales. The consolidated companies are responding through scenario analysis referencing the TCFD framework, accelerating research and development, and diversifying the supply chain among multiple suppliers.

The threat of cyberattacks targeting internal networks, production lines, and in-vehicle products is increasing, and incidents targeting the consolidated companies have actually occurred. An attack far exceeding expectations could disrupt critical operations, leak confidential information, and adversely affect the functionality of in-vehicle products, potentially leading to a loss of competitiveness and reputational damage. The consolidated companies are working to strengthen security measures, provide employee training, and build and embed a group-specific in-vehicle security framework.

Many of the consolidated companies' business sites are located in areas designated for Nankai Trough earthquake disaster prevention measures, creating a risk that production and delivery activities could halt in the event of a major earthquake. Disasters occurring at customer or supplier companies could also affect the entire supply chain. The consolidated companies work to mitigate damage through regular disaster prevention inspections, business continuity plan (BCP) formulation, and the development of emergency action manuals, but complete prevention of impact cannot be guaranteed.