Management Policies & Systems

Business and Other Risks

1.Risk Management Framework of the Mitsubishi Electric Group

The Group, in addition to each division and domestic and overseas affiliates independently carrying out risk management, has established a Risk Management system that 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 CRO (Chief Risk Management Officer) and a Corporate Legal & Risk Management Group supervise the entire Group.
 While assigning priority to various types of risks according to their impact on the management of the entire Group, we will make management decisions at the Risk Management Compliance Committee Meetings and proceed with them in a flexible and strategic manner, not only in response to conventional risks such as large-scale disasters and social risks, but also in exploration of and preparedness for new risks in economic security, technological innovations including AI, and fields such as sustainability, etc. 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.

diagram: Risk management framework of the Mitsubishi Electric Group

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 has been 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. 1) The impact of the social, economic, and political upheaval due to heightened geopolitical risks

    The escalating tensions in international relations surrounding areas such as Ukraine and the Middle East have raised the level of geopolitical risks, destabilized social conditions, and caused a slow down in the recovery of global economy. In addition, the results of elections to be held in major countries and regions in 2024 will affect political and economic relations on multilateral and bilateral bases, increasing the possibility of unforeseeable risks for companies.

     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. If social, economic, and political upheaval caused by heightened geopolitical risks causes a change in demand for our products or affects sales trends of customer products in which the Group’s products are used, the business performance of the Group may be adversely affected.

     To respond to these rapid changes in the economic security policies of various countries worldwide, we investigate and analyze policy developments and legal systems and conduct 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. 2) Changes in supply chain (material procurement) environment

    Although the supply-demand situation for semiconductors has eased off recently, the bottoming out of PCs and smartphones and the increase in demand for generative AI may cause concerns about it tightening again in the future. Furthermore, supply disruptions due to infectious diseases, natural disasters, etc., the expansion of various economic security regulations, and the need to address human rights issues have made it necessary to strengthen the supply chain. In addition to this, there are also expected to be impacts on supply chains due to tensions in specific countries and regions.

     In light of these circumstances, the Group will promote procurement BCP measures equipped to respond to various risks in order to build a resilient supply chain based on the procurement of parts and materials at fair prices, and will continuously supply competitive products and services to the market.

  3. 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 lost 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. In addition, unknown vulnerabilities in the products we deliver to our customers could have a significant impact on the services they provide and on society as a whole.

     In response to this increasing risk, we will promote activities to reinforce our 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

  1. 4) Acceleration of technological innovation and intensifying competition

    With the acceleration of technological innovation (game change) and intensifying competition, international laws and regulations, social values, and social structures continue to change. In light of such increasing uncertainties in the business environment, we must respond promptly and flexibly to convert such changes into opportunities while complying with international laws and regulations and reducing risks.

     The Group will build a robust management base that can withstand these changes. 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.

  2. 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."

     We will also actively utilize the processes of the Responsible Business Alliance (RBA), a corporate alliance that promotes social responsibility in the global supply chain, to step up and strengthen our human rights due diligence efforts in the value chain of the Group.

  3. 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 BCP(Infectious disease and large-scale disasters)

  1. 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’s 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 to centrally manage company-wide information, ensure the safety of each business site, and restore and continue business activities (BCP). We will also build a supply chain for stable procurement and to strengthen our BCP.

Viewpoints 4 Quality of products and services and related compliance risks

  1. 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 measures.

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

  1. 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.

    <Stock markets>
    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 25, 2024).