JDI > Risk Factors

Risk Factors

Japan Display Inc. (JDI) is confronted by risks that may affect our business results and financial condition. These risks are presented below. The forward-looking statements contained in this web page are based on judgments made by JDI as of February 14, 2018.

(1) Variability in Economic Conditions

JDI conducts business operations in various regions of the world. Variability in the global economy determines increases or decreases in demand for our display products and can affect our overall business performance, results of operations and financial condition. Above all, as demand for mobile products that incorporate use of our small-medium displays is strongly affected by global economic trends, unexpectedly negative domestic or overseas economic conditions may result in lower demand for JDI's displays and the end-products that are equipped with our displays. This may in turn cause the economic climate surrounding our business to deteriorate and adversely affect our overall business performance, results of operations and financial condition.

(2) Focus on Small-Medium Displays

The majority of JDI sales depend on sales of small-medium displays. The focus of our manufacturing and sales is on highly functional high-value added small-medium displays with high-resolution, wide-viewing angle, low-power consumption, thin/light form factor and narrow borders. Thus JDI's business performance, results of operations and financial condition can be affected by trends in the domestic and overseas markets for small-medium displays and by market trends for smartphones, tablets, automotive displays, digital cameras, medical devices and other end-products that incorporate small-medium displays manufactured by JDI.

In particular, smartphones in the premium price range which make a large contribution to JDI's sales are showing signs of maturity in advanced countries while the use of low-price smartphones in newly developing countries is expanding. This may result in lower than expected market growth for premium smartphones. As a result JDI's business performance, results of operations and financial condition may be adversely affected.

(3) Growing Competition

JDI faces severe competition from other makers in the domestic and overseas small-medium display market. It is possible that among our competitors some have advantages with respect to financial resources, research & development, technology, manufacturing capacity, marketing, cost competitiveness, business portfolios or other. Also, if some competitors devote greater resources to the small-medium display business and increase production, or if they form alliances or execute mergers (recent years have seen the creation of competing alliances), the competitive environment may become more severe. An increase in competition in the small-medium display market due to these factors may have an adverse impact on JDI's business performance, results of operations and financial condition.

(4) Selling Price Declines

JDI takes various actions to protect itself against the risk of selling price declines. We endeavor to achieve greater added value and improve product quality to maintain or achieve premium price levels. We also try to reduce the number of components, improve yields and take other steps to reduce costs. However, overcapacity in the overall display industry, a drop in demand for high-specification displays, entry into the high-specification display market by makers in China and Taiwan, a growing ratio of JDI sales of displays used in medium-price smartphones (especially in China) and severe competition in the domestic and overseas markets are among the reasons why the prices of JDI products may fall below the level of cost reductions or may result in an expansion of sales of products that carry a low profit margin. If these events happen JDI may be unable to secure sufficient profits, which may adversely affect results of our operations.

(5) Market and Seasonal Factors

In general the market for smartphones, tablets and other major end-products that use the small-medium displays manufactured by JDI strongly depends on business trends that are driven by economic conditions and consumer spending levels in various regions, sales timing of popular models, new model releases and the success of newly released models. At the same time sales of these end-products also depend on seasonal factors that can boost sales, such as the start of school terms in the US and Europe, Christmas and the Chinese New Year.

In a typical year these seasonal factors generally result in a slowdown in JDI's sales in the first quarter (April to June) and the fourth quarter (October to December). Our production is adjusted mainly in response to purchase orders placed by our customers. However, we often undertake advance sourcing of materials that have long lead times or make-to-stock production based on our customer demand forecasts in order to enable the timely supply of products. For these reasons, if market fluctuations cause actual orders from our customers to substantially change, this could lead to excess inventory of materials or semi-finished products, a lower fab utilization rate or damage suffered due to missed business opportunities, which in turn might have a significant adverse impact on results of our operations. Also, the seasonal factors described above can result in changes in orders and sales conditions, which can adversely affect results of our operations.

(6) Rapid Technology Innovations

Since JDI manufactures and sells small-medium displays that require advanced technology, possessing superior technology is crucial to our ability to be competitive. We believe our core technology, LTPS, is currently the driving force behind the demand for displays with higher resolution, narrower bezels and lower power consumption in the small-medium display market and end-product market. However, since small-medium displays are a technology field subject to extremely fast innovation the ability to swiftly provide customers with products containing the latest technology may require long-term investment and resource allocation. Therefore, despite making these investment and resource commitments, any loss of technology advantages by JDI may cause us to become less competitive and profits obtained may not be commensurate with our investment and resource allocations. This in turn may adversely affect JDI's business performance, results of operations and financial condition.

(7) Consumer Trends

JDI at this time recognizes that there is high demand for high-end high-value added small-medium displays with high-resolution, wide-viewing angles, low-power consumption, thin/ light-weight features and narrow borders for high-specification smartphones and tablets. However, sales of smartphones, tablets and other important end-products that use the small-medium displays manufactured by JDI are highly susceptible to consumer trends. If demand slows for the end-products that use our displays due to a change in consumer preferences, if we fail to accurately understand consumer trends or the needs of our customers, or if we are unable to supply products commensurate with demand from our customers, JDI's business performance, results of operations and financial condition could be adversely affected.

(8) The Uncertainty of Benefits from Investment in Research and Development

In order to maintain our position as a leading company in the small-medium display business JDI is committed to investing in research and development (R&D). However, the possibility exists of being unable to realize the benefits expected from investment in R&D or of obtaining benefits that do not lead to sufficient profits. In order to minimize this kind of negative result we try to maximize our R&D investment benefits by cautiously making selective R&D choices based on clear development objectives. Also, at the development stage we make periodic reviews in order to judge whether to continue certain development initiatives. Despite the existence of these precautions if we are unable to obtain a return on investment in R&D this may adversely affect JDI's business performance, results of operations and financial condition.

(9) Manufacturing Line Operational Conditions

The small-medium display business that JDI is involved in requires having and maintaining large-scale fabs and manufacturing equipment as well as hiring a large number of employees, which results in a relatively high level of fixed costs. Accordingly, if our fab utilization rate falls to a low level due to fewer orders from major customers, changes in demand, over-supply, competition with other companies or other factors, this may adversely affect results of our operations.

The production of high-end high-value small-medium displays with high-resolution, wide-viewing angles, low-power consumption and thin/lightweight features requires sophisticated manufacturing technology and advanced skills. The majority of JDI's manufacturing is devoted to custom products. Since components and manufacturing equipment settings are different for many of our products, making products based on new technologies backed by little accumulated know-how or making changes to manufacturing processes can require time before achieving high production yields and lead to product quality issues. Also, meeting the responsibilities imposed by customer supply contracts or satisfying customer needs may require continuing to manufacture products that have low yields. JDI carefully manages and integrates its development, design, process, manufacture and product quality assurance policies to minimize problems in these areas. We have also created a company structure that can quickly resolve any occurrence of problems. Further, we have educational programs for upgrading the skills of employees operating our manufacturing lines. Still, if yield problems or product quality issues occur they can adversely affect results of our operations.

(10) Reliance on Specific Devices or Customers

JDI currently manufactures displays used in specific smartphone models that have large shares of the global smartphone market. Sales to a particular customer who is an end-product maker of these specific models represent a large portion of JDI's total sales. A reduction in the competitiveness of this customer or the specific models, an inability by JDI to meet demand from this customer, the development of new displays by competitors that substitute for our products or other adverse development may cause this particular customer to reduce or discontinue orders to JDI or deterioration in profit margins, or business conditions associated with the transactions with this customer could have an adverse impact on results of our operations.

(11) Partnerships, Strategic Alliances or Buyout Benefits

In order to achieve stronger competitiveness and earnings potential, maintain a long-term supply structure and develop new technology and new products, JDI has business collaborations with component makers, equipment makers, end-product makers and other companies. Going forward, enhancing our competitiveness in R&D, manufacturing and other areas may involve additional collaborations as well as strategic alliances, buyouts and other actions. These collaborations, strategic alliances or buyouts may be unavoidably impossible to achieve or maintain or the associated benefits may be too few due to fundraising limitations, changes in strategic goals, occurrences of business problems related to technology management or product development, licensing or other regulatory problems or changes in the market. If any of these events happen it may adversely affect results of operations or financial condition. Also, the results of collaborations with particular third parties, strategic alliances or buyouts may interfere with our transactions involving collaborations or alliances with other companies or potential buyouts, resulting in restrictions on JDI's company management or business management choices.

(12) Litigation or Other Legal Proceedings

JDI manufactures and sells small-medium displays that utilize advanced technologies. However, the products manufactured using advanced technologies may contain errors or defects that are undetected prior to shipping. If product quality problems occur after shipping, product returns or repairs, design changes or other corrective actions may require large costs or require us to divert engineering or other employee resources to resolve problems. Our relationships with customers or trust in JDI may also suffer damage. Further, defects in JDI products may lead to litigation against JDI or our customers. Since JDI operates around the world we are subject to the risk of litigation or becoming a party to legal proceedings in a variety of countries. If JDI does become involved in litigation or become a party to legal proceedings differences in judicial and court systems in other countries, or depending on the type of legal case, we may become subject to a legally enforceable order to pay large-scale compensation for damages or penalties.

Also, in relation to possible violations of competition laws governing the display business, JDI may face investigations conducted by government authorities that regulate commerce or litigation proceedings in Japan or other countries or regions. The result of such investigations or litigation may be legally enforceable orders to pay penalties or compensation for damages in multiple countries or jurisdictions. Anticipating penalties or legal enforcement actions imposed by regulatory authorities or a court of law is difficult. The resolution of legal enforcement matters may require considerable time and expense, which may in turn negatively affect JDI's business performance, results of operations and financial condition as well as seriously injure our reputation and creditability.

(13) Largest Shareholder Innovation Network Corporation of Japan

JDI was established on March 30, 2012 as a new company based on the integration of the small-medium display subsidiaries and certain related businesses of Sony Corporation, Toshiba Corporation and Hitachi, Ltd. under an arrangement mainly handled by the Innovation Network Corporation of Japan (INCJ). At the end of the most recent consolidated accounting period INCJ had more than one-third of JDI's common stock voting rights. These voting rights allow INCJ to exert a certain amount of influence over fundamental JDI decisions about the appointment and dismissal of directors, organizational restructuring such as mergers with other companies, sales of important assets or business departments, changes in our articles of incorporation and declarations of dividends. The interests of INCJ may not always agree with the interests of our other shareholders. Also, as a sponsor that supports further increases in JDI's corporate value INCJ has indicated its intention to apply a long-term view to its JDI shareholdings. However, if INCJ sells a portion of its holding in the stock market the scale of the sale or some other market action may affect the supply and demand and the price of JDI shares.

(14) Foreign Exchange Rate Trends

JDI's customers, suppliers and business transactions span various regions around the world. Since the cost and prices of products and services denominated in foreign currencies are influenced by fluctuations in exchange rates in the foreign exchange market, this can have an effect on JDI's business, results of operations and financial condition. JDI engages in forward exchange contracts or other hedging transactions to minimize the influence of foreign exchange rate fluctuations, but there is no assurance that such arrangements will be sufficient to protect us against adverse movements in exchange rates. In addition, because the local currency-based assets and liabilities of our overseas subsidiaries are translated into yen terms when we prepare our consolidated accounting financial statements, JDI's financial condition may be adversely affected by foreign exchange rate fluctuations.

(15) Delays in Acquiring, Unavailability, Declines in Product Quality or Steep Price Increases of Externally Sourced Raw Materials & Components and Higher Energy Costs

JDI purchases raw materials, components and other supplies from multiple suppliers. Our manufacturing is structured to acquire raw materials and other supplies as needed and in appropriate amounts. However, since some of these raw materials and components have special properties, the number of suppliers is limited or switching to alternative suppliers can be difficult. If the business environment affecting one of our suppliers turns negative, disasters or other problems result in delayed supplies of raw materials or components, or we experience insufficient supply or sudden price increases for supplies, this may cause delays in delivery of our products or a rise in our costs if we are compelled to procure supplies from an alternative supplier. Also, defects in the raw materials or components procured or supplies that do not meet the specifications of JDI or our customers can affect the quality and evaluation of JDI products or result in claims or legal action against JDI or our customers.

Further, JDI's business depends on large, steady supplies of energy. If the cost of electricity rises due to reductions in power supplies caused by restrictions in operating capacity at Japan's nuclear power plants or by rapid increases in prices for oil and other imported fuels due to sudden yen depreciation or other pricing factors, this may adversely affect results of our operations.

(16) Development of Overseas Business

In addition to Japan, JDI has manufacturing sites in China, Taiwan and the Philippines, and we conduct business in many countries around the world. Sales made to overseas customers represent a large portion of our total sales. When we develop business overseas we examine such risk factors as changes in our overseas subsidiaries, economic and political instability of a country, wage growth due to inflation in newly emerging countries and antagonistic relations with local workers, strengthened foreign exchange controls, unexpected enactment of or changes in laws or regulations, differences in or adverse changes in taxation, the judicial system or business environment, taxation or other administrative actions, military conflict, terrorism and boycotts based on anti-Japanese sentiment. Any of these factors could affect JDI's business performance, results of operations and financial condition.

(17) Procurement of Funding

JDI may obtain funding through borrowing from financial institutions, leasing or issuing corporate bonds in order to sustain investment in R&D and advanced manufacturing lines. However, based on financial market or display industry trends or JDI's creditworthiness, the procurement of necessary funding may not be possible or funding procurement costs may increase. When borrowing from financial institutions, leasing or issuing corporate bonds, certain financial covenants may be prescribed in the relevant agreements. If we breach such financial covenants and lose the benefit of time, we may be obliged to repay the outstanding principal and interest thereof before the agreed repayment date, and, as a result, our cash management may be adversely affected. If some event has a negative effect on JDI's funding procurement, JDI's business development, capital expenditures, results of operations, financial condition or some other aspect of JDI may be adversely affected. Also, in the future funding may be obtained through the issuance of new stock. Procuring funds via an equity offering could result in dilution and may adversely affect JDI's stock price.

(18) Impairment of Fixed Assets and Business Restructuring Charges

JDI has a number of fixed assets such as tangible fixed assets and goodwill. The carrying value of fixed assets in consolidated accounts is determined by the periodic evaluation of the realizable residual value of estimated future cash flow from these assets. If for competitive or other reasons our business profitability declines and we make a determination that these assets cannot generate sufficient cash flow, recognizing the impairment loss of these assets in our financial accounting becomes necessary, which may affect results of our operations and our financial condition.

Also, remaining competitive in the future means that JDI may need to close unproductive manufacturing facilities, cancel R&D projects or take other business restructuring steps. If such action is required business restructuring costs may be incurred in connection with impairment of equipment assets or employee downsizing, skilled employees may leave JDI or other consequences may appear that adversely affect results of our operations and our financial condition.

(19) Highly Specialized Personnel and Senior Management

JDI believes that by hiring and retaining highly specialized personnel for its technology development departments it can maintain a competitive advantage. However, since the availability of highly specialized personnel is limited the competition involving the hiring and retaining of these personnel is severe. If personnel with superior qualifications cannot be hired this may affect results of our operations and our financial condition. Also, if highly specialized personnel resign to take positions with competitors and share the experience and knowhow they acquired while employed at JDI this could result in a relative decline in our competitive standing. Further, the capabilities and services contributed by JDI's senior management is considerable. If for some reason members of senior management resign their position at JDI and cannot be replaced, the health of particular members of our management declines, or the need to respond to litigation or other unexpected situations diverts the attention of company management away from the management of JDI's business, JDI's business performance, results of our operations and our financial condition may be adversely affected.

(20) Internal Controls Related to Financial Statements

JDI considers the establishment and operation of internal controls to assure the integrity of financial statements as one of the most important responsibilities for management. Such controls are used throughout JDI to inspect and improve the oversight of group company operations and perform other important functions. However, there is no assurance that the establishment or operation of these internal controls will remain effective in the future. Moreover, as internal controls have inherent limitations, any failure by these controls to function effectively or any defects in these controls that relate to financial statements or that result in failure to disclose material information could adversely affect the credibility of JDI's financial statements.

(21) Leakages of Personal Information and Other Kinds of Confidential Information

JDI maintains and manages confidential information in a variety of formats that includes information about our company, business partner and customer technology, R&D, manufacturing, sales and marketing activities as well as private information received from customers, business partners and shareholders. We use appropriate management procedures to protect this confidential information. However, there is no assurance these procedures will always remain effective. If due to unexpected events the information we maintain and manage leaks and is subsequently acquired or used inappropriately by third parties this could lead to such consequences as litigation related to a demand that JDI provide compensation for damages. Any legal action pursued against JDI may have a negative effect on our business performance, results of operations, financial condition, reputation and credibility.

(22) Intellectual Property Rights

JDI seeks to protect its corporate technology by taking appropriate steps in Japan and other countries or regions to acquire intellectual property rights. However, it is possible that in some countries or regions we have not acquired a sufficient level of these rights.

Also, JDI often enters into licensing agreements with third parties to use third-party intellectual property assets. However, the possibility exists that JDI may not be able to secure the necessary licensing from third parties, that we can only secure licensing with unfavorable conditions attached or that competitors enter into more advantageous licensing agreements with third parties than we can obtain, any of which could result in a relative decline in JDI's competitiveness.

Moreover, the intellectual property rights associated with JDI products could become subject to patent infringement lawsuits or other litigation by a third party against JDI or our customers. As a result some of JDI's products may be unable to be manufactured or sold in certain countries or regions or JDI may become liable for payment of compensation due to damages to third parties or JDI customers.

Other companies that have licensing agreements with JDI maybe be bought out by third parties. In that case the buyout may allow a third party that has had no licensing arrangements with JDI to obtain access to JDI intellectual property assets. Such an event may result in a decline in JDI's competitiveness.

In addition, the content of new business that is based on an alliance or other cooperative arrangement with a third party may not be covered by the scope of an existing intellectual property rights licensing agreement with another third party. In that event JDI may be compelled by the latter third party to make new payments.

Finally, JDI may at times be forced to preserve its intellectual property rights by taking legal action against a third party. As a result of any litigation we may lose access to important technology. Further, under internal company policies JDI provides financial rewards to employees who realize a discovery or creation during the performance of his or her duties at JDI. However, the possibility exists that an employee may take legal action against JDI in regard to the amount of this financial reward or for other reasons.

(23) Environmental and Other Regulatory Restrictions

JDI's business is subject to restrictions under various laws and regulations in Japan and other countries. Also, we abide by the application of pollution of air/land/water, hazardous substances, waste treatment, product recycling, prevention of global warming, energy and other environmental laws and regulations in countries and regions around the world. JDI's business operations pay careful attention to these laws and regulations. However, the possibility exists that restrictions on the manufacturing and sale of our products or on capital investment may harm the development of our business, compliance with any new or modified laws or regulations may impose greater costs on JDI or JDI may violate certain laws or regulations. Any of these outcomes may adversely affect results of our operations or cause harm to our reputation for social responsibility in local communities or countries.

(24) Possibility of Recovering Deferred Tax Assets

JDI recognizes the realizable amount of deferred tax assets attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and for operating losses carried forward, taking into consideration future taxable income.

We review as appropriate future taxable income in light of changes in the business environment and other conditions. However, if the review results in a determination that the full amount or a partial amount of deferred tax assets cannot be recovered, a reduction in deferred tax assets may adversely affect results of our operations or our financial condition.

(25) The Impact of Natural Disasters and Other Damaging Events

JDI has manufacturing facilities in Japan, China, Taiwan and the Philippines, and sales offices situated around the world. Major damages due to earthquakes, tsunamis, torrential rain, floods, lightening and other natural disasters; malware damage to computers; leakage of customer data; disruption of the supply chain due to a disaster at a components supplier; outbreaks or the spread of epidemics; military conflict; terrorist incidents; violent protests or labor strife or other disastrous events may have a crippling effect on JDI's business operations, resulting in production, supply or shipment stoppages.

Also, any instability in the electrical power systems or infrastructure caused by a disastrous event that may result in shortages of power supplies, distribution disruptions or other problems with public infrastructure may cause a decline in JDI's manufacturing output, interfere with supply acquisitions, delayed product deliveries or other negative consequence. As a result JDI's business performance, results of operations and financial condition may be adversely affected. In order to protect ourselves against damage from disasters we have obtained various kinds of insurance that provide in our judgement appropriate levels of coverage for damage to or caused by buildings, structures, equipment, costs of substitute inventory or shipments in progress, business stoppages, product liability and other adverse events. However, as this insurance contains deductibles and other limiting conditions the full cost of any damages suffered by JDI may not be fully recoverable.

Material Events Related to Going Concern Assumptions

JDI is currently implementing the structural reforms announced on August 9, 2107. As a result, the recording of a portion of business structure improvement expenses and a net loss attributable to owners of the parent in the accounting of consolidated financial results for the third quarter of FY 2017 raises substantial doubt about the company's ability to continue as a going concern,

However, financial measures that will assure stable funds procurement and financing are being taken to improve cash flow. Also, based on revamping its manufacturing capabilities and streamlining of fixed assets, the selection and elimination of business activities and rebuilding of its organizational structure, JDI is making fundamental structural improvements to rationalize management that will support the transition to a more flexible and leaner corporate structure and bring other positive changes.

These actions are ultimately intended to lead to improvements in earnings. Furthermore, JDI is moving forward with accelerating the establishment of mass manufacturing technology to commercialize OLED displays and strengthening management resources in growth business areas in order to transform and improve its earnings structure. Based upon these observations and measures, JDI has concluded that there is no significant uncertainties related to going concern assumptions.

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