A wide variety of economic, political, and social factors in countries throughout the world have the potential to impact negatively the NYK Group’s mainstay shipping and integrated logistics operations as well as the Group’s cruise and other businesses. This could affect the Group’s operating performance, share price, and financial conditions.
The NYK Group’s Risk Management Committee meets twice a year in accordance with the Risk Management Rules and the Risk Management Regulations to report and assess the status of critical risks that could have a significant impact on our operations. The Group defines risk as uncertainty that could adversely affect the ongoing growth of the NYK Group, and the Risk Management Committee identifies these risks. "Major Risks" that can have a major impact on the management of the NYK Group include strategic risk, market fluctuation risk, operational risk, and financial and accounting risk. “Critical Risks” include compliance risks, operational risks such as severe accidents, disaster risks, and cyber risks. Critical risks are those that may have a significant impact on the Group's business continuity and are selected by the Risk Management Committee among the major risks.
The following are the major risks that management recognizes as having the potential to have a significant impact on the financial position, operating results, and cash flows of the consolidated companies among the matters concerning the business status, accounting status, etc. described in the annual securities report.
The items described in the text below represent the Group’s judgement of potential future events as of March 31, 2020.
1. Compliance Risk
Companies around the world are being required to comply with increasingly strict regulations in all regions.
The Company's Compliance Committee convenes twice yearly to discuss and decide items related to major policies and maintaining systems to promote and enhance compliance.
The Group has set September as the compliance-strengthening month during which it conducts comprehensive compliance checkups and provides opportunities for staff members to review their conduct and work processes. One activity designed to raise employee awareness of compliance issues is a compliance survey that is distributed throughout the Group followed by several opportunities to provide feedback via the company's internal web bulletin board.
Moreover, the Group maintains an Executive Committee Overseeing Thorough Antitrust and Anti-bribery Law Compliance dedicated to ensuring complete Group compliance with not only specific laws such as the Antimonopoly Act, laws related to bribery, and economic sanctions, but also compliance of all laws, regulations, and licenses.
However, there is a possibility that compliance risks cannot be completely avoided, and in the event of a situation that conflicts with laws or regulations, etc., the Group’s business operating performance and financial condition may be affected by the deterioration of the Group's social credibility and brand image, the payment of compensation for damages that occur, etc.
2. Severe Accidents
Guided by our corporate philosophy of "Bringing value to life," the Group is engaged in a broad network of logistics businesses via sea, land, and air. We recognize the safe operation of vessels and aircraft and preservation of the environment as our top operational imperatives. To ensure operational safety, we have implemented our own safety management system, NAV9000, to pursue environmental management certification. We have established the Safety and Environmental Management Committee, chaired by the NYK president, to periodically review safety measures for shipping and other operations. This structure is designed to guarantee steady improvements in the Group’s safety levels and to ensure appropriate responses in the event of an emergency. Nevertheless, a major unforeseen accident, such as an oil spill or some other type of environmental contamination, injury to or death of a seafarer or passenger, damage to or loss of a vessel, outbreak of an infectious disease on board, quarantine strengthening resulting from a global epidemic of an infectious disease, or a safety-related incident, such as an act of piracy or terrorism, could delay or halt cargo transport; nullify transport agreements or render them uncollectible; result in administrative fines, lawsuits, penalties, or trade restrictions; prompt higher insurance premiums; or cause damage to the Group’s reputation and relationships with customers. The materialization of such risks or the inability to cover them with insurance could impact the operating performance and financial condition of the Group.
The Group's Air Cargo Transportation business covers a wide range of regions around the world, and we are working to ensure safe operation by establishing a company-wide safety promotion system based on our safety policy "Safety Takes Precedence Over All." However, in the event of a serious aircraft accident leading to the death or injury of a crew member, loss or damage of an aircraft; a problem that seriously impairs the safety of an aircraft; a cause that seriously impairs the operation of an aircraft; or political instability, terrorism, spread of diseases such as the novel coronavirus (COVID-19), or natural disaster in each region, the Group may face freight delays and disruptions, cancellation of transportation contracts, nonfulfillment of financial obligations, penalties, litigation, fines, business restrictions, insurance premiums, or deterioration of reputation and customer relations. If such risks cannot be adequately covered by insurance, the Group's business results and financial condition may be affected. If the safety of an aircraft cannot be confirmed, we may voluntarily suspend the operation of the aircraft and perform maintenance, such as inspections, until safety can be confirmed.
3. Business Continuity at NYK Headquarters and Major Offices
Natural disasters such as earthquakes, tsunamis, tornados, cold waves, etc., and wars, terrorism, conflicts, and social disruptions, could affect business continuity and operations at the NYK headquarters and major offices.
NYK has prepared business continuity plans (BCPs) for all the major operations at the NYK headquarters so that the Group will be able to keep its important functions uninterrupted wherever possible, or quickly restore them if interrupted. If these events occur, however, the NYK Group’s business operating performance and financial condition could be affected.
4. Information Security
The smooth operation of its fundamental IT systems is essential to the operations of the NYK Group. The Group works to ensure the safety and stability of its system with respect to earthquakes, fires, or other calamities. In addition to strengthening security measures through multi-layered defense against cyberattacks, we are also focusing on minimizing damage and promptly restoring operations. We are implementing regular drills and building a global management system. However, if a system downturn takes place for a certain period of time or more, and if the provision of information to customers and business processes become delayed, the Group's performance and financial position could be affected.
5. Operations and Management Plan
Based on its medium-term management plan, the NYK Group has implemented business developments and procedures to increase profitability, with the risks indicated below.
Ⅰ Investment Plans
Although the NYK Group plans and implements investment in the expansion of its fleet of vessels and aircraft, fluctuations including changes in the conditions in the global market or the shipping market and government regulations could prevent these plans from progressing as initially intended. Such changes could affect the operating performance and financial condition of the NYK Group.
From the ordering of a vessel through to its completion takes several years, and changes in demand during this period are a factor. Large-scale shipbuilding plans are subject to delivery delays and may be affected by shipyard labor disputes, management difficulties, or other factors that affect the shipyard itself.
Ⅱ Disposal of Operating Vessels
Dramatic changes in the conditions in the shipping market, as well as technical developments and advances, cause physical limitations on the use of vessels as they become outdated or no longer comply with safety and other legal requirements. In such cases, the NYK Group may dispose of its operating vessels or aircraft, or cancel certain charter contracts for vessels to be chartered. Such activities could affect the operating performance and financial condition of the NYK Group.
There is no guarantee that the NYK Group will always be able to sell vessels and aircraft under attractive conditions or, indeed, be able to sell them at all. When market conditions are stagnant and market prices on vessels and aircraft are falling, the NYK Group could be compelled to sell vessels or aircraft that are not fully depreciated for prices below their book values and, as a result, could be forced to record a loss on their sale and retirement. In the event that depressed market conditions continue without disposal of the vessels or aircraft, expected profits for the assets could possibly not cover fixed costs. In such case, an extraordinary loss could be recorded due to the value of the assets being written off. As a result, the NYK Group’s business operating performance and financial condition could be affected. If the NYK Group cancelled charter contracts, based on discussions with shipowners, it could pay penalties for breach of contract.
Ⅲ Relations with Business Partners
Through its containership business, the NYK Group is a member of THE Alliance, a strategic alliance with other marine transport companies. The NYK Group considers this alliance to be necessary to ensure the efficiency of NYK’s containership operations and the ability to maintain a global network. At the same time, maintaining the same safety and service standards, and management directions and procedures, across alliance activities can be challenging, and an alliance could be integrated or dissolved, or members could withdraw, which presents the risk that an alliance may not deliver the anticipated results. If the NYK Group is unable to respond appropriately to such factors, its business, operating performance, and financial condition could be affected.
Ⅳ Securing Stable-Freight-Rate Business
The NYK Group gives priority to long-term, stable contracts and procures the majority of its fleet as owned and long-term chartered vessels. However, if there were not sufficient long-term cargo contracts commensurate with the scale of the fleet, the Group would operate these vessels based on short-term contracts. In such as case, if the level of freight rates fell significantly, earnings acquired from the operation of vessels would not adequately cover fixed expenses of owned vessels. As a result, the NYK Group’s business operating performance and financial condition could be affected.
The NYK Group’s Dry Bulk Carrier Division and Energy Transportation Division place importance on long-term contracts with business partners. These long-term agreements help stabilize the Group’s business in the face of market fluctuations by fixing freight rates, carrying volumes, and rate adjustment conditions. If business conditions for some of the business partners with which the NYK Group maintains long-term agreements were to deteriorate, these business partners may become unable to continue fulfilling all terms of the agreements that are in place. Furthermore, the NYK Group may find itself unable to procure third-party chartered vessels that would enable it to fulfil the terms of the long-term agreements it has made. If charter companies become unable to fulfil the terms of their agreements with the NYK Group before their charter period has ended, the NYK Group could suffer losses due to an inability to procure alternative vessels. Such circumstances could impact the NYK Group’s business, operating performance, and financial condition. Also, although long-term agreements provide some insulation against market fluctuations, in an upward-trending market the NYK Group may become unable to pass on rising market prices immediately by demanding higher freight rates.
Important business partners of the NYK Group include automakers, paper manufacturers, electronics manufacturers, steelmakers, public utilities, and retailers. The scale of its transactions with important business partners could shrink, or the NYK Group could lose an important business partner. Such a situation could impact the NYK Group’s business operating performance and financial condition.
Ⅴ Stronger Legislation on Environmental Preservation, Safety, and Security
In each of the regions in which it operates, the NYK Group is obliged to observe international law regarding the safe operation of its vessels and the prevention of marine accidents. The Group also must comply with regional legislation and other requirements concerning environmental protection, import-export, taxation, and foreign exchange.
The NYK Group recognizes the importance of environmental preservation activities and measures to ensure the stability and safety of its distribution supply chain while developing and expanding its global operations. Examples of the NYK Group’s environmental preservation measures include incorporating ballast water management systems in vessels; responding to regulations aimed at preventing the transfer of algae, shellfish, moths, and other organisms that attach to vessels; use of alternative fuels such as LNG, methanol, etc. for vessels; reducing CO2 emissions through energy-saving operations; reducing SOx emissions by using low-sulphur bunker oil; reducing NOx emissions by introducing electronically controlled engines; and equipping vessels with exhaust gas treatment devices.
A rise in the costs required to respond or difficulties in complying with legislation or other regulations in certain regions could limit the NYK Group’s operations in that region, which could impact the Group’s business operating performance and financial condition.
6. Climate Change
The NYK Group recognizes that climate change, one of the ESG factors, is one of the important management issues. While recognizing the global movement to reduce greenhouse gas emissions, including the Paris Agreement, the Group’s long-term aim to achieve zero-emission transportation is considered to be achievable through the technologies proposed for use on the NYK Super Eco Ship 2050 concept ship. However, achieving zero-emission transportation on large oceangoing cargo vessels, which the Group operates, requires major technological innovation from the current level. Furthermore, since the lifetime of the vessels is around 15 to 20 years, even if innovative technologies are born, considerable time and costs are expected to be incurred for the technology to be applied to all vessels around the world. With this in mind, in the process of technological innovation and realization, the Group believes that it is necessary to satisfy the transport demand required for sustainable growth of the world with solutions that have the lowest environmental impact at the time and to gain an understanding of the burden on society accordingly.
In addition, it is necessary to measure the impact of climate change on the Group’s business over the long term, and to implement specific management strategies. To this end, the Group has established a governance system for managing climate change. The Group will incorporate climate change factors into its transportation demand forecasts, and manage risks and opportunities based on socially rational scenarios.
If the Group is unable to respond appropriately to climate change risks in the future, the Group may lose customers, damage relationships with local communities, or be unable to obtain financing for vessels, which could affect the Group’s business operating performance and financial condition.
7. Risks related to changes in the shipping markets
Ⅰ Changes in the Shipping and Freight Markets
The NYK Group endeavors to generate stable operating revenue that is not affected by changes in the shipping market. However, such factors as general economic fluctuations, a falloff in international freight demand, increasingly severe competition, or changes in the balance of shipping supply and demand could cause a substantial decline in shipping revenues or vessel rental income. Such a situation could impact the operating performance and financial condition of the NYK Group. In particular, imbalances in shipping supply and demand are causing major fluctuations in freight rates. Meanwhile, if shipping supply surpasses demand, in the market the level of charterage fees could fall.
Further, factors which could affect demand for shipping include the following.
- Global and regional geopolitical trends and economic conditions
- Trends in the demand for and inventory levels of energy resources, raw materials, and products that the NYK Group transports
- Globalization of production
- Changes in marine and other transport methods, as well as the development of alternative methods
- Environmental development and other legislative trends
Meanwhile, factors which could affect the supply of shipping include the following.
- Increase in shipping capacity due to completion of construction of new vessels
- Decrease in shipping capacity due to scrapping of aged vessels
- Congestion or closure of ports and canals
- Increase or decrease in vessels owing to changes in or expanded provisions for environmental legislation or other regulations that could limit the useful life of vessels
Air freight rates may fluctuate significantly due to imbalances in transport space and cargo movement. In addition to the decline in air freight rates due to intensified competition, fluctuations in foreign exchange rates and prices of fuel oil could also affect the NYK Group's financial position and results of operations.
Ⅱ Fluctuations in Currency Exchange Rates
Many of the NYK Group’s operations are denominated in foreign currencies, creating the possibility of losses resulting from exchange rate fluctuations. To match the currencies in which it generates revenue and pays expenses, the NYK Group conducts hedging transactions, including foreign exchange contracts and currency swaps, to minimize the effects of exchange rate fluctuations. When preparing consolidated financial statements, the NYK Group converts the financial statements of its consolidated overseas subsidiaries into yen. As a result, fluctuations in currency exchange rates could affect the operating performance and financial condition of the NYK Group.
Ⅲ Changes in Fuel Prices
The NYK Group regularly purchases bunker oil for use as fuel for the vessels and aircraft it uses to transport cargo throughout the world. Bunker oil prices account for a substantial portion of the costs the NYK Group incurs in the liner trade segment, bulk shipping business, and air cargo transportation segment. Bunker oil prices and purchase availability are subject to global crude oil supply and demand, foreign exchange market fluctuations, changes involving OPEC and other crude oil producing countries, the state of environmental legislation, competition, and changes in myriad other factors, and forecasting the changes in all of these conditions is difficult. The NYK Group seeks to minimize the impact of such factors on its operating performance by purchasing bunker oil from diverse regions, using derivative transactions to hedge against fuel price fluctuations, and economizing on fuel consumption. Even so, these measures have limited effect, and there is no guarantee that they will be sufficient to protect the Group against price fluctuations and supply shortages.
Ⅳ Fluctuations in Interest Rates
To meet funding requirements for working capital and capital investment, such as that needed for vessels, aircraft, and transportation-related facilities, the NYK Group uses internal funds, as well as funds procured from external sources. Currently, a portion of the external funds are procured at floating interest rates. The Group seeks to minimize the effect of interest rate changes by moving towards fixed interest rates on the basis of its assumptions about the interest rate environment.
8. Effects of Low Sulfur Fuel Regulations from 2020
With the tightening of vessel fuel oil regulations related to sulfur content (i.e., SOx regulations) starting in January 2020, it is necessary to procure fuel that meets these regulations. However, there is a possibility that procurement costs will increase as the prices of such fuel soar. On the other hand, there is a possibility that investment in the renovation of vessels will increase in the future for the installation of desulfurization units so that high-sulfur fuels may continue to be used. The NYK Group intends to shift the cost burden arising from these regulations to customers by raising freight rates and applying fuel oil surcharges, among other plans. If all cost increases cannot be shifted, the NYK Group’s business, operating performance, and financial condition could be affected. Additionally, the operation of the NYK Group’s vessels could be influenced or delayed due to disruption caused by supply shortages of regulated fuels after the regulation commencement.
9. Valuation Losses on Investment Securities
The NYK Group uses the current value method to evaluate its holdings of investment securities that have explicit market values, taking as the market value the average market price during the one-month period preceding the end of the fiscal year. As a result, changes in stock market conditions could affect the operating performance and financial condition of the NYK Group.
Other Risks Related to Overall Management
10. Spread of Novel Coronavirus (COVID-19)
The Group forecasts that the contraction in economic activity due to the pandemic caused by the novel coronavirus (COVID-19) will have a major impact on all the NYK Group’s businesses. The Group is making every effort to ensure the safety of all employees by encouraging employees to work remotely and by implementing preventive measures against infection at worksites and offices. The Group has also adjusted operational measures, such as arranging crew changes and borrowed long-term capital and funds to ensure medium- to long-term financial commitments. However, the operation of the Group could be affected by risks, such as an increase in absences by sick employees at certain offices, temporary delays to the provision of services, an impact to transportation caused by the spread of infection on certain vessels, and harm to the provision of services to areas where the infection has spread.
The Group continues to give top priority to preventing the spread of infection inside and outside the company and ensuring the safety of employees. The Group continues to safely operate vessels and engage in stable transportation of energy, resources, and other materials that support life, but the performance and financial situation of the Group may be affected.
11. Affecting Global Operational Developments
Because the NYK Group’s operations extend to many areas around the world, economic conditions in each of these areas can influence the Group’s operations. Some potential risks are described below.
- Political or economic factors
- Government regulations, such as operational or investment permissions, taxes, foreign exchange controls, monopolies, or commercial limitations
- Joint operations or tie-ups with other companies
- Social upheaval, such as wars, riots, terrorist acts, piracy, infectious diseases, strikes, and computer viruses
- Earthquakes, tsunamis, typhoons, and other natural disasters
The NYK Group collects information in-house and uses external consultants to prevent or avoid the actualization of these risks. However, the occurrence of these events could affect the NYK Group’s business operating performance and financial condition.
As an air transport operator, the NYK Group operates its international air transport business in accordance with international laws and regulations, including international agreements, bilateral agreements, and decisions by the International Air Transport Association. The NYK Group air cargo transport business may be subject to antitrust laws regarding freight rates and charges. In addition, the cost of security measures is expected to increase amid the development of laws and regulations related to the strengthening of aviation security worldwide, particularly in the United States. Furthermore, efforts to reduce environmental impacts are steadily underway in the field of international civil aviation. If the cost of measures increases due to tighter regulations, etc., the NYK Group's business results and financial position may be affected.
Highly capable seafarers are particularly vital to the safe operation of the NYK Group’s vessels. The NYK Group employs various methods to secure highly capable seafarers, such as providing education and training and recruiting in other countries, but there is no guarantee that in the future the Group will always be able to secure enough seafarers that have the necessary skills at an appropriate level of cost. For instance, for several years before the collapse of Lehman Brothers in 2008, shipping demand was strong, and personnel costs for seafarers skyrocketed. If the COVID-19 spreads further and the NYK Group becomes unable to employ the required number of seafarers at a reasonable cost, the management of operations could be affected. Furthermore, some NYK Group employees, including seafarers, belong to labor unions. Any employee strikes, work stoppages, or acts of sabotage could affect the NYK Group’s management of operations. Third-party strikes or work stoppages by employees outside the NYK Group, such as, for example, strikes at port facilities in North America, could also impact the NYK Group’s management of operations.
In addition, war or other political factors could adversely influence the NYK Group’s business. The NYK Group is affected by the risk of conflicts and terrorism throughout the world, including the Middle East and North Korea. This risk includes issues and political uncertainties of international relations. In December 2019, the government of Japan decided to dispatch the Maritime Self-Defense Forces to the Gulf of Oman, the northern part of the Arabian Sea, the Gulf of Aden, and the Strait of Hormuz, where the threat of terrorism persists, to protect Group vessels. Further, although damage due to piracy has been decreasing in recent years, some of the vessels the NYK Group owns or charters operate in areas where pirate attacks are still frequent, including the straits of Malacca and Singapore, the Sulu and Celebes Seas, along the west coast of Africa, and in areas where Somali pirates are active, including the Gulf of Aden, the Arabian Sea, and the Indian Ocean. The NYK Group takes piracy countermeasures, such as gathering information from relevant agencies and getting escorts by the Japan Maritime Self-Defense Force in the Gulf of Aden region. However, terrorist or pirate attacks, or political instability or conflict, could impact the NYK Group’s business, operating performance, and financial condition. The exclusion of regions in which NYK Group vessels operate from coverage by standard war risks insurance (certain areas are already so designated) could impact insurance premiums and claim payments.
12. Litigation and Other Legal Procedures
The NYK Group is engaged in businesses in the liner trade and air cargo transportation segments, the Bulk Shipping Business, the real estate business, and other businesses. There is a risk of litigation, investigation, or punishment by regulatory authorities concerning all these business activities. Including the examples below, depending on the outcome, litigation could affect the operating performance and financial condition of the NYK Group. Since September 2012, the NYK Group has been investigated by authorities overseas on suspicion of violation of antitrust law in relation to the transport of automobiles and other cargoes.
Further, in the several countries, the NYK Group is a defendant in class action civil lawsuits demanding injunctions and unspecified payments to compensate for damages based on the allegation that the NYK Group and major automobile shipping companies jointly set freight rates with respect to the ocean transport of finished vehicles. It is difficult to reasonably estimate the outcome of these investigations and lawsuits.
The specific items described above are some of the ongoing risks that the NYK Group faces in its everyday operations and are not intended to encompass all potential risks.