Fujitsu 2006 Annual Report Download - page 44

42 Fujitsu Limited
5. Public Regulations, Public Policy, and Tax Matters
The business operations of the Fujitsu Group are impacted by a
variety of public regulations and trends in public policy, as well
as laws pertaining to taxation. Specifically, wherever it operates,
the Group must comply with a variety of regulations, such as
authorizations for business or investment, import/export regu-
lations and restrictions, as well as laws pertaining to antimo-
nopoly policies, intellectual property rights, consumers, the
environment and recycling, labor conditions, and taxation. Earn-
ings might be affected by increased compliance costs associated
with measures to make stricter or otherwise revise such laws and
regulations. We also provide solutions in certain fields and busi-
ness domains such as healthcare and communications that are
subject to other public regulations, meaning that regulatory
trends in these sectors may potentially impact Group businesses.
6. Other Operational Risks
The Fujitsu Group makes every effort to eliminate known risks
but can offer no guarantee of its ability to always achieve every
desired outcome in the course of executing business operations.
Some of the specific risks faced in this respect are detailed below.
1) Deficiencies or Flaws in Products and Services
Quality is a core value of the Fujitsu Group. We are committed
to improving quality at the design and development stages as well
as in manufacturing. We are also promoting stricter quality con-
trol when purchasing components from external suppliers. These
efforts notwithstanding, it is impossible to totally eliminate the
possibility of deficiencies or flaws occurring in products, includ-
ing software. While the Group is also promoting software
modularization, standardization of development work, and
enhanced security measures in order to improve the quality of
system development and other services, the possibility of defects
arising cannot be excluded. In the event that such deficiencies or
flaws occur, the Group may have to initiate product recalls or
repairs, engage in system recovery work, pay damages to custom-
ers or suffer opportunity losses, all of which would negatively
impact Group sales and profitability.
Following incidents involving system troubles at the Tokyo
Stock Exchange, in November 2005 we initiated comprehen-
sive inspections of customer systems that play an important role
in supporting the societal infrastructure. In cooperation with
our customers, we have been checking for any potential prob-
lems in these systems, including the operating environment,
software and hardware.
2) Project Management
Due to such factors as the increasing scale of systems and more
rigorous demands from customers, as well as the advance of open
system environments, system development work is becoming
increasingly complex. At the same time, greater competition is lead-
ing to increasingly intense pricing pressures. In the fiscal year ended
March 2004, the emergence of certain loss-generating projects
prompted the Group to implement extensive risk management
measures, including standardized guidelines for projects of a set
scale and above, the introduction of the percentage-of-completion
method, and other measures to help prevent the occurrence and
enhance the early identification of such projects. In the fiscal year
ended March 2005, we strengthened these efforts by establishing a
new organization to screen projects at the contract negotiation
phase and curtail the occurrence of projects with deteriorating prof-
itability. Additionally, in April 2005 we established the Systems
Integration Assurance Unit, a body with enhanced powers that
reports directly to the president. In this way, along with revising
our approach to making contracts with customers, and advancing
the standardization of sales and system engineering business pro-
cesses, we are working to manage risk from the business negotia-
tion stage through actual project implementation and thereby
prevent new incidences of loss-generating projects. Along with
these measures, the Group continues to maintain reserves for losses
as necessary. Nevertheless, in spite of these measures, there is a
possibility that we may be unable to completely prevent the occur-
rence of loss-generating projects.
3) Investment Decisions
In the IT industry, large investments in R&D and facilities and
equipment are necessary to maintain competitiveness. Accord-
ingly, the success or failure of investment choices has a pro-
found effect on the business results of the Fujitsu Group. When
making such investment decisions, we give ample consideration
to a range of factors such as market trends, customer needs,
the superiority of Group technologies and our business portfo-
lio. There is, however, the risk that promising markets and tech-
nologies identified by the Group may fail to grow as anticipated,
or that supply and demand imbalances or price erosion may be
more severe than expected. Investment in semiconductor facili-
ties and equipment represents one such area with a high degree
of risk. In addition to substantial funding requirements, this
field is characterized in particular by short product cycles, major
changes in the market landscape and stiff competition from
other companies. The Group takes a number of steps to miti-
gate this risk, including responding to these inherent fluctua-
tions by dividing investment into multiple phases and forging
agreements with customers prior to investment. Nonetheless,
there is no guarantee that the Group can generate sufficient
returns on such investments.
4) Intellectual Property Rights
The Fujitsu Group has accumulated technologies and expertise
that help distinguish its products from those of other compa-
nies. Legal restrictions in certain regions, however, may impair
our ability to fully protect some of the Group’s proprietary tech-
nologies, with the result that we could be unable to effectively
prevent the manufacture and sale of similar products developed
by third parties using the Group’s own intellectual property.
Moreover, the creation of comparable or superior technologies