This website uses cookies. Using this site will signify that you agree with all terms of our Privacy Policy.close

Risk Factors

Print

Font Size
  • Normal
  • Larger

Business Risks

MGC Group defines “risk” as possibilities or hazards that, if they were to manifest, could inflict economic losses on MGC due to human casualties, property damage, reputational damage, opportunity losses or other such detriments. The Group has built a risk management regime designed for both routine and exigent circumstances. Specifically, it has established Basic Rules on Internal Control & Risk Management, formulated risk management/mitigation policies and established an Internal Control & Risk Management Committee chaired by the officer in charge of internal control and risk management as a decision-making body that reports directly to the president. The committee makes decisions on matters related to risk management policies, initiatives and plans; matters related to business and operational risk management and guidance, direction and oversight incidental thereto; and matters related to guidance, direction and oversight related to business continuity planning. Additionally, it periodically reports to the Board of Directors on the state of risk management.

The main foreseeable risks that could affect the Group’s business results, share price, or financial condition are enumerated from 1) through 11) below. They are all risks that the Group deems to be a realistic possibility, though specifics such as the degree and timing of their manifestation and their impacts are impossible to estimate as of the company's annual securities report's filing date (June 25, 2021) (however, they do not necessarily include every risk to which the Group is exposed).

From a medium-term perspective, MGC Group considers mitigation of risks stemming from climate change to be a key management issue with business-continuity implications. Climate-change-induced amplification of the magnitude of natural disasters such as anomalous weather events, typhoons and flooding may disrupt MGC Group manufacturing sites’ operations and/or adversely affect product distribution or supply chains. The Group may have to globally deal with fuel or raw material cost inflation, imposition of carbon taxes as a climate-change mitigation measure and/or demands to install additional equipment to reduce environmental impacts.

Initiatives launched by MGC Group to address climate change include the following. In May 2019, the Group endorsed the Task Force on Climate-Related Financial Disclosure’s recommendations. It has established an internal Climate change Action Technical committee that discusses and assesses risks and opportunities posed to the Group by climate change. The committee’s assessments are reviewed and approved by a CSR Council comprised of directors and chaired by MGC’s president. In addition to mitigating risks due to climate change through analyses based on +2℃ and +4℃scenarios, the Group will strengthen its resilience to be better able to transform risks into business opportunities.

Issues around disposal and reuse of post-use plastics, most notably marine plastic pollution, are gaining recognition globally. MGC Group places priority on recycling and circularity. It is developing recycling technologies, easily recyclable materials and compostable bioplastics. Other such initiatives include collecting and recycling waste materials generated when customers use its products and actively participating in similar initiatives led by industry organizations.

1. Endogenous Business Risks

Nature of Risk

MGC Group is mainly a manufacturer. With many of its products used as raw materials, intermediate goods or pharmaceutical inputs in customers’ business activities, its sales are sensitive to economic conditions in the countries and regions where its customers’ products are sold. In particular, marketpriced commodities such as methanol, methanol derivatives, general-purpose aromatic chemicals and polycarbonate resins are generally prone to declines in unit sales and sales prices during economic downturns. Such products’ economic sensitivity could adversely affect the Group’s operating results and/or financial condition.

In specialty and high-value-added product markets, the Group competes on multiple dimensions, including price, quality, functionality, delivery time and customer service. Intensification of competition due to, for example, the advent of products offering alternative functionality, could adversely affect the Group’s operating results and/or financial condition. For example, electronic materials supplied mainly to the electronics industry typically have a short product lifecycle and are constantly exposed to competition through technological innovation. The Group’s sales consequently could decline as a result of existing products’ obsolescence or product development delays. Additionally, some of the Group’s products are sold to only a limited number of customers. If one customer stops using such a product, the Group’s sales could decrease.

MGC Group externally sources electric power and raw materials like xylene. Its manufacturing operations could be disrupted if a required input were to become unavailable. Its operating results and/or financial condition could be adversely affected by a sharp rise in input prices also.

Main Risk Mitigation Measures

MGC Group endeavors to develop new markets and businesses in addition to conducting basic and applied research to develop new products and manufacturing processes and improve existing ones. Other risk mitigation measures include close communication and collaboration, inclusive of R&D, with customers, use of long-term supply contracts with both suppliers and customers, and sourcing of raw materials and other inputs from multiple suppliers.

2. Overseas Business Risk

Nature of Risk

MGC Group has subsidiaries and manufacturing and sales operations in Asia, North America, South America, the Middle East and elsewhere. Depending on country-specific conditions, such overseas operations and even dividend remittances from overseas subsidiaries could be disrupted by political instability or societal or economic turmoil due to a natural disaster, war, infrastructure failure, a widespread infectious disease outbreak or other unforeseeable circumstances. Other risks that could adversely affect the Group’s operating results and/or financial condition include problems due to differences in legal systems, investment restrictions imposed by foreign governments, nationalization or expropriation of assets, and personnel or labor issues.

Main Risk Mitigation Measures

To respond to overseas risks as effectively and expeditiously as possible, MGC Group endeavors to gather information from various sources, including locally stationed expat personnel, joint venture partners, attorneys and government authorities.

3. Joint Venture Risk

Nature of Risk

MGC Group has numerous manufacturing joint ventures in not only Japan but also foreign countries such as Saudi Arabia, Venezuela, Thailand, China, South Korea, and Trinidad and Tobago. It sources and sells products such as methanol and engineering plastics through its JVs. The Group’s joint venture partners are not under the control of the Group. There is consequently no assurance they will make decisions in the best interests of the Group or even the joint ventures themselves. In the event of a joint venture’s dissolution or other such circumstances, the Group’s operating results and/or financial condition could be adversely affected.

Main Risk Mitigation Measures

MGC Group seeks to maintain and further improve good communication, share targets and objectives and maintain relationships with its joint venture partners while mitigating risks through joint venture agreements and other operational agreements.

4. Product Quality Risk

Nature of Risk

MGC Group manufactures many products that are used as raw materials, intermediate goods or pharmaceuticals in customers’ business activities and that conform to specifications agreed upon with the customer. However, if it sells a qualitatively defective product, it may have to compensate customers that used the defective product, end-product users and/or other parties for not only direct damages but also opportunity losses. Its societal reputation also may be impaired. In such an event, the Group’s operating results and financial condition could be adversely affected.

Main Risk Mitigation Measures

Even though most MGC Group manufacturing sites operate in conformance with globally recognized quality control standards, the Group has liability insurance coverage that includes product liability insurance as a precaution against risk. Other means by which the Group mitigates risk include explicitly limiting the scope of its liability as necessary in agreements with customers.

5. Natural Disaster and Accident Risks

Nature of Risk

MGC Group has numerous manufacturing sites in Japan and elsewhere. Their production activities could be disrupted by earthquakes, storms, flooding or other natural disasters, war, terrorism, civil unrest, labor actions, communication infrastructure failures, widespread outbreaks of infectious diseases such as COVID-19, equipment malfunctions, human error or other unforeseeable circumstances. Given that MGC Group handles hazardous chemical substances on a daily basis, it cannot completely eliminate the possibility of explosions, fires, toxic gas leaks or other accidents that damage production facilities, harm employees, inflict losses on neighboring property owners or customers, pollute the environment or otherwise inflict damages. Additionally, many MGC Group manufacturing sites have multiple production facilities that share utilities such as electricity, water and steam. Interruption of utility service to a manufacturing site consequently could shut down the site’s entire production operations. In such an event, the Group’s operating results and/or financial condition could be adversely affected.

Main Risk Mitigation Measures

While pursuing continuous improvement based on an environmental safety management system, MGC Group diligently strives to upgrade its safety and disaster preparedness regime through better risk assessment and thorough safety training. In addition to of course endeavoring to properly maintain and stably operate its manufacturing facilities, the Group also formulates business continuity plans and builds redundancy into its network of production sites, including overseas. Additionally, the Group mitigates risk with broad insurance coverage that includes fire, business interruption, oil pollution and liability insurance.

In response to the COVID-19 pandemic, MGC Group swiftly set up a Crisis Response Headquarters and has been expeditiously implementing anti-pandemic measures. Even now, it continues to refine its plants and other workplaces’ anti-pandemic measures customized to specific operations on a workplace-by-workplace basis to ensure the safety of its stakeholders, particularly its employees and their families and its customers. Specific measures include proactively using online videoconferencing throughout the Group to reduce opportunities for contagion, allowing head office staff and other employees to work from home and repeatedly adjusting on-site staffing in response to changing infection rates.

6. Information Security Risk

Nature of Risk

MGC Group possesses confidential and personal information required for its business activities and uses various information systems in its operations amid ongoing digitalization of its businesses. In the event of a leak of such information, an information system failure, a cyberattack, fraud committed by a malicious third-party or other such event, the Group’s business activities and/or operating results could be adversely affected.

Main Risk Mitigation Measures

MGC Group has established an information security regime and internal regulations based on various guidelines and educates its employees to increase their information-security literacy. It also conducts ongoing initiatives to ensure the adequacy of and upgrade its information security.

7. Investment Risk

Nature of Risk

MGC Group invests in capital assets and R&D to grow its businesses and increase its competitiveness. In doing so, it focuses its efforts on strengthening existing businesses and developing new businesses aligned with prospective market needs. The Group also invests and intends to continue investing in business expansion in Japan and overseas through such means as establishing or cofounding new companies, including joint ventures, and acquiring existing companies. If the Group fails to earn adequate returns on such investments or incurs impairment losses on non-current assets, securities valuation losses or equitymethod investment losses, its operating results and/or financial condition could be adversely affected.

Main Risk Mitigation Measures

MGC Group has established and carries out internal investment screening procedures and performs additional due diligence as warranted by the nature of the prospective investment. Additionally, involved organizational units endeavor to devise appropriate risk mitigation measures.

8. Currency Risk

Nature of Risk

Export, import, and other transactions denominated in foreign currencies could adversely affect the Group’s operating results and/or financial condition, including by reducing sales revenues or exacerbating losses, as a result of exchange rate movements.
Additionally, financial statement accounts denominated in overseas MGC Group subsidiaries’ local currencies are translated into yen to prepare MGC’s consolidated financial statements. Such currency translation could adversely affect the Group’s operating results and/or financial condition depending on then-prevailing exchange rates.

Main Risk Mitigation Measures

MGC Group partially hedges currency risk associated with foreign-currency receivables and payables, mainly using currency forward contracts, in accord with internal regulations.

9. Financing and Interest Rate Risks

Nature of Risk

MGC Group partially meets its financing needs by borrowing from financial institutions. In the event of a precipitous change in the financial environment, the Group’s operating results and/or financial condition could be adversely affected, including by inability to access funding or increased interest expense due to a rise in interest rates.

Main Risk Mitigation Measures

MGC Group strives to maintain adequate financial soundness as measured by indicators such as debt/equity ratio and shareholders’ equity ratio. It also endeavors to optimize its mix of fixed- and variable-rate debt and maintain healthy, favorable relationships with financial institutions and other sources of capital.

10. Compliance Risk

Nature of Risk

MGC Group handles toxic and otherwise hazardous chemical substances, including high-pressure gases, as an inherent aspect of its operations. As such, it is globally subject to various legal and regulatory restrictions at every stage from manufacturing to storage, distribution and sales. If the Group were to fail to comply with said legal restrictions or any other law or regulation or societal norm, its operating results and/or financial condition could be adversely affected by resultant criminal, civil or administrative liability, remediation costs, social sanctions or reputational damage.

Main Risk Mitigation Measures

In addition to establishing specialized organizational units to oversee environmental and other regulatory compliance, the Group has built a compliance regime, including an internal whistleblowing system, and endeavors to fully comply with laws and regulations. It also implements various measures to foster a general compliance consciousness among its personnel.

11. Litigation Risk

Nature of Risk

In the event of an unfavorable outcome to litigation or other legal proceedings brought against MGC Group in connection with its domestic or overseas operations, the Group’s operating results and/or financial condition could be adversely affected. For example, the Group seeks to protect its intellectual property through such means as applying for and obtaining patents in Japan and overseas. It also endeavors to avoid infringing on other parties’ rights. However, if litigation pertaining to intellectual property rights was to be decided against MGC, the Group’s operating results and/or growth could be adversely affected.

Main Risk Mitigation Measures

MGC Group endeavors to not only comply with all laws and regulations applicable to its operations but also avoid disputes through such means as researching other parties’ rights and drafting proper agreements that explicitly delineate rights and obligations with the assistance of attorneys and other expert advisors.