Risks that may have a significant impact on the business performance of the NX Group (“Group”) include the following. Forward-looking statements in the text are based on the judgment of the NX Group as of the end of the fiscal year ended December 2024.
The NX Group focuses on business-to-business logistics. However, our clients continue to globalize further, including the disaggregation of production and the expansion of multinational transactions. Trade frictions between the U.S. and China and the struggle for supremacy over technology have intensified in recent years. These developments have led to uncertainties that could put downward pressure on trade and manufacturing growth. Geopolitical risk due to conflicts and other factors are also on the rise, particularly in Asia, Eastern Europe, and the Middle East. A global macroeconomic recession due to these factors could affect transport demand among our customers adversely, and such could have a negative impact on NX Group business performance and financial condition. In particular, a slowdown in the U.S. and Chinese economies could have a significant impact on the Group's Logistics Business segment, as these economies could affect the manufacturing industries in many countries, including Japan.
We continue to mitigate risk by expanding our contribution to production and procurement logistics for our manufacturing customers. We strengthen and expand the area of consumer goods-related sales logistics in each country, and accelerate our entry into emerging areas.
The core of the NX Group is our Logistics-Japan business, and we believe the strengths of our business will continue to be our business in Japanese and transactions with Japanese companies. At the same time, the business environment in the Japanese domestic market is expected to change. For example, BtoB freight transportation demand is likely to decline as a result of weaker demand due to falling birthrates and an aging population in Japan, as well as changes in logistics effected by e-commerce.
Although a decline in transportation demand in the Japanese domestic market poses a risk that could adversely affect the NX Group business, operating results, and financial position, we view this factor as a medium- to long-term issue, and we believe the decline will be gradual for the time being. The Group will continue striving for solid earnings in Japan, which represents the focus of the Nippon Express business. The Group will capture logistics needs of the type expected to grow in demand in Japan in the future, which include logistics for pharmaceutical-related industries, logistics for semiconductor-related industries, and green logistics. In addition, we intend to invest further in the overseas logistics distribution market, which we view as a growth sector.
New business models and services are emerging across all industries, driven by rapid IT and digital technology development.The logistics industry is also undergoing a wide range of changes, as represented by the entry of digital forwarders and other traditionally non-logistics companies that use IT to connect customers with carriers and other parties. While we expect these changes will lead to labor savings and greater efficiencies through IT and other digital technologies, these developments also represent a potential risk over the medium to long term. These risks could result in less need for logistics, which could counter the strengths that the NX Group has developed over the years.
Other risks include potential supply chain delays due to driver and staff shortages caused by the 2024 Issues, the effects of increasingly severe and frequent disasters, and heightened geopolitical risks stemming from international conflicts. In responding to these risks, we are considering enhancing efficiency by introducing advanced equipment, such as automated conveyors and robotics, at our logistics sites. Additionally, we plan to optimize and automate work schedules by utilizing AI-based demand forecasting models.
Under the business plan through 2028, we will respond to and prepared for change, analyzing developments in the business environment while collaborating and co-creating with other industries. At the same time, we are looking to grow our businesses through digitalization and new services that respond to the changing times.
As laws and regulations become stricter globally, companies must develop a high level of compliance awareness. The NX Group Corporate Philosophy serves as the basis of our commitment to safety, compliance, and quality. The NX Group Code of Conduct reflects this corporate philosophy and describes how we practice compliance management in the NX Group. Our Compliance Committee is chaired by the president and CEO. The committee discusses important policies and key issues for the NX Group and pursues compliance initiatives. However, the NX Group logistics and other businesses are global and diverse. If legal regulations restrict certain of our business activities, business performance and financial position may be affected adversely in the form of decreased revenue or an increase in new expenses.
Natural disasters in various parts of the world are increasing in frequency and magnitude. The impact of climate change is becoming more severe and large-scale earthquakes, ensuing tsunamis and volcanic eruptions, and large-scale wind and flood damage present significant risk to the business activities of the NX Group and our customers. Each company in the NX Group has established a business continuity plan (BCP) based on the NX Group Basic Policy on Business Continuity. In this way, we endeavor to improve the resilience of the group overall. However, the NX Group possesses a wide variety of transportation modes, including rail, automobiles, ships, and airplanes. In the event of transportation disruptions due to natural disasters. The Group may not be able to mitigate the impact of said disasters on the production and sales activities of our clients, even if we implement alternative transportation modes. In the event of damage to Group facilities, we may not be able to avoid adverse effects on our business performance and financial condition.
The NX Group operates a global business, offering services in many countries. At the same time, we recognize the need for vigilance against the risk of the rapid and global spread of infectious diseases and the emergence of new infectious diseases with the increase in travel in the post-COVID-19 environment. While the NX Group has anti-infection and other BCP measures in place, we understand that a large-scale infectious disease could break out in any country where we conduct business activities. In this event, we would expect the suspension of customer business activities, interruptions of transportation infrastructure, and sick leave taken by large numbers of employees or subcontractors, which are factors that could affect Group business continuity.
To optimize management resources for growth as a global logistics company, the NX Group engages in selection and concentration detailed management control within the group. We view M&A activities as one of our options to expand into other business sectors or to acquire and expand necessary functions. When conducting M&A, we carefully examine the financial details of the target company and contractual terms, making a final decision after understanding the risks involved. However, risks could remain that were not possible to confirm during the due diligence process. Unforeseen changes in the business environment could occur after an acquisition, such as was seen in the spread of COVID-19. If, due to these factors, the target business does not develop or provide results according to business plans, a deterioration in business performance or goodwill impairment loss, etc., may adversely affect the business performance and financial condition of the group.
We must secure outstanding human resources if we are to provide advanced logistics solutions and respond flexibly to a rapidly changing business environment.
We understand the need for a system that supports the growth of a diverse base of human resources and an environment in which employees can fully exercise their abilities. Therefore, we develop a wide range of training programs and adopt personnel policies that encourage employees to take on new challenges. At the same time, we are working at the global level to secure professional human resources which have high levels of expertise and business experience.
However, securing talented personnel is an issue shared across all industries worldwide. We may not be able to enhance our corporate value sufficiently if it becomes difficult to secure the necessary human resources. The failure to secure sufficient personnel could hamper business management and the execution of business plans, negatively impacting group business performance and financial condition, as well as hindering growth in corporate value.
Group companies in Japan engaged mainly in transportation are redesigning work environments and systems, introducing cutting-edge technologies for labor and personnel savings, and pursuing advanced logistics through the use of data. These are some ways to address the 2024 problem and the accelerating decline in the workforce.
However, if these efforts prove ineffective and it becomes difficult to secure the necessary human resources needed to continue in business, such events could hamper business continuity, negatively impacting group business performance and financial condition.
The main need for funds within the NX Group is for operating expenses, including transportation, fuel, and selling, general and administrative expenses, as well as investments in new construction, facility renovations, and M&A. We intend to meet these financing needs in part by borrowing from financial institutions and raising funds through the issuance of bonds.
Further, the NX Group owns numerous logistics bases in Japan and overseas. When making decisions regarding capital investments or long-term lease contracts, we first conduct thorough studies from a long-term perspective, including the calculation of investment effects and the expected collection of cash flows. However, future economic trends, client company trends, and other factors may result in the disposal or return of these assets earlier than originally planned, causing temporary losses or impairment losses and negatively impacting group business performance and financial condition.
The NX Group places the highest priority on safety in our business activities, pursuing a safety policy that states safety is our top priority. However, in the unlikely event of a serious cargo accident, traffic accident, or industrial accident, the Group may suffer a loss of customer trust and a weakening of public confidence. In addition, certain business activities may become difficult to continue due to administrative penalties, including the suspension of operations or revocation of business licenses, which may negatively affect business performance and financial condition.
The NX Group strives to prevent and avoid risk in today's complex and unstable global environment. Today's complexities include the situation in Russia and Ukraine, conflicts in the Middle East, further escalation of tensions in Taiwan, and global-scale trade wars. We prepare against such risks by gathering information within the NX Group and by consulting with outside experts. However, the NX Group operates worldwide. Changes in political, economic, social, and legal conditions in various countries, restrictions on economic activities due to riots, terrorism, and wars, and restrictions on international transport could adversely affect our businesses and have a negative impact on group business performance and financial condition.
With recent rapid developments in information and communication technology, the strategic use of information systems has become essential for business operations. The availability of systems and appropriate information handling are important management issues for the NX Group. Systems and information are also social responsibilities that we must fulfill as a business entity. The NX Group integrated our IT systems divisions to ensure we act in a unified manner to formulate and implement IT strategies. We also established shared group rules on IT governance and systems risk. Employees receive security education and training through e-learning and other means, building systems to respond to external attacks and emergencies, ensuring smooth IT department operations and an appropriate IT systems environment.
However, unexpected failures in information systems and communications, or the destruction or theft of confidential information due to cyber attacks, which continue to grow in scale, frequency, and sophistication in recent years, might not only affect NX Group business activities, but may also negatively impact group performance and financial condition.
