Business-Related Risks

The MMC group globally sources raw materials and parts, etc., from the perspective of enhancing product quality and cost competitiveness. Depending on the parts and materials, we make it a rule to place optimal orders, such as through centralized ordering or multiple ordering. In addition, we also use rare metals such as palladium and rhodium, which are not only produced in low quantities but are also produced only in specific countries and regions.
Therefore, if supplies from those suppliers are stopped, or if it is not possible to procure in a timely way and at competitive prices due to such unexpected reasons as rapid changes in the supply and demand of raw materials, parts, etc., changes in the political situation of the country of procurement, tightening of import/export regulations related to economic security, and occurrence of natural disasters, or other reasons, production of our products will be delayed or stopped, and costs may increase.
Furthermore, if human rights violations at a supplier occur and/or are discovered in spite of the MMC group's human rights initiatives, they will damage the reputation of the MMC group.
These risks would significantly impact the MMC group's medium- and long-term business plans, and the importance of measures is increasing. The MMC group continues to review and reinforce the supply chain to minimize such an impact on our business and performance. Due to heightened geopolitical risks, a company-wide cross-sectional team was established having the participation of concerned departments in the fiscal year under review to consider and implement further strengthening measures. Nevertheless, events associated with such risks may still occur.

In order to improve product quality, the MMC group works to promptly clarify the causes of failures and execute countermeasures through collaboration with related departments based on market information, and appropriately examine potential risks.
If recalls, improvement measures, etc. due to product defects or failures become large scale, or if there is a large-scale liability claim from customers due to product defects or failures in spite of the Group's efforts to improve the quality of products and services and ensure safety, the operating results and/or financial position of the MMC group may be affected due to the incurring of substantial costs, evaluation of the Company's products, damage to its brand image, decline in sales, etc.

The MMC group is subject to various laws and government regulations concerning the environment, such as gas emissions, fuel efficiency, noise, chemical substances, recycling, water resources, etc. related to automotive industry, in the countries where the Group operates.
Moreover, it is also subject to a wide range of laws and regulations in Japan and overseas, such as consumer protection regulations, certificates and permission related to business and investment, labor regulations, regulations on foreign exchange, trade control including that for security purposes, various tax laws (including tariffs), antimonopoly laws and anti-bribery laws.
In order to deal with these laws and regulations, the MMC group has put in place a system to ensure that the Group complies with laws and regulations; each department in charge has implemented measures to prevent potential non-compliance with laws and regulations, etc., and the MMC group has also enhanced a structure to respond promptly to any compliance-related matters detected by the Group. However, the possibility that a law violation may be committed in the future is not zero. It might be pointed out to the Group that there is a law violation, or the content, effect, promptness or other part of its response is insufficient. In such a case, we might become a subject of administrative investigation by a regulatory authority or receive punishment, or a party involved in a suit party in a lawsuit. If such an event occurs, it could have a negative impact on the MMC group's compliance reputation, and consequently, on the operating results and/or financial position of the MMC group.

As the MMC group conducts its business activities, we may become a party involved in various lawsuits and other legal procedures with users, business partners and third parties. In such a legal procedure or an ongoing legal procedure, if a judgement that is unfavorable to us is made, the operating results and/or financial position of the MMC group may be affected.
Moreover, although the MMC group holds product liability insurance that would fully cover compensation for damages and legal costs arising from claims for damages and lawsuits in relation to product liability where the courts ruled in favor of plaintiffs, the ruling requiring the Group to pay the amount of compensation larger than anticipated may impact the operating results and/or financial position of the MMC group.

The MMC group endeavors to protect its own technologies, know-how and other intellectual property as well as to prevent the infringement of third-party intellectual property rights. However, in the event that a third party unlawfully uses the MMC group's intellectual property results in a fall in legal costs, or in the event that an unexpected infringement of a third-party intellectual property right by the MMC group requires a halt in manufacturing or sales or the unforeseen payment of license fees or compensation, or causes damage to the reputation of the MMC group's products and a consequent drop in demand, the operating results and/or financial position of the MMC group may be impacted.

The information that the MMC group uses in its operations, products, services, etc. and the information technology such as networks and systems where such information is stored come in a wide variety, including those managed by subcontractors. Given the advancement of connected services and IoT technologies, the MMC group implements safety management measures for hardware and software, including measures to protect personal information, as well as information security training for Group employees. Nevertheless, due to hacking and cyberattacks on the infrastructure, products, services, etc., of the MMC group or our business partners, inadequate management or human error within the Group or at contractors, or occurrence of natural disasters, there may be leakage of confidential, personal, and other information including information concerning our technologies, suspension of our important operations and services, improper paperwork or destruction/falsification of important data resulting in an impairment of the Group's brand image and social credibility causing sales to decline, legal claims, lawsuits or liability for damages, obligation to pay penalties or fines, or operational problems such as production suspension. If such a possibility realizes, it could have a negative impact on the operating results and/or financial position of the MMC group.

In the auto industry, there is fierce competition on a global scale. Furthermore, the concept of an automobile as a means of mobility for people and transportation for goods is changing due to electrification and the development of certain technologies. We believe that we are welcoming a period of immense change that happens only once every hundred years. By promoting the medium-term business plan "Challenge 2025," which poses "regional strategy to establish a stable revenue base," "promotion of efforts to achieve carbon neutrality" and "digital transformation and initiatives towards new business" as its main challenges, and providing customers with products and services bearing the distinct hallmarks of Mitsubishi Motors, the MMC group aims to maintain and expand the sales volume and market share and improve profitability. Nevertheless, if such strategy does not progress as planned and we are unable to implement measures that surpass our competitors, it may impact the operating results and/or financial position of the MMC group.

To provide customers with a rich mobility lifestyle that awakens a sense of adventure through reliability backed by "Environment x Safety, Security and Comfort" in the midst of rapid changes in technology and postures required of automobile manufacturers, such as various demands in certain areas and the efforts to achieve carbon neutrality, the MMC group works on development every day considering that it is important to arrange timely introduction of new products and technologies, which are useful, practical and easy-to-use, satisfying customers' values and needs and manifesting "MITSUBISHI MOTORS' uniqueness." However, when we cannot sufficiently capture the values and needs of customers even with our research and development based on detailed study and/or when we cannot provide customers with new technologies and products in a timely manner because of internal and external factors, our sales market share, sales and profitability could decline.

Our Group has entered into business alliances and partnerships with other companies, including joint ventures, in the areas of research and development, production, and sales, with the expectation of greater efficiency in management resources and synergistic effects. However, there is a possibility that alliances or joint ventures may change or cannot be maintained or may not produce the expected results due to changes in the business strategy of the other party, disagreements in alliance policy between the parties, changes in the investment ratio, or other factors. If the results do not meet expectations, the financial condition of the partner deteriorates, or there is a change in the investment relationship, a significant change in the alliance, or the dissolution of the alliance, our Group's management performance and financial condition may be affected.

The MMC group believes it is extremely important to secure highly-specialized personnel and to provide them with opportunities, and it promotes the creation of a corporate culture that supports diverse working-styles through appropriate assignment of personnel based on having the correct key members and the establishment of a role-based compensation system in addition to the creation of schemes that encourage individual growth.
However, if recruitment and retention do not proceed as planned due to hiring difficulties and increased liquidity in the labor market, our Group's competitiveness may decline over the long term.
Moreover, the MMC group recognizes that efforts to respect human rights are an indispensable element in fulfilling our social responsibilities in order to expand our business globally and grow sustainably, and works on prohibiting discrimination and eliminating unfair labor practices set out in the "Human Rights Policy." However, if our Group or related parties take actions that are problematic in terms of human rights, our business foundation may be affected by a loss of trust and confidence from customers or damage to our brand image due to a decline in social credibility, etc.

In anticipation of tighter fuel efficiency/CO₂ emission regulations and ZEV regulations, as well as the increased introduction of carbon pricing, etc., our Group is promoting electrification, energy conservation activities at all our bases and the introduction of renewable energy, based on our "Environmental Plan Package" which sets forth the policies and targets of our Group's environmental initiatives. However, in the event that cost of sales rises to address the further strengthening of fuel economy/CO₂ emissions regulations and other regulations due to climate change countermeasures proceeding more than expected, or if costs of production and procurement rise due to expanding the introduction of carbon pricing, etc., the operating results and/or financial condition of the MMC group may be affected.
We are also striving to promote adaptation measures, such as formulating Business Continuity Plans, in preparation for the possibility that global CO₂ emissions will not be reduced, temperatures will continue to rise, and natural disasters such as typhoons and torrential rains will become more frequent and catastrophic in a wider area than at present. However, if parts procurement, product manufacturing, sales, distribution, etc., are delayed or halted due to more frequent or severe natural disasters such as floods than expected in the countries or regions where our Group or our transaction partners' production bases are located, our Group's management performance or financial position may be affected.

As overseas sales account for around 80 percent of the MMC group's overall sales, the Group holds receivables denominated in foreign currencies, including US dollars, Euros and Australian dollars. Further, as the MMC group manufactures products to export globally at a Thai subsidiary, it also holds liabilities denominated in foreign currencies, primarily the baht.
As the values of foreign currency denominated assets (accounts receivable - trade, etc.) and foreign currency denominated liabilities (accounts payable - trade, etc.) change when foreign exchange markets for Japanese yen and foreign currencies fluctuate, the MMC group's yen-based profit or loss may be affected.
At present, the MMC group has worked on measures to reduce the impact of exchange rates, such as the export of the vehicles manufactured in Indonesia, and sales expansion in Thailand of the vehicles manufactured in the country, to contain the impact of foreign exchange rates over the medium- to long-term. However, if there are significant fluctuations in foreign currencies, the operating results and/or financial condition of the MMC group may be affected.

The MMC group operates business around the world, and engages in production and sales activities in various countries and regions.
These business activities may be affected by an economic downturn, financial crisis, etc. in an individual country and region, and if transportation costs rise, it is difficult to secure ships for transportation, or ship arrangements are delayed, our production and sales activities may be adversely affected, affecting the operating results and/or financial condition of the MMC group.

As the MMC group conducts its business activities, we are exposed to credit risks in its dealings with dealers and with customers and other trading partners and in its automobile financing business.
Regarding credit risk related to business partners, such as distributors, we strive to control risk by maintaining appropriate credit protection, while continuously evaluating country risk and the financial status of business partners. Moreover, we carry out strict credit screening and collection management for risks arising from the sales finance business to control the occurrence of bankruptcies and uncollectible receivables. However, if a loss stemming from such risk exceeds the MMC group's expectations due to a deterioration of the external environment, etc., the operating results and/or financial condition of the MMC group may be affected.

In addition to borrowing from financial institutions, the MMC group issues commercial paper, etc. for financing. In order to prepare for increased demand for funds due to deterioration of the business environment, MMC secures sufficient liquidity by setting up commitment lines at overseas subsidiaries in addition to commitment lines of credit worth about 150.0 billion yen, and strives to maintain good relationships with our main bank and other relevant financial institutions. However, if unable to finance the required funding at appropriate terms in the financial markets due to an economic or financial crisis, etc. or due to a lowering of the MMC group's credit ratings, this may seriously impact the operating results and/or financial position of the MMC group.

The MMC group has facilities for development, manufacturing, sales, etc. in Japan and other parts of the world, and the occurrence of terrorism, war, civil war, political instability, security concerns, etc. in these regions may cause serious disruptions, such as interruption of operations of the MMC group or its business partners.
In anticipation of such a situation, the cross-functional economic security team prepares and executes measures to mitigate any possible obstacles, and if such an event should occur, a countermeasures meeting is established with the participation of the relevant divisions to address the situation from a company-wide, cross-functional perspective.
However, if terrorism, war, civil war, political instability, security instability, or the like occurs on a larger scale than is expected, and when parts procurement, production and sales of products, logistics, etc. are delayed or stopped or costs increase, the operating results and/or financial condition of the MMC group may be affected.

The MMC group has facilities for development, manufacturing, sales, and other bases in Japan and other parts of the world. Natural disasters such as large-scale earthquakes, typhoons, torrential rains, and floods, fires and other accidents, and outbreaks of infectious diseases in such regions may cause serious disruptions, including interruption of the MMC group's operations or those of its suppliers.
The BCM* Committee has formulated a business continuity plan, while also verifying the effectiveness through regular training and preparing for any emerging threats based on a scenario that would have a serious impact on the MMC group's operations.
However, if facilities, such as manufacturing bases, are damaged due to a natural disaster, accident or spread of infectious disease on a scale larger than anticipated, or if the procurement of components, manufacture, sale and distribution of products, etc. are delayed or suspended, this may affect the operating results and/or financial condition of the MMC group.
*:BCM is an abbreviation for "Business Continuity Management"