Business Risks

Of the matters concerning the business situation, financial situation, etc., described in the Securities Report, the main risks that management recognizes as potentially having a significant impact on the financial position, operating results, and cash flows of the Group are as follows:

The forward-looking statements contained in this section are based on judgments made as of the date of filing of the Annual Securities Report and inherently involve uncertainties. Actual results may therefore differ from these statements.

(1) Regarding the impact of production trends of automobile manufacturers

Our group's main business is the manufacturing and sales of automotive transmission systems (MT and AT). Sales from external customers in the automotive transmission system business account for a high 86.8% of consolidated sales revenue in the fiscal year ending March 2026.

Therefore, given the progress of vehicle electrification and production and sales trends among automakers, which are our major customers, our automatic transmission (AT) business, in particular, is likely to contract.

Furthermore, while we closely monitor technological trends and market changes and are developing products that adapt to these environmental changes, a delay in responding to market needs for electrification could negatively impact our group's performance, such as a decrease in sales.

(2) Regarding overseas expansion

Our group is moving towards local production in response to automobile manufacturers' global optimal procurement policies. The overview by location for the fiscal year ending March 2026 is as follows:

Asia and Oceania are promising markets for the Group's overseas business, with significant potential for growth in automobile production, and we intend to actively expand our business in these regions. However, market fluctuations resulting from changes in political and financial conditions in these regions may affect the Group's operating results.

(3) Regarding exchange rate risk

Our group manufactures and sells products worldwide. Items denominated in local currencies, including revenues, expenses, and assets in each overseas country, are converted to Japanese yen when preparing consolidated financial statements. However, due to exchange rates at the time of conversion, the value after conversion may be affected even if the value in the local currency remains unchanged.

Furthermore, for products manufactured in Japan and exported overseas, appreciation of the yen against other currencies could reduce the relative price competitiveness of our products in global markets and adversely affect the Group's operating results. Accordingly, fluctuations in foreign exchange rates may affect the Group's operating results and financial position.

(4) Risks of procuring raw materials and parts

The Group procures most of its raw materials and some components from outside the Group. While we strive to maintain stable business relationships with our suppliers, price increases, tight supply-demand conditions, unforeseen accidents at suppliers, and other factors may result in shortages of raw materials and components, which could adversely affect the Group's operating results.

(5) New product development

The Group strives to develop cost-competitive products with high environmental performance. We will continue to develop attractive products. However, if the products we develop fail to meet customer or market needs, or if we are unable to develop and launch products in a timely manner, particularly if we are unable to develop new products in response to the shift toward electrification in the automotive industry, the Group's operating results and financial position could be adversely affected.

To address this, Business Development Department within Strategic Business Headquarters is planning new businesses, and Development Headquarters has been reorganized to improve development efficiency. Through the creation of new businesses and open innovation, we are developing products toward a decarbonized society.

(6) Product quality defects

The Group considers maintaining quality to be one of the most critical factors supporting its business and conducts quality control for all types of products manufactured at its plants around the world. However, there is no guarantee that all products will be free from defects or that recalls will not occur in the future. If a product defect results in a large-scale recall or product liability claim, the significant costs associated with addressing the issue, as well as a decline in business resulting from damage to the reputation of the Group's quality management, could adversely affect the Group's operating results and financial position.

(7) Business investment risks, including new ventures

Recognizing that some of our existing businesses are likely to decline as electrification progresses, the Group is working to create new businesses beyond the framework of its existing operations with the aim of enhancing corporate value over the medium to long term. Through these efforts, we seek to contribute to the development of a decarbonized society and the minimization of environmental impact, while creating and delivering products that provide new value to our customers.

These activities include acquiring new technologies and accelerating the development speed of new businesses, such as through M&A and joint development involving investments in startup companies.

If the business activities of our investee companies do not proceed as expected, or if unforeseen problems are discovered at those companies, our company's performance may be adversely affected, such as through impairment losses.

As our group is making aggressive investments to launch new businesses, we must always be aware of the possibility that this risk may materialize.

To mitigate this risk, our group is using a stage-gate method to verify whether or not we can continue investing in new businesses.

Furthermore, our group's medium- to long-term direction and decision-making, including that of the group as a whole, are deliberated and resolved by the Board of Directors, and KPIs are monitored at management meetings, sustainability meetings, etc.

(8) Impairment risk relating to fixed assets

The fixed assets used by the Group may be subject to impairment losses if profitability declines due to changes in the business environment.

In the future, if profitability declines and impairment losses are recognized due to a significant deterioration in the business environment, such as electrification progressing more rapidly than anticipated, this could affect the consolidated financial statements.

(9) The risk of price competition for gaining demand that may arise with competitors.

Price competition in our automotive parts business, which accounts for the majority of our group's consolidated sales revenue, is extremely fierce.

Our group has built three strengths: "Manufacturing Excellence," "Engineering Excellence," and "Customer Network." We strive to provide the highest quality products that will delight customers around the world, and we hold a world-leading market share in clutch and torque converter products.

However, if we are unable to maintain our price competitiveness and competitive advantage in the future, it could negatively impact our group's performance and financial condition through customer attrition and a decline in product prices.

(10) Risk of dependence on business partners

Our group supplies products to major global automobile manufacturer groups, regardless of whether or not we have capital ties with them, and we are not highly dependent on any particular customer. However, if the production and sales of vehicles equipped solely with internal combustion engines decline at a rate exceeding our expectations and electrification progresses among many of our customers, our performance may be affected and fluctuate.

(11) Impact of disasters, power outages, etc.

The Group strives to minimize production line disruptions caused by equipment failures and other issues by conducting regular maintenance and inspections of its production equipment. However, there is no guarantee that the Group can completely prevent or mitigate the impact of disasters at its production facilities or disruptions to infrastructure such as power supply. As a result, there is a risk that production and delivery operations may be suspended.

In particular, we will implement measures to mitigate the risks of wind and flood damage in Japan, such as raising the elevation of facilities and relocating factories.

(12) Risks related to environmental regulations

In many of the countries and regions where our group operates, we are subject to a wide range of environmental regulations and other legal restrictions, including those concerning product safety, fuel efficiency, emissions regulations, and restrictions on pollutant emissions from our factories. These regulations are expected to become stricter in the future.

Our group has adopted "Contributing to the creation of a decarbonized society and minimizing environmental impact" as Long-Term Vision. We are expanding our range of products that contribute to decarbonization and promoting activities to build a production system that achieves carbon neutrality and minimizes environmental impact.

However, if environmental regulations become more stringent in the countries or regions where the Group operates, the Group may incur significant additional costs, including development costs and capital expenditures required to comply with such regulations. Furthermore, failure to comply with these regulations could result in the Group being unable to sell its products in the relevant markets, which could affect the Group's operating results and financial position.

(13) Impacts of climate change

Our group considers addressing climate change to be one of our most important challenges, and we are identifying climate change risks through scenario analysis (2°C and 4°C scenarios) and implementing countermeasures. However, the following risks may materialize due to insufficient or delayed responses.

① Risks due to climate change

Transition Risk

The rapid transition to a decarbonized society poses a risk of increased operating costs due to the introduction of carbon regulations and other measures. In addition, if the Group is unable to respond to changes in demand for its existing products resulting from the discontinuation of sales of internal combustion engine vehicles and the accelerated shift to electric vehicles, its corporate value could decline.

Physical Risks

There is a risk of factory shutdowns due to extreme weather events, and disruptions to the supply chain leading to the cessation of product and service deliveries.

② Risk management measures

Transition Risk

To address the transition to a decarbonized society, the Group deliberates on and advances basic policies and key initiatives related to environmental and climate change issues, primarily through the Sustainability Committee chaired by the President and CEO. The Group has also established a framework for continuously monitoring changes in the international landscape, preventing risks before they materialize, and responding promptly when necessary.
In addition, to respond to changes in product demand, the Group has established internal project teams to develop products that contribute to a decarbonized society through the creation of future-oriented products and open innovation.

Physical Risks

We have formulated a Business Continuity Plan (BCP) that includes our suppliers, conducted risk assessments for each business site using hazard maps, and are working to improve our business continuity capabilities by implementing both hardware and software measures, as well as conducting training exercises that simulate emergencies.

(14) Risks related to intellectual property rights

The Group holds numerous intellectual property rights, including patents and trademarks, relating to its products, product designs, and manufacturing methods, both in Japan and overseas. However, not all applications result in registered intellectual property rights. Applications may be rejected by patent offices, or registered rights may subsequently be invalidated as a result of challenges by third parties.

There is a possibility that third parties may circumvent our group's patents and introduce competing products to the market. Furthermore, because our group's products utilize a wide range of technologies, we may become a party to litigation concerning the intellectual property rights of third parties.

(15) Risks related to securing human resources

Our group's Long-Term Vision is to "become an attractive company where people can feel excitement and passion." We are committed to creating an environment that encourages employee growth through proactive challenges and proposals, and expanding systems that allow diverse employees to work with peace of mind. Through these efforts, we aim to create a company where employees are happy to work and contribute to the long-term creation of value for the company.,

Furthermore, we will actively recruit experienced professionals to help create new businesses.

However, if we are unable to develop and secure human resources due to factors such as a tight labor market and intensified competition for talent, including from other industries, it may become difficult to implement the strategies of our medium- and long-term management plans and achieve their goals.

(16) Information security risks

To appropriately protect confidential and personal information from threats such as cyberattacks, we have established and implemented information security policies and regulations. We also work to strengthen information security and prevent information leaks through measures such as regular employee training.

However, the threat of cyberattacks and other malicious activities is increasing. If the Group experiences a cyberattack that significantly exceeds expectations, its information systems could be disrupted, confidential or personal information could be leaked, and business operations, including those across the supply chain, could be temporarily interrupted. Such incidents could adversely affect the Group's financial position and operating results due to disruptions to its business operations and damage to its reputation.

(17) Impact of global pandemics

If a new infectious disease spreads globally, production and delivery operations may be suspended, which could adversely affect the Group's operating results and financial position.