This section contains an overview of the principal business-related and other risks facing the KDDI Group that could have a material bearing on the decisions of investors. The section also discloses information on a number of other subjects that, while not explicitly considered business risks at present, could be materially relevant to investment decisions.
KDDI discloses information on possible risks in the interest of greater transparency, and assesses the likelihood of issues arising in connection with the various risk factors. Based on these assessments, it strives to take all appropriate measures to avoid risk wherever possible and to develop appropriate and timely countermeasures for situations as they arise.
This section contains various forward-looking statements that represent the best judgments of the KDDI Group as of March 31, 2013.
Investors should note that future developments are also subject to unknown risks and uncertainties that by their nature cannot be covered by the following discussion.
The Japanese information communications market continues the shift from conventional mobile phone devices to smart devices (i.e. smartphones and tablets) and the acceleration of the communications network through LTE. At the same time the homogenization of services and devices continues.
With the spread of smartphones, the competitive environment in the mobile communications field is entering a new phase to attract the developing late majority, the target for the future transition to smartphones — telecommunications carriers are introducing various new rate plans to meet the needs of customers and there is a flurry of new MVNO carriers.
Furthermore, along with the start of NTT's fixed line/mobile set (bundle) discount using the wholesale of fiber-optic access lines, the mobile communications field is expected to see an overall change with the further spread of MVNOs and the progression of SIM-free devices.
In this environment, KDDI strives to reach a new stage of growth wherein our business growth is based on the expansion of communication fee revenue and value-added earnings. To accomplish this, we are refining the au image in every facet including network, devices, service, support, and fees, in order to strengthen our differentiation and respond to the changing competitive environment. Our business growth is not limited to domestic operations. We are also taking on challenges with new growth opportunities in the global field. However, due to the competition with other carriers and other technology and the rapidly changing market, uncertainty exists mainly with the topics and there is a possibility that our financial condition and business performance will be negatively affected.
- Market demand trends out of line with KDDI Group expectations
- Subscription growth trends out of line with KDDI Group expectations
- Fall in communications revenues due to tariff discounts sparked by fierce price competition, or higher sales commission and retention costs
- Decline in communications revenues due to drop in service usage frequency by subscribers
- Drop in customer satisfaction with the quality of the network or content due to unforeseen developments
- Decrease in attractiveness of handsets or supplied content in comparison with offerings of rival carriers
- Increase in handset procurement costs associated with adoption of more advanced functions, or higher sales commissions
- Drop in customer satisfaction caused by spam and threats stemming primarily from the security issues with smartphones, plus increases in costs to address these issues
- Increase in network costs associated with the construction of base stations to accommodate new frequencies or the sharp rise in data traffic
- Inability to acquire bandwidths in accordance with the Company's needs
- Increase in competition due to new high-speed wireless data technology
- Effects associated with dependence on specific communications protocols, handset technologies, network technologies, or software
- Reduced revenue from voice call fees due to the expansion of apps with free calling features
- Possibility of increase in connection fees with other telecommunications carriers
- Intensified competition due to partnerships with different industries, the sale of sets that combine fixed-line and mobile communications, the penetration of new MVNO carriers, etc.
KDDI is legally obliged as a licensed Japanese telecommunications carrier to safeguard the security of communications over its network. The Company is also actively engaged in protecting the confidentiality of customer and other personal information. KDDI has established the Corporate Risk Management Division, Security Operations Center, and a committee for privacy and security issues to formulate and implement measures across the entire KDDI Group to prevent internal privacy breaches and other information leaks, as well as unauthorized access from external networks.
We are also stepping up measures to prevent information leaks. For example, we are limiting the use of information systems that manage personal and customer information, reinforcing supervision over use, saving access logs, and forbidding employees from taking internal data out of the office or from copying data from work PCs to external memory devices.
As part of its activities to maintain awareness of these policies, KDDI conducts ongoing training on the privacy of communications and the protection of personal and customer information. At the same time, KDDI stringently manages subcontractors with regard to information security. In particular, we are implementing a comprehensive program of initiatives targeting au shops, one of our sales venues. This program includes improvement and monitoring measures for shop operation as well as thorough educational activities.
Despite all these measures and safeguards, however, KDDI cannot guarantee that breaches of privacy or leakage of confidential customer information will never occur. Any such incident could seriously damage the brand image of the KDDI Group. In addition to a possible loss of customer trust, the Company could also be forced to pay substantial compensation, which could have a negative impact on the financial position and/or earnings performance of the KDDI Group. Going forward, the Company may also face higher costs to develop or upgrade communications security and privacy protection systems.
The KDDI Group depends on communications network systems and equipment in and out of Japan to provide voice and data communication services. The KDDI Group, to minimize as much as possible the risk of service outages or interruptions as a result of natural disasters or accidents, takes steps to improve the reliability of its network and to prevent service outages.
However, should there be a service outage as a result of failures in network systems or communications equipment, or substantial billing errors, the discredit to the Group's brand image, reliability, and lower customer satisfaction caused by opportunity loss in provision of products and services due to agent closures and distribution suspension could have a negative impact on the Group's financial position and/or earnings performance.
The following incidents could cause a service outage
- Natural disasters, such as earthquakes, tsunamis, typhoons, or floods, as well as secondary damages from the spread of toxic substances caused by natural disasters
- Spread of infectious disease
- War, terrorism, accidents or other unforeseen events
- Power brownouts or blackouts
- Computer viruses or other forms of cyber-attack, hacking
- Operation system hardware or software failures
- Flaws in communications equipment and services
The revision or repeal of laws and ordinances governing telecommunications, together with related government policies, has the potential to exert a negative impact on the financial position and/or earnings performance of the KDDI Group. The Group believes it is taking all appropriate measures to respond to such laws, ordinances, and government policies, including those related to social issues with potentially injurious implications for its brand image and customer trust. However, if such measures were to prove ineffective in the future, it could negatively affect the financial position and/or earnings performance of the KDDI Group.
Regarding the policies for competition in the new era, the KDDI Group advocates measures for fair competition with other telecommunications companies through various deliberative council, study groups with the Ministry of Internal Affairs and Communication and by offering opinions through a public comments system. However, if KDDI's market competency is lost despite the above efforts, it could have a negative impact on the financial position and/or earnings performance of the KDDI Group.
The Company's business operations are subject to the following elements of uncertainty in regard to the revision or abolishment of telecommunications laws and regulations, to government policies, and to factors affecting the competency of the KDDI Group.
- Rules concerning the mobile business model
- Revisions to inter-operator access charge calculation formulae and accounting methods
- Revisions to the specified telecommunications equipment system and the regulations on prohibited activities
- Revisions to systems governing universal service
- New carriers entering the mobile communication market as Mobile Virtual Network Operators (MVNOs)
- Revisions to radio wave usage rules
- Rules regarding access to the next-generation networks of NTT East and NTT West
- Regulations regarding the operations of NTT East, NTT West, and the NTT Group as a whole
- Revision of rules on consumer protection
- Regulations of the mobile Internet due to an increase in harmful websites
- Regulations of mobile phone usage
- Regulations regarding the effect of radio waves on health
In each of the countries in which it operates, the KDDI Group takes steps to secure the appropriate business and investment permits and licenses, to establish procedures in conformity with national safety and security laws, and to apply various other government regulations. The Group also seeks to comply fully with commercial, anti-trust, patent, consumer, tax, currency exchange, environmental, labor, and financial laws. Were these laws and regulations enhanced, or should the Group and/or business contractors fail to comply with legislation, it could result in limitations being placed on the future business activities of the KDDI Group and increases in costs.
Litigation stemming from alleged infringement of intellectual property and other rights associated with KDDI Group products, services, and technologies could potentially have a negative impact on the financial position and/or earnings performance of the KDDI Group.
The KDDI Group invests in company-wide personnel training to ensure that it can respond rapidly to technological developments, although the training process takes time for the desired effects to manifest. Going forward, KDDI faces the risk of a substantial increase in personnel development costs.
The KDDI Group provides a defined-benefit pension plan (fund type) and a retirement allowance plan (unfunded type). Some consolidated subsidiaries have defined-contribution pension plans or association- establishment-type employees' pension funds. KDDI regularly reviews its asset management policies and agencies in accordance with future predictions of retirement payment liabilities. However, going forward the KDDI Group could incur extraordinary losses if a fall in yields on managed pension assets leads to a drop in the market value of the pension funds, or in the event of significant revisions to the actuarial assumptions (such as the discount rate, composition of personnel, or expected rate of salary increases) on which planned retirement benefit levels are based.
In the year ended March 31, 2015, the KDDI Group posted impairment loss on assets including certain communication facilities that have seen reduced utilization rates and non-operational equipment that was not converted due to the shift from the 2GHz band to the LTE broadband. Going forward, the KDDI Group may post other impairment losses against property, plant and equipment, depending on the level of its utilization.
Consolidation within the telecommunications industry in Japan and abroad could exert a negative impact on the financial position and/or earnings performance of the KDDI Group. Going forward, the KDDI Group may undertake further business restructuring measures at some later date. The Group cannot guarantee that such action would necessarily have a positive impact on its business performance.
DMX Technologies Group Limited ("DMX", located in Hong Kong and listed on the main board of the Singapore Exchange, or the "SGX"), a KDDI overseas consolidated subsidiary, has provided notice to the SGX regarding irregular accounting practices conducted by its subsidiaries in 2008 and 2009.
Currently within DMX, the following are being conducted: (i) an investigation by its internal investigating committee formed under the new management team led by the new CEO; (ii) a financial audit by DMX's accounting auditor; and (iii) investigations by external attorneys including investigations regarding its previous transactions, the financial impact and where responsibility lies. During those processes, in addition to the above-mentioned irregular accounting practices regarding the transactions in 2008 and 2009, new questions have arisen regarding the collectability and soundness of accounts receivable and other assets related to some of the transactions.
KDDI has also launched its own investigation into this matter. Additionally, as of today KDDI has established an investigating committee composed of external experts ("External Investigating Committee") aiming (i) to investigate and analyze KDDI's capital participation in DMX and KDDI's governance on DMX and its subsidiaries since its capital participation in DMX, and (ii) to investigate the causes of the incidents and to develop preventive measures for the future.
We will use the results from the External Investigating Committee to strengthen the governance of overseas subsidiaries and pave the way for the development of overseas business.