Business Risks

Risks that may have a significant impact on the Nippon Express Group's financial position, operating results, and cash flow status are as follows. Matters discussed here that are not historical fact reflect the judgment of the Nippon Express Group as of the end of the current consolidated fiscal year (March 31, 2020). Matters marked as Important Issues are issues identified in our environmental analysis as important for the achievement of our long-term vision. These issues will be addressed over the medium to long term as well. Issues are based on determinations at this point in time and may be revised in the future. Please refer to the Nippon Express website as well as our CSR reports for matters marked as Important Issues related to sustainability, including climate change, human rights, and compliance.

1. Risks Related to the Business Environment

A. Changes in the Global Macroeconomic Environment

The Nippon Express Group engages in business with a focus on B2B inter-company logistics. However, customer business activities continue to globalize. This globalization includes division and specialization of production, as well as an expansion of multinational transactions. If the global macro economy slows due to greater geopolitical risks and/or factors that constrain trade and manufacturing industry growth (as seen in US-China trade friction), such developments could adversely affect transport demand among our customers. This could have a negative impact on Nippon Express Group business performance and financial condition. In particular, slowdowns in the US and Chinese economies could affect manufacturing industries across several countries, including Japan, and could have a major impact on the Group's Logistics business segment. We will continue to expand business areas that contribute to logistics in connection with production-related procurement for manufacturing industry customers. We will also strive to reduce risks by accelerating our expansion into emerging economies, strengthening and expanding consumption-related sales logistics worldwide.

B. Growth Potential of the Japanese Domestic Market 【Important Issue】

The Nippon Express Group business focuses on our Logistics business in Japan. This continues to be a key business necessary to secure profits in Japan to support our long-term vision of further growth in our global businesses. On the other hand, it is expected that the business environment in the Japanese domestic market will change and the demand for B2B freight transportation will decrease. These changes included forecasted declining birthrates and an aging population, as well as shifts in logistics, as seen in the rise of e-commerce. A decrease in demand for transportation in the Japanese logistics market poses the risk of adversely affecting the Nippon Express Group business, busines performance, and financial condition; however, we have are approaching this issue as a medium- to long-term issue, and believe this decrease will be gradual for the time being. We will continue to secure solid profits in Japan, the core of the Nippon Express Group business, while expanding demand for domestic logistics needs in Japan, which include pharmaceutical logistics and green logistics. In addition, we will continue to invest in overseas logistics markets, using these growth areas to expand our business.

C. Competition 【Important Issue】

Competition in the Japanese domestic market will continue to intensify due to the anticipated reduction in transportation demand. In addition, one issue in further expansion overseas is handling competition with global forwarders, which are utilizing M&A to expand their business scale in overseas markets. In response, the Nippon Express Group will strive to develop and provide high-value-added transportation services. However, intensified competition (including price competition) between domestic and overseas companies could adversely impact business performance and financial condition.

D. Digital Transformation 【Important Issue】

The rapid development of IT and digital technologies is generating new business models and services across all industries. Even the environment surrounding the logistics industry is experience numerous changes. One example is the entry by players from different industries, such as digital forwarders, which use IT to connect customers with transport companies. These changes are expected to result in greater labor savings and efficiency in business through IT and digital technologies. At the same time, these changes could present medium- to long-term risks that cancel the strengths we have cultivated over years in our businesses. Further, these changes may reduce the need for logistics.  During the period of our current Group Business Plan, which concludes in 2023, we will strive to respond to and prepare for changes occurring today and changes that may occur in the future. Here, we will analyze changes in the business environment and enter into collaborations and co-creation with other industries. We will also incorporate digital transformation, creating services that are adapted to the changing times and leading to growth in our business.

E. Laws and Regulations

The Nippon Express Group employs diverse transport methods subject to legal restrictions in their respective business areas. The Nippon Express Group recognizes compliance management as a top priority and we are taking measures accordingly. However, in the event of legal constraints on a portion of our sales and other activities, sales could decrease or new expenses could arise, which could have an adverse effect on business performance and financial condition.

F. Natural Disasters and Abnormal Weather 【Important Issue】

Natural disasters have grown not only in frequency but also scale around the world, presenting major risks to the business activities of both the Nippon Express Group and our customers. Such disasters include large-scale flood damage in Japan, heat waves in Europe, hurricanes in the Caribbean Sea, cyclones in Southeast Asia, forest fires in Australia, and others. The Nippon Express Group possesses a wide range of transport methods that include rail, automotive, and ships. The impact of natural disasters could impede transport and we may not be able to fully mitigate the impact on customer production and/or sales activities, even with the use of alternative methods. Further, our facilities could be damaged by disasters. We may not be able to avoid the adverse effects of disasters on our business performance and financial condition. The products transported by the Group, particularly by our Logistics business in Japan, include primary agricultural product commodities, drinking water, apparel, and more. Transportation demand for these items fluctuates seasonally and are greatly affected by the weather. Large-scale natural disasters could have an adverse effect on Nippon Express Group business performance and financial condition. The same is true for abnormal weather, including cold summers, warm winters, light rains, and other phenomena. These phenomena could result in lower production and sales demand among our customers and therefore have a negative impact on our sales. At the same time, we will strive to mitigate risks by capturing demand in our inventory storage business. This is a strength of the group and a means for us to adjust supply and demand. Further, we will work to build a broader customer base with different transport demands.

G. Pandemic Influenza and Other Infectious Diseases

The Nippon Express Group operates businesses in Japan and 48 other countries/regions (as of the date of this submission). We employ a large number of people in each country who play different roles in providing services to our customers. Increasing interactions among people in the global economy comes with growing risks that include the rapid spread of pandemic influenza and the rise of new infectious diseases. The outbreak of an infectious disease in a country or region where the Nippon Express Group conducts business activities entails risk of negative impact on our business operations in countries where the disease has spread. These risks include constraints on business activities to deal with infection risk among Group employees and suspension of customer business activities. Further, restrictions on economic activities could lead to global macroeconomic downturns. We are taking action against growing risks and support transport to our customers through risk management systems (including the establishment of pandemic influenza control rules). We also initiate BCP transport in the event of an outbreak. However, the spread of infectious diseases may adversely affect the business performance and financial condition of the group.

2. Risks Related to Corporate Strategy and Business Expansion

A. Expansion of Global Businesses 【Important Issue】

In our aim to achieve our new long-term vision of becoming a logistics company with a strong presence in the global market, the Nippon Express Group pursues investment expansion in growth fields and business expansion in untapped overseas areas, such as Africa. When expanding, we first scrutinize all details and identify the risks before making a decision and formulating a business plan. However, changes in international circumstances, political unrest, changes in laws and regulations, or other unforeseen circumstances could prevent business development from proceeding as originally planned, and may adversely affect business performance and financial condition.

Please also refer to B. Country Risks, under (3) Risks Related to Business Operation, below.

B. M&A and Business Investment

The Nippon Express Group pursues M&A as one option for expanding business domains and/or acquiring and enhancing necessary functions. We do this to optimize management resources in the interest of growth as a global logistics company. We implement consistent business management throughout the group and engage in selection and focus. When conducting M&A, we carefully examine the financial details of the target company and contractual terms. We make a final decision only after identifying and understanding the risks involved. However, failure to obtain the results initially expected due to changes in the post-acquisition business environment and/or other factors may adversely affect business performance and financial position. These factors include a deterioration of business performance in the target company and goodwill impairment loss.

C. Relationships With Customers and Business Partners 【Important Issue】

The Nippon Express Group leverages long-term logistics-based relationships with customers (primarily Japanese firms) to expand our business. We support both domestic and overseas business expansion for our customers while expanding our own business. The Group has supported the expansion of foreign-affiliated companies into Japan using our overseas development to build a larger base of transactions in forwarding transport and other areas. The trust placed in the group's long-cultivated services supports a solid customer base, and the group continues to take on the challenge of expanding our base of new customers with a focus on foreign-affiliated firms.
However, customer industries are changing at an unprecedented pace due to the rise of China-affiliated companies and shifts in industry structures driven by major tech firms such as the GAFA companies. These developments could result diversified customer needs, altering demands on quality and resulting in a new paradigm under which traditional customs do not hold. In addition, there are growing risks of loss of customer base and business failure of partners due to curtailments driven by factors such as customer industry reorganizations and intensifying competition. The Nippon Express Group strives to achieve greater growth in our customer base and to foster trust. We accomplish this by advancing sales strategies that include initiatives for priority industries, efforts to strengthen sales to foreign-affiliated target companies, the pursuit of diversity management, and the globalization of management and strategy. As we pay close attention to changes in customer industries, we also strive to engage in credit management and credit protection, responding to changes and creating new value through collaboration and co-creation with customers.

D. Climate Change 【Important Issue】

The adoption of the Paris Agreement by the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) and its ratification by a majority of countries has led to efforts being made to reduce emissions of greenhouse gases causing climate change and global warming around the world. The scale and frequency of natural disasters caused by climate change have expanded in recent years, with an increasing potential to impact our businesses and business performance. These risks are presented above in F. Natural Disasters and Abnormal Weather. The Nippon Express Group has set CO2 reduction targets for 2030 and is working to reduce the generation of greenhouse gases. At the same time, we are working to contribute to CO2 reduction in our customer supply chains by promoting green logistics, including use of joint transport and modal shifts.
On the other hand, rapid changes in climate change-related legislation across different countries, including regulations on exhaust gases in the automotive industry, could significantly affect business activities in customer industries and lead to fluctuations in freight forwarding demand. These developments could indirectly impact the group's business performance and financial condition. To meet the aforementioned reduction targets, we intend to make planned capital investments in switching to eco-friendly vehicles, LED lighting, and renewable energy. However, if environmental regulations are stricter than expected, increases in new expenses could affect business performance and financial condition.

E. Securing Personnel 【Important Issue】

The Nippon Express Group operates many labor-intensive businesses, making it critical to secure personnel. To respond to future business expansion and changes in the business environment, we must pursue diversity management whereby diverse employees play active roles if we are to achieve our long-term vision. To secure talented personnel, we endeavor to enhance the attractiveness of the Nippon Express Group, making efforts to improve and restructure work environments so a diverse group of human resources can play active roles and take advantage of diverse work styles. At the same time, we accelerate efforts to evolve our logistics through advanced technologies, achieving labor and manpower savings. However, securing talented personnel is an issue shared across all industries and across the globe. Given the increasingly tight balance between labor supply and demand, the failure to secure sufficient personnel could negatively impact group business performance and financial condition, as well as hinder growth in corporate value.

F. Changes in the Provider Environment for Freight Forwarding

As a comprehensive logistics company, the Nippon Express Group offers a variety of transport modes in servicing our customers. Underlying these services is our transport business (Nippon Express Group undertakes shipping on our own) and our freight forwarding business (utilizing shipping companies, airlines, railway companies, and trucking companies as transport providers). Our collaborations with these partners is one of the group’s strengths. However, the provider environment is weakening due to labor shortages not only in Japan but also in Western nations, China, and elsewhere. Providers are also experiencing rising labor costs and intensified freight forwarding demand in connection with economic growth in the emerging economies of Asia and other regions. This provider environment is expected to fluctuate significantly with changes in freight forwarding demand. We strive to bolster relationships with our providers/partners, to improve integrated Nippon Express Group purchases and operations, and to collect the appropriate fees from customers commensurate with changes in the environment. However, if the provider environment weakens beyond group expectations, or if competition with other firms intensifies to a point where the appropriate fees cannot be fully collected, such developments could adversely affect business performance and financial condition.

3. Risks Related to Business Operation

A. Quality and Operations (e.g. Shipping) 【Important Issue】

A strong commitment to the factors underpinning the core of our business, namely safety, compliance, and quality, is an important management issue and a shared value for all employees. Insufficient dedication to this value or a major freight or transport incident within the group or one of our partners could damage trust in group quality, harm the reputation of our brand, or result in legal action and/or suspension of business. The occurrence of any of these risks could adversely affect group business performance and financial condition.

B. Country Risks

In addition to the global macroeconomic environment, Nippon Express Group's globally-based businesses are exposed to country risks caused by regional political and economic instability. Our business structures outside Japan, the U.S., and China are concentrated to a certain degree in international transport services that support the global supply chains of manufacturers. These structures include inter-regional services, which presents certain risks.
Political instability, regulations on international transportation, and/or the rise of protectionist trade policies in countries where we operate present risks that could adversely affect the group's business performance and financial condition. At present, we are strengthening our efforts in sales and consumer logistics, building a logistics platform targeting specific industries and products. These industries and products include pharmaceuticals and luxury fashion, which are experiencing increasing consumer demand in emerging countries such as India and the countries in Southeast Asia. We pursue cross-region, global development of business and continue to strive to diversity our revenue base.

C. Information Systems and Information Security

The strategic use and proper handling of information systems has become an increasingly important management issue for the Nippon Express Group. This is particularly true amid the expansion and convenience of information and communication networks, which have led to remarkable advancement in information and communication technology in recent years. We engage in IT strategy planning and implementation as a unified group, establishing related rules such as our Information Security Rules and building an appropriate use environment. Further, we strive to educate our employees through e-learning and other methods. We also hold regular training in anticipation of attacks from external parties and emergency situations. However, the Nippon Express Group may not be able to fully prevent the destruction or theft of sensitive group information due to an information system or communications failure beyond the level expected by the group. Or we may be subject to cyberattacks which have become larger in scope, more frequent, and more sophisticated in recent years. These events could severely impact the group's business operations, adversely affecting our business performance and financial condition.

D. Management of Customer Information

The particular nature of our Moving & Relocation, Travel, and Security Transportation businesses result in the handling of a large amount of customer information, which includes personal information. The Group has established the Nippon Express Compliance Regulations and Personal Data Protection Policy, and we are working to properly manage customer information and personal information by conducting in-house education for all employees. However, the leakage of customer information could affect future business development, business performance, and financial condition of the group.

E. Violation of Laws, Regulations, and Internal Rules by Management and Employees 【Important Issue】

The Nippon Express Group strives to strengthen our internal control system by establishing various rules, improving internal audit effectiveness, and engaging in other efforts. In addition, we strive to improve employee awareness and knowledge of compliance through rank-based education programs. We also enhance education through the regular use of e-learning and other methods.
On the other hand, a number of issues make compliance an important issue for management going forward. These issues include traditional environmental challenges shared throughout the transport industry, including a culture of long working hours, country-by-country variances in human rights-related practices (the UK Modern Slavery Act and others), and the fostering of globally shared value systems, such as the SDGs. As a corporate group responsible for more than 300 companies in Japan and across the globe, if our internal control system is not structured or updated sufficiently in the face of such issues, we may fail to fully prevent potential violations of various laws, regulations, and internal rules in the course of work done by employees. Such violations, which may include accounting fraud, harassment, and corruption, could adversely impact the group’s business operations, business performance, and financial condition.

F. Human Resources and Labor 【Important Issue】

The Nippon Express Group aims to transform our company into one that makes employees feel satisfied and fulfilled, as described in our group business plan. We endeavor to establish a work environment as described in the Securing Personnel section above. We also implement human resources and education programs that encourage employees to take on challenges, using a job rotation and various other training systems. However, if systems at the various Group locations are not fully functioning and employees are not able to obtain sufficient opportunities for challenge and growth, or if the gap widens between our measures and employee desires, increased employee turnover could result in an exodus of talented personnel, resulting in a serious issue for the growth of our business. Although situations vary from country to country, many Nippon Express Group employees belong to a labor union. In the event of a labor dispute, such as a collective strike by group employees or by an organization that includes group employees, business continuity could become a challenge, adversely affecting our business performance and financial condition.

4. Risks Related to Market Fluctuations

A. Fluctuations in Crude Oil Prices

As the Nippon Express Group operates transport businesses, an increase in crude oil prices could result in increased transport costs such as fuel costs, ocean forwarding costs, and air forwarding costs, mainly in our Logistics and Security Transportation segments. Further, our Logistics Support segment engages in petroleum and LP gas sales. Here, unit purchase and sale prices are linked to fluctuations in crude oil prices.
We strive to minimize the impact of crude oil price fluctuations by introducing eco-friendly vehicles and diversifying procurement methods. However, an inability to pass on costs to our customers commensurate with cost increases could adversely affect our business performance and financial condition.

B. Exchange Rate Fluctuations

Fluctuations in exchange rates could affect customer demand for import and export freight forwarding, adversely impacting the group’s business performance and financial position in the international freight sector.
In addition, we hold foreign currency-denominated debt in ocean freight fees, air freight fees, and other sources, since we handle import and export freight. We strive to reduce risks through currency hedging methods, which include forward exchange contracts. However, abrupt exchange rate fluctuations could adversely affect group business performance and financial condition.
The Nippon Express Group conducts business globally. The financial statements of overseas group companies are prepared in their respective local currencies (e.g. USD, EUR, RMB), after which the currencies are converted to Japanese yen. A strong yen could result in the understatement of the overseas portion of our Logistics Segment business performance.

C. Impact of Interest Rates

The Nippon Express Group is engaged in the leasing business. Lease contracts with customers are determined based on the interest rate at the time of contract execution, with a fixed amount of revenue recorded over the period specified in the contract. However, the cost of funds (procurement cost) fluctuates due to changes in market interest rates. Therefore interest rates rising more than expected could adversely affect the group’s business performance and financial position.

D. Retirement Benefit Liabilities

Nippon Express Group retirement benefit obligation and expense are calculated on the basis of actuarial calculation assumptions, expected returns of pension assets, and other factors. In the event that the actual obligation/expense differs from the projected obligation/expense, or if there is a change in assumptions, the amount of this impact is recognized as an actuarial difference. Differences are accrued and amortized over a generally accepted period. Therefore, these assumptions impact retirement benefit obligation and expense. In addition, the company has established a retirement benefit trust based on securities. Falling stock prices for listed stocks could decrease the market value of pension assets, and unrecognized actuarial differences and future amortization costs could increase. This development could adversely impact the group’s business performance and financial condition.

5. Risks Related to Finances

A. Increases in Funding Costs

The main demand for Nippon Express Group funds relates to operating expenses (e.g. transportation expenses, fuel expenses, selling, general, and administrative expenses), investments related to new equipment construction, renovations, lease asset acquisitions, and so on. A portion of this funding demand is financed through borrowings from financial institutions and the issuance of corporate bonds.  We partially reduce risk in interest rate fluctuations related to borrowings exposed to interest rate fluctuation risk through interest rate hedges and interest rate swap transactions. However, in the event of significant interest rate fluctuations, or in the event that a rating institution downgrades the Nippon Express Group credit rating, costs of financing could increase, adversely affecting our business performance and financial condition.

B. Disposal and Impairment Loss of Assets

The Nippon Express Group has a number of distribution centers in Japan and overseas. We engage in capital investment and long-term leasing agreements after a thorough examination from a long-term standpoint, including the return on investment and outlooks for cash flow recovery. However, future economic trends, customer trends, and other factors could result in the disposal, return, or treatment of capital investments earlier than originally planned. This development could cause a one-time loss and/or impairment loss, which could adversely impact our business performance and financial condition.

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