MGC Group perceives “risk” as potential events or hazards whose occurrence could cause harm to people and property, result in loss of opportunities, harm our reputation, and so on, ultimately leading to economic losses for the company, and we have established systems to manage risk during normal and emergency times. Specifically, we established the Basic Rules on Internal Control & Risk Management, formulated policies in risk management and responses, and established the Internal Control & Risk Management Committee as a decision-making body under the direct authority of the president and chaired by the officer responsible for internal control and risk management. The committee makes decisions on policies, implementation, and planning relating to risk management systems and so on and risk management in business and operations as well as guidance, instruction, and supervision of related matters, and the formulation of business continuity plans. The committee also reports periodically on the status of risk management to the Board of Directors.
The main risks believed to present a possibility of affecting the Group’s business performance, share price, or financial status are listed below. These are all risks determined by the Group to be liable to occur, although degree and timing of occurrence and the specific impacts and so on are difficult to estimate as of the date of submission this securities report (June 25, 2020) (however, the stated risks are not necessarily exhaustive of all possible risks).
Immediate concerns include impacts from the COVID-19 novel coronavirus. The major part of the Group’s business is not directly affected by the spread of COVID-19 or the measures to prevent its spread, but our products are used by a wide range of customers as raw materials, material products, and pharmaceuticals, and there are concerns that the economic stagnation in Japan and overseas caused by COVID-19 will have an adverse impact on the Group’s operating results and financial condition.
Moreover, it is possible that the status of the spread of COVID-19 will have an impact on procurement of raw materials and the manufacture and distribution of products. As discussed below, depending on the raw materials or product, the Group procures goods from multiple suppliers and performs manufacturing and other processing at multiple sites including overseas sites, but the effects of COVID-19 are global, and there are concerns regarding an adverse impact on the Group’s results and financial status according to the circumstances regarding the spread of COVID-19.
MGC established a Crisis Response Headquarters to address COVID-19 at an early stage, recommended working from home and took measures to maintain employee motivation while placing the highest priority on ensuring the safety of stakeholders including employees, their families, and customers. MGC was able to maintain production and distribution and continued business in order to fulfill our supply responsibilities.
In any case, it is not possible as of the day of submission of this securities report to forecast the timing when COVID-19 will be controlled or the extent of its impact, and if it becomes necessary to revise our forecasts of results, we will promptly make an announcement.
1. Risks Relating to Business Characteristics
Details of Risks
MGC Group’s primary business is manufacturing, and many of the Group’s products are raw materials, material products, or pharmaceuticals used in customers’ business, and therefore, our business is susceptible to impact from the economic conditions in the countries and regions where products are sold. In particular, market-sensitive commodities such as methanol, methanol derivatives, general-purpose aromatic chemicals, and polycarbonate resin are generally prone to declines in sales volume and selling prices during times of economic downturn, which adversely affects MGC Group’s operating results and financial condition.
Competition among specialty products and high-value-added products is mainly on the basis of categories including price, quality, function, delivery time, and customer service, and a rise in the level of competition in these areas due to the emergence of products with alterative functions or other reasons could have an adverse impact on MGC Group’s operating results and financial condition. For example, electronic material products, for which the electronics industry is the primary customer segment, typically have a short product life and are constantly exposed to competition in technological innovation. Therefore, sales could decline if existing products become obsolete or if new product development is delayed. In addition, some Group products are sold only to specific customers, and the suspension of use of those products by a customer could result in a decline in sales.
MGC Group purchases raw materials including mixed xylene and electric power from outside suppliers. It is possible that the inability to procure necessary raw materials and so on could impede the Group’s manufacturing activities. Also, if prices were to increase suddenly, there could be an adverse impact on the Group’s operating results and financial condition.
MGC Group conducts basic and applied research to develop new products and manufacturing processes and to improve and enhance existing products and manufacturing processes and works to develop new markets and business fields. R&D and other divisions engage in close exchanges in information with customers and take risk mitigation measures such as entering into long-term supply agreements. When purchasing raw materials and other commodities, the Group enters into procurement and long-term purchase agreements with multiple suppliers to mitigate risks.
2. Risks relating to Business and Other Investment
Details of Risks
MGC Group engages in capital investment and invests in R&D to achieve business growth and bolster competitiveness and focuses its efforts on reinforcing existing business and creating new business closely aligned with future market needs. Moreover, the Group undertake business investment in Japan and overseas such as establishing new companies including joint ventures and making equity investments as well as acquiring existing companies, with these activities to be continued going forward.
When these investments fail to yield earnings commensurate with the amounts involved, losses are incurred from revaluation of securities held, or other setbacks occur, losses including impairment of fixed assets, losses from securities revaluation, and equity method losses may occur, which could have adverse effects on the Group’s operating results and financial condition.
MGC Group established and operates an internal screening system for investments. Depending on the content of the screening, the Group also checks business conditions and other factors as necessary and makes efforts so that related divisions adopt countermeasures.
3. Risks Relating to Natural Disaster and Accidents
Details of Risks
MGC Group has multiple manufacturing bases in Japan and other countries. The facilities at these bases are subject to damage from the impact of earthquakes, windstorms, floods or other natural disasters, war, terrorism, riots, strikes, disabling of communication infrastructure, spread of infectious diseases, problems with facilities, human error, and other unforeseen circumstances, which may result in suspension of production activities. MGC Group routinely handles hazardous chemical substances, and the possibility of explosions, fires, toxic gas leaks or other accidents, damage to production facilities or harm to employees, damage to areas surrounding production facilities or harm to customers, environmental pollution, and other damage cannot be entirely excluded. Many of MGC Group’s manufacturing bases have multiple production facilities that share electricity, water supply, steam, and other utilities. Consequently, if such facilities are shut down, the production activities of an entire base could be suspended. If these types of circumstances were to occur, there could be adverse effects on the Group’s operating results and financial condition.
MGC Group makes ongoing improvements based on an environmental safety management system, reinforces risk management, and conducts comprehensive safety education to ensure maintenance and stable operation of production facilities while doing everything possible to construct safety and disaster prevention systems as well as formulating business continuity plans and establishing redundancy in manufacturing bases including overseas bases. In addition, the Group maintains various types of insurance coverage including fire insurance, profit insurance, oil pollution insurance, and liability insurance.
4. Risks Relating to Overseas Business
Details of Risks
MGC Group has established subsidiaries and conducts manufacturing and sales in Asia, North America, South America, the Middle East and other regions. Depending on the circumstances in each country, the risks relating to natural disaster, war, disabling of infrastructure, spread of infectious disease, or other unforeseeable circumstances as described above could lead to political instability or social or economic turmoil, causing difficulties for business activities as well as remittance of dividends and the like. Other risks that could have an adverse effect on MGC Group’s operating results and financial condition include problems due to differences in legal systems, the possibility of restrictions on investments and nationalization or expropriation of assets by foreign governments, and personnel or labor issues.
MGC Group collects information for officers and employees dispatched to local sites, joint venture partners, relevant authorities, and other sources so that it can respond as effectively and promptly as possible.
5. Risks Relating to Joint Ventures
Details of Risks
MGC Group is involved in a number of manufacturing joint ventures not only in Japan but also overseas including Saudi Arabia, Venezuela, Thailand, China, South Korea, and Trinidad and Tobago to procure and sell methanol, engineering plastics, and a variety of other products. These joint ventures are not under the control of the Group, and consequently, there is no guarantee that the joint venture partners will make decisions that are best for MGC Group or the joint ventures. In the event that circumstances preventing the maintenance of a joint venture occur, there could be an adverse effect on the Group’s operating results and financial condition.
MGC Group maintains and reinforces good communications with the joint venture partners developed until now, works to establish shared targets and objectives and maintain relationships, and strives to maintain Group profit through joint venture agreement and other business agreements.
6. Risks Relating to Product Quality
Details of Risks
As stated earlier, many MGC Group products are used by a wide range of customers as raw materials, material products, and pharmaceuticals, and the Group ships products that conform to specifications agreed upon with customers. However, in the event that a product with a quality defect is shipped, the need will emerge for MGC Group to compensate customers who used the defective product, users of final products, or others not only for direct damages but also for opportunity loss, and MGC may lose social credibility. MGC Group’s operating results and financial condition could be adversely affected.
Most MGC Group manufacturing bases perform manufacturing in accordance with globally-recognized quality control standards and maintain liability insurance coverage including product liability insurance to address any risks that should occur. In addition, the Group enters into agreements with customers as necessary to clarify the scope of the Group’s liability.
7. Risks Relating to Exchange Rate Fluctuations
Details of Risks
Exports, imports, and other transactions conducted in foreign currencies, are subject to exchange rate changes, which could have a negative impact on the Group’s business results and financial situation such as decreased sales or increased losses.
Financial balance data that is valued in local currencies for MGC Group overseas subsidiaries are translated into yen when creating the Group’s consolidated balance sheet. Depending on the exchange rate at the time, MGC Group’s business results and financial situation could be adversely affected.
MGC Group engages in risk hedging to a certain degree by conducting foreign exchange futures transactions in accordance with internal rules in order to mitigate the risk of exchange rate fluctuations with respect to receivables and liabilities denominated in foreign currencies.
8. Risks Relating to Capital Procurement and Interest Rate Fluctuations
Details of Risks
When procuring necessary funds, MGC Group secures loans and other financing from financial institutions to a certain degree, but if the financial environment suddenly changes, it may be difficult to procure funds, and if interest rates increase, the amount of interest payments also rises, which may adversely affect MGC Group’s operating results and financial condition.
MGC Group strives to maintain a certain level of financial health based on indicators such as the debt/equity ratio and shareholders’ equity ratio. The Group also maintains an appropriate balance of fixed and variable interest rates and work to maintain sound and good relationships with financial institutions and others.
9. Risks Relating to Compliance and Environment Issues
Details of Risks
MGC Group handles hazardous chemical substances including toxic and deleterious substances, hazardous materials, and high-pressure gas as part of its business and is subject to various legal restrictions, both in Japan and overseas, at each stage, including manufacturing, storage, distribution, and sale. In addition, with rising environmental awareness worldwide regarding issues including climate change and marine plastic, regulations as well as societal demands concerning chemical substances and waste materials including greenhouse gases are becoming increasingly stringent.
In addition to these environmental issues, the Group’s operating results and financial condition could be adversely affected by criminal, civil, and administrative liability, remediation costs, social sanction, and loss of credibility due to the failure of MGC Group to comply with legal regulations and social norms.
MGC Group has positioned proactive and dynamic responses to environmental problems and reinforcement of compliance as a top management priority (materiality). In addition to the existing specialized divisions that respond to environmental regulations and issues, the Group created a new task force team. The Group also takes various measures to enhance compliance awareness by officers and employees, created various systems including an internal whistleblowing system, and strives to strictly comply with laws and regulations.
10. Risks Relating to Litigation
Details of Risks
If lawsuits or other legal proceedings are filed against MGC Group related to its domestic and overseas businesses and the outcomes of such proceedings are unfavorable, the result could be an adverse effect on the Group’s operating results and financial condition. For example, the Group applies for and obtains patents to protect its intellectual property rights and strives to prevent infringement of the rights of third parties in Japan and other countries, but if litigation were initiated with a third party in relation to intellectual property rights and MGC’s assertions were not recognized, there could be an adverse impact on the Group’s operating results or growth.
MGC Group complies with laws and regulations applicable to its business and cooperates with attorneys and other professionals to clarify rights and duties by executing appropriate agreements, investigate the rights of third parties, and take other actions to prevent the occurrence of disputes.