Omron 2004 Annual Report Download - page 38

36
RISK AND RISK MANAGEMENT
With respect to items related to the Omron Group’s business and
accounting, the following risks may influence the Omron Group’s man-
agement results and financial condition (including share price), and we
believe that these items may substantially affect investor decisions.
Note that items referring to the future reflect the Omron Group’s fore-
casts and/or assumptions as of June 25, 2004.
1. Economic Conditions
The primary business of the Omron Group is electronic components
used in the manufacture of control system equipment and other elec-
trical/electronic equipment by the manufacturing sector and in capital
investment related areas. Accordingly, demand for Omron Group
products is affected by economic conditions pertaining to these mar-
kets. Also, the Omron Group procures raw materials and semi-fin-
ished products in a wide variety of forms, and rapid increases in
demand could result in supply shortages and/or sudden increases in
prices that could halt production and/or cause sudden increases in
costs.
Both in Japan and overseas, therefore, market forces affecting sup-
pliers to, and purchasers from, the Omron Group can result in the
contraction of demand for our products, thereby possibly having a
negative impact on our operating results and financial condition.
2. Risks Accompanying Overseas Business Activities
The Omron Group is actively undertaking business activities such as
production and sales in overseas markets. This imposes risks related
to possible social unrest in the countries where we do business, due
to factors such as differences in culture or religion, differences in busi-
ness customs, economic circumstances such as specific legal and tax
systems, and terrorisms, wars, or other political circumstances. In
particular, the Omron Group continues to expand the scale of produc-
tion and components procurement in China, which has been growing
rapidly in recent years. It is therefore possible that problems could
arise in the management of our production equipment and the per-
formance of other businesses due to sudden changes in the Chinese
political or legal environment, the surfacing of problems related to envi-
ronmental issues or delayed response to social infrastructure needs
such as electrical power generation, or other unpredictable events
within China, including changes in the economic situation.
These factors may have a negative impact on the Omron Group’s
operating results and financial condition.
3. Exchange Rate Fluctuation
The Omron Group has 90 overseas affiliated companies and continues
to reinforce its business operations in overseas markets, such as
China for which major market growth is anticipated in the future. The
percentages of consolidated net sales accounted for by overseas
sales during the fiscal years ended March 2003 and March 2004 were
38.3 percent and 39.2 percent, respectively, and we expect further
increases in the overseas operations ratio due to factors such as pro-
duction shifts. The Omron Group seeks to hedge against exchange
rate risk in such ways as balancing imports and exports denominated
in foreign currencies. Exchange rate fluctuations, however, could have
a negative impact on our operating results and financial condition.
4. Protection of Intellectual Property, including Imitation
Products in China
The Omron Group has accumulated technology and expertise allowing
us to differentiate our products from those of our competitors. But it is
impossible to completely protect all of our intellectual property consist-
ing of proprietary technology and expertise, due to legal restrictions in
specific regions, including China, and/or conditions that allow only lim-
ited protection. At present, the Omron Group is working on intellectu-
al property protection against imitation products, through such meas-
ures as the placement of full-time personnel in China. However, it is
possible that we will not be able to effectively prevent third parties
from using our intellectual property in the manufacture of imitation
products. It is also possible that future Omron Group products and/or
technology may be cited as infringing upon the intellectual property
rights of competitors. Such events could impact negatively on our
operating results and financial condition.
5. Product Defects
The Omron Group is committed to the management philosophy; maxi-
mization of customer satisfaction, and implement the philosophy by
providing the best quality products and services based on our motto
of “quality first.” We have strict quality control standards in place, and
we develop and manufacture our products accordingly. The
Corporate General Affairs Division of the parent company conducts
quality audits, and a Group-wide quality check system is in place for
the ongoing improvement of the quality of our entire line of products
and services.
Nevertheless, there is no assurance that all our products are without
defects, and that recalls will not occur in the future. Large-scale
recalls and/or product defects resulting in liability-related damages
could impose huge costs, could severely influence evaluations of the
Omron Group, and could result in reduced sales. Such events could
impact negatively on our operating results and financial condition.
6. Regulated Chemical Substances
The Omron Group currently manufactures products with materials
containing regulated chemical substances such as lead and cadmium
that will be banned from use in the EU from July 2006. A regulated
chemical substance investigation project has been launched within the
Omron Group, and we are working with our suppliers to review the
status of regulated chemical substances in all of the components and
materials we use. Efforts are also being made to switch to substitute