Risks that may affect the business results and financial position of the azbil Group are summarized below. These risks are deliberated on by the azbil Group General Risk Committee and the Board of Directors, and are managed comprehensively. In addition to this overall management, related departments also take measures to mitigate risk. Information that pertains to the future was judged by the Group to be valid as of March 31, 2022.

1. Risk related to the Business Environment

Risk awareness

• Risk that changes in the economic environment (such as increased inflation) in the regions we operate in, widespread difficulty in parts procurement, changing market conditions in specific regions and key business sectors, including construction and manufacturing, may have an impact on capital investment; risk of medium- to long-term decline in demand for offices due to changes in the environment; and a major economic recession could all have an adverse impact on the Group’s operations, business results, or financial position.

Countermeasures and risk mitigation

• Aim for business growth by expanding life-cycle businesses, the demand for which is relatively stable amid economic fluctuation.

2. Risk related to Growth in a Competitive Environments

Risk awareness

• Risk that inadequate responses to business opportunities that may arise from changing conditions in society, technological innovations, and the like could lead to the loss of competitive advantage.
• Risk that the loss of competitiveness—caused by misreading of technological trends, slow R&D progress, or failure to respond to open innovation and technological developments—or delays in launching new products, sluggish sales, and the like could affect the Group’s operations or business results.

Countermeasures and risk mitigation

• Upon recognizing new risks, develop new subscription models, etc., and engage in strategic collaboration.
• Develop business by forming deeper alliances (including M&As) with other companies. This will require the establishment of a reparatory system and careful consideration.
• Make appropriate technology R&D investments and create a new organizational structure dedicated to specialized fields, such as IT solutions and cloud services; take action to verify new business models; improve systems by using the Azbil Academy to help train employees and help them change jobs; continue pursuing M&A opportunities; update and strengthen core information system and roll them out across the Group; and take other measures to avoid delays in addressing changes in the environment and competitive disadvantages.

3. Risk related to Product Quality

Risk awareness

• Risk that costs incurred by accidents due to defective products, systems, or services, or the resulting damage to our corporate reputation, or the effects of the aforementioned could affect the Group’s operations, business results, or financial position.

Countermeasures and risk mitigation

• Use a dedicated organization to check quality at the product development and manufacturing stages.
• Strengthen quality control efforts such as managing and improving production lines to maintain proper inspection work processes and checking legal compliance related to factory operation, construction management, etc.
• Conduct inspections using a dedicated organization that specializes in safety in addition to checks at the design and production stages.

4. Risk related to Global Operations

Risk awareness

• Risk that unforeseen situations, such as regional political and economic upheaval, changes in laws, and terrorism; geopolitical risks such as wars and conflicts; as well as differences in business practices or the occurrence of an epidemic such as COVID-19 could affect the Group’s operations, business results, or financial position.
• Risk that delays in planned business expansion for reasons such as regional peculiarities could affect the Building Automation (BA) business.
• Risk that sharp foreign exchange fluctuations may impact net sales, prices of raw materials and parts, SG&A expenses, etc.

Countermeasures and risk mitigation

• Continue to monitor the geopolitical risks presented by the Ukraine crisis and its economic effects and respond appropriately.
• Prepare disaster response, BCPs, etc. Introduce flexible work styles such as working from home.
• In the BA business, establish bases especially in Southeast Asia and China; secure in-house engineers and partner companies to establish a robust business execution system; start providing services aimed at launching life-cycle businesses overseas.
• Hedge against foreign exchange fluctuations appropriately and expand overseas production to mitigate risk.

5. Risk related to Securing and Developing Human Resources

Risk awareness

• Risk that obstacles to securing, educating, and smoothly deploying human resources needed to address business structural changes could lead to a decline in productivity or other performance indicators.
• Risk that delays in securing, educating, or deploying personnel needed for overseas business development may inhibit achievement of business growth targets.

Countermeasures and risk mitigation

• Secure and allocate the personnel necessary to address changes in business structure.
• Take steps to establish a new personnel system.
• Implement measures for securing and training human resources for overseas business development tailored to the situation of each business location.

6. Risk related to Information Leaks and IT Security

Risk awareness

• Risk that leaks of confidential business information or personal information due to unforeseen circumstances could affect the Group’s business performance or financial position, or cause damage to its corporate reputation.
• Risk that unexpected cyber-attacks, possibly using new methods, could affect the Group’s business operations.

Countermeasures and risk mitigation

• Ensure confidentiality of important information and comply with laws on personal information protection (establish and implement internal regulations and educate employees).
• Create a strong IT environment and implement employee training.
• Establish a new inspection department that specializes in information security (integrated management and countermeasures for everything from products and services to business systems).
• Thoroughly enhance information security management, including support for network transmissions to entities outside the Group, limits on the sending and receiving of potentially dangerous email attachments, and changes to VPN methods.

7. Risk related to the Environment, Climate Change, and Natural Disasters

Risk awareness

• Risk of damage to production and supply of products and services stemming from large-scale disasters, lockdowns, and other activity restrictions in major cities, or other unforeseen events
• Risk that events beyond those assumed in the BCP will have a negative impact on business continuation, which could have a major effect on the Group’s business results or financial position.
• Risk that climate change could lead to long-term market structural changes or impact the Group’s core businesses
• Risk that long-term market structural changes or a decline in sales generated by customers in core businesses could affect the Group’s business results.

Countermeasures and risk mitigation

• Decentralize the production network to reduce the risk of concentration.
• Devise a production response plan anticipating a situation equivalent to a lockdown, such as restrictions on activities in major cities.
• Verify the business continuity period without limiting it to specific events; prepare the necessary funds, product inventories and materials, personnel, and production equipment.
• Formulate a long-term vision to achieve “substantially zero emissions” of greenhouse gases associated with our business activities by 2050; reduce our environmental impact (obtain Science Based Targets initiative (SBTi) certification and formulate long-term vision aimed at “substantially zero emissions”).
• Identify various events that may be caused by climate change and check the details of the risks and potential impact on operations, and then undertake scenario analysis and respond accordingly (disclosure according to the recommendations by the Task Force on Climate-related Financial Disclosures framework).

8. Risk related to Compliance

Risk awareness

• Risk that the violation of laws (antitrust laws, construction industry laws, labor laws, bribery laws, etc.), including violations resulting from failure to address characteristics of newly entered regions and industries and delays in responding to new laws and revisions of existing laws, may result in administrative penalties and fines; risk that inappropriate acts by the Group and/or its business partners will lead to harmful rumors and damage the Group’s reputation.

Countermeasures and risk mitigation

• Conduct regular monitoring in Japan and abroad to check compliance with laws and internal rules; engage in rigorous compliance education.
• Place top priority on legal compliance and conduct regular monitoring in Japan and overseas to check compliance; strengthen system for concluding contracts while also informing and educating all employees.

9. Risk related to Changes in How Employees Work

Risk awareness

• Risk of undesirable changes in how employees work as a result of efforts to introduce new work styles, increased telecommuting, and support for remote work as a countermeasure for infectious disease
• Risk of regulatory problems
• Risk of negative effects on employee health such as mental health problems, lack of exercise, etc.

Countermeasures and risk mitigation

• Revise various internal rules and standards in line with changes in systems and business processes.
• Conduct disease prevention seminars, health promotion programs, and employee surveys, and issue alerts.

10. Risk related to Difficulties in Procuring Parts

Risk awareness

• Risk of the prolonged effects of difficulties in procurement and cost increases for semiconductor-related parts and other parts in the global market
• Risk of long-term suspended production or largescale reduced production due to difficulties in procuring parts

Countermeasures and risk mitigation

• Improve production operations; use a parts inventory for BCPs; secure products for market distribution; switch to alternate parts or change designs.