The Furukawa Electric Group's management performance is affected by the economic conditions of the various markets in which we sell our products and provide services.
The Furukawa Electric Group's management performance, stock price and financial condition may be affected by the following risks, assessed by the Group as of June 26, 2007, the date on which we submitted our financial report.
Infringement of third-party intellectual property rights and other rights
The Furukawa Electric Group carried out preliminary investigations and took steps to obtain the necessary licenses, etc., so that the intellectual property and other rights of third parties would not be violated through the development, manufacture, use and sale of products and software, etc., or through other business activities. However, if a third party brings a lawsuit on the basis of an alleged violation of intellectual property or others rights, or if a third party violates the intellectual property or other rights of the Furukawa Electric Group, a negotiation or dispute concerning these rights with the third party will arise. A dispute concerning intellectual property rights may entail the suspension of manufacture and sale, etc. and very substantial compensation for losses or money paid for a settlement. If the Furukawa Electric Group is subject to the suspension of manufacture and sale, etc. or is obliged to pay very substantial compensation for losses or a settlement, there is a possibility that its results and financial position will be adversely affected. In addition, while systems are established, if the manufacturing technologies (know-how) of the Furukawa Electric Group are divulged to a third party, there is a possibility that the Furukawa Electric Group’s competitiveness will be weakened.
Defective products
The Furukawa Electric Group manufactures products and services in accordance with prevailing domestic and international standards and specifications as well as its own quality control standards developed over the course of its extensive business experience. However, we cannot warrantee that all our products and services are free from defects or that we will not be liable for any future losses or damages. Any defects in products such as power cables, communication cables and automotive parts may incur significant additional costs.
While our product liability insurance policy covers risks associated with our products, it may not cover all the damages we might be required to pay. Product defects causing significant damage or product liability may incur major costs and tarnish the Group's reputation, adversely affecting the results of the Group's operations and financial position.
Rise in raw material and fuel prices
Prices for our main raw materials, such as copper, aluminum and polyethylene, along with fuels such as heavy oil and LNG, may rise beyond expectations due to changes in international politics and market trends. In the event of substantial price increases, we may not be able to sufficiently raise sales prices to compensate for higher raw material costs, or we may unable to do so in a timely manner. This may adversely affect the results of our operations or financial position.
Fluctuations in exchange rates
The Furukawa Electric Group owns foreign currency-denominated credit and obligations. Therefore, we may incur exchange losses as a result of an unfavorable foreign currency environment.
Higher interest rates
If interest rates rise, our interest expenses will increase, which may adversely affect the results of operations.
Lowering of credit ratings
Should our performance stagnate, we may incur the risk of credit rating agencies downgrading our long-term bonds and commercial paper.
Impairment of assets
In the event of unfavorable conditions in the market or business environment, the market value of our assets may substantially decline, or the profit generated by our assets may decrease, leading us to incur impairment losses on such assets.
Soil pollution on land held for business purposes
Soil contamination was found in part of the land owned by the Furukawa Electric Group in the Nikko area. The Group plans to take purification measures, and has undertaken improvement works for a part of land owned in the Yokohama area. The Group also commenced an investigation into the disposal of waste kept in land it owns, as well as the contamination of land in the Koyama area. It also conducted improvement work with the aim of removing the "contaminated" designation for the site where the Neyagawa Plant previously stood, which is owned by Kyowa Electric Wire Co., Ltd., a subsidiary. The Furukawa Electric Group is also dealing with soil and underground water of the land of the Ibaragi Plant, which is owned by Aoyama Kinsho Co., Ltd. There is a possibility that, in other areas, costs will arise for action on soil contamination, depending on the results of investigations at the time of the reuse or sale of land used for business.
Overseas activities
The Furukawa Electric Group manufactures and sells products not only in Japan but also in overseas markets, including markets in the U.S., Europe and Asia, as well as emerging markets. We face various potential risks in these overseas markets, such as unexpected changes in laws and regulations, labor disputes caused by changes in the economic environment or sudden outbreaks of epidemics. Such risks may adversely affect the result of our operations.
In particular, the company has many facilities in the Guangzhou, Shanghai, Beijing and Tianjin regions of China, which has been growing sharply over the past several years. There is a possibility that difficulty in managing the business will arise should an unexpected event occur, such as the amendment of laws and regulations concerning investment, exchange, finance, and import and export, the suspension of electric power supply, or the outbreak of an epidemic within China.
Concretely, should the Chinese GDP growth rate sharply decline due to the adoption of a governmental policy to curb excessively rapid economic growth, or should the exchange rate of the yuan be adjusted, the results of our operations in China may significantly differ from our business plan forecast. In such cases, the cash flows of our subsidiaries in China may be adversely affected because the collection period for sales receivables from Chinese customers is relatively long.
Fine, compensation and legal action
Furukawa Electric was subject to a cessation order and an order for the payment of a surcharge from the Fair Trade Commission on May 21, 2010, on the grounds that the Company has violated the Antimonopoly Act in trade for optical fiber cables and related products. The Company has already set up a reserve for an amount equivalent to the surcharge to be paid in the accounting term ended March 2010. However, there is a possibility that a civil suit, etc. will be brought claiming compensation for losses incurred by the act of violation in the future. In February 2010, the Fair Trade Commission conducted an onsite inspection of the Company on the grounds of a suspected violation of the Antimonopoly Act in trade for automotive wire harnesses and related products. With respect to the subsidiaries of the company, the Fair Trade Commission conducted an onsite inspection of Furukawa Elecom Co., Ltd. in December 2009 and Kyowa Electric Wire Co., Ltd. in April 2010, on the grounds of a suspected violation of the Antimonopoly Act in trade for electric wires and cables used for construction and power distribution. There is a possibility that a surcharge will be imposed or compensation for losses will be claimed as a result of this investigation.