Kawasaki Heavy Industries, Ltd.

International geopolitical risks are intensifying, including the situation in the Middle East, China's export restrictions on Japan, and U.S. tariff measures, raising concerns about disruptions in procurement and logistics as well as cost increases at the Kawasaki Heavy Industries Group's production and sales sites spanning multiple countries. If responses to regulations in various countries, including Japan's Economic Security Promotion Act, prove insufficient, there is a risk of a material impact on business continuity. As countermeasures, the Group conducts continuous risk monitoring, secures alternative procurement sources, diversifies production sites, and passes costs through to sales prices.

In 2024, misconduct cases came to light in the submarine repair business and marine engine business, along with a case of improper labor-hour allocation at the Kobe Shipyard and a case of misconduct in fuel efficiency testing for submarine engines, giving rise to risks of loss of social trust and damage claims. The Group has disclosed the findings of investigations by a Special Investigation Committee and established a new Compliance Special Promotion Committee, continuing to implement recurrence prevention measures based on three pillars: "building a system that prevents misconduct," "strengthening the detection of misconduct," and "reforming organizational culture and awareness." If violations of laws or ethical standards recur, there is a possibility of a material impact on operating results and corporate value.

As the Group provides a wide range of products and services including social infrastructure in aerospace, defense, energy, and railways, unexpected product defects or quality deficiencies could lead to damage claims or a loss of social trust. Since FY2019, a company-wide dedicated organization for promoting TQM has been established, advancing sophistication of quality control using digital technologies, and in FY2026 a Quality Assurance General Division will be newly established at the head office to strengthen the company-wide quality control system.

In large-scale projects, there are risks of losses arising from estimation, contract terms, technical specifications, execution capability, and receivables management, and in the past significant losses have been recorded due to deficiencies in contract terms or differences in interpretation. For large-scale projects currently underway, including the large-scale hydrogen supply chain construction project (a NEDO Green Innovation Fund project), the Group has strengthened risk screening prior to order acceptance, established pre-contract checks by the legal department, and set up a system for timely reporting to the Management Council and the Board of Directors. If trouble occurs in the execution of a project, there is a possibility of a material impact on operating results.

Against the backdrop of ongoing inflation in Japan and overseas and heightened tensions in the Middle East, increases in labor costs, energy prices, raw material prices, and logistics costs continue, and if cost increases or parts supply shortages occur beyond what was assumed in the business plan, there is a possibility of an impact on operating results. As countermeasures, the Group incorporates escalation clauses into sales contracts and appropriately passes on increases in procurement prices to sales prices, while also implementing ongoing cost reduction activities.

Against the backdrop of increasing global electricity demand driven by AI and data center demand growth, if the supply of renewable energy and nuclear power fails to keep pace, dependence on thermal power generation will continue, creating a risk that the transition to hydrogen-related products promoted by the Group could be delayed relative to expectations. While closely monitoring decarbonization policy trends in various countries, the Group is strengthening its energy business, including gas turbines and gas engines, and responding to market needs during the transition period by expanding its lineup of "hydrogen-ready products" that can use both natural gas and hydrogen as fuel.

With the advance of digitalization in business processes, cyberattacks targeting the entire Group, including overseas sites, and the supply chain, are on an increasing trend, heightening the risk of losses due to leakage of important information, system shutdowns, ransom demands, and attacks on factory production systems. The Group is promoting the strengthening of its global cyber defense system, sophistication of security operations, establishment of communication systems with suppliers, and development of cyber BCP, while also conducting ongoing security education for officers and employees.

Due to the declining working-age population from the falling birthrate and aging population, intensifying competition to acquire talent, and the increasing fluidity of the labor market driven by diversifying career awareness, there is a risk that it may become difficult to secure the human resources necessary for business continuity and growth. Under the "Kawasaki Heavy Industries Group HR Policy," the Group is working to develop an environment where employees can feel a sense of job satisfaction and ease of working, while also promoting management that maximizes results with fewer personnel through operational efficiency gains using robots, AI, and DX.

The Group's earnings forecasts incorporate a certain degree of foreign exchange rate fluctuation risk, and there are particular concerns that the situation in the Middle East is increasing short-term volatility in exchange rates, as well as longer-term exchange rate effects through rising crude oil prices. In addition to hedging actual-demand foreign-currency-denominated receivables and payables through forward exchange contracts and other means, the Group works to reduce risk through measures such as passing on exchange rate impacts to prices, primarily in the Powersports & Engine business, and reviewing the ratio of overseas procurement and overseas production.

If financial markets fail to function normally due to a financial crisis or other event, it may become difficult to raise funds as planned, and a sharp rise in market interest rates could impact operating results through increased interest expense burdens. In addition, if covenants (financial restriction clauses) attached to borrowings are breached, there is a risk of a material impact on the financial position due to loss of the benefit of the term or demands for lump-sum repayment. As countermeasures, the Group diversifies its fundraising methods, secures sufficient credit facilities including commitment lines, raises long-term funds at fixed interest rates, and actively utilizes sustainable finance.