Nintendo 2006 Annual Report Download - page 20

18
Nintendo Co., Ltd. and consolidated subsidiaries
•Product valuation and adequate inventory procurement
Demand for products in the video game industry is significantly impacted by consumer preferences as well as seasonality
characterized by short product life cycles and very high demand around the holiday season. Although production is targeted at
the equilibrium point of supply and demand, accurate projections are extremely difficult to obtain which may lead to the risk of
excessive inventory. In addition, inventory obsolescence could have an adverse effect on Nintendo’s operations and financial
position.
•Overseas business expansion and international activities
Nintendo engages in business in territories such as the Americas, Europe, Australia, and Asia in addition to Japan.
Expansion of business to these overseas markets involves risks such as ① unpredicted enforcement or changes to laws or
regulations, ② emergence of political or economic factors that prove to be a disadvantage, ③ inconsistency of multilateral
taxation systems and diversity of tax law interpretation leading to a disadvantaged position, ④ difficulty of recruiting and
securing human resources, ⑤ social disruption resulting from terrorist attacks, war, and other events.
•Dependency on outside manufacturers
Nintendo commissions a number of certain outside manufacturers to produce key components or assemble finished
products. In the event of their commercial failure, these manufacturers may not adequately provide or produce significant
components or products. In addition, certain manufacturers may not have the capacity to provide the ordered amount of
components. A shortage of key components could lead to issues such as margin decline due to higher pricing as well as
insufficient product supply, and quality control. This may impair the relationship between Nintendo and its suppliers.
Furthermore, as there are many production locations overseas used by our suppliers, when production is interfered by
events such as riots or natural disasters at the local area, it could have an adverse effect on Nintendo’s operations and
financial position.
•Business operations affected by seasonal fluctuation
Since a major portion of demand is focused around the holiday season, the demand is influenced by seasonal fluctuations.
Should the Company fail to meet the period of high demand in any of its business activities, including but not restricted to the
launch of attractive new products and supplying hardware, it would suffer unfavorable operating performance.
(3) Other risks
Other than set forth above, factors such as product liability, limitations of protecting intellectual property, leakage of
personal information and confidential information, changes in accounting standards and taxation system, litigation,
uncollectibility of trade accounts receivable and notes receivable, failure of financial institutions, and restrictions regarding
environmental protection may adversely affect Nintendo’s future performance and financial position.
Analysis of Operations and Financial Review