Business Risk Factors

Renesas Electronics Group's operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect investors' judgments.

The Group recognizes the following as some of the most significant risk factors faced in its business operations as of March 31, 2011.

1) Market Fluctuations

Although the Renesas Electronics Group carefully monitors changes in market conditions, it is difficult to completely avoid the impact of market fluctuations due to economic cycles in countries around the world and changes in the demand for end products. Market downturns, therefore, could lead to sales declines for the Group, as well as lower fab utilization rates, which may in turn result in diminished cost ratios, ultimately leading to a significant deterioration in profits.

2) Foreign Currency Fluctuations

The operating results and financial position of the Renesas Electronics Group are affected by fluctuations in foreign currency exchange markets. The Group takes various measures to reduce risks relating to fluctuations in the foreign currency exchange markets, such as forward exchange contracts. However, significant fluctuations in the exchange rate may impact the yen values of foreign currency-denominated product sales, materials costs, and production costs in factories overseas. In addition, conversion of Renesas Electronics' foreign currency-denominated assets and liabilities, and the foreign currency-denominated financial statements of Renesas Electronics' overseas subsidiaries into Japanese yen for disclosure may also affect the Group's assets and liabilities, as well as earnings and expenses.

3) Countries' Legal Systems and Related Compliance

The Renesas Electronics Group conducts development, production and sales activities all over the world. Consequently, the Group may encounter risks associated with the countries and regions where it operates. Such risks include political and social instability, changes in legal regulations and social policies pertaining to areas such as trade, employment and the environment that impact business development, as well as deterioration in underlying economic conditions.

4) Natural Disasters

Natural disasters such as earthquakes, typhoons, and floods, as well as accidents, acts of terror and other factors beyond the control of the Renesas Electronics Group could severely damage semiconductor manufacturing facilities and other Group-owned facilities. The Renesas Electronics Group owns facilities in areas where earthquakes occur at a frequency higher than the global average. Consequently, the effects of earthquakes and other events could force a halt to manufacturing and other operations. The Renesas Electronics Group is insured against losses and damages relating to earthquakes; however, the insurance may be unable to cover all the losses and damages if the earthquake is extraordinarily severe.

5) Competition

The semiconductor industry is extremely competitive, and the Renesas Electronics Group is exposed to fierce competition from rival companies around the world in areas such as product performance, structure, pricing and quality. To maintain competitiveness, the Renesas Electronics Group takes various measures, including development of leading edge technologies, standardizing design, and cost reduction, but in the event that the Group is not competitive, the Group's market share may decline, which may negatively impact the Group's financial results. Price competition for the purpose of maintaining market share may also lead to sharp declines in the market price of the Group's products. When this cannot be offset by cost reductions, the Group's gross profit margin ratio may decline.

6) Product Production

a. Production Process Risk

Semiconductor products require extremely complex production processes. In an effort to increase yields from the materials used, the Renesas Electronics Group takes steps to properly control production processes and seeks ongoing improvements. However, the emergence of problems in these production processes could lead to worsening yields. This problem, in turn, could trigger shipment delays, reductions in shipment volume or, at worst, the halting of shipments.

b. Procurement of Raw Materials, Components, and Production Facilities

The timely procurement of necessary raw materials, components and production facilities is critical to semiconductor production. To avoid supply problems related to these essential raw materials, components and production facilities, the Renesas Electronics Group works diligently to develop close relationships with multiple suppliers. Some necessary materials, however, are available only from specific suppliers. Consequently, insufficient supply capacity amid tight demand for these materials as well as events including natural disasters, accidents, worsening of business conditions, and withdrawal from business by suppliers could preclude their timely procurement, or may result in sharply higher prices for these essential materials upon procurement.

c. Product Defects, Anomalies and Malfunctions

Although the Renesas Electronics Group makes an effort to improve the quality of semiconductor products and related software, they may contain defects, anomalies or malfunctions that are undetectable at the time of shipment due to increased sophistication of technologies and the diversity of ways in which the Group's products are used by customers. These defects, anomalies or malfunctions could be discovered after Renesas Electronics Group products are embedded in customers' end products, resulting in the return or exchange of Renesas Electronics' products, claims for compensatory damages, or discontinuation of the use of Renesas Electronics' products, which could negatively impact the profits and operating results of the Group. To prepare for such events, the Renesas Electronics Group has product liability insurance and recall insurance, but it is not guaranteed that the full costs of reimbursements would be covered by these.

d. Risks Associated with Outsourced Production

The Renesas Electronics Group outsources the manufacture of certain semiconductor products to external foundries and other entities. In doing so, the Group selects its trusted outsourcers, rigorously screened in advance based on their technological capabilities, supply capacity, and other relevant traits. This screening notwithstanding, the possibility of delivery delays, product defects and other production-side risks stemming from outsourcers cannot be ruled out completely. In particular, inadequate production capacity among outsourcers could result in the Group being unable to supply enough products amid periods of high product demand.

7) Product Sales

a. Reliance on Key Customers

The Renesas Electronics Group relies on certain key customers for the bulk of its product sales to end customers. A decision by these key customers to cease adoption of the Group's products, or to dramatically reduce order volume, could negatively impact the Group's operating results.

b. Changes in Production Plans by Customers of Custom Products

The Renesas Electronics Group receives orders from customers for the development of specific semiconductor products. There is a possibility that the customers may decide to postpone or cancel the launch of the end products in which the ordered product is scheduled to be embedded after the Group has started product design work based on their unique specifications. There is also a possibility that the customers may cancel their order if the functions and quality of the product do not meet the customer requirements. Further, the weak sales of end products in which products developed by the Group are embedded may result in customers reducing their orders, or postponing delivery dates. Such changes in production plans, order reductions, postponements and other actions by the customers concerning custom products may cause declines in the Group sales and profitability.

c. Reliance on Authorized Sales Agents

In Japan and Asia, the Renesas Electronics Group sells the majority of its products via independent authorized sales agents, and relies on certain major authorized sales agents for the bulk of these sales. The inability of the Group to provide these authorized sales agents with competitive sales incentives or margins, or to secure sales volumes that the authorized sales agents consider appropriate, could result in a decision by such agents to replace the Group products handled with those of a competitor, which could cause a downturn in the Group sales.

8) Retaining Human Resources

There is fierce competition in the semiconductor industry for talented human resources such as managers, technicians, researchers, and developers. For this reason, there is a risk that the Group may be unable to indefinitely retain talented human resources with adequate backgrounds in science, technology or engineering, particularly in the fields of LSI design and semiconductor manufacturing process technology.

9) Retirement benefit obligations

Retirement benefit obligations and prepaid pension cost recognized by the Renesas Electronics Group are calculated based on the premise of actuarial calculations such as discount rate and expected return on plan assets. It could negatively affect the Group's business, earnings and financial conditions if retirement benefit obligations increase when there is a discrepancy between the premise and result of actuarial calculations due to lower interest rates or declines in the stock market.

10) Impairment Loss on Long-term Assets

The Renesas Electronics Group has recorded property, plant and equipment and many other long-lived assets in its consolidated balance sheet, and when there is an indicator of impairment loss, the Group reviews whether it will be able to recover the recorded residual value of these assets in the form of future cash flows. If these assets do not generate sufficient cash flows, Renesas Electronics and the Renesas Electronics Group may be forced to recognize impairment loss in their value.

11) Information Management

The Renesas Electronics Group has in its possession a great deal of confidential information relating to its business activities. While such confidential information is managed according to internal regulations specifically designed for that purpose, there is always the risk that information may leak due to unforeseen circumstances. Should such an event occur, there is a likelihood that customer confidence and social trust would deteriorate, resulting in a negative effect on the Group's performance.

12) Environmental Factors

The Renesas Electronics Group strives to decrease its environmental impact with respect to diversified and complex environmental issues such as global warming, air pollution, industrial waste, tightening of hazardous substance regulations, and soil pollution. There is the possibility that, regardless of whether there is negligence in its pursuit of business activities, the Renesas Electronics Group could bear legal or social responsibility for environmental problems. Should such an event occur, the burden of expenses for resolution could potentially be high, and the Group could suffer erosion in social trust.

13) Business Activities Conducted Outside Japan

The Renesas Electronics Group implements various measures aimed at expanding business in overseas markets. These efforts can be adversely affected by factors such as barriers to long-term relationships with potential customers and local enterprises; restrictions on investment and imports/exports; tariffs; fair trade regulations; political, social, and economic risks; outbreaks of illness or disease; exchange rate fluctuations; drops in individual consumption or in equipment investment; fluctuations in the prices of goods and land; and rising wage levels. As a result, the Group may fail to achieve its initial targets regarding business expansion in overseas markets, which could have a negative impact on the business growth and performance of the Group.

14) Strategic Alliance and Corporate Acquisitio

For business expansion and strengthening of competitiveness, the Renesas Electronics Group may engage in strategic alliances, including joint investments, and corporate acquisitions involving third parties in the areas of R&D on key technologies and products, manufacturing, etc. The Group studies from many aspects the potential of these alliances and acquisitions in terms of return on investment and profitability, but time and money are necessary to achieve integration in areas such as business execution, technology, products, and personnel, and it is possible that these collaborative relationships cannot be sustained due to issues such as differences from the Group's partners on management strategy in areas such as capital procurement, technology management, and product development, or financial or other business problems the Group's partners may encounter. It is also possible that strategic alliances and corporate acquisitions may not actually yield the results initially anticipated.

15) Legal Issues

The Renesas Electronics Group is a defendant in multiple civil lawsuits related to intellectual property rights, and is the subject of legal proceedings by regulatory authorities and a defendant in multiple civil lawsuits related to possible violations of antitrust law/competition law. It is possible that the Group will become a party to such legal proceedings in future.
The Group has been named in the U.S. and other countries as one of the defendants in multiple civil lawsuits related to possible violations of antitrust law/competition law involving DRAM brought by purchasers of such products. Although a U.S. subsidiary of the Group had been named as one of the defendants in multiple civil lawsuits related to possible violations of antitrust law violations involving DRAM brought by indirect purchasers of such products as well as the Attorneys General of several states in the U.S., it agreed on settlement with plaintiffs. The U.S. subsidiary of the Group has already resolved by settlement class action lawsuits brought by direct purchasers, but it is still in settlement negotiations with several customers who have opted out of such class action lawsuits.
The Group has been named in Canada as one of the defendants in multiple civil lawsuits related to possible violations of competition law involving SRAM brought by purchasers of such products.
The Group has been named in the U.S. and other countries as one of the defendants in multiple civil lawsuits related to possible violations of antitrust law/competition law involving flash memory brought by purchasers of such products.
The Group's subsidiaries in North America, Europe and South Korea are the subject of investigations by the U.S. Department of Justice, the Competition Bureau of Canada, the European Commission, and the Korea Fair Trade Commission in connection with possible violations of antitrust law/competition law related to thin-film transistor liquid crystal displays (TFT-LCDs). Among those, the European Commission issued a statement of objections against the parties concerned and entered into formal investigation process in May 2009, and also imposed a fine on multiple LCD panel manufacturers in December 2010. However, the subsidiary of the Group has not received this statement of objections, nor has it been treated as a subject in the following procedures.
The Group is the subject of an investigation by the European Commission regarding possible violations of competition law in relation to smartcard chips.
It is difficult to predict the outcome of the legal proceedings to which the Group is presently a party or to which it may become a party in future. The resolution of such disputes may require considerable time and expense, and it is possible that the Group may be required to pay compensation for damages, possibly resulting in significant adverse effects to the business, performance, and financial condition of the Group.

16) Business Integration

On April 1, 2010, the former NEC Electronics Corporation and the former Renesas Technology Corp. merged to form Renesas Electronics Corporation. It is possible that the anticipated benefits and synergies from the merger may not be realized, that changes to operating procedures due to the merger could cause confusions, or that unexpected situations arising from the merger could generate costs that are larger-than-expected, which could have a negative impact on the business performance of the Renesas Electronics Group.