In the NYK Group's Liner Trade Business, Air Cargo Transportation Business, Logistics Business, Bulk Shipping Business, Real Estate Business, and Other Business Services, a wide variety of economic, political, and social factors around the world have the potential to impact on the Group's business and business performance. As a results, this could affect the Group's share price, and financial conditions.
The NYK Group's Risk Management Committee meets twice a year in accordance with the Risk Management Rules and the Risk Management Regulations to report and assess the status of major risks that could have a significant impact on our operations, and they report the results to the Board of Directors.
The Group defines "uncertainty that could have an adverse effect on the Group's continued growth" as a risk, and identifies major risks based on reports from each headquarters in the Risk Management Committee, which is chaired by the NYK president and comprised of the chief executives and the executive officers in charge of ESG management Promotion. For each major risk, the Group decides the headquarters to work as the promoter of risk responses, and promotes risk reduction activities of the entire NYK Group. "Critical risks" that can have a significant impact on the business continuity of the Group include compliance risks, operational risks such as serious accidents, and risks related to responses to climate change, disasters such as natural disasters, COVID-19, and cyber security. "Major risks" that could significantly affect the management of the Group include strategic risks, market fluctuation risks, operational risks, and financial and accounting risks. Each year, "critical risks" are selected from "major risks" at Risk Management Committee.
The following are the major risks that management recognizes as having the potential to have a significant impact on the financial position, operating results, and cash flows of the consolidated companies among the matters concerning the business status, accounting status, etc. described in the annual securities report.
The items related to future described in the text below are judged by the Group as of March 31, 2022.
1. Compliance Risk
Companies are being required to comply with increasingly strict regulations around the world. The Company's Compliance Committee convenes twice yearly to discuss and decide items related to major policies and maintain systems to promote and enhance compliance. The Group has set September as the compliance-strengthening month during which the Group does overhaul to provides opportunities for staff members to review their conduct and work processes. One activity designed to raise employee awareness of compliance issues is a compliance survey that is distributed throughout the Group followed by several opportunities to provide feedback via the company's internal web bulletin board.
Moreover, the Group maintains an Executive Committee Overseeing Thorough Antitrust and Anti-bribery Law Compliance dedicated to ensuring complete Group compliance with not only specific laws such as the Antimonopoly Act, laws related to bribery, and economic sanctions, but also compliance of all laws, regulations, and licenses.
However, there is a possibility that compliance risks cannot be completely avoided, and in the event of a situation that conflicts with laws or regulations, etc., the Group's business operating performance and financial condition may be affected by the deterioration of the Group's social credibility and brand image, the payment of compensation for damages that occur, etc.
2. Impact by Serious Accidents
Based on our corporate philosophy of "Bringing value to life," the Group is engaged in a broad network of Logistics Business via sea, land, and air. We recognize the safe operation of vessels and aircrafts and environmental protection measures as our top priority, and we strive to ensure safe operation by implementing assessments based on our own safety standards "NAV9000" for our vessels. We have established "the Safety and Environmental Management Committee", chaired by the NYK president, to periodically review safety measures for shipping and other operations, and the system for improving the Group's safety levels is constructed. We prepare to ensure appropriate responses in the event of an emergency. Nevertheless, in the event of an unforeseen accident, such as an oil spill or some other type of environmental pollution, injury to or death of a seafarer passenger, or people visiting the vessels including people related to cargo handling, outbreak of a serious accident leading to damage to or loss of a vessel, outbreak of an infectious disease on board, quarantine strengthening resulting from a global epidemic of an infectious disease, or a safety-related incident such as an act of piracy or terrorism, the Group may face cargo delay or disruption, cancellation of transportation contracts, nonfulfillment of financial obligations, administrative fines, lawsuits, penalties, business restrictions, insurance premiums, or deterioration of our reputation and customer relations. If such risks cannot be adequately covered by insurance, the Group's business performance and financial condition could be affected.
The Group's Air Cargo Transportation Business covers a wide range of regions around the world, and we are working to ensure safe operation by establishing a company-wide safety promotion system based on our safety policy "Safety Takes Precedence Over All." However, in the event of a serious aircraft accident leading to the death or injury of a crew member, loss or damage of an aircraft; a problem that seriously impairs the safety of an aircraft; a cause that seriously impairs the operation of an aircraft; or political instability, terrorism, spread of diseases such as COVID-19, or natural disaster in each region, the Group may face freight delays and disruptions, cancellations of transportation contracts, nonfulfillment of financial obligations, administrative fines, lawsuits, penalties, business restrictions, insurance premiums, or deterioration of our reputation and customer relations. If such risks cannot be adequately covered by insurance, the Group's business performance and financial condition could be affected. If the safety of an aircraft cannot be confirmed, we may voluntarily suspend the operation of the aircraft and perform maintenance, such as inspections, until safety can be confirmed.
Our group companies operate aircrafts in accordance with international conventions, bilateral agreements, IATA (International Air Transport Association) decisions, and other international agreements, and our Group's Air Cargo Transportation Business may be subject to the restrictions of the Antimonopoly Act on the setting of fares and charges. In addition, we expect costs for security measures to increase as laws and regulations related to the strengthening of aviation security continue to advance on a global scale, particularly in the U.S. Moreover, efforts to reduce environmental impact are steadily underway in the field of civilian international aviation. If measures costs increase due to tighter regulations, the Group's business performance and financial condition could be affected.
3. Risks of Natural Disasters which Have a Significant Impact on Business Continuity at NYK Headquarters and Major Offices
There are risks of paralysis of the head office function of the management system, the business continuity risk caused by paralyzing the management system at the NYK headquarters, and the business continuity risk caused by paralyzing the operation system at our major offices if our headquarter or major office would suffer from natural disasters such as earthquakes, tsunamis, tornados, cold waves, etc., and social disruptions resulting from wars, terrorism, conflicts, and other reasons.
NYK has prepared business continuity plans (BCPs) for all the major operations including the Group companies so that the Group will be able to keep its important functions uninterrupted wherever possible, or quickly restore them if interrupted. If these events occur, however, the NYK Group's business performance and financial condition could be affected.
4. Risks Related to Information System Security
Currently the smooth operation of IT system is essential corporate foundation for the operations of the NYK Group. We work to ensure the safety and stability of its system even in the event of earthquakes, fires, or other calamities. In addition to strengthening security measures through multi-layered defense against cyberattacks, we are also focusing on minimizing damage and promptly restoring operations. We are implementing regular trainings and building a global management system. However, if a system downturn takes place for a certain period of time or more, or if the provision of information to customers and business processes become delays, the Group's performance and financial position could be affected.
5. Risks Caused by the Spread of COVID-19
The worldwide epidemics of COVID-19can still have a major impact on all of the Group's businesses. We are working to ensure the safety of our employees by encouraging employees to work from home and by implementing prevention measures against infection at worksites and offices. We are also implementing measures for operational maintenance including ensuring crew changes, and borrowed long-term capital and funds to ensure medium- to long-term financial commitments. In terms of cruise, we created countermeasure plans for the fight against epidemics and constantly updating, and are ensuring commercial cruise with thorough countermeasures. However, there is a possibility that our group's business operations could be affected due to temporary stagnation in the provision of services caused by an increase in the number of employees lacking in sickness in a particular office, the impact on operations due to the spread of the infection in the individual vessels, and the impact on the provision of services to areas affected by the spread of the infection. The Group continues to place top priority on preventing the spread of infections both inside and outside the company and ensuring the safety of our employees. We continue to operate vessels safely and engage in the stable transportation of energy, resources, and other materials that support our daily lives. However, the Group's business performance and financial condition could be affected.
6. Responses to Climate Change Risks
Recognizing that climate change, one of the elements of ESG, is an important management issue, the NYK Group set in September 2021 a long-term target of net-zero emissions of greenhouse gas emissions by 2050 for the Group's oceangoing business. However, in order to achieve this long-term target, it is essential to commercialize zero-emission fuels such as ammonia and hydrogen, and for this, major technological innovations from the current level are needed. Since large oceangoing vessels are used for 15 to 20 years or so, even if innovative technologies become available, considerable time and cost are expected to be incurred in order to spread them to vessels worldwide. Based on this recognition, in the process of technological innovation and realization, we believe that it is necessary to gain an understanding of the commensurate burden on society while responding to the demand for transportation required for sustainable global growth with solutions with the lowest environmental impact at the time.
We also need to appropriately assess the impact of climate change on our business over the long term and implement specific management strategies. To promote these initiatives, we established a climate change management system headed by the NYK president in April 2020. In addition, in "Sustainable Growth Task Force" which was established for the purpose of formulating a sustainable growth strategy based on ESG management, specifically assessed risk management and opportunities based on socially rational scenarios by adding climate change factors such as global warming to our original transportation demand forecast. We also announced "the NYK Group ESG Story 2022" in March 2022, and introduced specific initiatives aimed at reducing greenhouse gas emissions as outlined in "the NYK Group ESG Story" announced in February 2021. If the Group fails to adequately respond to climate change risks in the future, we may lose customers, deteriorate our relationships with local communities, or be unable to obtain financing for vessels, and the Group's business performance and financial condition could be affected.
7. Risks related to Management Strategy
Based on its medium-term management plan, the NYK Group has implemented concrete measures towards business growth and improvement of profitability. However, there are risks described below when executing our business strategy and implementing aggressive initiatives in next-generation growth areas.
Ⅰ Investment Plans
Although the NYK Group plans and implements investment related to its fleet and aircraft, fluctuations including changes in the conditions in the global economy, the shipping market and public regulations could prevent these plans from progressing as initially intended. Under such circumstances, the business performance and financial condition of the Group could get affected. It takes several years from order placement to completion of a new vessel, and changes in demand during this period are one factor. Shipbuilding plans are subject to delivery delays and may be affected by shipyard labor disputes, management difficulties, or other factors that affect the shipyard itself. It is also affected by factors related to the shipyard itself, such as the possibility of delays in delivery associated with shipbuilding plans, labor disputes at shipyards, and management difficulties at shipyards.
Ⅱ Impact on Disposal of Vessels in Operation and Impairment Loss on Fixed Assets Due to Deterioration in Market Conditions
The NYK Group may sell vessels and aircraft we owned by our group or terminate chartering contracts for vessels chartered by our group due to significant fluctuations in the shipping and air transportation market, obsolescence caused by the development and introduction of new technologies for vessels and aircraft in operation, or restrictions on physical use caused by changes in safety regulations and legal requirements. As a result, our Group's business performance and financial condition may be affected. There is no guarantee that our Group will always be able to sell vessels and aircraft under favorable conditions, and there is also a possibility that it cannot be sold. When market conditions of vessels and aircraft are stagnant and their market prices are falling, the Group could be compelled to sell vessels or aircraft that are not fully depreciated for prices below their book values and, as a result, could be forced to record a loss on their sale. In addition, even if we do not sell, if the market downturn does not recover or worsens further, we may not expect to recover the amount of our investment due to a decline in the profitability of our vessels, aircraft and other fixed assets. In such case, an extraordinary loss could be recorded due to the value of the assets being written off, and consequently, our Group's business performance and financial condition could be affected. In the event that a charter contracts is cancelled or an equivalent action is taken, a penalty may be paid after due consultation with the shipowners.
Ⅲ Alliance Strategies with Other Companies
In the container shipping division, the NYK Group is a member of THE Alliance, a strategic alliance with other marine transport companies. The Group believes that such alliance are necessary to maintain an efficient and global network of containership businesses. At the same time, maintaining the same safety and service standards, and management directions and procedures, across alliance activities can be challenging, and an alliance could be integrated or dissolved, or members could withdraw, which presents the risk that an alliance may not deliver the anticipated results. However, the activities of the alliance involve risks such as the difficulty of maintaining uniform safety and operational standards and management policies and procedures, the possibility of alliance integration and dissolution, the withdrawal of a member, and the possibility that the alliance may not necessarily yield the expected results. If our Group is unable to respond appropriately to such factors, its business performance, and financial condition could be affected.
Ⅳ Accumulation of Stable-Freight-Rate Business
The NYK Group gives priority to long-term, stable contracts and procures many of its fleet through the possession of vessels or long-term chartering. However, if there were not sufficient long-term cargo contracts commensurate with the scale of the fleet, the Group would operate these vessels based on short-term contracts. In such as case, if the level of freight rates fell significantly, earnings acquired from the operation of vessels would not adequately cover fixed expenses of owned vessels. As a result, the Group's business operating performance and financial condition could be affected. However, if long-term contracts for cargo that commensurate with the size of the fleet cannot be obtained sufficiently, the vessels will be put into service under short-term contracts. If the freight rate level falls significantly, the revenues gained from the operation of the vessels will not sufficiently cover the fixed costs of the owned vessels and long-term chartered vessels, and as a result, the business performance and financial conditions of our group may be affected. The Group's dry bulk business division and energy business division place importance on long-term contracts with business partners. Such long-term contracts determine freight rates, carrying volumes and rate adjustment conditions which help mitigate the impact of changes in the market environment. help If business conditions for some of the business partners with which the Group maintains long-term agreements were to deteriorate, these business partners may become unable to continue fulfilling all terms of the agreements that are in place. Furthermore, the Group may find itself unable to procure third-party chartered vessels that would enable it to fulfil the terms of the long-term agreements it has made. The shipowner may not be able to fulfill the contract with our Group before the end of the chartering period, which may incur costs to procure other vessels. If such a situation occurs in the future, the Group's business performance and financial condition may be affected. Although long-term contracts have the effect of reducing the impact of market fluctuations, they may not be immediately reflected in freight rates even when market conditions rise. Important business partners of the Group include automakers, steelmakers, paper manufacturers, public utilities, electronics manufacturers and retailers. If the scale of transactions with important business partners shrinks, or the Group loses an important business partner, this may impact the Group's business performance and financial condition.
Ⅴ Stronger Legislation on Environmental Preservation, Safety, and Security
In each region where our Group carries out its business, the vessels of our Group must comply with international laws on safe operation and prevention of marine accidents. In addition, local laws and regulations regarding environmental protection must be observed. Recognizing the importance of environmental conservation activities and logistics supply chain safety and security measures, the Group is conducting and expanding its business globally. For example, we are promoting R&D for future alternative fuels such as ammonia and hydrogen, expanding the construction of LNG / LPG / methanol-fueled vessels, expanding the construction of LNG bunkering vessels, reducing CO2 emissions through energy-saving navigation, installing treatment equipment for ballast water management, complying with regulations concerning the prevention of the migration of marine objects such as algae, shellfish, and moths, and introducing cyber-security measures. If, in the future, the costs of measures associated with them increase, or if it becomes difficult to comply with laws or regulations in a particular region, the operation of our Group in that region will be restricted and the business performance and financial conditions of our Group may be affected.
8. Risks related to Changes in the Shipping Markets
Ⅰ Changes in the Shipping and Freight Markets
Although the NYK Group endeavors to generate stable operating revenue that is not affected by fluctuations in the shipping market, the impact of global economic trends, international cargo movements, intensified competition, and the balance of shipping supply and demand could cause a substantial fluctuations in shipping revenues or charter revenues. As a result, the Group's business performance and financial condition may be affected.
In particular, marine freight rates tend to fluctuate significantly due to imbalances in the tonnage supply and demand. Meanwhile, if the supply of tonnage exceeds demand, the level of charter rates may decline.
Further, factors which could affect the demand for shipping include the following.
- Global and regional conflicts, political trends and economic conditions
- Worldwide spread of infectious diseases
- Demand and inventory levels of energy resources, raw materials, and products that the Group transports
- Globalization of production
- Changes in marine and other modes of transport, as well as the development of alternative modes of transport
- Environmental other regulatory trends
Meanwhile, factors which could affect the supply of shipping include the following.
- Increase in shipping capacity due to completion of new vessels
- Decrease in shipping capacity due to scrapping of aged vessels
- Congestion or closure of ports and canals
- Changes in environmental regulations and other regulations that may limit the service life of the vessel
Air freight rates can fluctuate significantly due to imbalance between cargo and space in which cargo is transported. Significant air freight rate fluctuations resulting from competitive conditions in the airline industry and economic trends, or fluctuations in the handling volumes, may affect the Group's business performance and financial condition. In addition, in logistics business including forwarding, freight rates may fluctuate significantly due to imbalances in space supply and demand, like ocean and air freight. Significant changes in freight rates and the handling volumes in the logistics business may affect the Group's business performance and financial condition.
Ⅱ Fluctuations in Currency Exchange Rates
Many of the NYK Group's operations are denominated in foreign currencies, creating the possibility of benefits/losses resulting from exchange rate fluctuations. While proceeding the measures to match the currencies in which it generates revenue and pays expenses, the NYK Group conducts hedging transactions, including foreign exchange contracts and currency swaps, to minimize the effects of exchange rate fluctuations. When preparing consolidated financial statements, the NYK Group converts the financial statements of its consolidated overseas subsidiaries into yen. As a result, fluctuations in currency exchange rates could affect the business performance and financial condition of the NYK Group.
Ⅲ Changes in Fuel Prices
The NYK Group regularly purchases bunker oil to use as fuel for the vessels and aircraft under our operation to transport cargo throughout the world. Bunker oil prices account for a substantial portion of the costs those NYK Group incurs in Liner Trade Business, Bulk Shipping Business, and Air Cargo Transportation Business. Bunker oil prices and purchase availability are difficult to predict accurately as they are subject to global crude oil supply and demand, foreign exchange market fluctuations, trends in OPEC and other crude oil producing countries, the state of environmental regulations, wars, and many other factors. The NYK Group seeks to minimize the impact of such factors on its operating performance by purchasing bunker oil from diverse regions, applying bunker surcharge, using derivative transactions to hedge against fuel price fluctuations, and economizing on fuel consumption. Even so, there is no guarantee that those measures will be sufficient to protect the NYK Group against price fluctuations and supply shortages.
Ⅳ Fluctuations in Interest Rates
To meet the requirements of capital investment such as the acquisition of vessels, aircraft, and transportation-related facilities, and working capital related to the business activities, the NYK Group allocates internal funds and procures external funds. Currently, these external funds consist of variable interest rate funding and fixed rate funding. Although we are closely monitoring the ratio of these external funds in consideration of the interest rate environment and are working to reduce the impact of the interest rate fluctuations, the NYK Group's business performance and financial condition may be affected depending on the future interest rate fluctuation.
9. Valuation Losses on Investment Securities
The NYK Group uses the market value method based on the market price at the end of the fiscal year for the securities other than stocks, etc. for which there is no market price, as the basis and method of valuation for securities. Fluctuations in the stock market and other factors may affect the NYK Group's business performance and financial condition.
10. On human rights issues
In order to realize NYK groups corporate philosophy, we have established the "NYK Business Credo" as the foundation of our corporate activities to respect all basic human rights related to our business activities, and to recognize and respect diverse values and different cultures. Also we have established the "UN Global Compact Promotion Committee" to promote initiatives for human rights. Specifically, in order to raise employee awareness of human rights issues and discrimination and harassment issues in corporate activities, we are implementing human rights training, sharing information during the Human Rights Week, and disseminating and raising awareness of respects for human rights. We have also formulated "CSR Guidelines for Partners and Suppliers" as global social issues such as forced labor, child labor, and environmental destruction become apparent throughout the supply chain while we develop the global business activities. However, in the event of a human rights problem in the NYK Group's business activities, our business activities may be adversely affected by the damage to our social trust and brand image.
Other Risks Related to Overall Management
11. Impact of Global Business Expansion
Because the NYK Group's operations extend to many areas around the world, economic conditions in each area can influence our operations. Some potential risks are described below.
- Political or economic factors
- Public regulations, such as business or investment permissions, taxes, foreign exchange controls, confiscation of international assets, antitrust, or commercial limitations
- Joint operations or tie-ups with other companies
- Social upheaval, such as wars, riots, terrorist acts, piracy, infectious diseases, strikes, and computer viruses
- Earthquakes, tsunamis, typhoons, and other natural disasters
- Inadequate understanding of regulations and sanctions in each country
The NYK Group collects information in-house and uses external consultants to prevent or avoid the actualization of these risks. However, the occurrence of these events could affect the NYK Group's business performance and financial condition.
For the safe operation of NYK Group's vessels, it is particularly important to ensure excellent mariners. The NYK Group has taken a variety of measures to secure superior seafarers, including providing education and training and adopting them from various countries, but there is no guarantee that in the future, we will be able to sufficiently secure seafarers with the required technical level at an appropriate cost. For example, during the years prior to the Lehman crisis in 2008, when demand for marine transportation was high, personnel costs to hire crew increased significantly. If recent COVID-19 expands further and the required seafarers cannot be employed, maintained, or replaced at reasonable expense, our group's business operations could be affected. In addition, some of our group's employees, including seafarers, belong to the labor union. If a strike, suspension of business, or sabotage is performed by our group's employees, or if a strike or suspension of business by a third party other than our group's employees, such as a port facility in North America, may also affect our group's business operations. Furthermore, the wars and politic factors can also affect our group's business operations.
The NYK Group is affected by the security, political instability, and the strengthening of regulations and sanctions in various countries due to the conflicts and terrorism around the world, including the Middle East, and the situation in Russia and Ukraine. Our operating vessels are sailing in the Gulf of Oman, the northern Arabian Sea, and the Gulf of Aden to where the Cabinet of Japan decided to dispatch Maritime Self-Defense Force from December 2019. They are also sailing in the Red Sea where terrorist threats have been reported, and the Holmes Strait where a tense situation continue to persist. In addition, although the damage from piracy has been decreasing in recent years, the piracy still occurs around our vessels' route such as the Malacca-Singapore Strait, the Selves-Sulu Sea, the West African coast, the Gulf of Aden, the Arabian Sea, and the Indian Ocean. The NYK Group has taken countermeasures against piracy including gathering information from relevant organizations and receiving the defense of the Maritime Self-Defense Force in the Gulf of Aden. However, in the event of terrorist and piracy strikes, or in the event of instability of political situation or fights, it may affect the operations of our group. In the future, if these areas are designated as normal war insurance excluded areas (some areas have already been designated), they may affect the level of premiums and the payments for insurance. In addition, regarding some businesses such as Logistics Business, we may decide to downsize, abolish, or withdraw from the business activities due to the deterioration of the business environment depending on the security and political instability in the country where the business is conducted. In such cases, the business performance and financial conditions of the NYK Group may be affected.
12. Litigation and Other Legal Procedures
The NYK Group is engaged in Liner Trade Business, Air Cargo Transportation Business, Logistics Business, Bulk Shipping Business, Real Estate Business, and Other Business Services. There is a risk of litigation, investigation, or punishment by regulatory authorities concerning all these business activities. Including the examples below, depending on the outcome, litigation could affect the business performance and financial condition of the NYK Group. Since September 2012, the NYK Group has been investigated by overseas authorities on suspicion of violating antitrust laws in relation to the transportation of automobiles and other cargoes.
Further, in the several countries, the NYK Group is a defendant in class action civil lawsuits demanding injunctions and claims without specifying the amount to compensate for damages based on the allegation that the NYK Group and major automobile shipping companies jointly set freight rates with respect to the ocean transportation of finished vehicles. It is difficult to reasonably estimate the outcome of these investigations and lawsuits at this moment.
The specific items described above are some of the main risks expected in the continuation of the NYK Group's business, and are not limited to these.