Risk Management
Business Risks
The following is a list of factors that the Group believes are currently existing potential risks concerning the management of the Group and its engagement in business operations. The Group is taking measures to prevent the realization of these risks and to respond as required in the event that a problem occurs. All of these factors may have a significant effect on the Group's business or operating results.
Note that in the factors listed below, statements concerning matters that pertain to the future represent the Group's judgment as of the date of issue of this document. Actual results may differ due to inherent uncertainty.
1. Operating Environment
The silicon wafers that the Group manufactures and sells are used to produce a variety of semiconductor devices. As a result, its business is vulnerable to a number of factors related to the semiconductor industry and associated industries. Among these factors are rapid deterioration of market conditions in the semiconductor industry; the rapid pace of technological progress in the semiconductor and associated industries; the tendency for products to become obsolete; rapid shifts in product lineups; declines in product prices; reliance on a limited number of customers for a large percentage of sales; volatility in the volume of orders from such customers; changes in the Group's competitive advantages due to shifts in the competitive positions of peer companies; large fluctuations in demand from customers; and other factors. All of these factors may have a significant effect on the Group's business or operating results.
Moreover, the Group was formed by combining the silicon wafer operations of the Sumitomo Metals group and the Mitsubishi Materials group. These two companies remain major shareholders of the Group. Any change in the relationship between the Group and these two companies may have a significant effect on the Group's business or operating results.
2. Group Products
In general, the prices of semiconductors tend to decline after their release in the market due to proliferation and growth in sales volumes. The Group from time to time establishes business plans that incorporate measures to offset expected declines in the prices of its products, such as by expanding its manufacturing capacity to increase sales volumes and by improving manufacturing processes to raise production yields.
However, if prices decline significantly more than expected due to a sudden deterioration in market conditions or because of some other event, such price declines could have a significant effect on the Group's business or operating results.
In addition to the above factors, problems related to product quality can arise. Specifically, a product supplied to a customer may not meet the required specifications or may be incompatible with the customer's own products. A problem of this nature may result in a serious complaint and give rise to claims for damages related to product quality. There may also be problems involving the inability to improve productivity. For example, earnings may be reduced if the Group is unable to consistently increase manufacturing efficiency by improving manufacturing yields. There is also a risk of an interruption or significant delay in manufacturing processes due to an accident involving manufacturing equipment or other causes. Such events could reduce the manufacturing capabilities of the entire the Group and make it difficult to supply customers with certain products. These events could have a significant effect on the Group's business or operating results.
3. Ability to Procure Raw Materials and Key Manufacturing Equipment and Price Fluctuations
In order to ensure a reliable supply of raw materials for its business operations, the Group has concluded long-term supply contracts with major suppliers of polysilicon, including affiliated companies of its major shareholders. However, demand for polysilicon may significantly exceed the volume of this material that manufacturers can supply. This situation would not only raise prices, but could also make it difficult for the Group to secure a consistent procurement of polysilicon.
In addition, the key manufacturing equipment used by SUMCO includes specialized machinery, such as the double-sided mirror polishing machine developed jointly with a subsidiary of Sumitomo Metal Industries. Consequently, SUMCO may not be able to find an alternative supplier of such equipment. Any problems affecting the smooth procurement of such raw materials and manufacturing equipment may have a significant effect on the Group's business or operating results.
4. Risks Related to Customers and Suppliers (Business Failure, Work Stoppage, etc.)
The Group carefully monitors the creditworthiness of its customers. However, the business failure of a customer resulting in substantial amounts of receivables rendered uncollectable could have a significant effect on the business, operating results or financial conditions of the Group. To avoid risks of disruption of procurement, the Group has concluded long-term supply contracts with multiple numbers of suppliers of various materials. However, a supplier's work stoppage due to an accident involving manufacturing equipment, business failure or other causes resulting in difficulty in procurement of various materials could have a significant effect on the Group's business, operating results or financial conditions.
5. Capital Investment
The Group has allocated a substantial volume of its resources toward expanding its 300 mm wafer business, which is its core business. However, demand for 300 mm wafer products has sharply declined due to the drastic changes in economic conditions that followed the financial crisis that started in the United States. Consequently, the Group is currently reviewing and revising its capital investment plans. While the Group believes that demand for 300 mm wafers will increase over the medium and long terms, demand for products might not grow as fast as anticipated due to future economic developments and changes in the business environment surrounding the semiconductor industry. On the other hand, capital investment could fail to keep up with growth in demand for wafers, or delays could occur in the installation of manufacturing equipment. All of these instances could have a significant effect on the Group's business or operating results.
The Group is investing in the manufacture of silicon wafers for solar energy cells based on long-term contracts. However, future economic developments and deterioration of the business environment surrounding the solar energy cell industry could have a significant effect on the Group's business or operating results.
6. Technology and R&D
The semiconductor industry is characterized by rapid advances in technology. Progress takes the form of higher circuit densities, finer lines, new applications for semiconductors, greater precision and higher manufacturing efficiency. Customers have a broad range of technological demands with regard to silicon wafers supplied by the Group and are constantly demanding achievement of even higher specifications. For the purpose of increasing its market share, the Group is engaged in R&D activities with an emphasis on technologies for 300 mm wafers, an area where demand is expected to grow over the medium and long terms. By product category, emphasis is being placed on technologies related to epitaxial wafers, annealed wafers and other high value-added products, as well as to technologies pertaining to next-generation wafer products.
However, R&D activities may not produce the expected benefits due to difficulties in responding to technological advances in the semiconductor industry, the Group's inability to comply with customer demands, or other problems. These events could have a significant effect on the Group's business or operating results.
7. Intellectual Property
The Group is aware that accumulating patents and other forms of intellectual property is vital to its ability to compete with other silicon wafer manufacturers. The Group holds a large number of patents in Japan and other countries and has many patent applications pending. In addition, the Group holds fundamental patents concerning the manufacture of crystals grown from larger charge sizes and low-defect crystals, high-precision double-sided polishing and other items. The Group is also working on applying for patents involving technologies and peripheral technologies associated with existing patents.
However, the Group may infringe on the intellectual property rights of a third party if such party already holds a patent of which the Group is unaware. If such an infringement occurs, the Group may become a defendant in litigation seeking an injunction to cease its operations, damages or other actions. These events may have a significant effect on the Group's business or operating results.
8. Overseas Operations
The Group sells silicon wafers to major semiconductor manufacturers worldwide and has manufacturing and sales operations in the United States, Europe and Asia, as well as in Japan. Consequently, in addition to exchange rate risk, the Group's production and marketing activities may be affected by national and regional economic and political developments; changes in regulations, taxation or currency conversion restrictions; wars and acts of terrorism or epidemics or natural disasters; differences in social or labor customs; and the state of social infrastructure.
9. Environmental Regulations
The Group must comply with laws and regulations in Japan and other countries concerning the environment, particularly with regard to regulations applicable to individual manufacturing facilities. Such laws and regulations cover atmospheric emissions and effluents; the use and handling of harmful substances; the disposal of industrial waste materials; investigations of soil and groundwater pollution and remediation as needed; and numerous other items. The Group may be found legally responsible for the payment of certain expenses and damages or may be required to take other actions. Furthermore, in recent years, there is a general tendency for governments to tighten their environmental laws and regulations. Consequently, the Group may become subject to new environmental laws and regulations in Japan and other countries. In such cases, the Group may incur additional expenses for complying with these laws and regulations. Any of these events may have a significant effect on the Group's business or operating results.
10. Natural Disasters and Accidents
The manufacturing bases of the Group are vulnerable to natural disasters, such as earthquakes, typhoons, tsunamis and volcanic activities, as well as to accidents, fires, acts of terrorism and other contingencies and crises. Any of these events could interrupt manufacturing activities, damage equipment, disrupt access to water and electricity, and cause other problems that could have a significant effect on the Group's business or operating results.
In particular, in case the Group's facilities housing its manufacturing processes of the 300 mm wafer, the main product of the Group, are damaged by natural disasters, accidents, fires or other events, this could have a serious impact on the Group's ability to manufacture and sell 300 mm wafers. Such an event could have a significant effect on the Group's business or operating results.
11. Acquisition of Other Companies
When considering the acquisition of another company, SUMCO attempts to minimize risks by performing due diligence concerning the financial conditions and other aspects of the relevant company under consideration. However, such acquisitions could have a significant effect on the Group's business or operating results in unexpected situations, such as drastic changes in market conditions.
12. Other Risks
The following events resulting from changes in market conditions and other developments could have a significant effect on the Group's business results or financial condition.
[1] Major changes in market conditions, which necessitate that certain business and organizational restructuring or other actions be taken;
[2] With regard to liabilities for retirement benefits, a decline in the market value of SUMCO's pension fund assets or a decline in the return on these assets, or significant changes in the assumptions pertaining to the calculation of liabilities for retirement benefits;
[3] Significant changes in projections of future profits caused by serious deterioration in economic conditions, which necessitate that certain accounting measures be taken;
[4] Changes in the operating environment or other events resulting in greater demand for funds than previously anticipated by the Group, or the occurrence of events of default under agreements with financial institutions; inability to procure funds at the desired time and under the desired terms due to a change in market interest rates, market conditions or other factors.
