3. Risk factors
Listed below are the various risks that could significantly affect Nintendos operating results, share price and financial condition. However, unpredictable risks may exist other than the risks set forth herein.
Note that matters pertaining to the future presented herein are determined by Nintendo as of the end of the fiscal year ended March 31, 2017.
(1) Risks around economic environment
Fluctuation in foreign exchange rates
Nintendo distributes its products globally with overseas sales accounting for about 70% of its total sales. The majority of monetary transactions are made in local currencies. In order to reduce the influence of fluctuations
in foreign exchange rates, we have implemented measures such as increasing purchases in US dollars; however, it is difficult to eliminate the risks completely. In addition, the Company holds a substantial amount of assets in foreign currencies. Thus, fluctuations in foreign exchange rates have a strong influence not only
when accounts in foreign currencies are converted to Japanese yen but also when they are revaluated for financial reporting purposes.
(2) Risks around business activities
Fluctuation of market environment and competition against other companies
Nintendos business is engaged in one segment of the broad entertainment field. However, its business can be affected by trends in other segments of the entertainment field. If consumer preferences shift to other forms of
entertainment, the video game market may shrink. The emergence of new competitors resulting from technological innovation could have a detrimental impact as well.
In the video game industry, it may become even more difficult to be profitable due to large investments required in research and development, and marketing. In addition, competition may intensify with large-scale
companies doing business in the same industry or in other segments of the entertainment field. As a result, Nintendo may experience difficulty in maintaining or expanding its market share as well as sustaining
profitability.
Furthermore, Nintendo may face rapid structural changes or the imposition of new laws and regulations and, if unable to adapt to such changes, be affected in terms of its business and performance.
Development of new products
Although Nintendo continuously makes efforts to develop innovative and attractive products in the field of computer entertainment, the development process is complicated and includes many uncertainties. The various risks involved are as follows:
a. Despite the substantial costs and time needed for development of software for dedicated video game platforms and applications for smart device gaming services, there is no guarantee that all new products and services will be accepted by consumers due to ever shifting consumer preferences. Also, development of certain products may be suspended or aborted.
b. While development of hardware is time-consuming, with technology continuously advancing, the Company may not be able to equip technologies required for entertainment. Furthermore, delays of hardware launches could adversely affect market share.
c. Due to the nature of Nintendo products and services, it may become difficult to develop, sell or launch the products and services as planned and the original plan could differ to a large extent.
Product valuation and adequate inventory procurement
Products in the video game industry have relatively short life cycles, and are significantly impacted by consumers preferences as well as seasonality. Although production is projected based on the forecasted
equilibrium point of supply and demand, it is difficult to forecast demand accurately, which may lead to excess inventory. Obsolete inventory could have an adverse effect on Nintendos operations and financial
position.
Dependency on outside manufacturers
Nintendo commissions a number of outside manufacturers to produce key components or assemble finished products. In the event one or more of these businesses fail, Nintendo may have difficulty procuring key components or manufacturing its products. In addition, suppliers may be unable to provide necessary
components on a timely basis. A shortage of key components could cause marginal decline due to higher costs, shortage of products and quality control issues. These issues may impair the relationship between Nintendo and its customers. Furthermore, as many suppliers production facilities are located overseas, potential production interruptions caused by societal violence, natural disasters or any other accidents in the area could negatively affect Nintendos operating performance.
Business operations affected by seasonal fluctuation
A major portion of demand for Nintendos products is focused around the holiday season. Should Nintendo fail to release attractive new products or supply hardware during that period, it would suffer unfavorable operating performance.
Unauthorized access to systems
Nintendo operates various Internet services, including the Internet-based competition games, download sales of digital software and service provision via Internet servers, in addition to providing information via the Internet. If a cyber-attack were launched against these systems resulting in the termination or destruction of the systems, or the leakage or unauthorized use of data, it could have an adverse effect on Nintendos future
operating results, share price and financial condition.
Various factors affecting business activities
In addition to Japan, Nintendo engages in business in the United States, Europe, Australia, Asia and other areas in the world. Domestic and overseas business activities involve risks such as a) disadvantages from
emergence of political or economic factors, b) disadvantages from inconsistency of multilateral taxation systems and diversity of tax law interpretation, c) difficulty in recruiting and securing human resources, and
d) social disruption resulting from terror attacks, war and other catastrophic events.
