Management system

Business and Other Risks

The Mitsubishi Electric Group (hereinafter "the Group") is involved in development, manufacturing, and sales in four Business Areas: Infrastructure, Industry and Mobility, Life, and Business Platform. It has established Business Area Owners for these operations, which extend globally, not only inside Japan, but also in North America, Europe, Asia and other regions. Therefore, 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:

Viewpoint 1 Impact of improper quality control practices

  1. 1) Impact of improper quality control practices on the Group’s performance

    An internal investigation revealed that the inspections of some of the HVAC (Heating, Ventilation and Air Conditioning systems) and other products for railcars manufactured at Nagasaki Works were conducted in a different way from the inspections described in the purchase specification, had not been actually conducted, and had inappropriate documentation in the inspection reports, etc. Following this, the Company has set up the Investigative Committee (chaired by Hiroshi Kimeda, Nishimura & Asahi, announced July 2, 2021) to investigate the existence of improper quality control practices on a company-wide basis, the facts and causes of the improper practices, and based on the findings of the investigation, to formulate measures to prevent any recurrence, etc.

     The committee is verifying the consistency of objective data and other information obtained through a questionnaire survey for all domestic employees of Mitsubishi Electric Corporation, conducting forensic investigations into parties at the relevant sites and officers and carrying out interviews and inquiries with relevant parties. The investigation is still in progress.

     In the course of these investigations, the Company received investigation reports from the Investigative Committee on October 1, 2021, December 23, 2021, and May 25, 2022, regarding the status of the investigation as of each of these dates.

     In the investigation reports, new improper quality control practices were found at certain sites. The Company has been reporting the situation to the customers, discussing with the customers on the measures to be taken. The Company will also continue to cooperate with the investigation activities to the fullest extent to uncover all the improper quality control practices.

     Regarding the impact of the improper quality control practices, costs associated with additional inspection and reinforcements to the quality management system have to certain extent been incorporated based on certain assumptions. However, depending on the progress of future discussions with customers and investigations, losses exceeding these assumptions or losses arising from the discovery of new improper quality control practices may adversely affect the Group’s performance.

     To address the issues that have been identified, based on the recommendations of the Investigative Committee, we will institute measures tailored to each individual workplace while deepening and developing reform in three key areas (quality assurance, organizational culture, and governance) with the aim of regaining trust, including measures to prevent future recurrence.

Viewpoints 2 Supply chain disruption Increased geopolitical risk Expansion of cyber-attacks, etc.

  1. 2) 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, recent tensions between the U.S. and China have had a major impact on corporate information management and supply chains due to mutually contradictory policies, doctrines, and regulations. The international community has become divided into blocs. As a result, the possibility of unforeseeable business risks is increasing, and there are also events that cannot be judged solely on the basis of economic rationality.

     The Group conducts business in a wide range of areas from Energy and Electric Systems to Home Appliances, with approximately 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 slower-than-expected economic growth 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 such as an economic slowdown in Europe due to the prolonged situation in Ukraine, an economic slowdown in China due to the zero-COVID policy, etc., 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. 3) Changes in Supply and demand situation of products and supply chain (material procurement) environment

    New lifestyles such as remote working, which became popular as a countermeasure against COVID-19, have taken root as the new normal and are helping to expand global demand in areas such as data centers and 5G communication. In addition, the spread of renewable energy and electric vehicles is accelerating as part of efforts toward carbon neutrality.

     In addition to growth in global demand backed by factors such as economic measures in various countries, the prices of semiconductors, certain electronic components, materials, and logistics costs are rising and difficulties in procurement are becoming apparent primarily due to soaring energy prices caused by sanctions against Russia.

     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 the U.S. and China, or regulations in Europe and the U.S. 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 strengthen BCP measures to enable the continuation of its production activities.

  3. 4) Environment surrounding information security

    If the Group’s confidential corporate information relating to sales, engineering, intellectual property, and other areas, as well as information entrusted to the Company by its customers and stakeholders, 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 advanced and sophisticated, and maintain and enhance resilient information systems.

Viewpoints 3 Game change/Technological innovation Human rights due diligence Recommendations of Taskforce on Climate-related Financial Disclosures (TCFD)

  1. 5) Acceleration of technological innovation and intensifying competition

    The Group advances the research and development with a balanced approach. These R&D efforts reinforce and transform the Group’s existing businesses and promote the creation of new value, in order to solve a variety of social issues through the use of advanced technologies and contribute to the realization of a sustainable society. The Group will also accelerate development and work to create new value through proactive utilization of open innovation with universities and other external R&D institutions.

     Among the key issues for realizing a sustainable society, international legislative and regulatory efforts are accelerating to address climate-related issues (such as decarbonization), 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. Since a highly uncertain business environment is expected, the Group will endeavor to build a solid revenue base that is resilient in the face of these changes.

  2. 6) 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.

  3. 7) 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 climate-related risks 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), decreased revenues, and a lower stock price.

     In response to these risks, the Group will examine 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), and strengthen the efforts to address them.

Viewpoints 4 Economic stagnation due to infectious disease pandemic Interruption of business activities due to large-scale disasters, etc.

  1. 8) The impact of infectious disease (COVID-19), etc.

    The Group is executing business in countries and regions affected by COVID-19. The Group is implementing countermeasures as it continues its business operations while taking adequate precautions against the spread of infections. However, if the disease continues to spread or the pandemic becomes further protracted, declines in demand and other factors may adversely affect the Group’s performance.

     Although a certain level of business continuity is being secured against COVID-19 as a result of booster vaccinations and the new lifestyles being common, the timing of the end of the pandemic may become uncertain in the event of the emergence of an unexpected virus strain, etc. In that case, the Group’s performance may be affected to a greater extent than currently expected.

  2. 9) The impact of large-scale disasters (earthquakes, tsunamis, typhoons, floods, volcanic eruptions, and fires), etc.

    Japan has suffered from many natural disasters (earthquakes, tsunamis, typhoons, floods, volcanic eruptions, and fires), etc. In recent years, weather-related disasters have become more frequent, larger in scale, and more severe as the risk of climate change has increased, both in Japan and globally.

     Such a large-scale disaster 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. Even in cases where Mitsubishi Electric Group facilities are not directly affected, supply chain disruptions could impede various areas of procurement. This could have an impact on production activities, and also on shipping, logistics, and deliveries, which could result in substantial losses.

     In the event of 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 flexible and sustainable supply chain that is capable of responding to the risks of large-scale disasters and fortify its BCP measures for stable procurement that will enable production activities to continue.

Viewpoints 5 Increasingly complex, increasingly interrelated risks and Financial market uncertainty

  1. 10) 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 9) 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.

    <Stock markets>
    The Group holds stocks that are determined to be necessary for business operations, taking into consideration maintaining and strengthening relationships with business partners. 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, 2022).