IHI Corporation

In FY2024, a series of improper incidents were discovered at subsidiaries, most recently IHI Aerospace, which was suspended from participating in JAXA competitive bidding due to false reporting and improper billing to JAXA. If legal violations occur, this may result in losses such as fines, penalty surcharges, and additional tax assessments, as well as lost business opportunities due to administrative sanctions such as business suspension, and a decline in social reputation. As a recurrence prevention measure, the Group is rolling out compliance education programs targeted at each organizational level, promoting more active personnel rotation, and encouraging dialogue activities at each workplace.

The business environment is changing significantly due to US-China tensions, deteriorating conditions in the Middle East, and tariff measures, and if the Group becomes subject to export controls or other regulations, this could result in lost sales opportunities, business suspension, and supply chain disruption. If transactions are conducted in violation of the policies and regulations of various countries, including Japan, or if responses are insufficient, there is also a risk of damage to reputation and social credibility. As countermeasures, the Group is conducting internal transaction review and business partner screening, in addition to strengthening cyber, personnel, and physical security measures.

As the Group operates procurement, production, exports, sales, and construction globally, uncertainty is increasing further due to the deteriorating situation in the Middle East, Russia's invasion of Ukraine, US-China tensions, and other factors, creating a risk that business continuity could become difficult due to conflict, terrorism, political instability, default, and other events. If foreign exchange transaction freezes, remittance suspensions, uncollectible receivables, or seizure of invested assets materialize, this could adversely affect business performance and financial condition. The Group addresses this through thorough trade insurance coverage on a project-by-project basis, building a system for collecting and sharing risk information, and preparing and reviewing business continuity plans (BCPs).

For large-scale projects, construction costs may exceed estimates after contract conclusion due to surging energy prices from materialized geopolitical risks, sudden changes in materials and equipment prices and transportation costs, supply chain disruptions, and exchange rate fluctuations, potentially resulting in penalties or additional costs due to failure to meet performance requirements or delivery deadlines. Even for large-scale investments, failure to achieve target investment efficiency or recognition of losses may occur due to economic environment and market changes that could not be anticipated at the time of decision-making. The Group addresses this through multifaceted risk reviews conducted in collaboration between internal and external experts and the head office review department, as well as continued and strengthened monitoring after order receipt or investment commencement.

During periods of yen appreciation, the yen-equivalent amount received from foreign-currency-denominated export construction contracts decreases, while during periods of yen depreciation, the yen-equivalent expenditure for overseas procurement denominated in local currencies increases; exchange rate fluctuations thus directly affect business performance and financial condition. When interest rates rise, in addition to increased interest expenses and deteriorating net financial income, worsening terms for borrowings and bond issuances may adversely affect fund procurement. The Group implements risk hedging through forward foreign exchange contracts and currency matching (marrying), but may not be able to fully respond if fluctuations exceed expectations.

Syndicated loans carry financial covenants related to equity capital and profit, and if these are breached due to deteriorating business performance or other factors, this may result in a review of borrowing terms or an obligation for early repayment. If credit rating agencies downgrade the Group's ratings, the Group may be forced into transactions on unfavorable terms or become unable to conduct certain transactions, adversely affecting fund procurement. In addition, following the bankruptcy filing of an airline in May 2023, a portion of trade receivables through the Commercial Aero Engines (Spare Parts & Aftermarket Maintenance) international joint business has become potentially uncollectible, and the Group is working to enhance receivables management.

Information leaks or business disruption may occur due to increasingly sophisticated and elaborate cyberattacks, loss or theft of information devices and documents, and security incidents or system failures originating from outsourcing partners or the supply chain. If such incidents occur, this could adversely affect business performance and financial condition through a decline in social credibility, occurrence of damages, and increased recovery costs. The Group is working to continuously strengthen information security measures through establishing various regulations, technical and organizational measures, and employee education and awareness activities.

While each company within the Group must conduct business in accordance with the laws and social norms of each country and region and promote appropriate group management, if any company responds inappropriately to various risks, this could cause harm to customers and a decline in the Group's reputation. The series of improper incidents discovered at subsidiaries in FY2024 is an example of this risk materializing, and strengthening governance across the entire Group has become a key challenge. The Group has established a risk management system with clearly defined roles and responsibilities for the first, second, and third lines of defense, and conducts monitoring and internal audits.

If the supply chain is disrupted due to rapid fluctuations in materials and equipment prices, changes in supply-demand balance, sudden changes in the international situation, severe disasters, or the spread of large-scale infectious diseases, this could result in increased costs and delivery delays. Procurement costs may also rise in the process of promoting CSR procurement. The Group strives for stable procurement by promoting in-house production of key components within the Group, diversifying procurement sources, and thoroughly managing quality and delivery schedules.

Although the Group has established a quality management system and put in place quality assurance mechanisms and structures, if unexpected quality problems occur, this could lead to a decline in customer and social evaluation as well as liability for damages, adversely affecting business performance and financial condition. Quality assurance is positioned as a key theme alongside compliance in the FY2026 risk management activity policy as well, and strengthening quality control across the entire Group is required. The Group addresses this by incorporating requirements, including customer requirements, and by establishing and operating a quality management system that includes risk response at the planning stage.