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Associated Business Risks

Associated Business Risks Listed in the Financial Report (for the Year Ended March 2021)

Described below are the major risks associated with the status of business, accounting, and other aspects of the Nitto Group described in the Financial Report that our management deems to have the possibility of significantly affecting investment decisions. Risks associated with business are referred to as "Business Risks," while other risks that can affect the Group overall are referred to as "Operational Risks."

(1) Business Risks
a. Business Environment
The Nitto Group is a comprehensive manufacturer of components and materials used in a variety of industries and markets, and is therefore susceptible to end-user market trends. A drop in the competitiveness or prices of products that incorporate our components and materials, or any changes to the external environment, such as economic recession, can impact our financial results.
The Group strives to manage risks in various ways, including rebalancing our business portfolio and analyzing market trends.

b. Overseas Transactions and Foreign Exchange Risks
The Nitto Group operates a global business, with more than 70% of total sales revenue earned outside Japan.
Accordingly, there are risks in the various countries in which we operate, such as interruption of electric power supply or transportation services, rising labor costs, and deterioration of employment relationships or labor disputes. The Group's performance may also be adversely affected by abrupt changes in the global economy triggered by terrorism, coup or similar conflicts. Furthermore, the Group's performance may be adversely affected by unforeseeably large forex fluctuations, financial instability, the rise of protectionism, and trade restrictions for the sake of national security.
In addition to conducting timely monitoring of the Group's internal funds at our headquarters, we have established financial control centers in each area and are working to hedge foreign exchange risks, among other measures.

c. Financial Position of Customers
Serious financial problems could develop at some customers from whom the Nitto Group holds accounts receivable due to major changes in their operating environments. Should such receivables become irrecoverable at any one of its largest customers in the fast-changing electronics and life science sectors, the amount to be written off could be enormous, which in turn could negatively affect the performance of the Group.
The Group has established Credit Control Group, and makes it a rule to closely investigate the financial positions of its customers before starting business.

d. Procurement of Raw Materials
Some of the Nitto Group's raw materials are sourced from specific individual suppliers.
If the supply of raw materials were to decrease or be disrupted due to unavoidable circumstances on the part of those suppliers, such as damage from natural disasters, accidents, or bankruptcy, the supply-demand balance could be disturbed, resulting in failure to procure necessary raw materials or an increase in costs. Any of these contingencies could influence the performance of the Group.
The Group endeavors to reduce the risks involved in securing sufficient supply of key raw materials through measures including sourcing materials from multiple suppliers and setting and managing inventory levels for a given period of time.
In addition to contingency risks, we also confirm the ESG initiatives of our suppliers on a regular basis in accordance with our internal guidelines, encourage them to make improvements in order to reduce compliance risks, and work to ensure stable procurement.

e. Research and Development
The industry in which we operate our business experiences turbulent market changes that are not easy to predict.
New technologies or products from other companies can suddenly and unexpectedly cause our products to become obsolete. Situations like this can impact our future financial results. Such technologies and products include those related to climate change and water risks.
In order not to be influenced by trends in a given business, the Nitto Group works on R&D to develop new technologies and products focusing on the Sanshin ("three new") Activities, which is to stimulate demand through the development of new applications and new products, as well as make relevant equipment investments. We also practice rigorous intellectual property management to create barriers to entry.
Business Risks in each business segment are as follows:

f. Industrial Tape Business
The Nitto Group supplies a diverse range of Functional Base Products to a broad range of industries in the global market. For electronics and semiconductor applications, customers are increasingly seeking products with high added value. This creates the possibility that our performance may fluctuate in line with market conditions for electronics or semiconductors.
By creating Global Niche Top products and Area Niche Top products under our Niche Top Strategy and Sanshin Activities initiatives, we are working to create a business constitution that is unaffected by market forces.
In Transportation Business Sector, we supply global markets with structural materials used for reinforcement and vibration-damping applications in automobiles. Fluctuations in automobile production volumes can therefore impact our financial results.
By pushing expansion into growth areas such as EVs (electric vehicles) and CASE (Connected, Autonomous, Sharing/Service, and Electric), we are, also in this sector, working to create a business constitution that is unaffected by market forces. As part of our efforts in growth areas, we are also implementing structural reforms that reallocate existing resources within the Group.
In the markets that the industrial tape business serves, an increasing number of customers in the automotive and electronics industries are striving to contribute to the environment. To this end, in our industrial tape business we are also working to develop and manufacture products with lower environmental impact.

g. Optronics Business
The flat panel display field, in which the Nitto Group's Information Fine Materials Sector operates, is exposed to fierce competition from a number of companies. The obsolescence of products and technologies in which the Group's components are incorporated, a decline in sales due to market maturation, and pressure on profit margins due to the entry of competitors may negatively affect the Group's performance. Meanwhile, if a rapid increase in demand makes raw materials difficult to obtain due to insufficient production capacity by raw material manufacturers, this may also negatively affect the Group's performance.
We are working to identify the evolving needs of our industry-leading customers and to develop and market products accordingly, while striving to procure raw materials from multiple sources.
In addition, we are focusing our efforts in the printed circuit business on markets in which growth is anticipated. Fluctuations in demand in the markets we operate in may affect our performance. We are constantly striving to improve productivity in order to create a business structure that is less susceptible to fluctuations in market demand for our main applications of hard disk drive (HDD) and smartphone components.

h. Life Science Business
In the life science business, we are strengthening our initiatives in the oligonucleotide therapeutics field as a new business field for the Nitto Group.
The oligonucleotide therapeutics market is forecast to grow in the future, with a rise in the number of late-stage clinical research topics and progress starting to be made on new drug approvals. Demand for contract manufacturing of oligonucleotide therapeutics, which we undertake in the life science business, fluctuates according to the progress of customers' research and development and clinical trials, which may affect our performance.
We strive to mitigate the impact of demand fluctuations by handling a wide range of research and development activities and clinical trial projects commissioned by customers.
Meanwhile, as for drug discovery of oligonucleotide therapeutics, which we undertake in the life science business, we provide technologies to customers in the pharmaceutical industry after conducting in-house research and development. Performance may therefore be affected by the progress of our research and development efforts.
In drug discovery of oligonucleotide therapeutics, we are steadily advancing our research and development initiatives, including collaborations with external organizations, in order to ensure both safety and efficacy.

i. Others
The Membrane Division supplies components for water treatment in the energy sector and desalination plants. The impact of infectious diseases often causes instability in plant construction and customers' material procurement plans. In addition, a supplier oligopoly has developed for certain materials, meaning that in the event that a supplier is damaged by a disaster or trade regulations with the country of supply are tightened, materials may become difficult to procure, which may in turn adversely affect our performance.
In order to create a business structure that is resilient against the impact of market conditions, we are bolstering efforts to develop new markets and launch new products as quickly as possible, while in the area of raw material procurement we are striving to utilize multiple suppliers.
In addition, the Nitto Group's performance may be adversely affected if new businesses are not launched as planned. The Group strives to conduct sound business operations by regularly assessing the alignment of the Group's position with that of relevant markets and customers.

(2) Operational Risks

a. Product Safety
The Nitto Group manufactures and supplies products, primarily intermediate materials, to our customers in accordance with strict quality control standards as quality requirements in the industry grow increasingly diverse and sophisticated. In the event that a defect in product or service occurs, the Group may be held liable for compensation for such defects, which may affect the Group's performance.
The Group strives to earn the trust of society and to make continuous improvements by identifying problems at an early stage through efforts including obtaining certification and operating strict international quality management systems in line with those required by each industry, and implementing advanced management of chemical substances.

b. Environment
The Nitto Group operates businesses that are subject to heightened social demands with regard to environmental issues, such as growing momentum for measures to combat climate change and waste plastics, as well as increasingly stringent environmental laws and regulations.
In the event that the Group is unable to meet the demands of stakeholders and customers to whom these issues are of great importance, the Group's performance may be adversely affected. In particular, the Group uses a large number of chemical substances and plastics. In the event that stricter environmental regulations related to these areas make it difficult to sell existing products or the Group causes unexpected accidents or unforeseen environmental pollution, the Group's performance may be adversely affected.
The Group has set integrity with a commitment to environmental preservation as its Environmental Policy, and from a social responsibility perspective we are working to reduce CO2 emissions, achieve efficient use of energy, raw materials, and water, as well as to reduce emissions of pollutants and hazardous substances.

c. Information Security
Information systems play a crucial role in every aspect of the Nitto Group's business activities, and such systems are becoming increasingly complex and advanced with each passing year. At the same time, sophisticated cyberterrorism attacks and other forms of human-caused risk are growing.
In the event that the Group's information systems suffer a malfunction, or leakage or unauthorized use of information such as technical, customer, transaction, or personal information occurs, regardless of intent or negligence, the Group's performance may be adversely affected.
The Group implements a range of information security measures against cyberterrorism from both a hardware and software perspective. In addition, we implement a variety of measures to prevent leakage and unauthorized use of information due to negligence or error, including annual training for officers and employees on the importance of information security, and initiatives to improve the robustness of our systems.

d. Changes in Laws/Regulations and Compliance
The Nitto Group operates a global business.
The tightening of, significant changes to, and differing interpretations of laws, tax codes, and regulations, as well as differences in business practices, can restrict the group’s activities, generate new costs, and impact the group's financial results. A compliance violation on the part of an executive or employee could also impact our financial results.
The Group strives to comply with each country’s laws and regulations in all areas of its operations. We also strive to enforce compliance, for example, by translating the Group Business Conduct Guidelines booklet into 16 languages and distributing it to all group executives and employees, and by holding workshops on sustainability.

e. Governance of Overseas Group Companies
The Nitto Group conducts business on a global scale across a wide range of fields and maintains operations in 28 countries and regions worldwide, including Nitto Denko Corporation and its 94 subsidiaries and 6 affiliates.
Improper actions , business transactions or decisions made by officers or employees of these companies that are not in accordance with the Group's management policies could result in a failure of governance and internal control functions, which could incur losses to the Group and affect its performance.
The Group operates a matrix-based management approach, in which three axes complement and support each other: the business axis, which consists of six business sectors and divisions; the regional axis, which divides operations outside Japan into eight regions; and the functional axis, which consists of specialized functional divisions such as human resources and accounting. The business axis establishes governance and internal control systems, while the regional and functional axes audit and monitor their status appropriately. We are working to conduct thorough governance and strengthen internal controls by detecting and reporting operational risks and issues and implementing necessary improvements in these areas.

f. Accidents and Disasters
The Nitto Group operates a global business and thus has a number of production sites and sales sites in Japan and overseas.
A major accident or natural disaster such as an earthquake or tropical storm in any of these locations could damage these sites and their facilities. Moreover, such an event could damage power, gas or other infrastructure, eventually cutting off our supply chain extensively, which could seriously impact our financial results. Such events could also cause considerable damage to our customers or suppliers, stalling orders or supply for an extended period and seriously impacting our financial results.
Following our corporate philosophy "We place safety before everything else," we have prepared a business continuity plan (BCP) as a measure for preparing for accidents and disasters and for preventing disruptions to business functions, and we practice business continuity management (BCM) to periodically update the BCP and ensure its effective implementation

g. Infectious Diseases
The spread of the COVID-19 pandemic has had a major impact on the countries in which the Nitto Group operates.
The performance of the Group may be negatively impacted by larger-than-expected outbreak of the disease within the Group, suspension of operations at the direction of governments in countries in which we operate, or in the event that suppliers or customers are significantly impacted due to the spread of infection.
The Group is striving to prevent the spread of infection by disseminating information on infection prevention methods to its officers and employees and encouraging their implementation, as well as giving and taking supplies of protective equipment on a global basis. In addition, in the event of a confirmed infection, we have established procedures to control and prevent further spread of infection, including identifying contacts and carrying out disinfection procedures. Even in the case that we were required to suspend operations due to a government directive, we have formulated a business continuity plan that secures alternative production and facilitates a rapid restart.

h. Mergers and Acquisitions
The Nitto Group engages in mergers and acquisitions, business alliances, and strategic investments as necessary when such actions provide an effective means of acquiring technologies to enhance corporate value, expanding into new business areas, or accelerating business growth.
However, if the Group is unable to achieve the results or synergies that it initially envisioned due to significant changes in the market or competitive environment, or if the businesses it acquired are unable to be developed as planned, there is a possibility that the Group's performance may be adversely affected due to a decline in profitability or the impairment of business assets.
When forming partnerships with other companies or conducting mergers and acquisitions, the Group bases its decisions on due consideration of market trends, customer needs, the business conditions of the counterpart company, and competitive advantage in the market.

i. Intellectual Property Rights
The Nitto Group owns, maintains and manages a large amount of intellectual property rights for the purpose of enhancing its market competitiveness.
However, it is possible that a third party could claim that such rights are invalid, or such rights could be inadequately protected, imitated, or involved in litigation in some regions. Should the protection afforded by intellectual property rights be seriously lost, the performance of the Group may be adversely affected.
The Group pays due attention to the intellectual property rights of other companies to ensure it does not infringe upon them, while at the same time pursuing initiatives to uncover any products on the market that infringe upon the Group's intellectual property rights.

j. Retention of Human Resources
In order to promote the business activities of the Nitto Group, it is necessary to recruit and train personnel in a variety of fields, including research and development, manufacturing, sales, and administration. It is also necessary to promote diversity to enable the Group to respond to rapid changes in the business environment.
Failure to continually hire necessary personnel or to prevent the drain of talent could negatively affect the performance of the Group.
The Group is working to recruit and develop human resources in a variety of fields by enhancing its internship initiatives and conducting a range of open-participation training programs and workshops.

k. Work Environments
The Nitto Group operates a global business.
Various human rights issues, such as child labor, forced labor, and discrimination against foreign workers, as well as occupational accidents among employees in the supply chain can occur. If the Group fails to detect and correct them promptly enough, social credibility of the Group would be lowered and some customers may suspend transactions with the Group, which could significantly affect the performance of the Group. Furthermore, withdrawal from certain businesses etc., as a result of such issues, may have a significant impact on performance. In addition, in the event that regulations are significantly strengthened by related laws, ordinances, or international initiatives such as the OECD Guidelines for Multinational Enterprises or the ILO International Labour Standards, the Group may incur significant costs in order to comply with these regulations, which may in turn impact the Group's performance.
In order to promote the sustainable development of society, the Group, in accordance with the Nitto Group Basic Policy on Human Rights, is working to conduct human rights due diligence in the supply chain and to improve the workplace environment through the combined efforts of its business divisions and specialist departments. We are conducting surveys of our major suppliers in order to identify risks.

l. Defined Benefit Liabilities
The Nitto Group's defined benefit liabilities are calculated on the basis of various assumptions used in actuarial calculations and investment yields of pension assets. As such, fluctuations in the market value of pension assets, interest rate behaviors, and changes in retirement allowance systems and pension plans can affect the amount of such liabilities that are recognized and reported, thereby having an impact on the performance of the Group.
When managing pension assets affected by market fluctuations, the Group aims to achieve stable returns by setting long-term policy asset mix based on factors such as pension asset liability management (ALM) analysis, diversifying investments, and considering downside risks. In implementing the above, the Group has established an appropriate operation and management system by designating members from its finance and human resources departments as well as members with asset management experience as fund managers, in addition to engaging external consultants. When considering changes to retirement benefits and pension plans, such as reducing the risk of additional contributions by, for example, introducing defined contribution pension plans in certain cases, due consideration is given to the impact on retirement benefit obligations.


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