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[Risks in business]
Sojitz is engaged in a wide and diverse range of activities including general trading; the purchase, sale and trade of goods and commodities; and the manufacture and sale of a wide variety of products in Japan and overseas. The Company also provides comprehensive services to a variety of industries on a global scale. In addition, it is engaged in planning and arranging projects, and investing in a variety of business fields and financial activities.
In light of these activities, Sojitz is confronted by numerous risks. These risks include: market risk relating to movements in foreign exchange rates, interest rates, commodity market conditions, and stock prices; credit risk relating to non-payment and collection; investment risk; country risk; and other risks. These risks are to a certain degree unpredictable, and as they cannot be accurately ascertained, can impact the performance and financial position of the Company. Although risk can not be entirely mitigated, the Company is reinforcing and enhancing risk management systems to address wide-ranging business risks where possible. Sojitz recognizes that a unified and integrated approach across the Group is critical to comprehensive risk management. This also entails quantifying and monitoring risk on an ongoing basis as a vital element of management. Additionally, Sojitz is building an internal control system around its Internal Control Administration Office and reinforcing the compliance structure under the Chief Compliance Officer, both measures aimed at enhancing the management of risks that can not be quantified.
Sojitz is confronted by the following risks in the execution of its daily business activities:
[Market risk]
Sojitz is engaged in global business development and trade and is accordingly subject to a variety of market risks. Certain transactions are denominated in foreign currencies and as such are subject to exchange rate risks. The Company is also susceptible to movements in interest rates in connection with funds procurement and its investment activities. In its daily operating activities, the Company enters into purchase agreements, maintains inventories, and is exposed to commodity price risk. In addition, the Company is exposed to stock price risk due to its holdings of marketable and other securities. As a result, the Company is subject to a variety of market risks, and transactions susceptible to market risk are not limited to those identified above.
Sojitz works to avoid market risk-related losses by maintaining limits on the position (short/long) a business unit may assume and by setting loss-cut points. As well as managing these positions and any related losses, the Company strictly adheres to the loss-cut rule: if a loss greater than the loss-cut point occurs, the position is immediately dissolved and new transactions are prohibited during the applicable fiscal year. In order to offset market risks related to its general marketing and finance activities, Sojitz matches buying and selling transactions for commodities, adopts a matching principle for its assets and liabilities, and applies derivative financial instruments including forward foreign currency exchange contracts, commodity futures and interest rate swaps.
Taking these measures, however, is no guarantee that risks can be completely avoided. There is still the possibility that unanticipated market change could negatively affect the Company's operations.
[Credit risk]
In the course of its business, Sojitz extends credit facilities to a large number of customers in Japan and overseas, which in turn exposes the Company to credit risk. As part of efforts to manage and control this risk, the Company has established an 11-tier credit assessment system. In each instance, the Company objectively determines a credit rating for each customer, and based on this rating, sets the level of credit for the individual transaction. In addition, the Company strives to implement strict security and other collateral requirements in line with the credit rating for each customer. Also, Sojitz introduced a system to assess receivables from the fiscal 2006. Having extracted a target of assessment from customers owing operating receivables to the Group in accordance with a certain criterion, Sojitz set a new process to check credit status, receivable and security conditions with the Group, and spares no efforts in making more stringent the identification of status of credit risk and the calculation of individual allowance for doubtful accounts. Furthermore, the Company undertakes periodic assessment of credit risk related to deferred payment, finance and guarantee procedures based on risk/return considerations. When the risk/return is considered insufficient, steps are taken to improve returns and reduce risks.
Carrying out such administrative actions, however, is no guarantee that risks can be completely avoided. There is still the possibility that incidents involving uncollectible receivables could negatively affect the Company's operations.
[Investment risk]
One of Sojitz' major business activities is investing in a variety of business fields, which are subject to changes in investment values and other risks. The Company has established a screening system to ascertain the merits and risks of each investment proposal, and a management system to follow-up investments. Clearly defined standards have also been formulated with regard to withdrawal from an investment. Through these initiatives, the Group is working to prevent and reduce loss.
The Company has established a system to adequately screen and select new business investment opportunities. On evaluating each proposal, the relevant business plan, including cash flow projections, is comprehensively examined. Profitability is also strictly assessed by@setting a hurdle rate based on the internal rate of return (IRR).
Proposals that have been approved and implemented are subject to periodic review to ensure the early detection of issues and problems. In the event an issue or problem arises, steps are taken to ensure minimum loss. In addition, to ensure early detection and in an effort to avoid issues and problems, guidelines are established at the early stages to define acceptable risk and return, and to identify conditions for withdrawal and loss write-off.
Through these measures, the Company has in place a screening system for implementation of new business investment and procedures to ensure follow-up management of these investment decisions. It is difficult, however, to fully avoid the risk of revenues failing to rise as expected. It is possible that the Company could end up with losses associated with withdrawing from such business, and it is also possible that the Company would be unable to withdraw from such business for individual reasons such as relationships with other partners of that business. If such possibilities eventuated, it could negatively impact on the Company's results.
[Country risk]
Sojitz is subject to country risk in its trading operations and activities. In order to minimize country risk, the Company avoids excessive investment exposure to any one country or region. As a basic rule for countries allocated a high country risk rating, country risk avoidance measures such as trade insurance are implemented for each proposal. To manage country risk, Sojitz conducts risk analysis for each country and region and assigns a risk rating for each. It then constrains the net exposure within the maximum threshold for net exposure (calculated by subtracting country risk hedges such as trade insurance from the total exposure), which it sets according to the risk rating and economic fundamentals of the country.
Even with the employment of such risk management and hedges, Sojitz is unable to fully eliminate the possibility of losses being incurred as a result of political, economic or social change in a country the Sojitz Group's trading partners are located, or in a country in which the Sojitz Group has operational activities. If such events occurred, it could have a large impact on the Company's financial results.
[Risk relating to changes in the macroeconomic environment]
Sojitz is a sogo shosha with global operations that conducts its businesses both in Japan and overseas. It is active in a diverse range of businesses, including machinery and aerospace, energy and mineral resources, chemicals and plastics, real estate development and forest products, and consumer lifestyle business. Consequently, the Company's performance is affected by the economic situation in Japan and the other countries in which it operates, as well as by worldwide economic conditions. There is a risk that economic slowdown, either worldwide or in a particular region, could negatively impact the Company's performance or financial position.
[Risk relating to impairment of fixed assets]
Sojitz is subject to impairment risk relating to leased assets and fixed assets it owns including real estate, machinery and equipment, and vehicles. The Company accounts for the relevant assets in accordance with the standards for asset-impairment accounting, and the required impairment adjustments were recorded at the end of the interim period under review. However, there is a risk that a fall in market prices for the assets concerned could lead to a sharp decline in the value of the assets, making it necessary to record significant asset impairment. In this case, the Company's performance or financial position could be negatively impacted.
[Fund procurement risk]
Sojitz procures funding for its operations through loans from financial institutions, and by issuing bonds and commercial paper, among other means. Consequently, in the event of disruption in the financial markets, or if a rating agency were to significantly downgrade Sojitz' credit rating, Sojitz' ability to procure funds would be restricted and its fund procurement costs would increase. In this case, the Company's performance or financial position could be negatively impacted.
[Risk relating to increases in environmental costs]
Sojitz considers care for the global environment to be one of its most important management issues and is actively involved in tackling environmental problems. The Company has drawn up the Sojitz Environmental Policy, and takes the environment into consideration when conducting its operations. Sojitz also adheres strictly to environment-related laws and regulations and promotes initiatives targeting environmental protection. Nonetheless, implementing such initiatives cannot in itself eliminate all risk of potential environmental pollution arising in the course of business operations. In the event of such environmental pollution, potential adverse outcomes include suspension of Sojitz' operations, liability for decontamination and cleaning expenses, and liability for litigation costs.
[Compliance risk]
Sojitz is active in a variety of business fields, and laws and regulations relating to its operations are wide ranging. They include trade-related laws such as those regarding Company, tax, business monopolies and foreign exchange, as well as laws relating to each industrial sector such as regulations for the chemical products. To ensure adherence to these laws and regulations, the Company has developed a compliance program and established a Compliance Committee. It has also conducted compliance training and enforced implementation of compliance throughout the entire Group. Nonetheless, even measures such as these cannot eliminate all compliance-related risk in the course of conducting business. There is always a possibility that significant changes to the relevant laws and regulations, or new and unexpected interpretations of existing laws, could be enforced. In such cases, the Company's performance or financial position could be negatively impacted.
[Risk of litigation]
On matters concerning Sojitz' business activities, the Sojitz Group or its assets may on occasion be subject to, or an accused party of legal action including litigation or arbitration, either in Japan or overseas. However, as of the end of the interim period under review, there were no cases of litigation, arbitration or other legal action likely to exert a material impact on the performance or financial position of the Company.
[Risk relating to IT systems and security of information]
Sojitz considers appropriate safeguarding and management of its information assets to be a crucial issue in operating its businesses. In line with this stance, the Company has established an information management system based on an internal committee and developed a range of other provisions. To deal with failures in key IT systems and networks, Sojitz has implemented such measures as duplicating systems and equipment. The Company is also working to bolster its defenses against information leaks. To this end Sojitz has established firewalls to prevent unauthorized external access to computer systems, and has also implemented anti-virus measures and adopted encryption technology.
As detailed above, Sojitz is taking comprehensive measures to reinforce its information security and avoid any untoward events. These efforts notwithstanding, it is impossible to completely eliminate all risk, and a number of potential risks remain. These include infection by a new computer virus, and leakage or loss of key information assets containing personal information as a result of events such as unauthorized access to a computer. Another potential risk is total failure of an IT system due to unexpected natural disaster or malfunction. Depending on the scale of damage incurred, the Company's performance or financial position could be negatively impacted.
[Risks of natural disasters]
It is possible that business offices, facilities or employees could be damaged or injured by a natural disaster such as an earthquake, extreme wind or rain and for such an incident to directly or indirectly impact on the Sojitz Group. The Company has created disaster response manuals, emergency training, and installed systems to confirm employee safety. It is not possible, however, to have full protection from damage and there is a possibility that a disaster would negatively impact on the operational performance and financial position of the Sojitz Group.
