Operational Risks

The following risks have the potential to impact the HDSI Group’s operating results and financial conditions.
Forward-looking statements in the text are based on the Group's judgment as of the date of submission of the Annual Securities Report (June 22, 2023).

1.Risks related to capital investment trends

Since the majority of the Group's products are sold as components for industrial machinery, including industrial robots as well as semiconductor production equipment and FPD (flat panel displays) equipment, capital investment trends may have a negative impact on the Group’s performance. These industries in particular may experience significant growth on upturns in the smartphone and semiconductor device and panel markets and technological innovations in manufacturing. If, conversely, the market unexpectedly contracts due to factors such as supply-demand adjustments, the Group's performance may be adversely affected.

2.Risks related to research and development

As a technology and skill collective in the field of motion control, the Group develops and brings to market high value-added products with distinctive features through the focused allocation of resources to the R&D department. However, while we will continue our efforts to allocate and secure resources for R&D—human and otherwise—if we do not successfully develop appealing new products that keep pace with technological innovation and satisfy customer and market demand, or if we delay the launch or market penetration of new products that are the fruits of our R&D efforts, the Group's performance may be negatively impacted.

3.Risks related to quality

In the interest of enhancing customer satisfaction and market superiority, the Group is working to fortify its quality assurance system through measures such as the acquisition of ISO 9001 certification. However, the occurrence of issues such as unexpected product defects could affect the Group's business performance and other results.

4.Risks related to foreign exchange fluctuations

The Group has two consolidated subsidiaries in the U.S., one in China, one in Korea, and nine in Europe, and is actively promoting the internationalization of its business. As a result, exchange rate fluctuations may impact the Group's business activities. Moreover, exchange rate fluctuations may affect the yen value of the Group's revenues, expenses, assets, and liabilities associated with transactions denominated in foreign currencies, which could potentially have an adverse effect on the Group's business performance and financial position.

5.Risks related to retirement benefit obligations

The Company and a portion of its consolidated subsidiaries have defined-benefit retirement pension plans or lump-sum payment plans. However, a review of the conditions that serve as the basis for retirement benefit obligation and expense calculations, or a deterioration in the pension asset investment environment, could have an impact on the Group's performance and financial position.
Effective December 1, 2016, a portion of the defined-benefit pension plan was transferred to a defined-contribution pension plan.



6.Risks related to production

Although the Group is striving to improve and increase its production capacity, there is no guarantee that such capacity enhancements will be achieved as planned. Augmenting capacity requires the Group to hire employees for its production operations—particularly in the regions where its domestic factories are located. The Group's ability to satisfy its labor needs hinges on various external factors, including the availability of suitable employees in the regions where its factories are located, unemployment rates, salary levels, and local demographics. Even if the capacity increase is successfully achieved, there is no guarantee that production can be executed at a level or speed required to satisfy the customer.
On the other hand, if customer demand for the Group's products falls below expectations, production capacity may not be fully utilized, and the Group may not be able to recover its invested capital, or recovery will require more time than initially anticipated. 
In such cases, the Group's performance and financial position may be adversely affected.



7.Risks related to procurement

The Group purchases raw materials, components, and production equipment from a wide range of suppliers; however, factors such as shortages in materials available from suppliers or increased costs may limit the volume of materials available to the Group. Price increases or restrictions on the use of raw materials, components, and production equipment could negatively impact the Group's business performance.

8. Risks related to securing human resources

In the course of the Group’s business, it is necessary to secure skilled employees, including researchers and other technicians with in-depth knowledge of the business and technical expertise, as well as highly competent directors. Failure to secure such employees or directors could have a negative impact on the Group's performance. In addition, if the Group's human resources leave to join competitors, its technology and know-how may be leaked to those competitors, which may adversely affect the Group's performance.

9.Risks related to overseas business development

As the Group operates globally, it is potentially exposed to the following risks related to overseas business development.

  • Changes in political and economic conditions and social turmoil in various countries
  • Economic slowdown or recession in related industries in overseas markets
  • Unforeseen changes in laws and regulations in various countries including transfer pricing issues and the imposition or increase of withholding or other taxes on remittances or other payments by foreign subsidiaries and affiliates
  • Challenges and uncertainties in securing and maintaining permits and approvals in various countries
  • Changes in trade restrictions or tariffs
  • Terrorism, war, natural disasters, extreme weather, infectious diseases, and other force majeure
  • Deterioration in political or economic relations between or among the countries or regions in which the Group operates and Japan
  • Implementation or heightening of investment restrictions and other regulations by governments in various countries
  • Significant rise in labor costs and wages
  • Labor disputes, contentious actions, general strikes, or other disturbances concerning work environment
  • Unexpected accidents such as power outages brought about by underdeveloped infrastructure
  • Difficulties in managing local personnel and operations due to factors such as cultural differences
  • Limited protection of intellectual property in some countries

In addition, when developing business overseas, invested capital may not be recovered as initially planned, and expenses may increase at a faster pace than revenues. This could have a significant negative impact on the Group's performance and financial position.

10.Risks related to M&A and business alliances

The Group has entered into various business and capital tie-ups and joint ventures, including the acquisition of the German subsidiary Harmonic Drive SE, and may engage in further merger and acquisition (M&A) activity and business alliances should appropriate opportunities arise. Although the Group carefully considers the profitability and projected return on investment when conducting such activities, the possibility exists that the activities may not progress as planned at the time of implementation, that synergies may not be realized, or that management of the acquired business may not be successful. In such cases, the Group's performance and financial position could be adversely affected through the impairment of goodwill and intangible assets related to acquisitions and business alliances.

11.Risks related to the realization of business strategies

The Group pursues business strategies that include augmenting production capacity while maintaining a sound financial base. However, since the realization of business strategies and the achievement of goals depend on factors including the general economic and market environments in the regions in which the Group operates, and the level of competition and demand, the possibility exists that the implementation of the Group's business strategies may not have the intended effect, that actual figures may differ from the assumptions in the business plan, or that the established objectives may not be achieved. It is further possible that such objectives may be further modified in the future.

12.Risks related to competition

The Group has a number of products that have a high market share in the reducers and mechatronics product markets. If new entrants lead to intensified competition, the Group's business performance may be adversely affected due to deterioration in profit margins on products and lost sales opportunities.

13.Risks related to intellectual property

The Group strives to protect intellectual property rights, including patents and trademarks, and know-how such as confidential business information, as they are an important source of competitiveness. However, interference with the Group's rights could have a negative impact on our business performance. Moreover, should the Group unintentionally infringe upon the intellectual property rights of others in the course of its business activities, the Group's business performance could be adversely affected.

14.Risks related to litigation and other legal proceedings

If unforeseen problems or issues arise in the course of the Group's business activities, it may be subject to damage claims or lawsuits arising from these issues, regardless of whether or not the Group in fact bears responsibility for them. Such litigation may arise in connection with, among other things, intellectual property issues such as product and environmental liability and claims of patent infringement. Should any of these events occur—depending on the details of the lawsuit, the extent of damages, and the outcome—the Group's social credibility could be harmed, and the Group's business performance and financial position may be adversely affected.

15.Legal and compliance-related risks

The Group's business activities are subject to regulations in various countries. These regulations include trade, antitrust, intellectual property, product liability, labor-related laws and regulations, corporate governance, protection of personal information, environmental laws and regulations, government licensing, taxation, interstate national security laws, and regulations on import and export for national security purposes. If the Group's efforts to maintain risk management, compliance, and internal control systems are ineffective or insufficient, the Group may be involved in fraudulent or corrupt activities—whether committed by the Group employees or third parties—and may be perceived as being noncompliant with laws and regulations. These could result in sanctions or fines being levied against the Group, thereby adversely affecting its business and reputation. Furthermore, if laws and regulations are tightened in the future, or if the Group expands the scope of its international operations, it may be required to incur additional costs to comply with laws and regulations. This could adversely affect the Group's business performance and financial position.

16.Risks related to environmental laws and regulations and hazardous substances

The Group's operations are subject to a wide range of environmental laws and regulations in the countries in which it operates. This is particularly true in its manufacturing processes, which involve the use of chemical substances and other materials whose use, storage, discharge, and disposal are subject to strict regulations. Moreover, the Group is subject to various laws and industry standards regarding energy and resource conservation, recycling, global warming, pollution prevention, and environmental health and safety. Environmental laws and regulations may become increasingly strict. If and when this happens, it could result in restriction or prohibition on some of the Group's production and activities, or it may be forced to comply with corrective action orders. The costs associated with complying with such orders and the capital investment and other costs required to comply with applicable environmental laws and regulations could be substantial. These factors could have a negative impact on the Group's performance and financial position.

17. Other risks

Unforeseen events, such as changes in the economic or political environment, terrorism, war, natural disasters, extreme weather, infectious diseases, or other force majeure that the Group alone has no control over, may adversely affect the Group's performance.

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