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 2022.
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. Changes in customer needs and business models are accelerating, particularly in the wake of the COVID-19 pandemic. And all industries face the urgent need to review their businesses with an eye to the post-COVID-19 era. 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 or which could counter the strengths that the NX Group has developed over the years.
Unexpected events such as international conflicts, major city lockdowns, and natural disasters give rise to the risk of disruptions for cross-border supply chains that have become increasingly complex. In responding to this risk, we are working to strengthen our supply chain. Our approach includes analyzing data related to supply chain and risk management using AI to derive new insights and propose alternative means of transportation.
Under the business plan through 2023, we are responding to and preparing for potential 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.
The NX Group logistics and other businesses are diverse and are subject to legal regulations in their respective business sectors. The Group views compliance management as our most important issue. However, 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. These disasters pose a significant risk to the business activities of the NX Group and our customers. 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, however, the Group may not be able to mitigate the impact of said disasters on 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.
In addition, the commodities transported by the NX Group, particularly in our Logistics-Japan business, include primary agricultural commodities, drinking water, apparel, and other items for which transportation demand fluctuates seasonally. Transportation of these goods is also affected significantly by weather conditions. In addition to large-scale natural disasters, abnormal weather conditions such as cool summers, warm winters, and light rainfall could reduce customer production and demand. Weaker demand would result in lower sales revenues, etc., negatively impacting group business performance and financial condition. At the same time, we strive to mitigate risk by capturing demand for inventory storage services, one of the strengths of our business. In this way, we adjust supply and demand, while also working to build a broad customer base with different transportation needs.
The NX Group operates businesses in 49 countries, including Japan (as of March 2023). Increasing interactions among people in the global economy comes with growing risks of rapid, worldwide spread of infectious disease and the rise of new diseases such as COVID-19, which has yet to subside. An infectious disease could break out in a 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 number of employees or subcontractors, which are factors that could affect Group business continuity.
The NX Group will continue to place the highest priority on preventing the spread of infectious diseases and ensuring safety. We address emerging risks through a risk management system, which includes the NX Group risk and crisis management framework, as well as by providing alternative transportation modes to our customers.
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 a few ways we are coping with the accelerating decline in the labor force.
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 for investments in new construction and facility renovations. We intend to meet these financing needs in part by borrowing from financial institutions and raising funds through the issuance of bonds.
We use interest rate swaps and other hedging instruments to mitigate the risk of borrowings exposed to interest rate fluctuation risk. However, a significant change in interest rates or a downgrade of our credit rating by a rating agency could increase financing costs, negatively impacting group business performance and financial condition.
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.
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. However, insufficient dedication to this value or a major freight or transport incident within the NX 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 emergence of such risks could negatively impact group business performance and financial condition.
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 remarkable 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 a social responsibility 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 System Risk Countermeasures, NX Group Basic Policy on IT, and NX Group Basic Policy on Cyber Security, ensuring we create appropriate usage environments. Employees receive education and training through e-learning and other opportunities, and we conduct regular practice drills to prepare for external system attacks and other emergencies.
However, failures in information systems and communications at a level beyond expectations, 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 might also negatively impact group performance and financial condition.
Tackling climate change is a critical element in achieving a sustainable society, and we must limit the atmospheric temperature increase to +1.5°C above the level of the Industrial Revolution.
In accordance with our corporate philosophy, the NX Group will actively work to reduce CO2 emissions to help achieve the 1.5°C target as we aim at advancing society and bringing an enriched life to future generations through logistics. We view this initiative as a critical management item that is necessary for our Group to achieve sustainable growth and increase corporate value. We believe that by responding to these social changes, we will be able to minimize risk and create new business opportunities.
To this end, we announced our endorsement of the TCFD [Task Force on Climate-related Financial Disclosures] recommendations in May 2022, and we are moving forward with our responses to climate change based on the substance of those recommendations.
To promote sustainability management throughout the NX Group in January 2022, NIPPON EXPRESS HOLDINGS, INC. established the Sustainability Promotion Division, as well as the Sustainability Promotion Committee that serves as the core organization responsible for promoting sustainability throughout our Group. The Sustainability Promotion Committee chaired by the President and Representative Director (CEO) is comprised of executive officers, and advances our overall sustainability initiatives, including work on climate change issues.
In January 2022, our Group established the Risk Management Headquarters and the Compliance and Risk Management Division to promote risk and crisis management for the entire Group. Climate change risk is identified as a key issue in our environmental analysis for the realization of our long-term vision. Risk Management Committee, which meets annually, monitors the status of identifying and addressing risks, including climate change risk, and confirms the impact on our Group's business from a long-term perspective.
Our Group recognizes climate change as a global social issue. In light of the performance in reducing CO2 emissions, Nippon Express Co., Ltd. target of reducing CO2 emissions to 350,000 tons (equivalent to a 30% reduction from the FY2013 level) by FY2030, has been moved up to FY2023.
We have disclosed our Group CO2 emissions for Scope 1, 2, and 3, as we actively disclose the current status of our efforts to reduce CO2 emissions. We recognize that it is important for our Group to set targets for 2030 and 2050, and to continuously examine and take measures to achieve them in order to rise to the challenge of future carbon neutrality.
In the NX Group Business Plan 2023, our Group has set the establishment of ESG-oriented management for sustainable growth and improve corporate value as an initiative to realize our long-term vision. We are implementing measures to reduce CO2 emissions to achieve the 1.5°C target. In order to enhance our management resilience, we are also working to understand the various risks and opportunities that might be anticipated to result from climate change.
In addition to the 1.5°C analysis scenario that our Group is aiming for, we are also identifying the risks and opportunities associated with a second scenario*1 in order to demonstrate our resilience even in the event that a 4°C eventuality were to play out worldwide. The financial impact of these risks on our Group's business is evaluated qualitatively and quantitatively, and countermeasures are considered. We will continue to deepen our consideration of countermeasures and further assess the quantitative impact of the risks we have identified.
For the key risks we identified, we conducted a financial impact assessment of the cost increases resulting from the introduction of carbon pricing in FY2021. Based on the results of calculations assuming a carbon tax price in 2030, under the 1.5°C scenario, of approximately ¥13,000/t-CO2 and the unit price of electricity at approximately ¥10.2/kWh,*3 the impact of carbon pricing was calculated to be ¥9 billion to ¥11 billion in 2030. Under the 1.5°C scenario, we expect to incur costs from carbon taxes and other regulatory and market impacts, but we also expect to expand our business by capturing opportunities associated with climate change.