The following is a list of factors that the SUMCO Group identifies as major risks to its management and business activities. Although the Group is taking measures to prevent the realization of these risks and to respond as required in the event that a risk materializes, these factors may have a significant effect on the Group's operations, business results, or performance.
Note that forward-looking statements contained in the descriptions of the factors below are based on the Group's judgment as of the date of publication of this document. Actual results may differ as such statements include uncertainty.
1. Operating Environment
The silicon wafers that the SUMCO Group manufactures and sells are used for semiconductor substrates installed in mobile devices, such as smartphones, tablet PCs, and personal computers, as well as in applications for automobiles and a wide range of other consumer products. As a result, its business is vulnerable to a number of factors specific to the semiconductor industry and associated industries. Among these factors are sharp deterioration of market conditions in the semiconductor industry; the accelerated pace of technological progress in the semiconductor and associated industries; obsolescence of products; dramatic changes in product mixes; declines in product prices; reliance on a limited number of customers for a large percentage of sales, and volatility in the volume of orders from such customers; changes in the Group's competitive advantage due to a shift in its standing in comparison to competitors; and large fluctuations in demand from customers. These factors may affect the Group's business results or performance.
In addition to the above factors, the domestic and foreign economic situation such as the political situation including the countries with our customers, and changes in resources prices including energy and power prices may affect the Group's business results or performance.
2. Group Products
Prices of semiconductors that use products manufactured by the SUMCO Group generally tend to decline after their market release due in part to widespread application and subsequent growth in sales volumes. The Group's business plans incorporate various measures aimed at offsetting the expected decline in the prices of its products. These measures include efforts to raise sales volumes by increasing production levels and to improve manufacturing processes to raise production yields. However, if prices decline more significantly than expected due to a sudden downturn in the supply-demand balance or because of some other event, such price declines may affect the Group's business results or performance.
In addition to the above factors, problems related to product quality may arise. Specifically, a product supplied by the Group to a customer may not meet the required standards and specifications or may be incompatible with the customer's own products. Such problems may result in serious complaints on product quality. Problems pertaining to failure to reach targets for improving productivity may also arise. In such instances, earnings may decline if the Group is unable to consistently improve manufacturing efficiency, for example, by raising production yields. The Group is also exposed to the risk of interruption or significant delay in manufacturing processes due to an accident involving manufacturing equipment, system trouble or other causes. Such events could reduce the production capacity of the entire Group and make it difficult to supply customers with certain products. Consequently, these events may affect the Group's business results or performance.
3. Procurement of Raw Materials
The principal raw material for silicon wafers is extremely high-purity polycrystalline silicon. As only a very limited number of manufacturers are capable of producing such silicon, there is a risk of supply instability. To ensure stable procurement of raw materials, the SUMCO Group has concluded with the world's major polycrystalline silicon manufacturers long-term purchase agreements, under which the manufacturers are committed to supplying, and the Group agrees to purchase, specified volumes of polycrystalline silicon over a specified period of time. However, current consumption projections are no longer in line with demand expectations that prevailed at the time when the long-term purchase agreements were entered into. As a result, the Group is currently holding excess inventory.
In addition, because purchase prices are decided in long-term contracts, opportunities for the raw materials cost reduction may be limited until expiration of these contracts and inventory recovers to adequate level.
While inventory is expected to recover to appropriate levels over the medium- to long-terms, it should be noted that changes in consumption amounts or the introduction of necessary accounting measures due to significant changes in the business environment or other factors may affect the Group's business results, financial position, or performance.
4. Procurement of Key Manufacturing Equipment
Critical manufacturing equipment used by the SUMCO Group includes such specialized machinery as double-side polishing machines developed jointly with equipment manufacturers. Taking this into consideration, the Group may not be able to find alternative suppliers of such equipment. Consequently, any problem hampering the smooth procurement of such manufacturing equipment may affect the Group's business results or performance.
5. Risks Related to Customers and Suppliers (bankruptcies, shutdown, etc.)
While the SUMCO Group carefully monitors the creditworthiness of its customers, bankruptcies of customers resulting in substantial amounts of uncollectable receivables may affect the Group's business results, financial position, or performance. To avoid risks of disruption in procurement, the Group has taken multiple measures, such as concluding supply contracts with multiple suppliers of various materials. However, in the event, for example, of a supplier's bankruptcy due to a sharp deterioration in economic conditions, or of a supplier's shutdown due to an accident involving manufacturing equipment, the resultant difficulty in procuring materials may affect the Group's business results, financial position, or performance.
6. Capital Investment
The SUMCO Group undertakes capital investment based on its medium- to long-term demand projections. However, if changes in economic trends or in the operating environment of the semiconductor industry result in substantial shifts in projected demand, the Group's business development, business results, or performance may be affected.
7. Procurement of Funds
Significant deterioration in the SUMCO Group's financial position could result in breach of financial covenants set out in its syndicated and other loan contracts, and forfeit the benefit of time. Such an event could trigger demands for repayment of relevant loans, and in turn lead the Group to affect is ability to procure funds.
In addition, failure to procure funds at the desired time or under the desired terms due to interest rate levels, market conditions, or other factors may affect the Group's business results or performance.
8. Technology and R&D
The semiconductor industry is characterized by rapid advances in technology, a process that finds expression in such forms as 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 SUMCO Group and are constantly demanding the achievement of even higher specifications. To meet customer demands, the Group is engaged in R&D activities with an emphasis on technologies for 300 mm wafers, an area where medium- to long-term growth in demand is expected. By product category, emphasis is being placed on technologies related to epitaxial wafers and other high value-added products, as well as on technologies pertaining to next-generation wafer products.
However, R&D activities may not produce the expected benefits if the Group becomes unable to respond to technological advances in the semiconductor industry and to comply with customer demands, or if the technology development is delayed compared with competitors. In that event, the Group's business development, business results, or performance may be affected.
9. Intellectual Property Rights
The SUMCO Group recognizes that securing patents and other intellectual property rights is vital to its ability to compete with other silicon wafer manufacturers. The Group holds a large number of patents, including those pending, both in Japan and abroad.
Moreover, the Group holds basic patents pertaining to the manufacture of crystals grown from larger charge sizes, low-defect crystals, high-precision double-side polishing, and other items. The Group is also working on applying for patents involving technologies developed based on, and peripheral technologies associated with, its patented technologies.
However, the Group may infringe a third party's patent without knowing the patent exists. In that case, the Group may become a defendant in litigation seeking injunction against the use of the patent, payment of damages, or other actions. These events may affect the Group's business development, business results, or performance.
10. Overseas Operations
The SUMCO Group supplies silicon wafers to major semiconductor manufacturers and other entities worldwide. It also has manufacturing and sales bases in North America, Europe, and Asia, as well as in Japan. As a result, in addition to being susceptible to exchange-rate risks, the Group's manufacturing and sales activities may be affected by changes in the economic and political developments, laws and regulations, taxation, currency conversion restrictions, and other conditions of the countries and regions in which the Group operates. Other factors that may affect its activities include wars and local conflicts, acts of terrorism or natural disasters, epidemics, different social and labor practices, and underdeveloped social infrastructure in those countries and regions.
11. Environmental Laws and Regulations
The SUMCO Group operations, in particular its manufacturing bases, are subject to environmental laws and regulations in Japan and abroad that govern such matters as energy consumption, atmospheric emissions and effluents, the use and storage of harmful chemical substances, the disposal of industrial wastes, and investigation of soil and groundwater pollution and removal of their contaminants. Pursuant to these laws and regulations, the Group may be held legally responsible for certain expenses and damages or may be required to take other actions. Furthermore, in recent years, there has been a general tendency toward the tightening of environmental laws and regulations. Looking ahead, the Group may become subject to new environmental laws and regulations in Japan and other countries. In such cases, the Group could incur additional expenses for complying with these laws and regulations. Any of these events may affect the Group's business development, business results, or performance.
12. Natural Disasters and Accidents
In the event of natural disasters, such as typhoons, rainstorms, earthquakes, tsunamis, and volcanic activities, as well as of accidents, fires, acts of terrorism, and other contingencies and crises, the SUMCO Group manufacturing bases may face unexpected problems, including shutdown of operations, damaged equipment, and limited access to water and electricity. In that event, the Group's business development, business results, or performance may be affected.
In particular, in the event that the Group's facilities housing its 300 mm wafer manufacturing processes are hit by natural disasters, accidents, fires, or other events mentioned above, the Group's ability to manufacture and sell 300 mm wafers, its main product, may be impaired. Such an event may affect the Group's business development, business results, or performance.
13. Acquisition of Other Companies
When considering the acquisition of another company, the SUMCO Group endeavors to minimize risks by performing due diligence concerning the financial conditions and other aspects of the Company under consideration. However, in the event of drastic changes in the business environment and other unexpected situations, such acquisitions may affect the Group's business development, business results, or performance.
14. Other Risks
The following events resulting from changes in the business environment and other developments may affect the SUMCO Group's business results, financial position, or performance:
- 1.Major changes in the business environment necessitating business or organizational restructuring or other actions;
- 2.With regard to retirement benefit obligations, a decline in the market value of SUMCO's pension assets, a decline in return on investment, or significant changes in the actuarial assumptions used in the calculation of retirement benefit obligations;
- 3.Deterioration in earnings or significant changes in projections of future earnings caused by changes in the economic environment or other developments, which necessitate that certain accounting measures be taken;
- 4.Inability to recruit the human resources needed for the operations of the SUMCO Group;
- 5.Lawsuits and other legal actions brought against the SUMCO Group for product failure and other reasons;
- 6.Failure of internal governance to function properly.