Font Size
Nippon Paint Group operates a paint and coatings business on a global scale. We believe that the proper understanding and management of risks at our Group are essential for the sustainable growth of our businesses. Therefore, we have established a risk management system based on our Basic Policy on Internal Control Systems. This section contains forward-looking statements, and these statements are based on our judgments as of the date of filing the Annual Securities Report on March 28, 2025 (available only in Japanese).
(1) Risk Management System
Based on the Asset Assembler model, Nippon Paint Group operates a risk management system in which groups of our subsidiaries, organized into Partner Company Groups by region or business, manage risks in a decentralized manner as part of their autonomous business management. The Representative Executive Officers & Co-Presidents, who bear ultimate responsibility for overseeing this risk management system, periodically report to the Board of Directors on the status of risk management activities within each Partner Company Group. The Board of Directors reviews and monitors the management of critical risks associated with the Group’s overall business management and business execution.
These risk management processes are based on the autonomous activities of each Partner Company Group through self-assessment of risks, in accordance with our Basic Policy on Global Risk Management. The Partner Company Groups annually determine areas for improvement, develop enhancement plans with clear lead times, and identify critical risks using a risk-based approach, reporting their findings to the Representative Executive Officers & Co-Presidents. Based on these reports, the Representative Executive Officers & Co-Presidents grasp the overall status of risk management within the Group, participate in key management meetings by region and business, and provide directions for effective monitoring of business progress and appropriate and continuous risk responses. By timely sharing these updates with the Board of Directors, the Company formulates suitable management strategies that reflect responses to significant risks impacting the Group.
The Audit Department of the Company analyzes the significant risk evaluations related to the internal control systems conducted by the Partner Company Groups through self-assessment of risks, and reports the results to the Audit Committee and the Representative Executive Officers & Co-Presidents. Furthermore, under the Group audit structure based on the “Audit on Audit” approach, the Audit Department shares the analysis results with the heads of internal audit units at key partner companies, ensuring these results are reflected in internal audit plans for each region. This process enables the Company to oversee the effectiveness of the Group’s risk management framework, enhance the transparency and reliability of risk management, and promptly implement necessary remedial actions.
(2) Risk Associated with Business Operations
① Risks associated with changes in our markets
Our Group manufactures and sells paint and coatings, as well as adjacencies products, for use across a diverse range of industries, including buildings, automotive, metal products, structures, electrical machinery, and marine vessels. Our operations are primarily focused on Asia, with China being a key market, as well as in Japan, Australia, the Americas, and Europe. As a result, our Group’s business performance and financial position are inherently sensitive to fluctuations in economic conditions and financial market trends in the countries and regions where we operate. In recent years, the business environment has become increasingly uncertain due to a range of factors, including geopolitical tensions across the globe, concerns about global inflation and monetary tightening leading to economic slowdowns, supply chain disruptions, fluctuations in paint demand and raw material prices, and natural disasters. Asia, particularly China, is a critical operational region for our Group, making us especially vulnerable to economic volatility and political developments in the country. If China’s real estate market conditions or regulatory environment become more challenging than anticipated, this could have an adverse impact on our Group’s business operations.
Our Group aims to achieve sustainable growth through a range of group-wide initiatives, including expansion into new geographic markets via M&A, the development and sale of anti-viral products and environmentally friendly solutions to create new demand, strengthening brand presence across all regions, monitoring supplier trends, and enhancing the Group’s overall supply and procurement capabilities. However, if the business environment deteriorates beyond our expectations, there is a risk that our Group’s financial position and business performance could be adversely affected.
② Risks associated with selling prices
Our Group sets selling prices based on various factors, including raw material procurement costs, customer needs, and competitor trends. To mitigate the impact of fluctuations in raw material prices, we take measures such as negotiating purchase prices as needed through continuous monitoring, diversifying and strategically selecting suppliers, and evaluating and adopting alternative materials that are less susceptible to price volatility. However, there is no guarantee that we can successfully reduce the impact or rising raw material prices on our revenue. Additionally, we strive to maintain and enhance our competitive advantage by developing and selling technologically advanced products, strengthening support for sales channels, and exploring new distribution channels. However, due to competitive pressures and other factors, we may face challenges in passing on raw material price increases to customers or experience delays in doing so. If such risks materialize, our Group’s profitability may decline, potentially resulting in an adverse impact on our financial position and business performance.
③ Risks associated with overseas business operations
Our Group is actively expanding overseas operations and operates as a multinational corporate group. In fiscal year 2024, overseas revenue (after the elimination of intersegment transactions) accounted for approximately 90% of total revenue. The key risks anticipated in relation to our overseas business activities are outlined below. If any of these risks materialize, they may adversely impact our Group’s business operations, financial performance, and business performance.
(a) Exchange rate and price level volatility risks
Financial statements of our Group’s overseas subsidiaries are prepared in foreign currencies and are converted into Japanese yen using either the average exchange rate during the fiscal period or the exchange rate at the end of the fiscal period when preparing our consolidated financial statements. As a result, even if there are no significant changes in the business performance of overseas subsidiaries, fluctuations in exchange rates against the Japanese yen and the application of hyperinflationary accounting, which reflects price changes in hyperinflationary environments in financial statements, may affect our Group’s financial position and business performance.
In addition, our Group conducts manufacturing and sales activities globally through its overseas subsidiaries and operates production and sales bases across the world. Many of our Group’s products are characterized by a “local production for local consumption” approach. As a result, we believe that fluctuations in exchange rates have a limited impact on the competitiveness of our Group’s products. However, currency appreciation at a manufacturing or sales base may affect the price competitiveness of our products, which could, in turn, adversely impact our Group’s financial position and business performance.
(b) Changes in political and economic conditions
If unforeseeable events, such as changes in laws and regulations, rapid shifts in political and economic conditions, and social and political turmoil including terrorism, war, natural disaster, or pandemics occur in the countries and regions where our Group operates, leading to difficulties in procuring raw materials, sharp price increases, suspension of operations at manufacturing facilities, or disruptions in logistics that halt manufacturing and shipments, our Group’s financial position and business performance may be adversely affected. Our Group relies heavily on Asian markets for a significant portion of its sales, with the Chinese market accounting for a substantial percentage. Consequently, our Group’s financial position and business performance may be influenced by economic and political developments or other changes in China.
(c) Compliance with foreign laws and regulations
Our Group is subject to various laws and regulations in the countries and regions where our Group operates, including environmental regulations, product liability, occupational health and safety, labor-management relations, foreign investment regulations, foreign currency regulations, national security, consumer protection, competition policies, taxation systems, anti-bribery regulations, and export controls. If our Group violates any of these laws or regulations, we may be subject to civil, criminal, or regulatory penalties. Consequently, such violations could adversely affect our Group’s financial position and business performance and, by extension, damage our brand image and social credibility.
(d) Other risks
Our Group’s overseas business activities are subject to various risks, including differences in business practices, local working conditions such as the possibility of labor disputes, and challenges in securing exceptional management teams, engineers, and other skilled personnel, in addition to the risks described in (a) trough (c) above. We delegate significant authority to the management of Group companies in line with our management policy of respecting their independence and autonomy. While we make efforts to recruit and retain individuals who are well-versed in local markets and to ensure compliance with laws, regulations, labor conditions, and business practices in each country and region, there is no guarantee that we can fully identify or respond swiftly and appropriately to all risks. If any of these risks materialize, they may adversely affect our Group’s financial position and business performance. Furthermore, if the costs for entering new markets or expanding into new business fields in overseas markets exceed expectations, or if we are unable to effectively manage our overseas subsidiaries, our Group’s financial position and business performance could also be adversely affected.
④ Risks associate with raw materials
(a) Procurement of raw materials
A significant proportion of raw materials used in our paint and coatings is composed of general-purpose materials. As a result, we may encounter difficulties in procuring raw materials if demand for these materials surges in non-paint applications. Additionally, heightened concerns about economic security in various countries may lead to resource monopolization, making it challenging to secure certain raw materials. Furthermore, disruptions in container handling during marine transport and at ports could impede the international logistics of raw materials. These limitations in raw material procurement could pose a risk to our ability to fulfill supply obligations to our customers.
To prepare for such circumstances and minimize the impact of natural disasters, accidents, and other unforeseen events, the Group works to ensure stable procurement of raw materials by promoting their interchangeability, utilizing multiple suppliers, and diversifying sourcing regions. Despite these efforts, such measures cannot completely eliminate the risks posed by production shutdowns at raw material manufacturers or disruptions in supply chains. If difficulties in raw material procurement lead to delays in product supply, our Group’s financial position and business performance may be adversely affected.
(b) Price fluctuations of raw materials
Our Group relies heavily on petrochemical-based materials due to product characteristics, with such materials accounting for approximately 50% of all raw materials. As a result, the prices of our raw materials are significantly influenced by fluctuations in crude oil and naphtha prices. These price movements are shaped by a wide range of complex and interrelated factors, including OPEC production levels, natural gas market conditions, political stability in Ukraine and the Middle East, U.S. monetary policy, trade tensions between the U.S. and China, the rebound of shale oil production, pricing strategies of Middle Eastern oil-producing countries in response to exchange rate fluctuations, and the decreasing demand for gasoline stemming from the growing adoption of fuel-cell and electric vehicles. To ensure stable procurement of raw materials, our Group implements measures to mitigate the risks associated with raw material price volatility. These measures include strengthening relationships with key suppliers, diversifying production regions, and entering into long-term supply contracts. However, these efforts cannot entirely eliminate the impact of crude oil and naphtha price fluctuations. If raw material prices rise sharply and substantially, or if we are unable to adjust product prices in a timely and reasonable manner to reflect increases in raw material costs, our Group’s financial position and business performance may be adversely affected.
⑤ Risks associated with human resources
As we relentlessly pursue growth based on our Asset Assembler model, securing, promoting, and retaining a diverse range of professionals including management teams in key operating regions, along with cultivating and sustaining capable and diverse talent across our operations, is becoming increasingly critical.
The challenges we face differ by region, including risks such as the loss of highly skilled employees and inadequate succession planning. Addressing these risks requires timely and effective measures. Rising employee turnover rates not only inflate personnel costs due to increased recruitment and retaining expenses but also disrupt the transfer of crucial knowledge and technical expertise, potentially reducing operational efficiency and productivity. Moreover, failures in executing human resource strategies, unexpected resignations, or delays in appointing replacements for key leadership roles can result in the loss of invaluable intangible assets, such as technical expertise and human capital. This erosion of resources could jeopardize our competitive advantage and hinder the execution of strategic initiatives.
In this context, we have identified two primary human resource-related risks: (a) Recruitment of competent talent, (b) Retention of employees.
(a) Recruitment of competent talent
Our ability to fill key positions promptly with individuals who possess the suitable skills and potential is crucial. Any failure to do so, any shortcomings in the development of our recruited talent, or challenges in retaining them can result in significant setbacks in development and production. Additionally, it could increase the risk of technology or research leakage. To mitigate these risks, our Group is committed to actively recruiting top talent throughout the year. We continuously improve our training programs to enhance on-the-job education and skill development once individuals join our team. Our goal is to foster an environment that fully leverages the capabilities of our diverse workforce.
Additionally, we maintain connections with the external community and actively recruit from the job market.
Furthermore, we are actively working towards establishing fair evaluation and treatment systems. This initiative aims to create an environment that enhances employee engagement, promotes talent retention, fosters skill development, and enables talented employees to fully realize their potential.
(b) Retention of our employees
As the labor market grows increasingly dynamic, the loss of skilled employees could significantly impact the accumulation of expertise and technical capabilities, potentially diminishing our long-term operational efficiency and productivity.
Furthermore, failing to secure the next generation of our management team in a timely manner could hinder the transfer of valuable managerial expertise, resulting in a loss of organizational strength. This could, in turn, undermine our competitive capabilities and hinder the effective execution of our strategies.
As a countermeasure, our Group is actively enhancing our corporate brand strength through various public relations initiatives, including emphasizing our management approach that incorporates the perspectives of SDGs and ESG. These efforts are designed to boost our Group’s overall appeal, cultivate a sense of unity among employees, and improve employee retention rates. Furthermore, we are leveraging one of our core strengths—our global networks—to strengthen the borderless utilization of talent. This approach focuses on securing and developing skilled professionals and enhancing succession planning for critical positions across the organization.
If these initiatives fail to achieve their anticipated results, there is a risk that our Group’s businesses, financial position, and business performance may be adversely affected.
⑥ Risks associated with M&A
Our Group is pursuing sustainable growth through M&A initiatives in Japan and internationally that contribute to Maximization of Shareholder Value (MSV). For example, in 2019, we made DuluxGroup Limited and Betek Boya ve Kimya Sanayi Anonim Sirketi consolidated subsidiaries. In 2021, we completed the full integration of our Asian joint ventures and acquired the Indonesia business. In 2022, we acquired Cromology Holding SAS and DP JUB delniška družba pooblaščenka d.d., followed by the acquisition of N.P.T. s.r.l. in 2023 and Nippon Paint (India) Private Limited along with Berger Nippon Paint Automotive Coatings Private Limited in 2024. M&A、When selecting M&A targets, we set priorities based on criteria such as securing returns that exceed the cost of capital and driving growth in basic earnings per share (EPS), all while maintaining financial discipline. In addition to these financial considerations, we examine factors such as market trends, customer needs, the business performance, financial position, technological superiority, and market competitiveness of acquisition targets, as well as our Group’s business portfolio and the results of risk analyses conducted for M&A transactions. However, if we are unable to execute acquisitions as planned, or if there are significant changes in the market environment or competitive landscape after an acquisition, there is a risk that the acquired businesses may fail to operate or expand as planned, or that expected synergies may not materialize. These situations could prevent us from recovering the fund invested, result in additional costs, require the recognition of impairment losses on goodwill, or make it difficult to maintain financial discipline due to increased debt levels. Furthermore, if post-merger integration does not proceed as expected, or if we fail to achieve anticipated synergies and economies of scale, there is a risk that we may be unable to retain key executives and employees of the acquired companies, maintain relationships with major customers, suppliers, and other business partners, or achieve effective integration of the businesses. Such challenges could lead to significant changes in management policies, a reduction in business scale, a loss of economies of scale, a deterioration in profitability, and ultimately adversely affect our Group’s financial position and business performance.
Aligned with our M&A strategy, on March 3, 2025, our Group completed the acquisition of all of the equity interests of LSF11 A5 TopCo LLC, a holding company that oversees AOC, LLC and its affiliated companies, which operate primarily in the specialty formulation markets of the U.S. and Europe. Through this acquisition, we aim to expand our business in the U.S. and European specialty formulation markets, secure outstanding management teams, and leverage AOC, LLC to create new global growth opportunities for our Group. However, there is no guarantee that these outcomes will be realized as anticipated.
⑦ Risks associated with understanding customer and consumer needs and preferences
Our Group’s businesses rely on the continued demand for our Group’s brands and products across countries and regions worldwide. For the sustainable growth of our Group, it is essential to accurately understand the preferences and needs of customers and consumers and to develop and sell attractive products by both innovating existing products and creating new ones. This depends on factors, including our ability to develop and produce innovative products that meet customer and consumer expectations, as well as the effectiveness of our marketing activities, such as sales, advertising, and product life cycle management. If we fail to accurately grasp the preferences and needs of our customers and consumers, face difficulties or delays in product development, fail to accurately forecast product demand, or if product innovations require more time and costs than anticipated, our Group’s financial position and business performance may be adversely affected.
⑧ Risk of declining demand for our Group’s products due to technological innovation
Our Group utilizes coating technologies to bring color, comfort, and security to various aspects of people’s lives. As expressed in our Group’s Purpose, “Enriching our living world through the power of Science + Imagination,” we have long focused on leveraging technological strengths to develop products that address social challenges. Advanced technical expertise is indispensable for driving innovation to solve social issues and meet customer needs, as well as for enhancing competitive advantages, such as ensuring the stable supply of products. We are strengthening collaboration by integrating the comprehensive expertise of our engineers across our domestic and international operations and leveraging partnerships through external networks. Additionally, we continuously strive to precisely understand customer and consumer needs, along with changes in demand in global markets, to deliver groundbreaking and innovative solutions to society. However, there is a risk that we may not achieve the anticipated outcomes. For instance, if technological advancements progress faster than expected, we may struggle to develop new technologies or products in a timely manner. Moreover, competitors may create and market revolutionary products that surpass our Group’s existing technologies. Such developments could result in a decline in our market share domestically and internationally, potentially having an adverse impact on our Group’s financial position and business performance.
Furthermore, our Group is facing more fundamental downside risk mainly involving customers in the automotive coatings business due to technological innovation and developments aimed to eliminate and reduce the use of paint and coatings products. For instance, automobile manufacturers and material engineering companies are developing various technologies as alternative to paint on automobiles, such as decorative films, from the viewpoint of reducing costs and environmental impacts. If these alternatives for paint become mainstream products due to technological innovation, coupled with government policies for carbon neutral initiatives, there is a possibility that demand for paint products will decline or we will be required to make large investments to switch to alternative products. If this happens, our Group’s financial position and business performance may be adversely affected.
⑨ Risks associated with competition
Our Group faces intense competition in the paint and adjacencies businesses from peer companies both domestically and internationally. Heightened competition in these businesses could negatively impact our market share and profitability due to factors such as the loss of regional or major global customers and reduced pricing power. Furthermore, customer consolidation in certain sectors, such as automotive and industrial coatings, may have a negative effect on the prices we quote and our profit margins.
The paint and coatings business benefits significantly from economies of scale in areas such as raw material procurement, production processes, supply chains, logistics, R&D activities, and regulatory compliance. Consequently, integration provides substantial advantages for paint manufacturers. Similar to how our Group has expanded operations through overseas M&A in recent years, other major global paint manufacturers have been strengthening and expanding their market positions through M&A. We expect this trend to continue. If competitors grow larger than our Group through integration, it may become more challenging to compete effectively in areas such as capital, technological capabilities, and financial strength. Consequently, our Group’s financial position and business performance may be adversely impacted if our market share decrease or if downward pressure on prices increases due to the larger scale of competitors.
⑩ Risks associated with R&D activities
Our Group invests significant resources in R&D activities to provide products and services that address various social issues by leveraging our comprehensive technological capabilities and strengthening collaboration with external networks. These efforts aim to maximize the appeal of paint and coatings through advancements in technology. We are currently prioritizing the development of technologies for new products that address social issues in four key areas: reducing infectious disease risks, contributing to the realization of a smart/remote society, lowering environmental burdens, and controlling social costs. We believe these initiatives align with changes in social environments, responses to future products, untapped market opportunities, and technological advancements across industries. However, if our Group’s ongoing investments in R&D fail to generate revenue proportional to the resources invested, fail to create profitable products, or if there are significant changes in market structures, our Group’s businesses, financial position, and performance may be adversely affected.
⑪ Risks related to dependence on third parties for manufacturing and sales
Our Group outsources part of the manufacturing and sales activities for its products to external third parties. These contractors are either our affiliated companies or long-term business partners. Consequently, the likelihood of these relationships deteriorating is considered low. However, if these third parties damage their relationships with our Group or establish close ties with our competitors, or if their business operations are disrupted due to deterioration in business conditions, natural disasters, or other incidents, our Group’s business operations, financial position, and overall performance may be adversely affected. Additionally, if the manufacturing and sales activities of these third parties fail to meet our Group’s standards for quality and other criteria, or lag behind the standards of our competitors or their subcontractors, this could negatively impact the quality and reputation of our products and services, manufacturing and sales activities, and brand value.
⑫ Risks related to damage to brand value
Our Group holds a high market share in major markets such as Asia including China, Australia, and Japan. We believe that our Group’s brands enjoy high recognition among customers and consumers. Our Group continuously allocates resources to branding efforts aimed at maintaining and improving brand recognition. However, our brand value may be harmed by complaints or harmful rumors related to product safety or quality issues, accidents, misconduct, privacy violations, scandals involving management or employees, and other events that may be beyond our control. Even if such complaints or harmful rumors are partially or entirely unfounded, they may negatively impact the public perception of our Group’s businesses. Should these events undermine consumer trust in our Group or its products, demand for our products and the value of our brands may decline significantly, which could adversely affect our Group’s business operations, financial position, and overall performance.
(3) Risks associated with achieving the Medium-Term Strategy and other goals
Our Group released the Medium-Term Strategy in April 2024, as outlined in “1. Management Policy, Management Environment, and Challenges to Be Addressed (1) Management Policy, Management Strategy, etc. (4) Medium- to Long-Term Management Strategy and Financial Objectives.” The ability of our Group to achieve the targets set forth in this strategy will be influenced by various risks and challenges, including those described in “II. Business Overview 3. Business Risks.” These risks include the risk that markets in the regions and for the products we operate do not grow as anticipated; the risk that our Group fails to increase market share in specific regions or for certain products; the risk that capital expenditures outlined in the Medium-Term Strategy are either not implemented or do not deliver expected benefits, such as enhanced production efficiency; the risk that our Group’s technological capabilities and quality assurance systems do not improve, leading to deteriorating relationships with key customers; the risk that we fail to effectively manage or utilize the operations of subsidiaries in various countries; and the risk that compliance with environmental regulations increases costs or reduces competitiveness.
Our Medium-Term Strategy is based on various assumptions and forecasts, including the domestic and international market environment, corporate trends, competition with other companies, changes in laws and regulations, technological innovations, fluctuations in foreign exchange and raw material prices, and overall business conditions. If these assumptions and forecasts differ significantly from actual developments in the future, or if our Group is unable to adjust its strategies or business operations in a timely manner to respond to changes in the business environment, there is a risk that our Group may be unable to achieve the goals of the Medium-Term Strategy.
(4) Risks associated with our financial position
① Impairment of goodwill and other intangible assets
Our Group recognizes goodwill and other intangible assets resulting from M&A transactions on the Consolidated Statement of Financial Position. The amount of goodwill and other intangible assets as of the end of FY2024 stood at 970,745 million yen and 457,429 million yen, respectively.
Goodwill and intangible assets with indefinite useful lives are not amortized but are subject to impairment tests every fiscal year, regardless of any signs of impairment. In the impairment test, the higher of the fair value less disposal costs and the value in use in the cash-generating units is measured as the recoverable amount.
The assumptions used in the fair value calculation after deducting disposal costs, as well as the assumptions for future cash flows and discount rates expected from the disposal of the cash-generating units during and after their useful lives, may be affected by changes in economic conditions. These changes could potentially result in significant revisions to impairment loss calculations related to goodwill and intangible assets with indefinite useful lives. If such revisions occur, our Group’s financial position and business performance may be adversely affected.
② Interest-bearing debt and financing
Our Group utilizes borrowings from financial institution as a means of financing, and the total borrowings (excluding loans payable within one year) amounted to 613,540 million yen as of the end of FY2024.
Most of our Group’s long-term borrowings are at fixed interest rates; however, a portion is at floating interest rates. If interest rates rise in the future, additional costs may be incurred on these interest-bearing liabilities, which could adversely impact our Group’s business operations, financial position, and overall performance.
If our Group’s cash flows are negatively impacted, or if the terms and conditions of our capital and financing transactions deteriorate, or these transactions are restricted due to factors such as a deterioration in our Group’s financial position—including an increase in the interest-bearing debt ratio, economic slowdown, worsening financial market conditions, rising interest rates, a decline in our credit standing (such as a credit downgrade by external rating agencies), or a deterioration in our performance outlook—our Group’s business operations, financial position, and overall performance may be adversely affected.
③ Risks of capital investments not producing profits
To achieve our sole mission of Maximization of Shareholder Value (MSV), our Group must continuously make capital investments to expand production capacity and improve productivity. Accordingly, we will continue investing to capture business opportunities, enhance product quality and risk management systems, and improve profitability. Specifically, we will prioritize investments in areas such as logistics transformation within supply chains, including digital transformation technologies; maintaining and upgrading aging production facilities; ensuring workplace safety; streamlining operations and information technology; R&D activities; and environmental protection. While our Group will implement capital investment plans with flexibility to adapt to changes in the business environment, there is a risk that these investments may fail to yield sufficient returns. Furthermore, increases in capital investment and depreciation expenses may adversely impact our Group’s financial position and business performance.
(5) Risks associated with Laws and Regulations
① Quality assurance of products and product liability
Our Group has established a quality assurance system that includes strict design review procedures and a strengthened quality control system, and we are actively working to improve the quality of our products. In addition, our products are covered by product liability insurance. However, this insurance may not be sufficient to fully cover potential damages. Various factors may lead to product defects or quality issues, which could result in property damage or personal injuries. In such cases, our Group may be required to conduct product recalls, interrupt or delay manufacturing, or implement large-scale recalls. Furthermore, we may face claims for damages based on product liability from third parties, order cancellations, damage claims or demands from customers to strengthen quality control systems. If these issues arise, our Group’s reputation may be adversely impacted, and our financial position and business performance may also be negatively affected due to the need to record provisions for product compensation and other related costs.
② Intellectual property
Our Group has established regulations for the management of intellectual property, recognizing it as a critical asset and accumulating and utilizing it as a management resource. In addition, we respect the intellectual property rights of others. We have implemented a system to protect intellectual property by thoroughly managing technical information that qualifies as intellectual property. For instance, such information is managed in accordance with information management regulations and stored in a designated technology information database to prevent leakage. Despite these measures, if technical information classified as intellectual property is leaked by a third party including employees (including retirees) or manufacturing and sales subcontractors or if a dispute regarding intellectual property arises with a third party in the future, our Group’s financial position and business performance may be adversely affected.
③ Compliance with environmental and other laws and regulations
Our Group conducts compliance examinations at various stages, including the adoption of raw materials and product development activities. In anticipation of stricter regulations in the future, we also develop and launch marine environment-friendly products and anti-viral products that address social challenges. In addition, we comply with regulations governing factory operations and set reduction targets to minimize our environmental impact. Furthermore, we conduct procurement activities with suppliers in alignment with our social responsibility principles. However, law and regulations affecting the paint industry, such as those related to the environment, chemicals and health and safety, are undergoing revisions and are becoming increasingly stringent, particularly in China and Europe. If these regulations become stricter than anticipated or if we are unable to comply with them in time, our Group may face increased costs associated with legal compliance. Additionally, there is a risk that our manufacturing, sales, or procurement activities could be restricted, or that we may be subject to administrative penalties. Failure to comply with these regulations could result in fines or other sanctions imposed by regulatory authorities, as well as the obligation to bear costs for restoring conditions to their original state. If these risks materialize, they may adversely affect our Group’ financial position and business performance.
④ Compliance and litigation
Our Group operates globally and is subject to various laws and regulations of countries where we conduct business activities, both domestically and internationally. While we strive to ensure compliance with these laws and regulations, additional costs associated with compliance may arise, potentially adversely affecting our Group’s financial position and business performance. In addition, changes in laws, legal interpretations, or other factors may make compliance challenging leading to potential violations. In such cases, our Group may face measures or penalties imposed by regulatory authorities. Depending on the nature of these penalties, our Group’s business operations, financial position, and business performance may be adversely impacted.
Furthermore, in various countries and regions, our Group is exposed to the risk of litigation initiated by consumers, business partners, employees, and other parties concerning product liability, contract breaches, labor-related issues, and other matters. Depending on the outcomes of such litigation or related actions, our Group may be required to pay substantial damages. If such events occur, they may adversely affect our Group’s businesses, financial position, and overall performance, as well as our brand image and reputation.
(6) Natural Disasters and Accidents
① Major natural disasters
Our Group is headquartered in Japan and operates in Asia, a region historically vulnerable to natural disasters and adverse weather conditions. Accordingly, our Group prioritizes measures to prevent and minimize damage and losses from natural disasters, as well as the development of robust crisis management systems. In addition, we have begun building digital supply chains by utilizing digital tools and methods to enable remote work and simplify complex tasks, while also rebuilding supply chains from a business continuity planning (BCP) perspective. However, if a major natural disaster occurs, particularly a powerful earthquake or greater-than-anticipated tsunami in Japan, Indonesia, or Türkiye; or if large-scale flooding caused by mega typhoons or major mountain fires linked to rising temperatures, for which global warming is considered a contributing factor; or if electricity procurement costs increase due to cold waves, disruptions in raw material procurement, product manufacturing, and shipment may occur, preventing us from supplying products to customers in a stable manner. If such events arise, our Group’s financial position and business performance may be adversely impacted.
② Fires and explosions
There is a risk of explosions, fires, and emissions and releases of toxic and harmful substances due to the characteristics of our products. Our Group is continuously strengthening our safety operations systems to prevent accidents related to the handling of hazardous substances and chemicals. We provide comprehensive safety education to workers and factories handling hazardous substances and are also advancing efforts to switch to and improve water-based materials (non-hazardous substances) to enhance safety at our factories and other business sites. However, if a fire or explosion occurs, our Group may be required to temporarily suspend operations or face other consequences. Such events may adversely affect our Group’s financial position and business performance.
③ Spread and continuation of viral infections
A spread or continuation of viral infections may disrupt all or part of our Group’s business operations, causing restrictions such as factory closures, limitations or voluntary suspension of operations, and employee shortages. These disruptions could adversely affect product manufacturing, hinder the procurement of raw materials and equipment, or impede logistics. Additionally, if a slowdown in global economic activities negatively impacts the demand and prices of our products, or if the spread of viral infections among our Group’s employees necessitates temporary suspension of operations, our Group’s financial position and business performance may be adversely affected.
To address these risks, our Group has established an appropriate management system to prevent and mitigate the spread of viral infections. Furthermore, given the geographic breadth of our operations, we are closely monitoring production, sales, inventory, and logistics on a global scale while implementing various countermeasures to minimize the impact of viral infections.
(7) Risks Associated with Climate Change
① Long-term risks
Our Group may be physically impacted by geographically widespread natural disasters and adverse weather conditions, including those affecting parts of Asia. To address domestic and international policies, laws, and regulations related to climate change, as well as market demand, our Group is developing and launching environmentally friendly products. In addition, we are establishing targets for reducing global warming gas emissions from production processes and other operations and implementing concrete measures to achieve these reductions. However, our Group’s businesses may be affected by stricter regulations, including those based on the Japanese government’s policies to achieve a carbon-free society, as well as by global trends such as ambitious targets for reducing greenhouse gas emissions in the production processes of automobile manufacturers and other industries. Furthermore, our Group may face higher taxes and additional costs related to greenhouse gas emissions or rising expenses for procuring renewable energy that exceed projections. If any of these events occur, our Group’s financial position and business performance may be adversely impacted.
② Short-term risks
Our Group’s products are used in a wide range of industries, including automotive, construction, building materials, structures, metal products, electrical machinery, and marine vessels. However, adverse weather conditions such as typhoons and heavy rainfall, which have been increasing in recent years due to climate change, may cause significant damage to our Group and supply chains. As a result, production or shipments may be suspended for an extended period until recovery efforts are completed. Additionally, adverse weather conditions such as cool summers, warm winters, or prolonged rainfall may negatively impact the industries to which our Group supplies products. If such events occur, our Group’s financial position and business performance may be adversely affected.
(8) Other Risks
① Information security
Our Group relies on information technology systems to conduct business transactions accurately and efficiently, provide information to management, and prepare financial reports.
To safely store personal information and ensure the implementation of security procedures, our Group has established backup procedures, disaster recovery measures, and formulated information system security guidelines. However, our systems may be compromised due to earthquakes and other natural disasters, machinery or communication failures, computer viruses, cyberattacks, or other unforeseen events.
Cybersecurity incidents may occur as a result of intentional attacks from external actors or unintended events within our Group. Such incidents could involve the compromise of our internal systems due to computer viruses, unauthorized access, malware, or other cyberattacks, leading to the leakage or deletion of confidential information and impairing our ability to execute business operations.
These incidents include unauthorized access to our systems, computer viruses or other malicious codes, malware, ransomware, phishing, human error, or other events that could result in security violations, leakage of confidential information, or loss of assets.
The issues described above could negatively impact our systems, resulting in business interruptions, recovery costs, leakage of customer and confidential information, or legal violations. Despite implementing security measures, backups, and disaster recovery protocols, such failures cannot always be avoided. If such events occur, our Group’s social credibility, financial position, and business performance may be adversely affected.
② Relationship with the majority shareholder
We completed the pay-in procedure for the issuance and sale of new shares through a third-party allotment to the Wuthelam Group on January 25, 2021. As a result, the Wuthelam Group has become the parent company of NPHD, holding 58.7% of our common shares as of the date of filing the Annual Securities Report. Accordingly, the Wuthelam Group has significant influence over matters requiring special resolutions and ordinary resolutions at our General Meeting of Shareholders.
There are no agreements between NPHD and the Wuthelam Group regarding the ownership and sale of shares held by the Wuthelam Group, the exercise of its voting rights, or any agreements that restrict the management of NPHD. Mr. Go Hup Jin, the representative of Wuthelam, serves concurrently as a Director of NPHD and may continue in this role in the future.
The interests of the Wuthelam Group in relation to our business operations and management policies may differ from those of NPHD and its minority shareholders. As part of a transaction with the Wuthelam Group in August 2021, NPHD transferred its automotive coatings business in Europe to the Wuthelam Group. Following this transaction, a continuing commercial relationship has been established between NPHD and the Wuthelam Group with respect to this business through a management service agreement and a buy-back option. However, there is no guarantee that conflicts of interest will not arise between NPHD and the Wuthelam Group in the future.
We recognize that the Wuthelam Group supports our management policy of pursuing Maximization of Shareholder Value (MSV) while protecting the interests of minority shareholders as a listed company, and understand that it intends to continue holding our shares. However, the Wuthelam Group may increase or reduce its ownership of NPHD shares depending on its financial position or other factors. Such actions may impact the market price of our shares.
