Risk Management

Business and Other Risks

Of the matters concerning the status of business, status of accounting, and other issues presented in this securities report, 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 2024 under review. Actual results may differ from the statements, which are inherently subject to uncertainties.

1. Operating Environment

The silicon wafers the SUMCO Group manufactures and sells are used for semiconductor substrates and other parts that are used in various products, including personal computers, smartphones, tablets, other portable terminals, cars, and other consumer products. This makes them highly susceptible to the market demand for semiconductor devices. As a result, demand for silicon wafers is sensitive to rapid progress in technological innovation or product obsolescence, rapid change in the product mix, falling product prices, and other factors characteristic of semiconductors and surrounding industries. With the recent rapid expansion of the semiconductor and silicon wafer market coverages, the semiconductor device market has become increasingly intertwined with the global macroeconomic trend. Economic recessions caused by infectious diseases or geopolitical risks, such as Russia’s invasion of Ukraine and US-China trade frictions, may affect demand for semiconductor products.

Meanwhile, demands for semiconductor devices and silicon wafers are expected to grow in the medium to long term due to technological innovations, such as an increase in data communication volume, development of generative AI technology, popularity of HEVs and EVs, progress in driverless driving, widespread adoption of teleworking, and digital transformation (DX). There is, however, no guarantee that demand for silicon wafers will increase as expected by the Group. A discrepancy between the actual market condition and the Group’s expectation may impact the Group’s business results, etc.

To address these 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. If, however, such measures do not have a positive impact, it may affect the Group’s business results, etc.

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. If the sales price of semiconductor products declines more significantly than expected due to a sudden deterioration of a supply-demand balance or other events, downward pressure could be put on the prices of silicon wafers, which are basic materials of such products, and affect the Group’s business results, etc.

To increase its ability to deal with market fluctuations, the Group prepares business plans to offset potential declines in the prices of such products. These plans include efforts to improve productivity using AI technology and raise production yields through continuous technological improvement. These measures, however, may not produce the expected impact.

In addition to the above, the Group’s business results, etc. may be affected by a loss or decline in the Group’s production capacity caused by developments including the following: the occurrence of a large sum of expenses or damages payable by the Group due to a material claim about quality; falling sales volume or market share due to reputational damage; discontinuation of or significant delays in production or lowering yield rates following a large accident in its facilities, large-scale system errors resulting from malware infection, or other reasons; pandemics; breakdown of manufacturing facilities; supply shortage of materials; or disruption of distribution functions.

In response, the Group takes measures to avoid the risks of production capacity declines and product supply difficulties in the entire Group. Such measures include continuous communication with customers to comprehend changes in the required quality in a timely manner, continuous technological improvement, and periodical preventive maintenance of production facilities. Also, we work to prevent large-scale system errors by establishing CSIRT and firewalls, regularly updating antivirus software, and restricting taking portable memory devices into offices, such as USB memory sticks. However, if these measures are unsuccessful, it may affect the Group’s business results.

3. Competition with other companies

The silicon wafer market is characterized by large capital expenditures, customers’ strict demand for quality, price, delivery time, and so on, deterioration in the supply-demand balance due to the increased production capacity of competitors, impacts of technological innovation, among other things. The Company is mainly competing with other silicon wafer manufacturers globally in terms of pricing, quality, production capacity, product lineup, technology, and services. Many of these competitors are large companies which may have advantages over the Group in terms of their funding ability, technology, production capacity, relationship with customers, and so on.

Furthermore, consolidations or mergers among the Company’s competitors may dramatically raise their competitiveness and relatively weaken the Company’s competitiveness. This could lead to the lowering of product prices and falling sales and may affect the Company’s business development, business results, etc. Furthermore, even if the Group is able to improve its competitiveness, there is a limit to the expansion of its market share because many of its customers generally secure two or more suppliers of silicon wafers from the viewpoint of business continuity.

4. Major customers

A relatively small number of major manufacturers account for a large portion of the semiconductor market. As a result, a significant portion of the Group’s sales are made to specific major customers. However, there is no guarantee that its major customers will maintain the same level of purchase volume as before. Any reduction in the purchase of silicon wafers by these major customers from the Group due to semiconductor market conditions, geopolitical reasons, economic deterioration, or individual factors of customers, may impact the Group’s business development, business results, etc.

5. 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 to periodically conduct credit research and manage risks associated with customers’ financial conditions and business stability. There is, however, no guarantee that such a system sufficiently protects the Group against these risks.

6. 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. Therefore, opportunities to reduce the cost of raw materials may be limited until the Group’s inventories return to a proper level. With respect to an outlook for raw materials and supplies, including raw material inventories, 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 and financial condition.

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. There is, however, no guarantee that such efforts will produce a positive impact.

7. 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 the Group’s capital expenditures generate a positive effect on manufacturing later than expected due to the prolonged delivery of manufacturing equipment, the lack of supply capacity of equipment makers, price increases, and other reasons, 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.

Even when the Company uses new capital expenditures in the future to respond to cutting-edge quality, there could be a delay in operation commencement particularly because many facilities the Company needs are customized to special, highly advanced specifications and the number of equipment suppliers is small and their production capacity limited.

To prepare for the materialization of these risks, the Group takes measures to avoid the risk of supply chain disruptions 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. If, however, such measures do not produce a positive impact, this may affect the Group’s business results, etc.

8. Supply Chains

A supplier’s operation stoppage and other similar situation caused by reasons such as abrupt change in economic conditions, natural disasters, accidents involving manufacturing equipment, spreads of infectious diseases, or change in the geopolitical environment may cause problems to the procurement of materials the Group uses and ultimately affect the Group’s business results, financial position, etc.

The Group therefore takes measures to avoid the procurement disruption risk. These measures include making purchases from multiple suppliers and building up inventories. If, however, such measures do not produce a positive impact, this may affect the Group’s business results, etc.

9. 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.

Due to the variable nature of the semiconductor device industry, it is difficult to plan production capacity based on the accurate prediction of the future trend of the silicon wafer market and the production capacity reflecting such a trend. For this reason, if the market demand increases more than expected by the Company, the Company may not have a production capacity that meets the demand and thereby lose sales enhancement opportunities. This may negatively impact its relationships with customers or lower its market share. In addition, even if the Group decides to enhance facilities to match the market demand, the Group may end up having excess production capacity if the market conditions deteriorate or competitors enhance their production capacity more than expected by the Group while the Group is enhancing its production capacity, due to a time lag between making such a decision and completing the enhancement. Furthermore, capital expenditures for leading-edge technology will cost much money. If such investments do not result in the expected quality or yield rate, the Group may not be able to secure the projected production volume or may even post impairment losses.

Since 2022, the Group has been enhancing its production capacity of leading-edge 300 mm semiconductor silicon wafers and supplying products preferentially to customers who concluded longer-term sales contracts with economically rational pricing. However, depending on the semiconductor market conditions, the Group may not be able to sell products as stipulated under such long-term contracts or may not conclude or renew long-term sales contracts under the same terms and conditions.

To prevent these risks associated with capital expenditures, the Group disburses capital expenditures 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. It is, however, not easy to accurately predict the future market conditions of silicon wafers and there is no guarantee that such risks can be eliminated.

10. Assets

The Group has many non-current assets, including silicon wafer plants and manufacturing facilities. It expects its non-current assets to increase in the future through capital expenditures such as building new plants. If there is any possibility that the Company cannot recover its investments in such non-current assets or a group of non-current assets, an impairment loss may be incurred on non-current assets.

To determine whether there is any sign of impairment loss, it is necessary to consider factors, such as any significant drop in future cash flow from the businesses or product lines corresponding to assets, revisions to laws or ordinances or material deterioration in the business environment, worsening of the collectability of an important asset group, and lowering growth rate of product markets. Any negative change to these factors may have a material impact on the collectability of the relevant asset and affect the Company’s business results, etc. through, for instance, the needs to post an impairment loss on non-current assets.

In addition, any devaluation of inventories the Company owns may result in a valuation loss.

11. Financing

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 the downgrading of credit ratings, 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 to reduce risks for domestic loans that are newly made. The Group will continue raising finance based on interest rate levels and market environment and endeavor to maintain favorable relationships with partner financial institutions. If, however, such measures do not produce a positive impact, this may affect the Group’s business results, etc. In addition, some consolidated subsidiaries raise finance through long-term borrowings with floating interest rates. If interest rates rise in the future, it may affect the Group’s business results.

12. 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, focusing on technologies related to leading-edge 300 mm semiconductor silicon wafers, whose demand is expected to grow in the medium to long term. By product category, its R&D activities focus on technologies for high-value-added wafers, such as epitaxial wafers, and technologies for 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. It is not easy to develop or mass produce leading-edge 300 mm semiconductor silicon wafers, which the Group focuses on. If the Group incurs a higher-than-expected R&D expense or if it takes long to improve productivity, this may have a negative impact on the Group’s earnings.

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. If, however, such measures do not produce a positive impact, this may affect the Group’s business results, etc.

13. 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.

The Group obtains licenses from third parties for some of the intellectual property rights it uses in its business activities and may need to obtain licenses from third parties for other intellectual property rights in the future. The acquisition and maintenance of these licenses may require high costs, and there is no guarantee that these technologies will afford the Company advantages in its business.

For this reason, the Group strategically secures intellectual property rights and conducts research on its competitors’ patents to foresee any potential risks. In addition, the Group endeavors to minimize risks through measures such as developing alternative technologies that circumvent its competitors’ patents. If, however, such measures do not produce a positive impact, this may affect the Group’s business results, etc.

14. 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, terrorist activities, spreads of infectious diseases, delayed transportation services, suspension or lack of infrastructure, changes in labor conditions, human resource shortages, disasters, and so on in the countries or regions where the Group operates. Furthermore, major changes in various regulations, including those concerning taxation, foreign exchanges, tariffs, and exports or imports, and different standards or practices of regulatory authorities in different nations or jurisdictions may affect the Group’s business results, etc.

Of particular concern is the US-China trade friction, etc., which has resulted in significant increases in tariffs, sanctions against specific companies, and restrictions on and the expanded licensing requirements for products for certain uses. These may have a serious impact, such as the loss of major customers or the destruction of supply chains, in semiconductor-related industries that play an important role in national security and economic growth.

Furthermore, national governments’ policy to encourage domestic production of semiconductors including silicon wafers may lower competitiveness of the Company’s products and affect the Company’s business development, 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 the examination of country risks. If, however, such measures do not have a positive impact, this may affect the Group’s business results, etc.

15. Information management

The Group possesses a large volume of confidential technological and business information indispensable for operating businesses and confidential and personal information of various stakeholders, including its customers, which the Group has come to possess through its business activities. If any of the information the Group possesses is destroyed, lost, or leaked outside due to unauthorized access including cyber attacks, computer virus infections, information infrastructure breakdowns, unauthorized removals by related persons, or other reasons, this may lower the Group’s competitiveness or destroy the confidence society places on the Group. The Group may also be held accountable for such destruction, loss, or leakage of information. All the above events may affect the Group’s business development, business results, etc.

To minimize the risk of destruction, loss, or leakage of information, the Group takes various measures against cyber attacks and malware caused by outsiders via the internet and works on improving the company-wide security structure. In addition, the Group has established internal rules, guidelines, and so on, on information management and periodically offers educational opportunities for all its employees concerning information management rules and information security. If, however, such measures do not produce a positive impact, this may affect the Group’s business results, etc.

The Group heavily relies on its information systems in materials procurement, product manufacturing, sales, delivery, and other business processes. If the Group’s information systems are not operated effectively, a problem arises in relation to system renewal or migration to an alternative system, a material network failure occurs for the security of such systems due to cyber attacks or other reasons, or the Group cannot maintain uninterrupted, safe systems, its customer services may be delayed resulting in deterioration in the Group’s relationships with its customers. Furthermore, the Group’s operation efficiency may decline, the Group may require large capital expenditures to rectify the problems, or the Group’s reputation may suffer. All the above may affect the Group’s business results, etc. To address such risks related to information systems, the Group takes measures, such as duplicating core and peripheral systems, installing backup servers, and conducting periodical drills on a changeover to backup servers. If, however, such measures do not produce a positive impact, this may affect the Group’s business results, etc.

16. Laws and Regulations

The Group is subject to various laws and regulations in the countries where it operates its business activities including those related to labor, taxes, exports and imports regulations, products liability, competition, and the environment. It is also subject to governmental permissions, approvals, or regulations necessary to conduct business activities or to make investments. There is a possibility that the Group may not be able to obtain or maintain necessary approvals, permissions, etc., and even if the Group has been able to obtain them, if it fails to comply with certain conditions, restrictions, or limits attached to such approvals, permissions, etc., the Group may be required to pay a fine, penalty charge, or additional expense, or may be stripped of approvals, permissions, etc. by the regulatory authorities. 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 designates sections in charge of the laws and regulations that are relevant to the execution of its business, and creates a structure for these sections to continue monitoring and quickly respond to the establishment, amendment, and repeal of laws and regulations, to minimize the impact of risks associated with the strengthening of laws and regulations, etc. There is, however, no guarantee that these efforts of the Group will completely control the impact of such risks.

17. 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 closely monitors exchange rate trends and, as appropriate, executes forward exchange contracts. There is, however, no guarantee that this measure will eliminate such risks.

18. 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 is expected to incur new environmental preservation costs or to pay new taxes, etc., to comply with such laws and regulations. The Company’s failure to comply with the existing or future environmental regulations may result in compensation claims against the Company, imposition of fines, suspension of production or operation in certain areas, and damage to the Company’s reputation and credibility, which may affect the Group’s business development, business results, etc.

Furthermore, expectations for ESG initiatives from various stakeholders are increasing. The additional costs incurred in relation to new environmental regulations and obligations and carbon neutrality initiatives may affect the Group’s business development and business results. Moreover, the Company has set goals for priority issues and has been working to achieve such goals in order to solve social problems and continue improving its corporate value. There is, however, no guarantee that such efforts will produce a positive impact.

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 promoting renewable energy usage to reduce greenhouse gas emissions and improving production technologies to decrease the consumption of substances subject to regulations. However, if such efforts are unsuccessful, it may affect the Group’s business results.

19. 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 restoring and resuming operations. It also promotes various measures and drills, including BCP training. The Business Continuity Management (BCM) meeting, which is a company-wide meeting twice a year, reviews these measures and discusses their progress. The results of their discussions are reported at the Business Security Committee (BSC) meeting, which oversees risk management in general, and are reviewed by management. If, however, such measures do not produce a positive impact, this may affect the Group’s business results, etc.

20. 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.

In considering the execution of company acquisitions, the Group endeavors to avoid risks in advance through the due diligence of the financial status and other aspects of the target companies. There is, however, a possibility that the Group cannot recover the capital or other resources it has invested if, for instance, the expected synergy does not materialize post acquisition.

21. Infectious diseases

In addition to seasonal influenza and COVID-19, in the event of a new variant or pandemic, the Group’s business results may be affected by a global economic downturn, supply chain disruptions, and diminished business operations following the infection of its employees.

To address infectious diseases, the Group has taken possible effective measures, such as teleworking in certain areas, various infection prevention measures, and encouraging employees to receive vaccinations. However, once the infections spread, it may affect the Group’s productivity. If the spread of infection affects the Group’s operations, such as cluster infections in some of the Group’s production processes, it will take measures to minimize the impact on its operations and business results by adjusting work shifts or reassigning personnel for the affected processes. If, however, such measures do not produce a positive impact, this may affect the Group’s business results, etc.

22. 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