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, 2023.
(a) Business trends and effects of economic, social and political changes
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, LNG, and metals markets can cause our clients to terminate, postpone, or change their investment plans. Or they can negatively affect clients’ and partners’ financial circumstances. As such, any of these factors may affect the Group’s business performance.
When an order is received, the Group closely monitors economic and social conditions, determines the project’s possibilities and order certainty, and we strive to share the risk burden with our clients in an optimal manner. To prepare for clients’ sudden termination or postponement of their investment plans, we regularly formulate order receiving plans with back-up projects. In addition, we actively participate in EPC project studies in broad areas centered on new business fields to respond to unforeseen economic conditions.
(b) Natural disasters such as earthquakes, virus infectious disease, geopolitical risks and Force Majeure events such as terrorism and conflict
The occurrence of a natural disaster such as an earthquake, heavy rain, flooding or typhoon caused by global climate change, the spread of viral disease or a Force Majeure event such as an act of terrorism or armed conflict, may directly or indirectly result in damage to a worksite where there is an ongoing project, or to an office in Japan or overseas. Such risks can endanger workers' lives, delay the transport of equipment and materials to a worksite, or interrupt on-site work.
The geopolitical crisis in Ukraine, triggered by Russia in February 2022, increased global risks. An uncertain global economy or decoupling such as interchanging economic sanctions could arise. Such unstable global situations could adversely affect the Group’s business performance because the financial circumstances of our clients and joint venture partners could deteriorate, supply chains could be disrupted, and equipment and materials costs could soar.
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 clients and other stakeholders, 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 developed 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. Regarding the effects of the situation in Russia and Ukraine, we analyze the latest intelligence, and in addition to paying careful attention to the safety of the Group employees posted or traveling overseas, we will continue to monitor and address any effects on projects underway in other countries.
(c) Risks related to partners
In the Group’s business domains, we may receive an order jointly with partners by setting up a joint venture with based on project size and complexity and risk sharing. In the event of joint venture partners’ default or deteriorated financial circumstances, the Group bears contractual joint responsibility and this may affect the Group’s business performance.
The Group analyzes prospective partners’ financial circumstances before the collaboration decision. We also implement a system to immediately identify risks by monitoring joint venture partners’ financial circumstances.
(d) Surging equipment and materials costs
There is time lag between when a contract estimate is issued and when an order is placed. As a result, when there is a dramatic shift in the socio-political situation, such as with the current geopolitical crisis in Ukraine, we are exposed to the risk of an unforeseen increase in equipment and materials costs. 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 market prices for materials such as copper, nickel, aluminum, and zinc. There are also concerns that shipping rates may be affected by the surge in oil prices and higher insurance premiums.
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, early order placement for equipment and materials, and building good relationships with top-tier suppliers. Through discussions and negotiations with our business partners and stakeholders, such as clients, suppliers, and subcontractors, we are working to appropriately address the soaring equipment, materials and labor prices caused by global inflation.
(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 as planned, or by supply chain disruption. There is a risk that additional expenditure may be required to recover lost time due to these factors.
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 through development of construction methods such as modular construction and by forming cooperative relationships with leading contractors and equipment and materials suppliers. If construction is unavoidably suspended due to the worldwide spread of some infectious disease or epidemic other than COVID-19, a strike, or some other unforeseen occurrence, we will work with our clients and relevant local agencies on appropriate measures to minimize the impacts.
(f) Risks associated with changes in the business environment arising from climate change
Climate change is affecting society on a global scale, and it is one of the most important social challenges confronting the entire global community. The Group recognizes that the resulting changes to client investment environments and to their business portfolios by physical risks and transition risks could have a significant impact on our operations and business strategy.
The Group is addressing these challenges by formulating business plans that closely monitor the energy situation, review climate change policy, laws and regulations in each country, and by obtaining the latest information in a timely and appropriate manner via our government, agencies and customer networks in order to recognize the requirements of complicated and developed societies and client challenges and solve them accordingly.
Climate change can also be viewed as a new business opportunity. The business environment in which the Group operates is undergoing significant changes. These include advances in faster decarbonization and a carbon recycling society and an accelerated transition to a hydrogen-based society as well as the increasingly widespread adoption of low-carbon and renewable energy, including LNG. As a result of these changes, major clients are overhauling their business strategies and the Group sees prospects for growth thanks to new market opportunities. In view of the above, we have maintained the ‘business portfolio transformation’ as our 2030 vision in the MTMP, updated in May 2021.
Since our foundation, we have demonstrated an ability to optimize solutions for complex constraints and challenges. In EPC execution, we rely on this ability to optimize engineering and ensure quality, and the application ability of new technologies fusing basic research and EPC expertise. By leveraging these strengths, we will accelerate the transition to a carbon-free society, including hydrogen energy and carbon neutrality by 2050. By transforming our business portfolio on two fronts - growing carbon neutrality and life science contribution fields and creating and strengthening recurring business models - we aim to achieve a 50:50 profit split between existing and new businesses. Our objective is to transform our earnings structure to generate consolidated-basis net profit in excess of JPY 30 billion.
(g) Plant accidents
Should a major accident such as explosion or fire arise at a plant built or under construction and the Group is determined to be at fault, our liability for damage compensation 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. In addition, we seek to mitigate such risks by obtaining appropriate insurance coverage and securing contract terms that reasonably share the risk of such losses with the client. 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’, which stands for Chiyoda’s Safety Culture.
(h) Currency risk
Because amounts to be paid for equipment, materials, and subcontracted work for overseas projects can be in currencies that are different to our client payments, 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 payments ourselves and also through forward currency exchange contracts.
(i) 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, regulations, 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 clients. 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 divisional Compliance Officers as its members, as well as a Group Company Compliance Liaison Committee, also chaired by the CCO, with the subsidiary presidents as its members.
(j) Information security threats
The Group controls a large volume of client 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. Much of our core work and commercial activities are carried out making full use of state-of-the-art IT systems at various locations around the world. We mitigate risks by reinforcing protective measures to prepare for cyberattacks on important data system and network installations. However, an unforeseen event could cause a system failure, leak of confidential information, cyber fraud, or loss of important business information that could affect our business. Cyberattack risks on companies have recently increased, triggered by the geopolitical crisis in Ukraine.
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 all of our major group companies.
(k) Business investment losses
The Group may make 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 standards and rules, the Group only decides to make an investment after carefully considering our financial capacity relative to the risk of losses. After making an investment, we monitor the investee’s business plan progress and provide support in the form of personnel or capital if necessary in order to prevent or minimize losses.