Alps Alpine Co (APELF) Risk Analysis

ALPS ALPINE's products are used in a wide range of industries, especially for applications that require a high degree of precision, including in end products that affect human health-and-safety such as automobiles and healthcare equipment. While ALPS ALPINE manufactures its products in accordance with strict quality control standards, there is no guarantee that all products are free from defects or non-conformity to customers' specifications. Any defect in ALPS ALPINE's products or non-conformity of its products to customers' specifications could result in such things as serious accidents involving end-users, the suspension of the manufacturing operations of ALPS ALPINE's customers, or a product recall by ALPS ALPINE or its customers. These in turn could cause ALPS ALPINE to incur significant expenses, damage its reputation, subject it to adverse regulatory action or significant legal claims, or draw it into disputes with its customers that could require ALPS ALPINE to compensate its customers. Although ALPS ALPINE has a product liability insurance policy, there is no guarantee that such insurance policy will sufficiently cover the entire amount of damages to be paid in connection with a defective or non-conforming product. Therefore, any such defects or non-conformity to customers' specifications, or any product recalls, legal claims, disputes or other similar events that ensue from them, may adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows.

ALPS ALPINE's pension-related costs and benefit obligations relating to defined benefit plans for its group employees is calculated based on various actuarial assumptions relating to the plans, including discount rates and mortality rates. Also, plan assets are subject to volatility due to their exposure to market price fluctuation risk with respect to investments in equity instruments included in the plan assets. If the fair values of plan assets decrease due to market price fluctuations, if ALPS ALPINE needs to revise the discount rates due to changes in the interest rate environment or if the actual situations relating to employees' retirement plans, such as the rates of mortality and salary increases, differ from the associated actuarial assumptions previously made by ALPS ALPINE, ALPS ALPINE's retirement benefit expenses and obligations could increase. As a result, ALPS ALPINE's business, financial condition and results of operations and cash flows could be adversely affected.

Although ALPS ALPINE aims to manufacture critical parts for its products within the ALPS ALPINE group, some key parts are sourced from third-party suppliers in and outside Japan. These suppliers may be unable to deliver in a timely manner such parts in the quantities required by ALPS ALPINE due to, for example, natural disasters, political and social instability resulting from terrorism, outbreaks of disease, war or any other similar events. Similarly, accidents, product defects, lack of production capacity, excess demand on the suppliers, failure in procuring sufficient raw materials, bankruptcy or other factors may cause suppliers to be unable to provide ALPS ALPINE with such parts in the required quantity or at the level of quality ALPS ALPINE requires for its products. Such inability to provide a sufficient volume of key parts, or key parts of a sufficient quality, to ALPS ALPINE in a timely manner may lead to production delays at, or loss of sales opportunities for, ALPS ALPINE, which may adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows, notwithstanding any efforts of ALPS ALPINE to seek redress, pursuant to the supply contracts, for any losses or damages caused.

ALPS ALPINE is subject to or affected by various laws and regulations in and outside Japan in connection with its business activities, including requirements for business, investment and transportation permits, customs duties and other import and export regulations, and regulations concerning conflict minerals, value-added tax and corporate income tax. ALPS ALPINE will thus be exposed to various legal and regulatory risks, including those stemming from actual or interpretational changes in laws, regulations and accounting standards. ALPS ALPINE may need to expend substantial financial, administrative and human resources, or make significant adjustments to its business operations, in order to comply with such laws, regulations and standards. As ALPS ALPINE expands the range of its products and the geographical scope of its business, it will become exposed to risks that are unique to particular industries, markets or jurisdictions, and its compliance risk management systems and programs may not be fully effective in preventing all violations of applicable laws, regulations and standards. Failure to comply with such laws, regulations and standards not only may result in penalties or fines, but also may result in loss of business, as well as restrictions on ALPS ALPINE's business activities. ALPS ALPINE's exposure to various laws and regulations in and outside Japan could therefore adversely affect ALPS ALPINE's business, results of operations, financial conditions and cash flows.

While ALPS ALPINE has established and implemented compliance systems for its business activities, there is no guarantee that it will not become subject to legal actions or proceedings initiated by regulatory authorities, customers or other persons on such bases as alleged violations of laws, regulations, standards or obligations of ALPS ALPINE. Defending itself in litigation or other legal proceedings may be costly, as well as distract management from the operations of the business. ALPS ALPINE may also eventually have to pay damages or fines for any incompliance or liability, or otherwise pay amounts or agree to other unfavorable terms in order to resolve such actions or proceedings. If legal proceedings are initiated against ALPS ALPINE, they could thus adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows.

ALPS ALPINE is exposed to intense competition, especially in the electronic components and automotive infotainment markets, which are its principal business domains. In particular, price competition is intensifying in the mobile multimedia industry, causing price declines in the after-market. In addition, further price declines are expected in both the automobile and mobile multimedia industries, due to such factors as automobile and mobile manufacturers' demands for cost reductions and new market entrants. In ALPS ALPINE's logistics business, competition is also intense due to decreased cargo volumes in Japan resulting from customers' shifting production overseas, as well as the entry of large logistics services providers into the markets in which the ALPS ALPINE group has been operating. Furthermore, many of ALPS ALPINE's competitors may have greater financial, research and development, manufacturing, sales, marketing and service capabilities than it. Any failure by ALPS ALPINE to compete effectively against its competitors could adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows. Even if ALPS ALPINE is able to maintain its competitive position, intense price competition may cause the prices of ALPS ALPINE's products to decrease, which could have a similarly adverse effect on ALPS ALPINE.

ALPS ALPINE is expanding its business globally, principally through its electronics components and automotive infotainment businesses. For the fiscal years ended March 31, 2017, 2018 and 2019, sales to overseas customers constituted 80.0%, 81.8% and 81.4% of the ALPS ALPINE group's revenue, respectively. In particular, the ALPS ALPINE group has generated a substantial portion of its revenue from sales in the United States, China and Germany, and ALPS ALPINE expects that will continue to be the case. Because of the geographic reach of ALPS ALPINE's business, demand for ALPS ALPINE's products and services may be negatively impacted by any weakening of the economies of not just Japan, but the other countries mentioned above or elsewhere, for example through such economic declines adversely impacting consumer demand, the production levels of its customers or the industries in which they operate. In addition, some of ALPS ALPINE's products are used in end products, such as smartphones, that are subject to discretionary spending. The demand for such products is expected to be more volatile than general consumption levels in the markets where ALPS ALPINE conducts business. Thus, economic declines, particularly those that affect markets with greater demand volatility, could adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows.

ALPS ALPINE maintains allowances for doubtful accounts related to trade receivables for estimated losses resulting from customers' inability to make timely payments. However, trade receivables relating to the ordinary course of business are not covered by collateral or credit insurance. Therefore, if customers with whom ALPS ALPINE has substantial accounts receivable face difficulty in making payments due to economic downturn and if ALPS ALPINE is forced to write off those receivables, ALPS ALPINE's results of operations, financial condition and cash flows may be adversely affected.

A substantial portion of ALPS ALPINE's manufacturing and sales activities are conducted outside Japan, including in the Americas, Europe, China and other Asian countries. ALPS ALPINE may face a variety of risks in overseas manufacturing and sales activities, such as unexpected and unfavorable changes in laws and regulations (including custom duties, trade restrictions and tax), insufficient protection or enforcement of intellectual property rights and other legal rights, economic downturns in foreign markets, political and social instability resulting from terrorism, outbreaks of disease, war and other similar events, other sudden, significant political, economic or societal changes, such as shifts in national trade policies-exemplified by the trade tensions between the United States and China-the United Kingdom's planned withdrawal from the EU, or Brexit, as well as difficulties in securing human resources and managing labor relations at its overseas locations. ALPS ALPINE may encounter greater or different difficulties in managing those risks than in managing similar issues in Japan. The failure to adequately and efficiently manage such risks could adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows.

ALPS ALPINE's employees or facilities, including its headquarters, plants, sales offices and research and development centers, may suffer from disasters, natural or otherwise, such as earthquakes, typhoons, tsunamis, heavy rains, floods, accidents at nuclear power plants and pandemics. Any such event, over which ALPS ALPINE will have little or no control, could cause a decrease in demand for its products, make it difficult or impossible for ALPS ALPINE to manufacture and deliver products due to, for example, power failure or other disruptions, require large expenditures to repair or replace its offices, facilities or equipment, or create delays and inefficiencies in its supply chain due to the adverse impact on the supply of electricity and water, as well as traffic and other infrastructure, among other reasons. Its suppliers or customers may be similarly affected, which may cause disruptions of supplies that ALPS ALPINE needs to operate its business or declines in demand for ALPS ALPINE's products. Any of these could adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows.

ALPS ALPINE manufactures and sells a substantial portion of its products in countries outside of Japan and procures parts and raw materials around the globe, exposing it to fluctuations in foreign currency exchange rates. For example, the Japanese yen is the primary currency in which ALPS ALPINE incurs product and other costs. On the other hand, for product sales in currencies other than the Japanese yen (primarily, the U.S. dollar, the euro and the Chinese renminbi), ALPS ALPINE is exposed to the risk of exchange rates between the currency of the sale price and the Japanese yen (particularly the Japanese yen and the U.S. dollar, the U.S. dollar and the euro, as well as the U.S. dollar and the Chinese renminbi) fluctuating between the time the price is agreed upon and the time of payment. ALPS ALPINE estimates the impact on revenue from exchange rate fluctuations to be 4,800 million yen on an annual basis for each one yen change against the basket of major currencies impacting its business. Refer to "Item 5. Operating and Financial Review and Prospects-Operating Results-Principal Factors Affecting Financial Results-Exchange Rate Fluctuations." ALPS ALPINE engages in such actions as entering into foreign currency exchange forwards or currency options, as well as offsetting foreign currency exposures of assets and liabilities against each other, in an attempt to hedge its foreign currency exchange risk. However, ALPS ALPINE may not be able to mitigate the entire impact of currency exchange rate volatility, especially in situations where the exchange rate fluctuations exceed its expectations. ALPS ALPINE's exposure to foreign currency exchange rate fluctuations, as well as any failure on its part to adequately manage such risks, may adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows.

Innovation in the businesses that ALPS ALPINE will be engaged in proceeds rapidly. ALPS ALPINE's customers, particularly automotive manufacturers, frequently introduce new products and services, as well as develop new technologies, which in turn causes their needs and specifications for the kinds of products ALPS ALPINE offers to change often as well; it also accelerates the obsolescence and price reduction of existing products of ALPS ALPINE. Given this, ALPS ALPINE's success will depend greatly upon its ability to develop effectively and in a timely manner superior technologies, products and processes that meet the needs of the customers and markets in which the customers compete. In particular, because some of ALPS ALPINE's customers are manufacturers themselves in competitive markets, such as the automobile and smartphones markets, where technological innovation is critical to maintain competitiveness, ALPS ALPINE may need to invest in research and development based on its assessment of the possible future production or other plans of customers in such markets. ALPS ALPINE's investments in such research and development activities, however, may not result in the anticipated or desired outcome, including due to the inability to accurately predict or meet customer needs, which may adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows.

As technological innovation is one of the key factors of competition in many of the markets in which ALPS ALPINE competes, protection of its intellectual property rights will be essential for ALPS ALPINE to maintain its competitiveness. ALPS ALPINE generally employs technologies developed by itself, or each of Alps Electric and Alpine prior to the business integration, and seeks to protect such technologies by acquiring, or in some cases asserting, patents, trademarks and other intellectual property rights. In order to protect its intellectual property rights, including trade secrets and patents, ALPS ALPINE takes certain measures, such as executing nondisclosure agreements with certain of its employees, joint venture partners, customers and suppliers. However, there is no guarantee that such efforts will be successful or that there will be no other impediments to ALPS ALPINE's assertions of its intellectual property rights. For example, if ALPS ALPINE's counterparties breach such nondisclosure agreements, or if the other measures ALPS ALPINE takes are not properly implemented, ALPS ALPINE may not have an adequate remedy. In addition, protection of intellectual property rights in certain jurisdictions may be insufficient due to differences in laws and regulations or the enforcement thereof, and ALPS ALPINE may, as a result, not be able to prevent effectively the use of its intellectual properties by a third party to produce similar products. Furthermore, whereas ALPS ALPINE has obtained licenses to use the intellectual property of third parties in connection with the manufacturing and sale of certain ALPS ALPINE products, there is no guarantee that the owners of such rights will continue to grant licenses to ALPS ALPINE in the future or on terms acceptable to ALPS ALPINE. Insufficient protection of the intellectual property rights of ALPS ALPINE, or ALPS ALPINE's inability to license necessary intellectual properties on acceptable terms, could adversely affect ALPS ALPINE's business, results of operations, financial condition and cash flows. Also, third parties may allege that ALPS ALPINE has infringed their intellectual property rights. ALPS ALPINE will vigorously defend itself against allegations of infringement. However, as a general matter, ALPS ALPINE may pay damages or settlement amounts in connection with proceedings brought against ALPS ALPINE for alleged infringement of third-party intellectual property rights.