Nintendo 2016 Annual Report Download - page 9

- 7 -
(1) Risks around economic environment
• Fluctuation in foreign exchange rates
Nintendo distributes its products globally with overseas sales accounting for about 70% of its total sales. The
majority of monetary transactions are made in local currencies. In order to reduce the influence of fluctuations
in foreign exchange rates, we have implemented measures such as increasing purchases in U.S. dollars;
however, it is difficult to eliminate the risks completely. In addition, the Company holds a substantial amount
of assets in foreign currencies. Thus, fluctuations in foreign exchange rates have a strong influence not only
when accounts in foreign currencies are converted to Japanese yen but also when they are revaluated for
financial reporting purposes.
(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.
Furthermore, as the market for smart device gaming services is in the development stage, it is possible that
Nintendo may face rapid structural changes or the imposition of new laws and regulations and, if unable to
adapt to such changes, be affected in terms of its business and performance.
• 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 development of software for dedicated video game
platforms and applications for smart device gaming services, there is no guarantee that all new products
and services 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 incorporate technologies required for entertainment. Furthermore,
delays of hardware launches could adversely affect market share.
c. Due to the nature of Nintendo products and services, it may become difficult to develop, sell or launch the
products and services 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 of 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