Business and Other Risks
Of the matters concerning the status of business, status of accounting, and other issues, major risks that the Group’s management (hereinafter the “Management”) recognizes as potentially having a material impact on the Group’s financial position, business results, and cash flows are described below. The possibility and timing of these risks becoming evident are not stated if it is difficult to predict them in a reasonable manner.
The following is not an exhaustive list of all the risks related to the Group. There are other risks not stated below. Furthermore, forward-looking statements in the following items are based on the Group’s estimate as of the end of fiscal year 2020 under review. Actual results may differ from the statements, which are inherently subject to uncertainties.
1. Operating Environment
The silicon wafers that the Group manufactures and sells are used for semiconductor substrates, etc. installed in mobile devices such as personal computers, smartphones, and tablets, in automobiles, and in various products including other consumer products. As a result, they may be affected by a number of factors specific to the semiconductor industry and associated industries. Among these factors are accelerated advancements in technological innovation, product obsolescence, rapid changes in product structure, and drops in product prices.
To address these short-term, potential changes in the business environment, the Group is creating business foundations that can speedily and accurately adapt to market trends, while endeavoring to further strengthen its financial fundamentals.
2. SUMCO Group’s Products
Prices of semiconductors that use products manufactured by the Group generally tend to decline after their release into the market, due in part to their spread and subsequent growth in sales volumes. A more-than-expected price decline due mainly to a sudden deterioration of supply-demand balance may affect the Group’s business results, etc.
In order to increase its ability to deal with market fluctuations, the Group prepares business plans aimed at offsetting the expected decline in the prices of its products. These include efforts to improve productivity through the use of AI technology and to raise production yields by continuously improving technologies.
In addition to the above factors, events such as declined sales volumes or market shares resulting from serious complaints about product quality, or production disruption or significant production delay caused by large-scale facility accidents or system errors attributable to causes such as computer virus infections may affect the Group’s business results, etc.
In response, the Group takes measures to avoid risks of reducing the entire Group’s production capacity or making the supply of products difficult. These include continuous communication with customers to comprehend changes in the required quality in a timely manner, periodical preventive maintenance of production facilities, and regular updates of antivirus software and restrictions on taking into offices portable memory devices such as USB memory sticks to prevent large-scale system errors.
3. Credit Management
The Group takes every possible precaution to manage the credits it extends to its customers. If the financial position of a customer with a large amount of accounts payable deteriorates and the customer cannot make payments on due dates or the Group cannot recover the accounts receivable due to their bankruptcy, this may affect the Group’s business results, financial position, etc. Although recognizing that it can foresee signs of these risks becoming evident to a certain extent, the Group cannot say all of them are necessarily avoidable.
The Group has established a system in place to conduct credit research on a periodical basis and to manage risks associated with customers’ financial conditions and business stability.
4. Procurement of Raw Materials
The Group has concluded long-term purchasing agreements on polycrystalline silicon, the main material used to produce silicon wafers, with the world’s major polycrystalline silicon manufacturers to ensure stable procurement of raw materials. Due to a discrepancy that has arisen between the demand forecasts made at the time the Group concluded the long-term purchasing agreements and the consumption outlook, however, the Group is currently holding excess inventories. Opportunities to reduce the cost of raw materials may be limited until these contracts expire and the Group’s inventories return to a proper level. An outlook for raw materials and supplies, including raw material inventories, is described in “3. Business Environment and Issues to Address” in “Management Policies, Business Environment, and Issues to Address, etc.” Any change in consumption amounts or any implementation of necessary accounting processes due to significant changes in the business environment or other reasons may affect the Group’s business results, financial condition, etc.
In light of the above risks associated with the procurement of raw materials, the Group endeavors to maintain an appropriate level of raw material inventories.
5. Stable Procurement of Key Manufacturing Equipment
Key manufacturing equipment used by the Group includes polishing machines and other equipment of 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 business results, etc. In addition, if capital investments the Group makes do not generate positive change to manufacturing as fast as expected due to reasons such as the prolonged delivery of manufacturing equipment, this may affect the Group’s business development, business results, etc. Furthermore, any difficulty in the smooth procurement of manufacturing equipment due to factors such as abrupt economic changes, natural disasters, the spread of infectious diseases, or export restrictions placed due to geopolitical changes may affect the Group’s business development, business results, etc.
To prepare for these risks becoming evident, the Group takes measures to avoid the risk of supply chain disruption to ensure the stable procurement of manufacturing equipment. These measures include the enhancement and creation of relationships with major equipment suppliers and information sharing on the medium- to long-term stable supply of manufacturing equipment.
6. Supply Chains
A supplier’s bankruptcy or operation stoppage due to reasons such as abrupt changes in economic conditions, natural disasters, or accidents involving manufacturing equipment may cause problems to the procurement of materials the Group uses and ultimately affect the Group’s performance, financial position, etc.
The Group therefore takes measures to avoid the risk of procurement disruption such as making purchases from multiple suppliers and keeping sufficient inventories.
7. Capital Investment
The Group’s business development, business results, etc. may be affected by any future surplus of equipment capacity or obsolescence of existing or newly introduced equipment caused by market fluctuations, changing requirements of customers, and other changes in the environment surrounding the semiconductor industry.
To prevent these risks associated with capital investment, the Group makes capital investment based on factors such as the demand forecast factoring in medium- to long-term macro economic trends and the technological trends of customers comprehended through continuous communication with them.
Some of the Group’s bank loans, and its commitment line agreements are subject to financial covenants. Any significant deterioration in the Group’s financial condition that could result in the breach of those covenants, trigger the cancellation of those agreements and demands for repayment, and cause the Group to forfeit the benefit of time, may affect its financing.
In addition, any failure to raise finance 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, etc.
To address and mitigate these risks, the Group endeavors to maintain a sufficient level of liquidity in hand. In addition, it is taking advantage of the current low interest rate environment, mainly taking out long-term, fixed-rate loans. The Group will continue raising finance based on interest rate levels and market environment and endeavor to maintain favorable relationships with partner financial institutions.
9. Technology and R&D
The semiconductor industry is characterized by rapid advances in technology. As semiconductors feature increasingly high circuit densities and fine line widths and their applications become more diverse and advanced, customers’ demands for the silicon wafers the Group supplies are growing more diverse and sophisticated. To meet such customer demands, the Group conducts R&D activities with a focus on technologies related to 300 mm wafers whose demand is expected to grow in the medium to long term. By product category, its R&D activities focus on technologies related to epitaxial wafers and other high-value-added products, as well as on technologies pertaining to next-generation wafer products.
If, however, its R&D activities do not produce the expected benefits or it falls behind its competitors in terms of technology development, the Group will be unable to respond to technological advances in the semiconductor industry and find it difficult to meet customer demands. This may affect the Group’s business development, business results, etc.
To supply wafer products that meet the escalating customer demands in a timely manner, the Group needs to endeavor to constantly update its understanding of customer needs and technological trends in the semiconductor industry, and promote R&D activities, anticipating their future needs. The Group enhances a structure to systematically comprehend technological trends of the semiconductor industry and its customers and to provide this information to the Group’s R&D sections in a timely manner. At the same time, the Group conducts cutting-edge R&D activities utilizing joint research activities with universities and technological information obtained through academic conferences and other opportunities. To conduct advanced R&D activities, the capabilities of engineers are no doubt important. The Group therefore develops engineers through its fine-tuned educational programs. The Group strengthens these structures so that it does not fall behind its competitors in meeting customer requirements.
10. Intellectual Property Rights
The Group recognizes that securing patents and other intellectual property rights is vital to competition with other silicon wafer manufacturers. It thus holds a large number of patents, including those pending, both in Japan and abroad.
There is, however, a risk that the Group loses its technological advantages due to the insufficient protection of intellectual property rights. In addition, there is a risk of infringement on the intellectual property right of a third party if a patent has been granted without the Group’s awareness. In this case, the Group may be required to cease the use of the technology and sued for damages. Any of these risks becoming evident may affect the Group’s business development, business results, etc. including its marketing, production, sales, and financial positions.
For this reason, the Group conducts research on its competitors’ patents to foresee any potential risks. In addition, the Group endeavors to minimize risks through measures such as strategically securing intellectual property rights and developing alternative technologies that circumvent its competitors’ patents.
11. Overseas Operations
The Group has bases for production and sales in North America, Europe, and Asia as well as in Japan, which supply silicon wafers to major semiconductor manufacturers and other entities worldwide. These production and sales activities may be affected by the diminished operation of plants and other developments arising from economic or political conditions, conflicts, terrorism, disasters, etc. in the countries or regions. Furthermore, major changes in various regulations including those concerning taxation, foreign exchange, tariffs, and export or import may affect its business results, etc.
The Group hedges risks associated with changes in global situations with flexible production allocation through the established multiple-base production system and examination of country risks.
12. Laws and Regulations
The Group is subject to various laws and regulations in the countries where it operates. These include regulations on labor, taxes, import and export, product liability, competition, environment, and governmental approvals and licenses necessary for businesses and investments. Any future tightening of these laws and regulations, or stricter application or interpretation thereof may increase compliance-related costs, restrict the Group’s business development, and thus affect its business results, etc.
Based on internal rules, the Group therefore designates sections in charge of the laws and regulations that are relevant to the execution of their business, and creates a structure for these sections to continue monitoring and quickly respond to the establishment, amendment, and repeal of laws and regulations, so as to minimize the impact of risks associated with the strengthening of laws and regulations, etc.
13. Fluctuations in Foreign Exchange Rates
The Group conducts transactions in foreign currencies, such as in product exporting. It also translates financial data of overseas consolidated subsidiaries from foreign currencies into yen when creating consolidated financial statements. The Group’s business results, financial position, etc. may be affected by fluctuations in foreign exchange rates.
To avoid foreign currency risks that transactions to be conducted in foreign currencies are exposed to, the Group executes foreign exchange forwards on a regular basis.
14. Environmental Laws and Regulations
The Group’s 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, wastewater discharges, the use and storage of harmful chemical substances, the disposal of industrial wastes, the testing of soil and groundwater pollution, and the removal of the contaminants. Pursuant to these laws and regulations, the Group may be held legally responsible to pay certain expenses or compensate for damages, etc.
There has been a trend in recent years to tighten such regulations on environment, etc. It is an undeniable possibility that new environmental laws and regulations may be enacted in Japan or other countries. In such cases, the Group may incur additional expenses for complying therewith, including the payment of costs for environmental conservation and taxes. This may affect the Group’s business development, business results, etc.
To prepare for risks associated with the future tightening of environmental laws and regulations, the Group works on initiatives to reduce its environmental footprints. These include the promotion of the use of renewable energy to reduce greenhouse gas emissions and making improvements of production technologies to decrease the consumption of substances subject to regulations.
15. Natural Disasters and Accidents
In the event of natural disasters, such as typhoons, torrential rains, earthquakes, tsunamis, and volcanic activities, or of accidents, fires, infectious diseases, or terrorism, the Group’s manufacturing sites may encounter unexpected problems such as damage to equipment, limited access to water and electricity, and human sufferings, which may halt production and cause problems with the manufacturing and selling of products. If any of the Group’s key manufacturing sites is affected by the above natural disasters, accidents, fires, etc., the Group’s manufacturing and sales activities may be hindered, which affects its business development, business results, etc.
To address these risks associated with natural disasters and accidents, the Group prepares a Business Continuity Plan (BCP). The BCP clarifies the earthquake resistant and seismic isolation measures for its equipment and the procedures for stockpiling extra materials, organizing disaster prevention equipment and supplies, and resuming operations, and promotes actions such as disaster drills. The progress status of these measures and reviews of their details are reported to a company-wide committee, the Business Security Committee, each year for a review by the Management.
16. Acquisition of Other Companies
Acquisitions of other companies may entail unexpected problems such as a rapid deterioration in the acquired company’s business results due to dramatic changes in the business environment and an impairment loss of goodwill, which may affect the Group’s business development, business results, etc.
When considering acquisition of other companies, the Group endeavors to minimize risks by performing due diligence on financial conditions, etc. of the target company.
17. Novel Coronavirus (COVID-19) Infections
The current global pandemic of COVID-19 exposes the Group to the risk of global economic downturn and the risk of diminished business operations in the event its employees contract the virus. Both these risks may affect the Group’s business results, etc.
In response to this pandemic, the Group will take every measure that is considered effective in reducing the risk of infections. These include teleworking in certain regions, infection prevention measures, and the promotion of vaccinations to its employees. The Group’s manufacturing sites are currently operating without any problem. If infections spread and start affecting the Group’s operations due to, for instance, the emergence of a cluster in any part of the Group’s production process, the Group will take measures to minimize their impact on its operations, business results, etc. These measures may include adjusting work shifts or reassigning personnel for the affected process.
18. Other Risks
The following events resulting from changes in the business environment and other developments may affect the Group’s business results, financial position, etc.
- 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 relevant accounting treatment
- d.Failure to recruit the human resources needed for the operations of the Group
- e.Lawsuits or other legal actions brought against the Group for defects in its products or other reason
- f.Failure of its internal control to function effectively