Risk Factors

 The Kuraray Group has established a Risk Compliance Committee under the direct control of the President for the purpose of appropriately managing critical management risks, ensuring compliance with laws and regulations as well as corporate ethics, and conducting fair business practice. Based on the Kuraray Group Risk Management Rules, each Group entity in Japan and overseas conducts risk self-assessment. After deliberation by the Risk Management and Compliance Committee, the President identifies critical management risks, designating a person responsible for each risk, with measures implemented to prevent and mitigate the risks. The Board of Directors monitors the progress of these measures.
 The following are the main risks that management recognizes as having the potential to materially affect the financial position, business results, and cash flows of the Group, as described in the corporate financial statements. Forward-looking statements in the following text represent the Kuraray Group’s best judgment as of December 31, 2022.

1) Risks associated with changes in the business environment

 The Kuraray Group has a diversified business portfolio, with products geared to a variety of uses and applications. Many of our products are specialty materials that are less susceptible to fluctuations in commodity markets. In recent years, our products are increasingly suited to growth fields on which the Group’s overall business performance is becoming more dependent. These fields include automotive applications (EVAL™ for gas tanks, PVB film for windshields, KURALON™ for brake hose reinforcement, etc.), electrical and electronics (optical-use poval film for LCD panels, GENESTAR™ for connectors, etc.), and the environment (activated carbon for water treatment and air purification, etc.). As a result of changes in industry standards for end products, shorter product cycles and intensifying worldwide competition in product development, the market environment in these fields may undergo drastic change. Therefore, we may also face extreme changes in the environment and competitive conditions for our products. As a result, it may become necessary for the Company to downsize or withdraw from important businesses.

2) Risks associated with raw materials

 We manufacture products such as chemical products, synthetic resins, synthetic fibers and textiles out of key raw materials such as ethylene and other petrochemicals that are susceptible to fluctuations in the markets of crude oil and natural gas. Market fluctuations exceeding expectations can affect the Kuraray Group’s business results due to the lag in passing on the costs of such fluctuations to product prices.
 The Kuraray Group is exposed to the risk that it will be forced to downsize or close certain areas of its main businesses as a consequence of the changes in its business environment as described above. In addition, to reduce the risk of not being able to procure key materials, the Group concludes long-term purchasing contracts and utilizes multiple suppliers. Nevertheless, the occurrence of accidents or disasters at suppliers of key materials, logistics disruptions, economic sanctions, or various regulations in Japan or other countries could have a negative impact on the supply of products.

3) Risks associated with product liability

 Kuraray supplies products that play a significant role in ensuring end-product quality in sectors such as automotive, electronics, medical applications (dental materials) and food packaging (EVAL™ and PLANTIC™, etc.). We have introduced a product quality management system, mainly at each production base of the Kuraray Group. Product quality is imperative.
 However, in the event of a large-scale product recall caused by defective quality, there are risks of major financial losses including liability losses that cannot be fully covered by existing product liability insurance, as well as the possible loss of customer trust and social credibility.

4) Risks associated with accidents and disasters

 The Kuraray Group has manufacturing facilities in Japan, Europe, North America, Asia and Australia. Many of Kuraray’s production facilities are large-scale chemical plants. In accordance with the Guiding Principles, “Safety is the cornerstone of everything we do”, we have established a safety management system that we operate to prevent accidents and disasters (such as explosions, fires, and leaks of hazardous substances) and to minimize damage in the event of a disaster. In addition, the Group is taking risk countermeasures by decentralizing the locations of important production facilities and utilizing general insurance. The Group has also conducted risk assessments of severe disasters caused by climate change, and is taking measures to mitigate the risks. However, serious accidents, environmental pollution, natural disasters, or large-scale epidemics could cause personal or property damage to employees or third parties, damage to business assets, or long-term production stoppage.
 Accidents and disasters at suppliers of raw materials and fuels, equipment and maintenance parts, and services may adversely affect the supply of the Group’s products.

5) Risks related to legal regulations and compliance

 “Our Commitment” states our business activities should adhere to principles of conduct in all our diverse interactions with society. The “Kuraray Group Code of Conduct” provides guidelines to implement the commitment in performing day-to-day work. The President has declared that we will comply with laws and regulations and “Our Commitment” under all circumstances. To share these principles and commitments among all Kuraray Group employees throughout the world, the Compliance Handbook has been compiled containing the foregoing declaration by the President and explanations of the “Kuraray Group Code of Conduct” and distributed to all employees in Japan and overseas. In addition, we have appointed compliance officers at plants and overseas offices of Kuraray and Group companies, and have organized regional compliance committees to address company-wide issues as well as those specific to each region.
 To ensure compliance with antitrust laws, the Group has established a global compliance program. Specifically, the Antitrust Law Compliance Guidelines are periodically reviewed, guidelines are established regarding contact with competitors, transactions and meetings with competitors are reviewed in advance, and seminars are held for directors and employees. In addition, a variety of measures to ensure compliance are implemented by the Legal Department, which conducts internal inquiries on compliance, manages bidding information, and audits bidding departments.
 Despite efforts to ensure compliance as described above, a serious violation of laws and regulations could result in a loss of customer trust and social credibility as well as liability for damages and fines, which could have a negative impact on the Group’s business performance.
 The Group operates globally and is subject to the various laws and regulations of each country. Major changes in laws and regulations, including stricter regulations for the future, could lead to additional costs for countermeasure or restrict business activities, which could adversely affect Group business performance.

6) Risks associated with intellectual property

 The Kuraray Group has a number of businesses and products based on proprietary technologies. In the event of a serious infringement of our intellectual property rights or a dispute over our rights, or if the Group infringes on the intellectual property rights of other companies, the Group’s business performance may be adversely affected.

7) Risks associated with litigation

 The Kuraray Group is subject to the risk of litigation and other legal proceedings with business partners and third parties in connection with its domestic and overseas operations. The Group’s business performance may be adversely affected in the event of a significant lawsuit or other legal action.
 In May 2018, a civil lawsuit was filed against our U.S. subsidiary seeking damages following a fire involving injuries to contractor workers. While some settlements have been reached, this lawsuit, which is being handled with the assistance of attorneys, remains pending for some plaintiffs.

8) Risks associated with changes in exchange rates

 The Kuraray Group is expanding its manufacturing and sales operations in Japan and various overseas regions, including Europe, North America, Asia and Australia. Export prices of the Kuraray Group’s domestically manufactured products are affected by changes in exchange rates.
 Sales of products manufactured at our overseas bases, procurement and sales prices in different currency blocks, and the value of foreign-currency-denominated assets and liabilities are affected by changes in exchange rates.
 Although the Kuraray Group takes risk mitigation measures through forward exchange contracts and other means, exchange rate fluctuations that exceed the scope of our assumptions could adversely affect the Group’s business results.

9) Risks associated with overseas business development

 The Kuraray Group is engaged in global business development, with overseas sales accounting for over 70% of total sales. The Group has established regional companies in the United States, Germany, China, Hong Kong, Singapore, Thailand, India, and Brazil. The Group is constantly collecting risk information and analyzing business trends in each country and region, and has established a system in which the regional companies, business-controlled companies, and the relevant department of the Head Office collaborate when a response is required beyond the relevant region. However, the Group’s performance may be adversely affected by contingencies (such as large-scale epidemics, wars, riots, and terrorist attacks in various countries and regions), trade wars due to national or regional conflicts, and unforeseen changes in local laws and regulations.
 With regard to the situation in Russia and Ukraine, the Group was affected by the soaring price of natural gas and other factors in fiscal 2022. Depending on its future situation, the Group's business performance may be adversely affected by sluggish demand, supply chain disruption, natural gas prices rising again, or raw material procurement difficulties.

10) Risks associated with impairment of non-current assets

 The Kuraray Group applies the accounting standard for impairment of non-current assets. A decline in profitability due to a significant deterioration of the operating environment or a drop in market prices may cause an impairment loss on non-current assets held by the Group, which may adversely affect the Group’s business results.

11) Risks associated with the environment

 The Kuraray Group has established the Kuraray Group Environmental Policy and complies with various environmental laws and regulations, and is continuously working to improve the environment by reducing GHG emissions and through other measures to combat global warming, curbing the discharge of chemical substances, and effectively using resources. The Group is also strengthening its risk assessment and countermeasures against extreme weather events and severe disasters brought about by climate change. In addition to these efforts, the Group has expressed its support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and is striving to expand its information disclosure. However, if environmental pollution occurs due to an unexpected accident or natural disaster, or if environmental regulations are tightened, the Group’s business activities may be restricted or costs for countermeasures may increase, which may adversely affect business performance.

12) Risks associated with information security

 The Kuraray Group has implemented a variety of security measures for its information systems and networks, which are the foundation of its business activities, while further strengthening its information management system. However, in the event of a failure of information systems due to a disaster, cyberattack, or unauthorized access, or in the event that corporate or personal information is leaked outside the Kuraray Group, its business activities may stagnate and its reputation may be damaged, which could have a negative impact on the Group’s performance.