HI-LEX CORPORATION

The Group operates primarily in the automotive parts industry, and its business performance is linked to the production trends of automotive-related manufacturers in its principal markets of North America, China, Asia, and Europe. Economic fluctuations in each region, medium- to long-term changes in demand, and changes in product fitting rates may affect business performance and financial condition. As countermeasures, the Group is working on developing value-added products such as safety and weight-reduction features, and expanding sales into non-automotive fields.

The Group conducts production and sales activities worldwide, and fluctuations in exchange rates have historically had a significant impact on business performance and financial condition. In the short term, the Group hedges through forward foreign exchange contracts and currency swap transactions, but complete avoidance of this risk is difficult, and sharp exchange rate fluctuations directly affect business performance. In the medium to long term, the Group aims to reduce this risk by advancing the establishment of procurement systems for raw materials and parts across various regions worldwide.

The purchase prices of steel and resin, the Group's main raw materials, are affected by domestic and overseas market conditions and exchange rate fluctuations. In recent years, the global surge in raw material prices and increased procurement costs due to semiconductor supply shortages have become new challenges, and unexpected abnormal price fluctuations may affect business performance. As countermeasures, the Group is working to minimize risk through the adoption of alternative materials and procurement collaboration among Group companies.

In the automotive industry, the shift to by-wire systems is progressing with the advancement of EVs and similar technologies, and a transformation and evolution of automotive functions is expected over the medium to long term. The Group is working on developing and commercializing new products for by-wire applications, but if technological innovation progresses rapidly, it is uncertain whether the Group can maintain the same high level of competitiveness in new product fields as it has with Control Cables. This uncertainty entails the dual risk of declining demand for existing products and the need to secure competitiveness in new markets.

The Group holds and acquires intellectual property such as patents, designs, and trademarks related to its products, which have been, are, and will continue to be important for business expansion. If intellectual property cannot be broadly protected or is illegally infringed upon, business performance and financial condition may be affected. In particular, as overseas expansion increases, differences in intellectual property protection systems among countries may become a factor that heightens this risk.

The Group manufactures products in accordance with quality control standards, but there is no guarantee that all products are free of defects and that losses will not occur in the future. Depending on the nature of a defect, significant additional costs may be incurred and corporate reputation may decline, potentially affecting business performance and financial condition. In particular, claim costs related to software tend to be high, and the Group is working to roll out quality policies to sites around the world and to improve the quality control levels of each Group company.

The Group's overseas business activities are growing in importance, and it intends to continue expanding overseas in the future. There are complex risks including unexpected changes in laws and regulations, adverse political and economic factors such as import/export restrictions, foreign exchange controls, tax systems, and tariff policies, difficulty in securing human resources, labor disputes such as strikes, and social unrest caused by terrorism or war. As countermeasures, the Group is thoroughly examining country risks, developing local human resources, and building appropriate internal management systems.

The Group strives to conduct planned maintenance and inspection of factories and other facilities to maintain production, but if a disaster exceeding expectations occurs, such as an earthquake or storm/flood damage, significant damage to facilities may occur, potentially affecting business performance and financial condition. As an automotive parts manufacturer, a halt in production lines is directly linked to the responsibility to supply business partners, and thus carries a risk of spillover effects across the entire supply chain. Currently, preventive measures through facility maintenance and inspection are the main countermeasure.

The Group holds investment securities, mainly shares of business partners, for the purpose of maintaining and strengthening business relationships, and all securities with market value are measured at fair value. These are affected by fluctuations in stock market prices and other fair values, and if the fair value or substantial value declines significantly compared to the acquisition cost, impairment will be recognized after considering the possibility of recovery, which may affect business performance and financial condition. Due to the nature of these policy-holding shares, there is a risk that valuation losses may concentrate during periods of deteriorating market conditions.