2. 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, 2014.
(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 U.S. 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, it is possible that 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.
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 software development, there is no guarantee that all new
products 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, it is possible
that 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, it may become difficult to develop or sell the products 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.
Overseas business expansion and international activities
In addition to Japan, Nintendo engages in business in the United States, Europe, Australia, Asia and other areas in the world. Expansion of business to these overseas markets involves risks such as a) unpredictable enforcement of or changes in laws or regulations, b) disadvantages from emergence of political or economic factors, c) disadvantages from inconsistency of multilateral taxation systems and diversity of tax law interpretation, d) difficulty of recruiting and securing human resources, e) social disruption resulting from terrorist attacks, war and other catastrophic events.
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 online systems including the Nintendo Network for sales of digital software as well as to offer network-enabled entertainment services. If a cyber-attack were launched against these systems
resulting in the termination or destruction of the systems, or the unauthorized use of system data, it could have an adverse effect on Nintendos future operating results, share price and financial condition.
(3) Risks around legal regulations and litigation
Product liability
Nintendo manufactures its products in accordance with applicable quality control standards in locations of sale. However, large-scale product recalls may occur, and any such recalls would likely be primarily caused by discovery of defective products. Also, the defect of a product may lead to product reimbursement compensation resulting in additional expenses, and Nintendos reputation as well as its operating performance and financial position may suffer.
Limitations of enforcing intellectual property rights
Although Nintendo continues to accumulate various intellectual properties to produce different products, counterfeit products and unlawful software already have gone into circulation in some regions and (becomes available on the internet which) violate Nintendos intellectual property rights. In the future, it may continue to be a challenging task to take full action against every infringement of Nintendos intellectual property rights.
Leakage or unauthorized access of personal or confidential information
Nintendo possesses personally identifiable information about its consumers, as well as confidential information concerning development and business operations. If such personally identifiable information or confidential information were ever leaked outside of Nintendo, due to breach or other unauthorized access or disclosure, it could have an adverse effect on Nintendos future operating performance, share price and financial condition.
Changes in accounting standards and taxation systems
Unpredicted adoptions of or changes in accounting standards or taxation systems could have an effect on Nintendos performance and financial position. Conflict of views between Nintendo and the tax authorities may cause additional tax costs.
Litigation
Nintendos operations in Japan and overseas may be subject to litigation, disputes and other legal procedures. These issues may affect Nintendos operating performance.
(4) Other risks
Other than the risks set forth above, factors such as uncollectibility of notes and accounts receivable - trade, collapse of financial institutions and environmental restrictions may adversely affect Nintendos operating performance and financial position.
