Risk Management

Komatsu recognizes compliance, the environment, product quality, accidents and information security, as risk factors for sustainable growth and is therefore implementing the following countermeasures.

Basic Principles and System for Risk Management

Komatsu has established the Risk Management Rules to correctly recognize and manage risks, for which the company has appointed personnel in charge of individual risks, further promoting the build-up of a solid foundation for risk management. Komatsu has also established the Risk Management Committee to devise risk management policies of the Komatsu Group, evaluate and follow up risk measures in place, and take control of risks when they surface. The Risk Management Committee regularly reports its reviews and activities to the Board of Directors. When serious risks surface, Komatsu will establish an emergency headquarters and work to minimize damage(s) and implement appropriate measures.

Promoting a Business Continuity Plan

Komatsu has formulated a business continuity plan (BCP) to carry out major operations without suspension, or restore them after a short suspension, should a disaster or accident occur. At the Head Office, we conduct regular drills to ensure that employees are capable of taking appropriate action in the event of a real emergency, assuming the occurrence of an earthquake striking beneath the greater Tokyo metropolitan area. At all our plants, we have been enhancing the seismic strength of their buildings and facilities in addition to developing measures against torrential rainfall in accordance with the plans each plant has formulated. With respect to health risks of employees, we also strive to deepen employees' understanding by providing an action manual on how to prevent and respond to an outbreak of infectious disease, and related education.

Promoting Group-wide Risk Management

To reinforce the risk management structure across the Group, Komatsu is working to enhance the level of management at each Group company by establishing reporting lines and printing manuals related to risk and through explanatory meetings and study sessions on risk management and BCPs. We are also strengthening our Group-wide system for communications in times of emergency by introducing tools such as an emergency contact and employee safety confirmation system and a wide range two-way radio and by conducting regular drills on using the system and securing communication.

Strengthening Information Security

With the Information Security Committee at its core, Komatsu is developing a structure for information security for the entire Group. As part of this effort, we have distributed Information Security Guidebook to all employees in order to raise their awareness of information security, and have offered training programs based on this booklet. Additional measures include the establishment of a protective framework for our system to prevent information from being falsified, destroyed, leaked or lost due to negligence or unauthorized access from outside the company. Moreover, we undertake information security audits to confirm that measures are being effectively implemented, and to discover defects and make the required improvements.

Business and Other Risks as well as Countermeasures

Komatsu has identified the following risks as its primary risks based on information currently available to it.

1. Economic and Market Conditions

The business environment in which Komatsu operates and the market demand for its products may change substantially as a result of economic and market conditions, which differ from region to region. Changes in the business environment in which Komatsu operates may lead to a decline in sales, and inefficient inventory levels and/or production capacities, thereby causing Komatsu to record lower profitability and incur additional expenses. As a result, Komatsu's results of operations may be adversely affected.

[Countermeasure] Quick grasp on retail market conditions by promoting zero inventories at its distributors.

2. Foreign Currency Exchange Rate Fluctuations

A substantial portion of Komatsu's overseas sales is affected by foreign currency exchange rate fluctuations. In general, an appreciation of the Japanese yen against another currency would adversely affect Komatsu's results of operations, while a depreciation of the Japanese yen against another currency would have a favorable impact thereon. In addition, foreign currency exchange rate fluctuations may also affect the comparative prices between products sold by Komatsu and products sold by its foreign competitors in the same market, as well as the cost of materials used in the production of such products.

1.Flexible global cross-sourcing

2. Hedging activities to minimize the effects of short-term foreign exchange rate fluctuations

3. Fluctuations in Financial Markets

While Komatsu is currently improving the efficiency of its assets to reduce its interest-bearing debt and minimizing the adverse effect of interest rate fluctuations by mixing long-term, fixed-interest funds, an increase in interest rates may increase Komatsu's interest expenses and thereby adversely affect Komatsu's results of operations. In addition, fluctuations in the financial markets, such as fluctuations in the fair value of marketable securities and interest rates, may also increase the unfunded obligation portion of Komatsu's pension plans or pension liabilities, which may result in an increase in pension expenses. Such an increase in interest expenses and pension expenses may adversely affect Komatsu's results of operations and financial condition.

4. Laws and Regulations of Different Countries

Komatsu is subject to governmental regulations and approval procedures in the countries in which it operates. If the government of a given country were to introduce new laws and regulations or revise existing laws and regulations relating to customs duties, import and export controls, currency restrictions and other legal requirements, Komatsu may incur expenses in order to comply with such laws and regulations, or its development, production, sales and service operations may be affected adversely by them. With respect to transfer pricing between Komatsu and its affiliated companies, Komatsu is careful to comply with applicable taxation laws of Japan and the concerned foreign governments. Nevertheless, it is possible that Komatsu may be viewed by the concerned tax authorities as having used inappropriate pricing. Furthermore, if intergovernmental negotiations were to fail, Komatsu may be charged with double or additional taxation. When facing such an unexpected situation, Komatsu may experience an unfavorable impact on its business results.

5. Environmental Laws and Regulations

Komatsu's products and business operations are required to meet increasingly stringent environmental laws and regulations in many countries in which Komatsu operates. To comply with the environmental laws and other related regulations of concerned governments, Komatsu expends a significant share of its management resources, such as research and development expenses. If Komatsu is required to incur additional expenses and make additional capital investments due to revised environmental regulations adopted in the future, or if its development, production, sales and service operations are adversely affected by such revised regulations, Komatsu may experience an unfavorable impact on its business results.

6. Product and Quality Liability

While Komatsu endeavors to sustain and improve the Quality and Reliability of its operations and products based on stringent standards established internally, Komatsu may face product and quality liability claims or become exposed to other liabilities, if unexpected defects in its products result in recalls or accidents. If the costs for addressing such claims or other liabilities are not covered by Komatsu's existing insurance policies or other protective means, such claims may adversely affect its profits.

7. Alliances and Collaborative Relationships

Komatsu has entered into various alliances and collaborative relationships with distributors, suppliers and other companies to reinforce its international competitiveness. Through such arrangements, Komatsu is working to improve its product development, production, sales and service capabilities. However, Komatsu's failure to attain expected results or the termination of such alliances or collaborative relationships may adversely affect Komatsu's results of operations.

8. Procurement, Production and Other Matters

Komatsu's procurement of parts and materials for its products is exposed to fluctuations in commodity and energy prices. Price increases in commodities, such as steel materials, as well as energies, such as crude oil and electricity, may increase the production cost of Komatsu's products. In addition, a shortage of product parts and materials, bankruptcies of suppliers or production discontinuation by suppliers of products used by Komatsu may make it difficult for Komatsu to engage in the timely procurement of parts and materials and manufacture of its products, thereby lowering Komatsu's production efficiency. With respect to an increase in the cost of production as mainly affected by an increase in the cost of materials, Komatsu mainly strives to reduce other costs and make price adjustments of its products. Komatsu also strives to minimize the effects of possible procurement or manufacturing issues by promoting closer collaboration among its related business divisions. However, if the increase in commodity and energy prices were to exceed Komatsu's expectations or a prolonged shortage of materials and parts were to occur, Komatsu's results of operations may be adversely affected.

[Countermeasure] Reinforcement of collaboration with suppliers

9. Information Security, Intellectual Property and Other Matters

Komatsu may obtain confidential information concerning its customers and individuals in the normal course of its business. Komatsu also holds confidential business and technological information. Komatsu safeguards such confidential information with the utmost care. To forestall unauthorized access by means of cyber-attacks, tampering, destruction, leakage and losses, Komatsu employs appropriate safety measures, including implementing technological safety measures and strengthening its information management capabilities. However, when its network and information systems crash and/or have problems, such as a leak of confidential information concerning customers and individuals, occur, Komatsu may become liable for damages, or its reputation or its customers' confidence in Komatsu may be adversely affected. In addition, if Komatsu's confidential business and technological information were leaked or misused by a third party, or Komatsu's intellectual properties were infringed upon by a third party, or Komatsu were held liable for infringing on a third party's intellectual property rights, Komatsu's business results may be adversely affected.

[Countermeasure] Reinforcement of information security

10. Natural Calamities, Wars, Terrorism, Accidents and Other Matters

If natural disasters (such as earthquakes, tsunamis and floods), epidemics, radioactive contamination, wars, terrorist acts, riots, accidents (such as fires and explosions), unforeseeable criticism or interference by third parties or computer virus infections were to occur in the regions in which Komatsu operates, Komatsu may incur extensive damage to one or more of its facilities that they could not become fully operational within a short period of time. Even if Komatsu's operations were not directly harmed by such events, confusion in logistic and supply networks, shortages in the supply of electric power, gas and other utilities, telecommunication problems and/or problems of supplier's production may continue for a long period of time. Accordingly, if delays or disruption in the procurement of materials and parts, or the production and sales of Komatsu's products and services, or deterioration of the funding environment resulting from confusion on capital markets were to take place as a result of such events, Komatsu's business results may be adversely affected.

[Countermeasure] Risk management