Nissan 2004 Annual Report Download - page 51

Nissan Annual Report 2003 49
Business and Other Risks
Due to changes in government regulations, information on
risks involved in business operations has been disclosed in
the Yukashoken-Houkokusho for the year ended March 31,
2004 as follows:
Economic Factors
The demand for automobiles is affected by the economic condition in
each country or market in which they are offered for sale. Nissan
conducts its operations all over the world and, in particular, in the major
markets of North America, Europe, and Asia, to say nothing of Japan.
Nissan strives to develop a comprehensive and integrated projection of
the global economic outlook; however, a greater-than-anticipated
downturn in any one of these markets may have a significant effect on
Nissan’s results of operations.
International Activities and Overseas Expansion
The Nissan Group’s manufacturing and marketing activities outside
Japan are conducted in the United States, in Europe, and in the
developing and emerging markets of Asia. Nissan forecasts and
evaluates a wide variety of risks inherent in doing business in such
overseas markets, including the following factors, each of which entails
a greater-than-anticipated level of risk:
• Unfavorable political or economic factors
• Legal or regulatory changes
• Potentially adverse tax consequences
• Labor disputes including strikes
• Difficulties in recruiting and retaining personnel
• Social, political or economic turmoil due to terrorism, war, or other
destabilizing factors.
Research and Development
Nissan’s technology must be “real world”—useful, pragmatic and easy
to use. Nissan anticipates the nature and scope of the market demand,
and then prioritizes and invests in new technologies. Nonetheless, any
sudden and greater-than-anticipated changes in its business
environment or in customer preferences may impact negatively on
customer satisfaction with these new technologies.
Product Defects
Nissan places a high priority on safety and does its best to enhance
safety from the standpoint of research and development, manufacturing
and sales. Although Nissan takes out insurance policies to cover
product liability, this does not necessarily mean that all potential defects
and the related liabilities are fully covered. If Nissan were to implement
strict product recalls for its customers, Nissan would incur significant
expenses which could adversely affect its results of operations.
Fluctuation in Foreign Currency Exchange Rates
Nissan’s Japanese operations export vehicles to various countries
around the world. In general, the appreciation of the yen against other
currencies adversely affects Nissan’s financial results of operations and
vice versa. Nissan produces products and procures parts and materials
in its overseas markets. However, any sharp appreciation of the
currency of those countries against the yen could lead to an increase in
production and procurement costs, which would adversely affect
Nissan’s financial results of operations.
Derivatives
Nissan utilizes derivatives transactions for the purpose of hedging its
exposure to fluctuation in foreign exchange rates, interest rates and
commodity prices. While Nissan can hedge against these, Nissan
potentially misses the gains which might result from market
opportunities to profit from such fluctuation in exchange rates and
interest rates.
In addition, Nissan manages its exposure to credit risk by limiting its
counterparties to major international banks and well-established
financial institutions which meet its credit guidelines. However, a default
by any one of these counterparties could have an adverse effect on
Nissan.
Lawsuits and Claims
With respect to various lawsuits and claims which Nissan encounters,
the possibility exists that the position defended by Nissan will not be
accepted and that the outcome may be significantly different from that
anticipated. As a result, any such verdict or settlement could adversely
affect Nissan’s financial results.
Government Regulations
The automobile industry worldwide is influenced by a broad spectrum
of regulations governing the emission levels of exhaust fumes, fuel
economy guidelines, noise level limitations and safety standards, and
Nissan expects these regulations to become increasingly stringent. In
order to ensure compliance, it may be necessary for Nissan to make
significant ongoing investments in these areas which would have an
impact on Nissan’s results of operations.
Intellectual Property Rights
Nissan owns a wide variety of proprietary technologies and has the
expertise to differentiate Nissan’s products making them unique from
those of its competitors. These assets have proven their value in the
growth of Nissan’s business and will, no doubt, continue to be of value
in the future. Nissan strives to protect its intellectual property assets;
however, in certain markets, Nissan may encounter difficulty in fully
protecting the proprietary rights to its own technologies. Cases may
arise where Nissan finds itself unable to prohibit others from infringing
on its intellectual property rights.
Natural Disasters
Nissan’s corporate headquarters and many of its manufacturing
facilities are located in Japan, where the statistically proven probability
of earthquakes is higher than in many other countries. Nissan has
developed risk management guidelines relating to earthquake damage
and the CEO has organized a global task force to direct disaster
prevention and recovery activities. In addition, Nissan has begun to
strengthen its manufacturing facilities with anti-seismic reinforcement.
However, if a severe earthquake were to hit one of Nissan’s key
facilities causing a halt in production, this would adversely affect the
results of operations.
Sales Financing Business Risk
Sales financing is an integral part of Nissan’s core business, providing
strong support to its automotive sales while contributing to the
profitability and to the sound and stable financial condition of the
Group. However, the sales financing companies, despite Nissan’s strict
risk management policies, have a high exposure to interest-rate risk,
residual value risk, and credit risk, any one of which may adversely
affect Nissan’s results of operations.
Counterparty Credit Risk
Nissan does business with a variety of counterparties and manages its
counterparty credit risk by doing a comprehensive annual assessment
of its counterparties’ financial condition based on strictly reinforced
credit guidelines. Nonetheless, any significant default by a counterparty
would adversely affect Nissan’s results of operations.
Employee Retirement Benefit Expenses and Obligations
Nissan is obliged to pay retirement benefits to eligible employees upon
retirement, the amount of which varies according to the assumptions
used in the relevant actuarial calculations. These assumptions include
the discount rates applied, future levels of compensation, the projected
rate of return on pension plan assets, retirement rates and mortality
rates, and so forth. If Nissan’s actual results differ from those
assumptions or if the assumptions are changed, the resulting effects
will be accumulated and recognized systematically over future periods.
The cumulative effect could adversely impact the recognition of
expenses and liabilities recorded in future periods.