Nintendo 2012 Annual Report Download - page 23

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19
•Fluctuation in for
(2) Risks around business activities
•Fluctuation of market environment and competition against other companies
Nintendo’s business is engaged in one segment of the broad entertainment field. However, its business can be affected by
trends in other segments of the entertainment field. If consumer preferences shift to other forms of entertainment, it is possible
that the video game market may shrink. The emergence of new competitors resulting from technological innovation could have
a detrimental impact as well.
In the video game industry, it may become even more difficult to be profitable due to large investments required in research
and development, and marketing. In addition, competition may intensify with large-scale companies doing business in the same
industry or in other segments of the entertainment field. As a result, Nintendo may experience difficulty in maintaining or
expanding its market share as well as sustaining profitability.
•Development of new products
Although Nintendo continuously makes efforts to develop innovative and attractive products in the field of computer
entertainment, the development process is complicated and includes many uncertainties. The various risks involved are as
follows:
a. Despite the substantial costs and time needed for software development, there is no guarantee that all new products will be
accepted by consumers due to ever shifting consumer preferences. Also, development of certain products may be suspended
or aborted.
b. While development of hardware is time-consuming, with technology continuously advancing, it is possible that the Company
may not be able to equip technologies required for entertainment. Furthermore, delays of hardware launches could adversely
affect market share.
c. Due to the nature of Nintendo products, it may become difficult to develop or sell the products as planned and the original
plan could differ to a large extent.
•Product valuation and adequate inventory procurement
Products in the video game industry have relatively short life cycles, and are significantly impacted by consumers’ preferences
as well as seasonality. Although production is projected based on the forecasted equilibrium point of supply and demand, it is
difficult to forecast demand accurately, which may lead to excess inventory. Obsolete inventory could have an adverse effect on
Nintendo’s operations and financial position.
•Overseas business expansion and international activities
In addition to Japan, Nintendo engages in business in the United States, Europe, Australia, Asia and other areas in the world.
Expansion of business to these overseas markets involves risks such as a) unpredictable enforcement or changes in laws or
regulations, b) disadvantages from emergence of political or economic factors, c) disadvantages from inconsistency of
multilateral taxation systems and diversity of tax law interpretation, d) difficulty of recruiting and securing human resources, e)
social disruption resulting from terrorist attacks, war and other catastrophic events.
•Dependency on outside manufacturers
Nintendo commissions a number of outside manufacturers to produce key components or assemble finished products. In the
event one or more of these businesses fail, Nintendo may have difficulty procuring key components or manufacturing its
products. In addition, suppliers may be unable to provide necessary components on a timely basis. A shortage of key
components could cause marginal decline due to higher costs, shortage of products and quality control issues. These issues may
impair the relationship between Nintendo and its customers.
Furthermore, as many suppliers’ production facilities are located overseas, potential production interruptions caused by
societal violence, natural disasters or any other accidents in the area could negatively affect Nintendo’s business.
•Business operations affected by seasonal fluctuation
A major portion of demand for Nintendo’s products is focused around the holiday season. Should Nintendo fail to release
attractive new products or supply hardware during that period, it would suffer unfavorable operating performance.