（1）Risk Management System ＜Short- to medium-term risks＞
With regard to short- to medium-term risks, the AGC Group has established “AGC Group Enterprise Risk Management Basic Policies”, which include the basic policy for the Group’s risk management system under the Basic Policy concerning Internal Control, and has formed a risk management and crisis management system.
According to the relevant internal rules, the Group specifies important risk factors and the Group’s Management Committee and Board of Directors regularly discuss and monitor the status of risk management. As for individual risks associated with the business operations of the Group, the Corporate Divisions, In-House Companies and strategic business units (SBUs) analyze the risks of each operation and project and study countermeasures and, if necessary, the Management Committee and the Board of Directors deliberate on such matters. On the risk concerning the Group’s compliance, environment, disaster, quality, etc., each responsible division provides and announces respective guidelines, etc. and conducts training and internal audits if necessary and appropriate. The Group regularly reviews significant risk factors, taking into account their impact on the Group’s management when they occur and the likelihood of their occurrence.
(Risk Management Process)
- Including business strategy meetings and other meetings similar to Management Committee meetings
＜Response to Risks That Have Emerged＞
In preparation for unforeseen events that could have a significant impact both on operating results and financial condition of the AGC Group, in accordance with the relevant internal rules, the Group has established a crisis management report line to report on critical information speedily and surely to the CEO, and to further distribute and share the information among the officers and employees concerned under the “Bad News First” concept. In addition, the Group has a system where a Group task force can be set up immediately at the discretion of the President & CEO to ensure that a prompt and appropriate initial response can be taken.
The medium-term management plan incorporates future trends in global social issues and risks, as well as social issues that customers are working to solve, and identifies key opportunities and important risks that could affect the long-term direction of the Group’s management and corporate value as the AGC Group's materiality. The AGC Group then sets sustainability targets aimed at capitalizing on opportunities and addressing risks. The AGC Group has a Sustainability Committee, chaired by the CEO and composed of CTO, CFO, and the heads of each division, as a decision-making body for sustainability initiatives. With respect to important risks, under the supervision of the Board of Directors, the Committee also determines policies for dealing with the risks and deliberates on future measures based on the progress of the targets.
Set out below are risks associated with the AGC Group's operations and other risks that may materially influence the decisions of investors to invest in the AGC Group. Forward-looking statements in this section are based on information available as of March 30, 2023.
This section does not include all possible risks relating to the AGC Group; there may exist additional risks not stated below. Any such risks are also likely to influence investors' decisions.
＜Short- to medium-term risks＞ 1. Economic conditions in markets in which the AGC Group’s products are sold
Demand for the AGC Group's products is impacted by trends in industries such as construction and building materials, automobiles, electronics, displays, and chemicals. The AGC Group's products are supplied throughout the world, for example in Asia, the United States and Europe, as well as in Japan, and sales are therefore influenced by local economic conditions. Although the AGC Group is working hard to build an earnings structure that is resilient to changes in the business environment by improving productivity and reducing fixed and variable costs, through falling sales volumes and prices, its performance and financial position are susceptible to declining demand from the industries mentioned as well as economic downturns in the regions where its products are primarily sold.
The situation in each segment is as follows.
1) Architectural Glass
In the Architectural Glass segment, the Group has established development and production bases in Japan/Asia, Europe and the Americas and supplies products throughout the world. Demand for architectural glass is correlated with construction investment, which varies with economic conditions in each region and country. Accordingly, earnings in this business could be impacted by fluctuations in demand for architectural glass.
In the Automotive segment, demand for automotive glass is influenced by automobile sales volume, which is correlated with factors such as economic fluctuations in each region and country. Accordingly, earnings in this business could be impacted by fluctuations in demand for automotive glass.
Products in the display business are used in LCD TVs, smartphones, and tablets, etc. In the LCD glass substrate business, changes in the market shares of panel manufacturers, which are the Group’s customers, shifts in market trends, and other developments are expected to occur. The Group has been working to expand sales based on its customer portfolio. Nonetheless, customer and market trends could have an impact on the profitability of the display business. In the electronic materials business, the Group’s main customers are companies involved in industries such as semiconductors and optoelectronics. The performance of these customers depends on market trends in areas such as semiconductors, smartphones, communications infrastructure and industrial equipment. For this reason, earnings in the electronic materials business could be influenced by the impact of these trends.
4) Chemicals In chlor-alkali products, the Group has established production bases primarily in Japan and Southeast Asia, where progress is being made on infrastructure development, and is expanding its business. Demand for these products is mainly correlated with economic growth rates and capacity utilization in core industries in each region and country. Accordingly, earnings in this business could be impacted by fluctuations in demand for chlor-alkali products. In the fluorochemicals & specialty business, the Group’s main customers are companies involved in transportation equipment, semiconductor and construction industries. Accordingly, earnings in the fluorochemicals & specialty business could be impacted by market trends in these industries.
5) Life Science In the life science business, the Group is greatly impacted by business conditions and the development status of new products in the pharmaceuticals and agrochemicals industries. Accordingly, earnings in the life science business could be impacted by these trends.
2. Expansion of overseas operations
The AGC Group has substantial overseas operations, including exports of products and manufacturing abroad. The risks associated with operating abroad include deteriorating political and economic conditions, the imposition of regulations on imports and foreign investments, unexpected changes in laws, the worsening of public security, economic sanctions between countries, and the occurrence of terrorist attacks and war. The AGC Group is closely monitoring the political and economic situation and the regulatory trends in each country and region, and is striving to take actions according to the situation. However, the occurrence of such events could hinder the business activities of the AGC Group overseas and may significantly impact the AGC Group's performance and financial position.
3. Competitive edge and development and commercialization of new technologies and products
In every field in which the AGC Group operates, there are competitors supplying products similar to those of the AGC Group. Accordingly, to maintain its competitive edge, the AGC Group is striving to identify the needs of customers, and to develop and commercialize new technologies and products. However, should the AGC Group fail to appropriately respond to technical changes and customer needs or take too long to develop and commercialize new technologies and products, growth could be hampered and profitability could decline. This may significantly impact the AGC Group's performance and financial position.
The AGC Group strives to carry out preventive maintenance on all plant equipment and facilities, and it is working to strengthen priorities such as systems for safety review and maintenance and repair of equipment and facilities. If there are any serious production disruptions, this could have a significant impact on the AGC Group's performance and financial position.
5. Procurement of production materials and resources
If there are fluctuations in the prices of electricity, natural gas, heavy oil or raw materials used in the AGC Group's production activities, the AGC Group's performance and financial position could be affected. The AGC Group hedges the risk of price fluctuations for certain raw materials and fuel through instruments such as commodity contracts. Nevertheless, the AGC Group may be unable to completely eliminate the impact of rising raw material and fuel prices. In addition, the AGC Group's manufacturing activities use certain special raw materials and materials that are procured from a limited number of suppliers. We are making efforts to consider alternative materials and to promote multiple purchasing of such raw materials and materials. However, if the supply of these materials becomes tight or delays or price fluctuations occur, this may significantly impact the AGC Group's performance and financial position.
6. Government regulations
In the countries and regions where it operates, the AGC Group is subject to the local government approval and authorization of investments, regulations on exports and imports, and laws governing commercial transactions, labor, patents, taxation, foreign exchange, and other issues. The AGC Group closely monitors changes in relevant laws and regulations and endeavors to collect information. Changes in relevant laws and regulations may significantly impact the AGC Group's performance and financial position.
7. Environmental Regulations and Climate Change Response
The AGC Group designates the environment as an element of the Our Shared Values component of its AGC Group Vision. The AGC Group accordingly complies with all applicable laws and regulations related to the environment while furthermore striving to protect the global environment by mitigating environmental impacts associated with its operations through such means as setting and implementing voluntary control standards that are more stringent than legal and regulatory benchmarks.
Nevertheless, as an environmental regulation risk, the AGC Group could find itself involved in unintended environmental pollution or other such incidents as a result of emissions from the AGC Group’s manufacturing processes, chemical substances contained in its products, or other such causes. Such a scenario could result in a deterioration in the AGC Group’s social credibility, restrictions on business activity, incurring expenses, and other consequences, which could affect the Group’s profit and loss. Moreover, revised or strengthened regulations in each country or region may require the Group to bear additional costs or capital investment, or such regulations may hinder product development, production, sales, services, and other business activities. In such a scenario, the Group’s profit and loss could be affected.
To address sustainability, the Group actively engages in initiatives across its entire value chain to meet the goals it has set for addressing climate change, making effective use of resources, and conserving natural capital. The Group acknowledges, however, that there are physical risks as well as regulatory adaptation and transition risks.
Specifically, in terms of physical risks resulting from climate change, if natural disasters such as typhoons and floods, or if risks related to water resources, such as droughts, become more severe, the Group’s production activities may be affected. Furthermore, in terms of transition risks toward a low-carbon society, if carbon pricing such as a carbon tax which has already begun to be implemented in some areas is required to be implemented on a full scale, the cost burden required to comply with these regulations and other rules may have an impact on the Group’s profit and loss. Additionally, the Group may potentially be subject to opportunity loss due to deterioration of its reputation or social credibility if it is unable to address increasingly stringent regulations in each country and geographical region for conforming to regulations on greenhouse gas emissions and otherwise addressing climate change; it is unable to achieve targets for reducing greenhouse gas emissions in alignment with the Paris Agreement; or it is unable to address mounting stakeholder demands for the Group to contribute to decarbonization through its business activities.
Additionally, the Group may experience opportunity losses in the market if it is unable to address relevant sustainability issues, such as efforts to standardize and legislate circular economic systems and carbon footprints.
8. Product liability
The AGC Group is making every effort to ensure that products are of the highest quality, according to their individual characteristics. Despite these efforts, the possibility remains that quality problems may occur because of unanticipated factors, prompting a major recall, for example. This could substantially influence the AGC Group's performance and financial position.
9. Intellectual property rights
The AGC Group endeavors to acquire intellectual property rights that are useful for its present business activities and future operations alike, while investigating the rights and business conditions of third parties, in order to prevent intellectual property issues from arising. However, there is the possibility that the AGC Group will have disputes with third parties over intellectual property or that third parties will infringe the AGC Group's intellectual property rights. This has the potential to materially influence the AGC Group's performance and financial position.
10. Litigation and legal procedures
There is always a risk that other firms, corporate groups, or individuals may take legal actions against the AGC Group with respect to its operations at home and abroad. As of March 27, 2020, there were some lawsuits and legal proceedings pending. If these lawsuits and proceedings result in an unfavorable outcome for the AGC Group, its performance and financial position may be significantly impacted.
11. Effect of natural disasters and accidents
The AGC Group endeavors to prevent occupational accidents and other accidents involving equipment and facilities, such as production machinery, through the establishment and operation of a systematic management system for occupational safety and health, and for industrial safety and security, along with efforts to promote and ensure machinery safety, and to manage inspections, maintenance and repairs. However, the AGC Group faces the risk of unforeseeable events such as a severe occupational accident, serious fire, explosion or leakage incident. Regarding preparedness for natural disasters, the AGC Group has assessed risks concerning earthquakes, high winds, flooding and other natural events at its major bases, and has drawn up business continuity plans for bases that are exposed to significant hazards. Despite these efforts, the Group faces the risk of unforeseeable events such as damage to production facilities and the suspension of product shipments due to severed transportation networks, as a result of natural disasters such as major earthquakes, typhoons, and floods. If production is suspended temporarily or for an extended period in the Group or the Group's supply chain as a result of the occurrence of such unforeseen events, the supply of products to customers may be disrupted given that alternative production is not possible for certain products, and this could have a significant impact on the AGC Group's performance and financial position. The impact of the COVID-19 pandemic and countermeasures are as follows. In response to the COVID-19 pandemic, the AGC Group Emergency Response Headquarters was established in January 2020, headed by the President & CEO, to quickly assess the situation of the entire Group and respond to the crisis. Currently, in accordance with the guidance of the national and local governments in each country and region, we continue our business while working to ensure the health and safety of our employees and their families and to prevent the spread of infections outside the Company. The spread of the pandemic since February 2020 has affected the AGC Group's business results, including a decrease in demand in multiple businesses. At present, the AGC Group expects a moderate recovery in earnings, but the future remains uncertain, and depending on future conditions, the AGC Group's performance may be significantly impacted. The AGC Group will implement measures to improve profitability, such as building a manufacturing system that meets demand and strengthening the balance between cost reduction and investment.
12. Exchange rate fluctuations
The AGC Group manufactures and sells products worldwide, and converts transaction accounts in local currencies, including sales, costs, and assets, into Japanese yen when preparing its consolidated financial statements. Even if the values of these items remain unchanged in local currency terms, they may change when converted into Japanese yen depending on exchange rates. The AGC Group also manufactures products at its facilities worldwide, including Japan, and exports the products to a number of countries. The AGC Group generally procures raw materials and sells products in the local currency of each country/region, but there are some product sales and material purchases denominated in foreign currencies. Therefore, fluctuations in exchange rates affect the price of the raw materials we purchase and the sales prices we set. The AGC Group strives to mitigate risks by taking measures such as hedging transactions to respond to short-term exchange rate fluctuations and by deploying manufacturing bases and conducting manufacturing on a global basis. However, substantial exchange rate fluctuations may significantly impact the AGC Group's performance and financial position.
13. Retirement benefit obligations
The AGC Group calculates costs for employee retirement benefits and obligations based on actuarial assumptions of the returns on pension funds and a specific discount rate. If the actuarial assumptions and results diverge substantially because of deterioration in the market environment for pension fund management, future costs for retirement benefits will increase, and this may seriously impact the AGC Group's performance and financial position.
14. Impairment of non-financial assets
Non-financial assets including property, plant and equipment, goodwill and intangible assets reported on the AGC Group’s consolidated statements of financial position may become subject to impairment loss if a recoverable amount of any such asset has fallen below the carrying amount due to lower profitability, changes in fair value or other such circumstances going forward. Such a scenario could significantly affect the Group’s performance and financial position.
Notably, in the display business, which is included in the Electronics segment, the Group has recognized a deteriorated operating result primarily due to the impact of slow sales of televisions, personal computers and related items, and increased cost caused by the weaker yen and soaring raw material and fuel prices, which resulted in an indication of impairment for the cash-generating unit to which its business’ property, plant and equipment and related assets belong. The Group has performed an impairment test. As a result, the Group has recognized an impairment loss of ¥73,673 million. Moreover, the Group has identified indications of impairment, such as a significant decline in profitability, on goodwill and other intangible assets, among other items, in the super high-end CCL business and the industrial films business (printed circuit board materials business, etc.) included in the Electronics segment, in light of a decline in demand due to the impacts of U.S.-China trade friction and the spread of COVID-19 in China. The Group has performed an impairment test. As a result, the Group recognized an impairment loss of ¥32,223 million. Furthermore, the automotive glass business in Europe (Western and Central Europe), which is included in the Glass segment, has recognized recurring operating losses since before the previous fiscal year, and the business environment has further deteriorated primarily due to slow automotive demand caused by the situation in Russia and Ukraine. Consequently, the Group has identified indications of impairment for the cash-generating unit to which this business’ property, plant and equipment and related assets belong. The Group has performed an impairment test. As a result, the Group recognized an impairment loss of ¥6,700 million. Moreover, in the architectural glass and automotive glass businesses in Russia, the economic environment deteriorated because of the prolonged Russia-Ukraine situation. Consequently, the Group has identified indications of impairment for the cash-generating unit to which these businesses’ property, plant and equipment and related assets belong. The Group has performed an impairment test. As a result, the Group has recognized impairment losses of ¥9,922 million in the architectural glass business and ¥3,664 million in the automotive glass business.
15. Information security
With the importance of information systems in the AGC Group's business activities increasing dramatically, the Group is striving to protect information assets such as systems and data. The Group is also taking measures to prevent security incidents and minimize their impact if they occur. However, the interruption of important operations or leakage of confidential data due to disasters, cyberattacks, unauthorized access, or other unforeseen circumstances may significantly impact the AGC Group's performance and financial position.
＜Long-term risks＞ 1. Responding to climate change issues
Since the Paris Agreement was reached in 2015, the trend toward decarbonization has been accelerating, and energy-related policies and regulations are expected to become stricter, while social demands for companies to achieve net zero greenhouse gas emissions are increasing. With this risk in mind, the AGC Group has set its vision for 2050 to "aim for net zero emissions from our own business activities and contribute to the realization of net zero carbon worldwide through our products and technologies". To realize its vision for 2050, the AGC Group will strive to implement measures to reduce greenhouse gas emissions according to the source of emissions, such as the development of manufacturing technologies and facilities with low greenhouse gas emissions. At the same time, the Group will take this item as an important opportunity to expand sales of products that save or create energy throughout their life cycle and to build business models that contribute to the spread of renewable energy.
2. Effective use of resources
Stricter regulations on the use of depletable resources such as rare earth materials and increased demand for water resources due to the progress of urbanization are expected to have an impact on manufacturing activities. At the same time, social demand for waste reduction and recycling is increasing as the recycling-oriented economy accelerates. With this risk in mind, the AGC Group is striving to utilize recycled raw materials and materials, reduce the amount of landfill disposal, and reduce the amount of waste generated. We will also consider this item as an important opportunity to expand sales of products that contribute to the purification of groundwater and rainwater in water-scarce areas, develop products and manufacturing processes that use less depletable resources, and expand sales of products that are highly recyclable and reusable.
3. Supply chain considering society and the environment
As supply chains become more globalized and complex, it may be expected that illegal employment issues such as forced labor and child labor will occur at suppliers and subcontractors, as well as operational stoppages and regulatory violations due to stricter environmental regulations. With this risk in mind, in addition to the AGC Group Purchasing Policy, which stipulates sustainable procurement and other measures to reduce environmental impact, the Group will also work to add value to the entire supply chain, declare the Partnership Declaration, which aims to build co-existence and co-prosperity with suppliers through collaboration that transcends existing business relationships and corporate scale, and strive to manage suppliers with an emphasis on respect for human rights and environmental protection.
4. Ensuring fair and equal employment and workplace safety
There is a growing need for compliance in employment and respect for workers' rights, as well as a need for safety measures at manufacturing sites due to the increasing number of inexperienced and elderly workers. With this risk in mind, the AGC Group will strive to improve employee engagement and prevent the occurrence of serious and lost-time injuries.
5. Relationship with local communities and environmental considerations
There is growing interest in the expansion of living areas and the maintenance of surrounding biodiversity due to the spread of urbanization around the world, as well as a growing awareness of the need to improve quality of life (QOL) as living standards improve in emerging countries. With this risk in mind, the AGC Group will strive to reduce water consumption, conserve biodiversity, and eliminate environmental accidents, as well as build good relationships with the areas where its work sites are located.