1.Risk management framework of the Mitsubishi Electric Group
Risk management is implemented independently by each division and by domestic and overseas associated companies. In addition, the Group has built a framework to enable appropriate and quick decision making where Mitsubishi Electric's each corporate division (division in charge of risk management) supervises and assesses each division and domestic and overseas associated companies in their respective specialized areas, and a CRO (Chief Risk Management Officer) and a Corporate Risk Management Division supervise the entire Group.
We will focus on a wide variety of risks according to their degree of impact on the management of the entire Group, and will not only respond to conventional risks such as large-scale disasters and social risks, but also flexibly and strategically investigate and prepare for new risks in areas such as economic security, human rights, and the global environment. In particular, important matters related to management supervision and execution are deliberated upon and decided at the Board of Directors meetings and the Executive Officer meetings.
2. Business and Other Risks
The Mitsubishi Electric Group, with more than 50% of the Group’s revenue from overseas, aims to transform into a "Circular Digital-Engineering" company in a wide range of business fields. We also seriously consider various compliance events that have emerged, and are working to improve internal control systems.
In conducting its business, various factors may affect actual financial standings and operating results of the Group. Major factors that may affect actual financial standings, operating results, and the decision of investors are as follows:
Viewpoints 1 Increased geopolitical risk Supply chain disruption Expansion of cyber-attacks, etc.
- 1) The impact of the social, economic, and political upheaval due to heightened geopolitical risks
The international situation around Ukraine has changed the level of geopolitical risk, particularly in Europe. It has destabilized social conditions and slowed the global economic recovery. In addition, heightened tensions between the U.S. and China have increased the possibility of unforeseeable business risks becoming evident.
The Group conducts business in a wide range of areas from social infrastructure to home appliance, with more than 50% of the Group’s revenue from overseas. Domestic revenue includes not only products that are used domestically, but also products that are incorporated into customers’ products and exported overseas.
Therefore, the Group’s performance may be adversely affected by more severe economic slowdown than expected in countries and regions around the world, which could result in changes in demand for the Group’s products or sales trends of customer products in which the Group’s products are used. This could occur against the background of circumstances due to the prolonged situation in Ukraine and worsening global inflation, among other factors.
To respond to these rapid changes in the economic security policies of various countries worldwide, the Corporate Economic Security Division, which is under the direct control of the president, investigates and analyzes policy developments and legal systems and conducts an integrated risk management from the viewpoint of economic security related to the control of sensitive technologies, information security, investment, development, and supply chain in the entire Group.
- 2) Changes in supply chain (material procurement) environment
Although there are signs of improvement in the overall tightness of demand for semiconductors, prices for some industrial and automotive semiconductors, electronic components, and materials continue to rise and procurement remains difficult. In addition, the upgrading of supply chains has become a pressing issue due to supply disruptions caused by infectious diseases and natural disasters, expanding economic security regulations, and social demands for human rights issues.
In light of these developments, the Group will continue to focus on securing supplies for stable procurement and controlling price hikes in order to supply competitive products to the market. In addition, changes can be expected to arise in the supply chain due to tensions between specific countries and regions, or regulations in each country related to human rights or the environment. However, the Group will build a sustainable procurement system that can mitigate various procurement risks and respond to environmental changes. The Group will also strategically promote BCP measures to enable the continuation of its production activities.
- 3) Environment surrounding information security
If the Group’s confidential corporate information including information entrusted to the Group by its customers and stakeholders, as well as information relating to sales, engineering, intellectual property, and other areas, were to be destroyed or leaked outside the Group due to infection by a computer virus, unauthorized access, or other unforeseen circumstances, or if the kind of cyber-attack that would affect factory production were to occur, this may affect the business activities and performance of the Group. In addition, if information systems were to malfunction due to large-scale failure to software or hardware, unknown vulnerabilities in the systems of the Group and systems outside the Group’s control, the disruption of communications services provided by external operators, large-scale disasters, or other causes, this may affect the business of the Group.
As a response to such risks, the Group will promote activities to reinforce its information security infrastructure, strengthen its countermeasures to the latest patterns of cyber-attacks, which are becoming increasingly sophisticated and diversified, and maintain and enhance resilient information systems. We will also strive to protect confidential information, including strengthening measures to prevent human-caused information leaks.
Viewpoints 2 Game change/Technological innovation Increased social demands for human rights issues Risks related to climate change
- 4) Acceleration of technological innovation and intensifying competition
Among the key issues for realizing sustainability, international legislative and regulatory efforts are accelerating to address climate-related issues, human rights, and other issues. These could lead to changes to established values and social structures, triggering rapid technological innovation (game change). Rapid acceleration of technological innovation may lead to intensified competition, which may introduce the risk of impact on the Group’s performance.
In anticipation of a highly uncertain business environment, the Group will endeavor to build a solid revenue base that is resilient in the face of these changes. For example, in the area of research and development, we will attempt to design the society of the future and create new value in a timely manner by integrating knowledge from inside and outside the Group through collaboration with external research institutions, such as universities, and through joint creation with our customers.
- 5) Laws and regulations and increased social demands for human rights
The Group recognizes the following risks with respect to human rights.
- Risk of violating laws and regulations being enacted in various countries that require companies to address human rights if such requirements are not met appropriately and in a timely manner
- Risk of economic sanctions being imposed on companies if they are found to be complicit in human rights abuses
- Reputation risk such as loss of trust in the company involved in human rights violations
To address these risks, the Group is strengthening its initiatives based on international norms such as the United Nations "Guiding Principles on Business and Human Rights."
In addition, Mitsubishi Electric has joined the Responsible Business Alliance (RBA), a corporate alliance that promotes social responsibility in the global supply chain. The Company will actively address human rights issues in the Company and the supply chain.
- 6) Laws and regulations and increased social demand for achievement of a sustainable global environment
Among environmental risks, the Group places the highest priority on addressing climate-related risks. The risks related to climate changes can be broadly classified into the following: risks related to the transition to a decarbonized society (transition risks); and risks related to the physical impacts of global warming if it progresses (physical risks). These risks could result in various outcomes such as increased costs (e.g., production, internal administrative, and financing costs) and decreased revenues.
In response to these risks, the Group will strengthen the business operations, taking into consideration governance, strategy, risk management, and metrics and targets for climate-related issues in line with the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD). In addition, the Group will work to control business risks and create opportunities to promote solutions to social issues.
Viewpoints 3 Infectious disease and large-scale disasters
- 7) The impact of infectious disease and large-scale disasters (earthquakes, tsunamis, typhoons, floods, volcanic eruptions, and fires), etc.
An infectious disease or a large-scale disaster (earthquakes, tsunamis, typhoons, floods, volcanic eruptions, and fires) could cause direct damage to Mitsubishi Electric Group facilities and disrupt business activities of the Group, which has numerous main facilities in and outside Japan, including manufacturing facilities, sales offices, research laboratories, and the head office. In addition, supply chain disruptions could have an impact on procurement, production, logistics, etc., which could result in substantial losses.
In the event of emergencies such as an infectious disease or a large-scale disaster, the Group will establish a Corporate Crisis Management Office. Its purpose is to centrally manage company-wide information, ensure the safety of each business site, and restore and continue business activities (BCP). The Group will also build a supply chain for stable procurement that will enable the continuation of production activities.
Viewpoints 4 Quality of products and services and related compliance risks
- 8) Product quality and various compliance risks
The recording of losses due to defects or deficiencies in products or services, or the deterioration of social reputation due to the occurrence of related compliance violations may impact overall business management.
In response to such risks, the Group will strengthen its quality assurance system and establish an effective internal control system with an emphasis on preventive functions.
Viewpoints 5 Increasingly complex, increasingly interrelated risks and Financial market uncertainty
- 9) The impact of financial market risks (foreign currency exchange rates and stock markets)
If the foreign exchange market or stock market is affected by each of the increasingly complex separate risks indicated in items 1) through 8) above, or by the combined effects of these risks, the Group may be affected by the following.
<Foreign currency exchange rates>
In addition to North America, Europe, and China each accounting for roughly 10% of total Group revenue, the Group purchases imported materials that are denominated in U.S. dollars or euros, and sells export goods and purchases imported materials that are denominated in foreign currencies in its Asian production bases.
The Group strives to avoid foreign currency exchange rate fluctuations through the use of forward exchange contracts, etc. However, sudden changes in exchange rates that cause major deviations from the exchange rates expected by the Group may affect the Group’s performance.
The Group's basic policy is to "not own cross-shareholdings in principle," but at the same time, the Group may hold stocks that are determined to be necessary for business operations. Falls in stock market prices may lower the value of marketable stocks held by the Group and reduce its pension assets.
As a response to such risks, the Group makes a comprehensive judgment of the significance of its stockholdings, from the viewpoint of their profitability, business feasibility, holding risks, etc., and verifies and confirms them at the Executive Officer meetings and the Board of Directors every year. When stocks are judged to have a low holding significance, the Group considers the reduction thereof, such as by selling them, taking into consideration the situation of the companies concerned.
The above are forward-looking statements based on the judgment of the Company as of the date of submission of the Annual Securities Report (June 29, 2023).