(1) Dependence on automotive industry, etc.
Nearly 50% of the EKK Group's products are produced for the automotive and auto parts industries, and they are susceptible to trends in automobile production and sales. With regard to sales targeting the automotive and auto parts industries, the EKK Group has entered into a sales agency agreement in the domestic market with NOK Corporation, an associated company of the EKK Group, and we are performing sales activities under a cooperative framework with NOK.
In the automotive industry, including the auto parts industry, we are facing changes in the environment including further progress in globalization and increased competition, business alliances and reorganization, and reduction in procurement costs on a global basis. In addition, domestic auto makers and other companies are shifting production overseas. In line with such developments, auto parts makers, including the Company, are receiving stronger requests than ever for radical cost reduction, technological innovation, and global solution capabilities, in addition to quality improvement and strict observance of delivery time. Given the circumstances, operating results of the EKK Group may continue to be affected by such developments in the future.
Furthermore, the possible future growth in the use of hybrid vehicles, electric vehicles, fuel cell vehicles, and other developments may also have an effect on the EKK Group's performance.
(2) Trends in raw material prices
The EKK Group mainly uses steel, steel products, and synthetic rubber in producing products, and prices of these raw materials are fluctuating due to factors such as market conditions and exchange rate movements, and the procurement cost may increase.
While the EKK Group has established a policy of absorbing increases in procurement cost by reducing costs through streamlining and passing cost increases on to production prices, fluctuations of these raw materials in the future may affect the operating results of the EKK Group.
(3) Response to technological changes
The EKK Group has been engaged in research and development in different areas in order to respond to a wide variety of requests from diverse industries. In line with this concept, the EKK Group is proceeding with the development of products that generate synergy effects based on the sealing technology of rotation, fixation, and reciprocation, which has been accumulated over the years. However, in the event that the EKK Group becomes unable to respond to requests concerning technological innovation, and quality improvement in different industries, or the EKK Group's technologies, etc., become obsolete in the future, its business development may be affected.
(4) Business of seals for marine applications
The EKK Group regards the manufacture and sale of seals for marine applications as one of its most important businesses.
As for the future, we have a policy of responding to marine transportation demands in the world focusing on Asia and striving to expand business in such areas. However, should the demand for shipbuilding fall, the EKK Group's operating results may be affected.
(5) Interest-rate fluctuation
The EKK Group always pays attention to the level of interest-bearing debt; yet the percentage to total assets is considered relatively high. While interest rates are currently low, future possible fluctuations may affect the Group's operating results.
(6) Exchange-rate fluctuations
Foreign currency transactions pertaining to overseas business activities are shown in the consolidated financial statements as amounts translated into yen. The financial performance of the EKK Group could be affected by the fluctuation of exchange rates fixed at the date of translation.
(7) Overseas business development
With regard to overseas business development, the EKK Group's fundamental policy is to produce products in the optimal geographic locations, taking into account the demand from customers, product quality, and cost. We have been taking the measures necessary to respond to our customers' developments in overseas markets and have established supply capabilities in regions such as Europe, the U.S., Taiwan, South Korea, Thailand, India, and New Zealand, in addition to those in Japan.
Furthermore, based on the alliance with the Burgmann Group which manufactures and sells mechanical seals and other products in Germany and other countries, we have been moving forward with the manufacture and sale of mechanical seals and other products for general industrial machinery (excluding construction equipment, marine applications and aerospace). As the EKK Group's overseas business expands, its operating results may be affected by factors such as the overseas economic and political situation, exchange rate fluctuations, demand and supply in overseas markets, changes in regulations applicable to the location of business establishments. Also, the development of business alliances with the Burgmann Group may affect the EKK Group's financial position and operating results.
(8) Disasters and Social Infrastrucuture Breakdowns
The EKK Group strives to minimize interruptions to production and the disruption of product supplies resulting from disasters and other contingencies through precautions that include fire prevention and anti-seismic measures at key facilities, such as manufacturing sites. However, the operating results of the EKK Group could be affected if its production and sales activities are seriously disrupted by damage to social infrastructure and other contingencies resulting from earthquakes and other natural disasters of unexpected severity.