The SUMCO Group identifies the factors below as material risks to its management and business activities. Although the Group adopts a policy of endeavoring to prevent the realization of these risks and to respond as needed in the event a risk materializes, these factors may have a significant effect on the Group's operations or performance.
Note that forward-looking statements in the descriptions of the factors below are based on the Group's judgment as of the end of fiscal year 2019. 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 personal computers, smartphones, and tablets, as well as being used in automobiles and in various other products including consumer products. As a result, the business is affected by a number of factors specific to the semiconductor industry and associated industries. Among these factors are sharp deterioration of market conditions, sudden advances in technical innovation, product obsolescence, sudden changes in product configuration, drop 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 standing in relation to customers, and large variance in customer demand. Such factors may affect the Group's performance.
Other factors that may affect the Group's performance are changes in the political situation in each country including the countries of major customers, and the economic situation in and outside Japan including a trend toward protectionism, the impacts from US-China trade friction, stalling of economic activities due to epidemics, and changes in the prices of energy and other resources and in electric power prices.
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 include efforts to raise sales volumes by increasing production levels and to raise production yields by improving manufacturing processes. However, if prices decline more significantly than expected due to a sudden downturn of supply-demand balance or because of some other event, such price declines may affect the Group's 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 about 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, therefore affecting the Group's 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 long-term purchase agreements with the world's major polycrystalline silicon manufacturers, 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, due to a divergence of consumption projections from demand expectations that prevailed at the time when the long-term purchase agreements were entered into, the Group holds excess inventory.
In addition, because purchase prices are decided in long-term contracts, opportunities for raw materials cost reduction may be limited until these contracts expire and inventory returns to proper levels.
The outlook for increase in “Raw Materials and Supplies” is as indicated under “Management Policies, the Management Environment, and Challenges Facing the SUMCO Group 3. Management Environment and Challenges Facing the Group.” It should be noted that changes in consumption amounts or the implementation of necessary accounting measures due to significant changes in the business environment or other factors may affect the Group's performance or financial condition.
4. Procurement of Key Manufacturing Equipment
Key manufacturing equipment used by the SUMCO Group includes polishing machines and other equipment for which the Group may not be able to find alternative suppliers in a short time. Any problem hindering the smooth procurement of such manufacturing equipment may affect the Group's performance.
In addition, delays in the contribution of capital investment to manufacturing, such as due to slowness in delivery of manufacturing equipment, may affect the Group's business development or performance.
5. Risks Related to Customers and Suppliers (bankruptcies, operation stoppage, 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 performance or financial condition. To avoid risks of disruption in procurement, the Group has taken multiple measures, such as concluding supply contracts with multiple suppliers of various materials and keeping sufficient inventories. However, in the event of a supplier's bankruptcy due to a sharp deterioration in economic conditions, or of an operation stoppage at a supplier due to a natural disaster or accident involving manufacturing equipment, the resultant difficulty in procuring materials may affect the Group's performance or financial condition.
6. Capital Investment
The SUMCO Group undertakes capital investment based on medium- to long-term demand projections. However, if changes in economic trends or in the business environment of the semiconductor industry result in substantial shifts in projected demand, the Group's business development or performance may be affected.
7. Procurement of Funds
Regarding the SUMCO Group's syndicated and other loan contracts, significant deterioration in the Group's financial condition could result in breach of financial covenants, trigger demands for repayment, and cause the Group to forfeit the benefit of time, affecting its 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 performance.
8. Technology and R&D
The semiconductor industry is characterized by rapid advances in technology. Customers of the silicon wafers supplied by the Group have a broad range of constantly escalating demands for higher circuit densities, finer line widths, new semiconductor applications, greater precision, and higher production efficiency. To meet such 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 demand growth is expected. By product category, the R&D focus is on technologies related to epitaxial wafers and other high value-added products, as well as on technologies pertaining to next-generation wafer products.
In the event, however, R&D activities do not produce the expected benefits, so that the Group becomes unable to respond to technological advances in the semiconductor industry and to comply with customer demands, or if technology development lags behind competitors, the Group's business development 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.
The Group's patented technologies, moreover, cover a diverse range of areas from advanced control of crystal defects to high-precision polishing and high-quality epitaxial wafers, and it is aggressively applying for patents on these and other results of its day-by-day development efforts to meet ever more sophisticated technology demands.
In case, however, the Group infringes on the intellectual property of a third party because a patent had been granted without the Group's awareness, the Group may be required to cease use of the proprietary technology or be asked to pay damages, affecting the Group's business development 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, in addition to Japan. Accordingly, the Group's manufacturing and sales activities may be affected by US-China trade friction and other changes in the economic and political situations, legal systems, import and export 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, differences in social and labor practices, and underdeveloped social infrastructure in those countries and regions.
11. Foreign Exchange Market Volatility
The SUMCO Group conducts transactions in foreign currencies, such as in product exporting. It also converts financial data of overseas consolidated subsidiaries to yen when creating consolidated financial statements. The Group's performance and financial condition may therefore be affected by foreign exchange market volatility.
12. Environmental Laws and Regulations
The SUMCO Group operations, in particular at its manufacturing sites, are subject to environmental laws and regulations in Japan and abroad governing such matters as energy consumption, gas emissions and wastewater discharges, the use and storage of harmful chemical substances, the disposal of industrial wastes, and testing 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. The trend in recent years, moreover, has been toward further tightening of environmental and other regulations. It cannot be denied that in the future, 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, affecting the Group's business development or performance.
13. Natural Disasters and Accidents
In the event of natural disasters, such as typhoons, torrential rain, earthquakes, tsunamis, and volcanic activities, or of accidents, fires, or acts of terrorism, the SUMCO Group manufacturing sites may encounter unexpected problems such as shutdown of operations, damage to equipment, and limited access to water and electricity, affecting the Group's business development and performance.
In particular, in the event that the Group's facilities for manufacturing 300 mm wafers, its main product, are hit by the above natural disasters, accidents, fires, or other such events, the Group's ability to manufacture and sell 300 mm wafers may be impaired, affecting its business development and performance.
14. Risks in 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 or other unexpected situations, such acquisitions may affect the Group's business development and performance.
15. Other Risks
The following events resulting from changes in the business environment and other developments may affect the SUMCO Group's performance or financial condition.
- a.Major changes in the business environment necessitating business or organizational restructuring or other actions;
- b.Significant changes in the actuarial assumptions used in calculating retirement benefit obligations;
- c.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;
- d.Inability to recruit the human resources needed for the operations of the SUMCO Group;
- e.Lawsuits or other legal actions brought against the SUMCO Group for product problems or other reason;
- f.Failure of internal controls to function effectively.