Risk Factors

Risks to our operations and financial affairs with the potential to significantly affect investor decision-making, as well as the measures taken to address such risks, are described below.

Recognizing the possibility that these risks could arise, in addition to making every effort to reduce their occurrence, the Group also endeavors to respond as quickly as possible to minimize the effects should they arise.

We have recognized the following risks as of March 31, 2021.

(a) COVID-19 pandemic

There are still no prospects for containing the COVID-19 pandemic, and around the world there are growing restrictions on the movement of people and goods.

While prioritizing the health and safety of our employees and others, after identifying the impact on ongoing projects such as restriction on in-person meetings with customers and contractors, delay in the production and transportation of procured items, restriction on the assignment of work supervisors and on-site workers, and restriction on visits by foreign engineers to sites in Japan, and promptly taking necessary steps, we have entered into discussions with our customers and contractors concerning the burden of increased costs and delayed deliveries.

Furthermore, many of our customers are reviewing their investment plans due to the uncertainty, and we are endeavoring to analyze the situation because we recognize that our own order targets will inevitably be considerably affected.

(b) Effects of global trends and economic, political, and social changes

Besides the COVID-19 pandemic, other global economic trends, social and political changes, trade protections, economic sanctions, diplomatic tensions, energy policy shifts in various countries, and price trends in the oil, liquefied natural gas (LNG), and metals markets can cause our customers to terminate, postpone, or change their investment plans or negatively affect their financial condition.

As such, any of these factors may affect the Group’s business performance.

When receiving orders, the Group closely monitors economic and social conditions, and we strive to share the risk burden with our customers and counterparties in an optimal manner.

We endeavor to mitigate such risks by conducting due diligence on counterparties, verifying the pros and cons as well as the terms of a transaction, and securing alternative counterparties.

(c) Natural disasters such as earthquakes and Force Majeure events such as terrorism and conflict

The occurrence of a natural disaster such as an earthquake or heavy rain and flooding caused by global climate change, or a Force Majeure event such as an act of terrorism or armed conflict, may directly or indirectly result in damages to a worksite where there is an ongoing project or to an office in Japan or overseas by endangering workers' lives, delaying the transport of equipment and materials to a worksite, or interrupting on-site work.

Health and safety are priorities at the Group, and we have established a Crisis Management Section that is always at the ready.

Along with compiling and analyzing data, it assesses the situation in constantly changing danger zones.

We have also taken steps, such as hiring security consultants, to strengthen the crisis management organization.

When there is an emergency, we set up an emergency response headquarters, and along with promptly sharing information with customers and other involved parties, we establish emergency response procedures to minimize the impact of a crisis by implementing appropriate countermeasures in a timely and appropriate manner.

Furthermore, we have drafted a business continuity plan (BCP) to be followed in the event of a major earthquake.

We are working to improve our ability to continue operations by conducting drills so that in the event of a disaster we can conduct immediate safety checks, effect an initial response, and launch priority operations.

(d) Surging equipment and materials costs

Because of the time lag between a contract estimate and order placement, with lump sum turnkey (LSTK) contracts for plant construction projects there is a risk that equipment and materials costs may be higher than expected.

Specifically, the price of steel, which is a major component in plant construction, can be greatly affected by fluctuating prices for coking coal and iron ore.

It is also difficult to predict fluctuations in the market prices for materials such as copper, nickel, aluminum, and zinc.

To mitigate such risks, in addition to tracking market trends, the Group takes steps such as diversifying our suppliers and encouraging competition by ordering from suppliers around the world, placing orders for equipment and materials early, and building good relationships with top vendors.

(e) Difficulty securing workers, equipment, and materials

In plant construction, work may be delayed if we are unable to secure the necessary human resources such as construction workers, secure the necessary infrastructure, or procure the necessary equipment and materials according to plan.

Additional expenditures may be required to recover any lost time.

In locations where the labor market is tight or where the climate is harsh, both in Japan and overseas, the Group mitigates the risk of an unexpected rise in construction costs by devising construction methods such as modular construction and by forming cooperative relationships with leading contractors and equipment and material suppliers.

If construction is unavoidably suspended due to the worldwide spread of some infection disease or epidemic other than COVID-19, a strike, or some other factor, we will work with our customers and relevant local agencies to take appropriate measures to minimize the impact.

(f) Plant accidents

If there is a major accident for any reason, such as an explosion or fire, at plant built by the Group or one under construction, and the Group is determined to be at fault, our liability for the compensation for damages could affect our business results.

With safety design and construction site accident prevention as top priorities, the Group takes all possible quality control, construction safety management, and other measures to prevent such unforeseen circumstances from arising.

But we also seek to mitigate such risks by obtaining appropriate insurance coverage and securing contract terms that reasonably share the burden of such losses with the customer.

The Group is committed to fostering a culture of safety and we collectively refer to our various initiatives to ensure construction safety as “C-Safe” that stands for Chiyoda’s Safety Culture.

(g) Currency risk

Because amounts to be paid for equipment, materials, and subcontracted work for overseas projects might be in a different currency than the amounts received from the customer, fluctuating exchange rates could affect our business results.

The Group endeavors to mitigate currency risk by receiving payments for work in the currencies in which we expect to make outlays and also through forward exchange contracts.

(h) Compliance violations

In engaging in plant construction work in Japan and overseas, the Group must comply with the laws and regulations of the various countries in which we have our corporate headquarters, subsidiary companies, representative offices, and construction sites. In the unlikely event that we violate, or are suspected of violating, such laws or regulations, there could be a significant impact on project execution or our business operations.

In order to prevent violations, and also to avoid coming under such suspicion, the Group continuously educates our employees through programs such as group training and e-learning.

In doing so, we thoroughly disseminate information about the latest laws, regulation, and rules that are relevant to our business execution, including those pertaining to protecting human rights and preventing corruption.

We also constantly work to assess trends among our stakeholders, including domestic and foreign agencies and customers.

Furthermore, in order to ensure that compliance is incorporated into our business processes, we have established a Compliance Committee chaired by the Chief Compliance Officer (CCO) with the division directors as its members, as well as a Group Company Compliance Liaison Committee, also chaired by the CCO, with the subsidiary presidents as its members.

(i) Information security threats

The Group controls a large volume of customer and counterparty information that is necessary to execute our business, and we also possess confidential information about technologies, sales, and other aspects of our business.

Since much of our core work and commercial activity are carried out at locations around the world by taking advantage of IT systems, a system failure, leak of confidential information, cyber fraud, or loss of important business information due to a computer virus or unauthorized external access, phishing emails, cyberattack or other unforeseen event could affect our business.

The Group works to mitigate these risks through rigorous information security management practices, such as regular education and audits.

We have also obtained ISMS certification at not only our corporate headquarters but also at major group companies.

(j) Business investment losses

The Group makes business investments such as establishing new companies and acquiring existing companies.

In making these investments we may provide substantial amounts of equity capital or credit in the form of loans or guarantees.

As a result, there are certain risks.

An investee may fail to meet its earnings targets due to changes in the business environment, we may incur losses on the investment due to poor business results, or we may encounter a situation in which additional financing is required.

In addition to thoroughly examining a proposal in advance based on our own internal standard and rules, the Group decides whether to make an investment only after carefully weighing our financial capacity relative to the risk of losses.

After making an investment, in order to prevent or minimize losses we monitor the investee’s business plan progress and provide support in the form of personnel or capital if necessary.