Business Risks

The main operational and other risks that could significantly affect the decisions of investors, by having an impact measured in the tens of billions of yen or more on the Group's business performance, financial position, and cashflow, are set out below, as well as countermeasures against these risks. The forward-looking statements contained in this report are based on the judgement of the Group at the time of publication of the securities report, and do not encompass every possible risk posed to the Group.

Economic conditions in countries and regions that represent important markets for the Group could potentially have a major impact on the Group's business performance. Economic recession, falling demand, or increasing price competition in Japan or in the North American market that makes up approximately 70% of the Group's sales revenue, could undermine the sales revenue and profitability of the Group's products and services.

North America accounts for approximately 70% of the Group's sales revenue, and some of the Group's sales revenue, operating income, and assets are denominated in US dollars and other local currencies and are converted into yen when the Group's consolidated financial statements are compiled. If discrepancies arise between projected exchange rates in full-year forecasts and actual rates at the time of account settlement, the Group's sales revenue and financial position may be adversely affected when the yen appreciates and positively affected when the yen depreciates. The Company uses forward exchange rate contracts and other risk hedges to minimize exchange rate risk, but the effect of severe fluctuations in currency exchange rate at the end of the fiscal year could result in a major impact on the Group's business performance and financial position.

The Group secures funding for its business activities from internal funds, loans from financial institutions, and the issuing of corporate bonds.

Also, in order to secure sufficient liquidity in hand, we maintain a certain level of holdings in cash and cash equivalents. However, if an economic or financial crisis made it impossible to secure funding from the financial markets on appropriate terms, this could have a significant impact on the Group's business performance and financial position.

The Group also holds financial assets such as marketable securities and bonds, and significant fluctuations in the fair value or interest rates of these as a result of changes in financial markets could have a significant impact on the Group's business performance and financial position owing to impairment of financial assets and an increase in employee benefit obligations caused by fall in the value of pension assets.

The Group secures appropriate amounts of raw materials in a timely manner from numerous suppliers, but in some cases the Group relies on particular items and/or a limited number of suppliers. In response to the rising prices of many raw materials during FYE2022, the Group has sought to minimize the impact of these fluctuations by modifying the amount of certain precious metals used in our products, while maintaining their properties and functions. The price of raw materials is expected to continue to rise, and a further pressure on supply and demand could have a significant impact on the Group's business performance and financial position.

The Group mainly comprises the Automotive Business Unit and the Aerospace Company. Aiming to be a compelling company with a strong market presence built upon its customer-first principle, the Group has carried out selection and concentration, and our business model aims to make the best possible use of limited management resources to maximize sales revenue. The Automotive Business Unit accounts for more than 90% of the Group's sales revenue, and our sales are concentrated in the markets of developed economies, particularly in North America. At the Gunma Plant, our main production facility in Japan and at Subaru of Indiana Automotive, Inc. (SIA) in the United States, production is centered on sports utility vehicles (SUVs). Accordingly, if automobile-related demand, market conditions, price competition with other automakers, or other factors exceed projected levels, the Group's business performance and financial position could be significantly affected.

Major changes are underway in the business environment for the automotive industry, the Group's core business. Customer values and preferences are expected to continue to diversify as the spread of mobility services sees companies from other industries increasingly enter the automotive market, as environmental concerns lead consumers to shift to non-gasoline vehicles, and as the growing popularity of sharing and automated driving makes means of transportation more diverse.

In these circumstances, we are making progress with our mid-term management vision, “STEP,” aiming to strengthen our undertakings on safety and peace of mind and strengthening alliances, promoting the building of a robust brand to allow us to respond to new mobility fields, and strengthening the environmental features of our products. Recently, we announced a plan to reorganize production at our plants in Japan to equip our facilities to deal with the growing trend toward electrification. We strive to keep abreast of trends in market demand, plan products based on customer needs, and work to develop and manufacture new products and bring them to market at an appropriate timing and price point.

We are also working to implement reforms of our business processes through strategic application of the latest digital technology and data with the aim of strengthening our digital innovations, and are actively promoting the creation of opportunities for and promoting new business innovations. Despite these measures, if sales of new vehicles or new products do not meet sales plans, if the Group falls behind on digital innovation, or if our existing products become obsolete faster than expected, this could lead to reduced unit sales and have a significant impact on the Group's business performance and financial position.

High quality is a vital foundation of the Subaru brand and a key source of added value. In line with our mid-term management vision “STEP,” we are moving forward with quality enhancement as one of our priority undertakings. This initiative is making steady progress, and at present we are promoting efforts in three domains, including response to new technologies, as a phase that aims to demonstrate the results of our quality enhancement efforts in corporate results.

The first of these is “Thorough implementation of a ‘Quality-first’ mindset and reinforcement of organizational efforts and structure.” By reviewing our quality policy and revising our quality manual, we aim to redefine our vision for the company we want Subaru to be, and by carrying out quality awareness educational activities and looking back on past incidents, we encourage a reform in quality awareness in each and every employee. The second is “Execution quality enhancement,” which aims to prevent the spread of defects from the production preparation stage or later. This also includes coming up with measures to swiftly resolve any defects that have arisen in the market. The third is “Innate quality enhancement,” which revolutionizes the processes from initial studies to development and design, in order to ensure a constantly high level of quality control from the very start of development down through component logistics and production.

Despite these quality enhancement initiatives, a large-scale recall, in addition to the major costs involved in quality-related expenses, could have a substantial impact on the Group's corporate performance and financial position by damaging the brand image.

In manufacturing automobiles, aircraft, and other products, the Group procures components and raw materials from numerous suppliers. We work to ensure a stable supply by regularly checking the ability of our suppliers to guarantee quality and supply, and by checking the business position of our suppliers as necessary. We maintain in normal times a supply chain information database for each component supplied by primary and secondary suppliers. This allows us to quickly identify suppliers and components that might be at risk of impact, and to minimize the impact of supply chain disruptions in the event of a contingency by confirming the size of inventory needed to continue production, by considering production of alternative replacements, and providing support for restoration of production facilities. However, in the event of a fragmentation of supply chains or pressure on supply and demand caused by a major earthquake, typhoon, or other natural disaster, or an outbreak of infectious disease like COVID-19, we might be unable to procure a supply at a stable cost, delivery time, and quality, and this could have a substantial impact on the Group's corporate performance and financial position.

In addition to the global shortage in the supply of semiconductors that has been continuing since last year, in FYE2022 the impact of the COVID-19 pandemic in Southeast Asia meant that the Company was affected by interruptions to the supply of some components that we procure from suppliers, and had to adjust production by suspending work at some plants in January, April, September, and December 2021 and in January and February 2022. Although we are working to supply products to customers, including by adapting the models we manufacture according to the supply of semiconductors, we expect the short supply of semiconductors and other components to continue, and it is possible that this might have a significant impact on the Group's financial position, business performance, and cashflow, by forcing suspension of operations and adjustments to production.

The Group works to protect its technologies and know-how that are necessary to deliver the values of peace of mind and enjoyment to customers through our products and services, and we are committed to maintaining and enhancing the SUBARU brand value. However, the Group's business performance and financial position may be significantly affected if a third party makes unauthorized use of the Group's intellectual property to manufacture similar products or if a dispute relating to intellectual property arises and a decision disadvantageous to the Company is made.

The Group uses information technology, networks, and systems in product development, production, sales, and other business activities. We have drawn up the Basic Cybersecurity Policy to protect these assets, and carry out regular security training aimed at raising employee awareness. At the same time, our IT Strategy Division plays the central role in carrying out monitoring for speedier detection of cyberattacks and lead the response security incidents and putting in place a Security Incident Response Team. We have a system in place for backing up data across multiple locations, both in facilities we manage ourselves in our own data centers, and on cloud storage systems, and have measures in place to enable us to continue to operate our business and recover speedily from a localized disaster or other incident. Although safety measures are in place with respect to information technology, networks, and systems, interruptions to important work or services, data corruption or loss, leaks of confidential information, or other problems could occur due to cyberattacks, hacking, computer virus attacks, major power outages, or fire disasters. This could damage the brand image or have a significant impact on the Group's business performance and financial position.

Corporate culture reforms are listed as a priority initiative in our mid-term management vision “STEP,” and we have accelerated our activities in this area. In particular, the Group considers rigorous compliance to be one of its most important management priorities, and strives to avoid or minimize compliance risks by constructing and managing a compliance system and organization that ensures all employees are aware of the importance not only of compliance with all laws and internal regulations, but the execution of fair and equitable corporate activities in conformity with social norms, and we carry out training activities to this end. Nevertheless, the occurrence of a material legal violation at the Group or one of our subcontractors could have a significant impact on the Group's business foundations and adversely affect the Group's business performance and financial position due to loss of customer confidence and trust, or damage the brand image as a result of the fall of the Group's reputation in society.

To achieve sustainable growth and increase corporate value over the medium to long term, and to gain the satisfaction and trust of all stakeholders, the Group has established Corporate Governance Guidelines and works to strengthen corporate governance as one of its top management priorities. The Group also works toward fair disclosure in accordance with our Disclosure Policy, and discloses information in accordance with the relevant laws and regulations. We also disclose promptly, fairly, and appropriately any corporate information that we believe will be useful in terms of allowing a deeper understanding of our management strategies and business activities. We are also striving to improve stakeholder communication through constructive dialogue with shareholders, investors, and other stakeholders regarding the progress of our mid-term management vision “STEP” and ESG information, and by ensuring that feedback reaches the relevant people concerned within the company. However, in the event that a material legal violation such as unfair transactions such as insider trading or fraudulent misstatements led to a large fine being imposed on the Group, this could have a significant impact on the Group's business foundations owing to loss of trust and faith among shareholders, investors, and other stakeholders, and brand damage due to a loss of the Group's reputation in society, and affect its performance and financial position.

The Group puts people first and engages in people-oriented manufacturing. We regard respect for the human rights and individuality of each and every person as an important management issue for realizing Subaru's corporate philosophy, which aims to promote harmony between people, society, and the environment and contribute to building a more prosperous society. The Group has drawn up its Human Rights Policy and practices due diligence on human rights based on this policy. We are also engaged in undertakings to encourage respect for human rights by exhorting business partners and others involved in our business, including in our supply chains, to respect human rights based on this policy and implementing various measures to reduce risks.

Nevertheless, if the Group, or one of its business partners or other parties mentioned above, were involved in a case involving a problem in the working environment, health and safety at work, harassment of any kind, infringement of employee rights and opportunities, or procuring raw materials that were compromised by human rights issues, this could have a significant impact on the foundations of the Group's business owing to loss of customer trust and confidence and damage to the Group's brand image and reputation in society, and possibly have a significant impact on business performance and financial position.

The Group regards human resources development as an extremely important subject for achieving the goal set out in our mid-term management vision, “STEP,” of “delivering happiness to all.” To increase our competitiveness as a company, our human resources vision calls for employees to independently and voluntarily take on new challenges based on an identification with Subaru's values. With the aim of achieving a reform in corporate culture and in the awareness and behavior of employees, we are working to put in place a system that encourages individual growth through independent development of each employee's abilities and a readiness to take on new challenges.

In securing human resources, we are working more proactively than ever to secure personnel in specialized areas, including response to electrification, evolution of advanced safety technologies, and strengthening our abilities in the IT field. In order to continue to realize our distinctive values, as well as respecting diversity in terms of gender, nationality, culture, lifestyle, and other areas, so that employees with diverse attributes and values can develop their potential to the fullest of their abilities, we promote employees from all backgrounds without distinction and strive to create a comfortable work environment.

However, an inability to secure human resources due to a tight labor market, intensifying competition for human resources, including from other industries, the occurrence of labor problems that might lead to compliance issues, or an ongoing loss of human resources could have an impact on the Group's business activities and management. Similarly, insufficient human resources development or a failure to put in place a work environment that respects diversity and allows all employees to perform a full role could also have an impact on the Group's business activities.

The Group regards measures to address climate change as one of the most important challenges we face, and works to develop a sound awareness of the uncertain risks caused by climate change by forecasting the future with regard to related transition risks in the areas of policy and regulations, technologies, and markets.

The Group has set long-term goals as well as medium-term goals that serve as milestones for these long-term goals to achieve its target of carbon neutrality in 2050. Also, with a view to accelerating the roadmap toward 2050, and looking ahead toward the wider use and accelerating development of electric vehicles, we will carry out a strategic reorganization of our production system in Japan, with the aim of improving our business profitability through a flexible response to period of transition to BEVs and highly efficient production, with plans to invest ¥250 billion over five years from the fiscal year ending March 2024.

The Group will continue to develop products that will provide satisfaction and happiness to our customers and put in place a production system that is flexible in consideration of the market environment.

Note 1:

I.e. from the oil well to the vehicle. This approach calculates CO₂ emissions by going back to the energy source used to generate the electricity used in EVs and other vehicles that use electricity.

Note 2:

A reduction of at least 90% compared to 2010 of CO₂ emissions calculated from the fuel consumption (reported values) of all Subaru vehicles sold around the world in 2050. Based on total amount of emissions.

To carry out sustainable business activities, the Group will contribute to bringing about a carbon-free society by reducing the carbon dioxide emissions produced throughout the entire life cycle of our business activities, from procuring of raw materials, manufacturing, transportation, use, and disposal. However, if measures do not proceed appropriately, or owing to the impact or emergence of a climate change risk, extremely hard to predict at the present time, the Group's business performance and financial position could be significantly affected by an increase in research and development costs, and loss of sales opportunities owing to a falloff in customer satisfaction and damage to brand image.

The Group does business in countries around the world, with the bulk of our international business in North America. Business activities in overseas markets entail the following types of risk. If any of these risks materializes, the Group's business performance and financial position could be adversely affected.

• Unfavorable political or economic factors
• Changes in laws or regulations
• Revisions to taxes, tariffs, or other taxation systems

Also, legal regulations relating to the natural environment that have an impact on the Group's business include Japanese and international regulations relating to automobile fuel consumption, exhaust emissions, measures to promote more efficient use of energy, noise levels, recycling, levels of pollutants emitted from manufacturing plants, and safety.

Increased costs caused by a tightening of these legal regulations could have a significant impact on the Group's business performance and financial position in the future.

The Group has systems in place to allow an optimal response in the event of an emergency by classifying crisis risks – risks that could have a significant impact on our business and that would require a critical response that is difficult through normal decision-making routes – into the following categories: natural disasters, accidents, internal and external human factors, social factors (in Japan and overseas), and compliance risks. However, the occurrence of natural disasters, wars, terrorist attacks, infectious diseases, or other events could impede the Group's business activities, causing a delay or suspension of purchases of raw materials or components, production, sales and transport of products, and the provision of services. The Group's business performance and financial position could be significantly affected if such delays or suspensions became prolonged.

With regard to the ongoing crisis situation in Russia and Ukraine, the Group does not carry out local production in any of the areas affected, and the scale of our sales in the region is also small, so at the present time we expect the impact to be limited. However, we continue to monitor the situation closely with regard to the supply of components and raw materials used in our products.