Business Risks

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.
The KDDI Group has a system in place to centrally promote risk management activities. In addition, in order to sustainable growth for the entire group, The KDDI Group promotes risk management not only for this but also for the entire group, including subsidiaries.
The KDDI Group has built a PDCA cycle for risk management activities, recognizing that it is important to grasp the signs and take measures before the situation worsens in order to prevent the crisis of the company. The KDDI Group has built a crisis management system in place that enables us to take prompt and appropriate responses when risks are discovered.
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 environment surrounding society is undergoing major changes, full-scale digitization has continued to march forward with the advance of 5G, IoT, AI, big data and other technologies, shifting toward a data-driven society that finds greater value in data.
In the telecommunications industry, competition has intensified due to the entry of new telecommunications carriers and amendments to the Telecommunications Business Act and the spread of digital transformation (DX) which changed all industries through communications and Internet change in a business environment drastically.
Furthermore, as 5G,IoT moves into full swing, the variety of services will be created by using various advanced technologies, and we will enter a new era.
In response to these circumstances, the KDDI Group achieve sustainable growth in line with the seven business strategies centered on the "The integration of telecommunications and life design" raised in its medium-term management plan (FY2019-21).
Under these circumstances, due to competition with other businesses and technologies, and rapid changes in the market and business environment, there are uncertainties in the following items, and these could adversely affect the KDDI Group's financial condition and business performance.

• Market demand trends out of line with KDDI Group expectations
• Subscription growth trends out of line with KDDI Group expectations
• Unclearness of revenue expected by the decline and aging of population
• 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 products and services such as handsets and supplied content in comparison with offerings of rival carriers
• Support for product defects as a result of expanding the product goods business
• 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
• Intensification of competition due to changes in business conditions resulting from partnering with different industries, bundled sales of telecommunications with electric power and other products, the entry of new MNO, MVNO operators, and the expansion of business areas by other carriers.

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 Information Security Committee 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.

The KDDI Group as a whole is pursuing a number of initiatives to improve its compliance-related provisions. The Company has formulated the KDDI Code of Business Conduct, the KDDI Security Policy, and the KDDI Privacy Policy. Handbooks on customer privacy issues have been distributed to customers, and KDDI has established the Business Ethics Committee.

We are strengthening our safety management measures in terms of technology, organization, and personnel. 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 large-scale disasters due to climate change, etc. or accidents, takes steps to improve the reliability of its network and to prevent service outages.

Specifically, we have established a policy for implementing disaster prevention work so that we can secure communication services even in the event of a disaster, take measures in preparation for a disaster, and carry out close liaison and coordination with related organizations in Japan and overseas. In the event of a disaster, we strive to ensure communication and restore facilities as soon as possible 24 hours a day, 365 days a year by maximizing the functions of each company's organization.

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 KDDI Group's financial position and/or earnings performance.

In addition, due to the COVID-19 pandemic, a state of emergency has been declared in Japan, and there is increasing uncertainty about the future of the global economy.

While the KDDI Group is actively cooperating with the initiatives of governments, municipalities, and public organizations in various countries and promoting business activities, there are concerns about the impact on our mobile data communications, life design business, and enterprise solution services due to the acquisition of new customers by shortening business hours of au shops and the increase in the use of Wi-Fi at home, which may have an impact on our business activities and operating results.

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
• Pandemic of infectious diseases
• 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, electric and finance business, 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.

Recently, due to the revision of the Telecommunications Business Act, legislation has been enacted regarding the complete separation of communications and handsets, and the prohibition of excessive customer retention. However, if the KDDI Group'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.

• 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) and MNOs
• Revisions to frequencies allocation system
• Revisions to the radio wave fee system
• Regulations regarding the effect of radio waves on health
• Rules regarding the migration of NTT East and West's fixed telephone networks to IP networks
• 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 telecommunications service
• Rules regarding telecommunications service rates and other service terms
• Rules regarding the measurement of Internet service quality and advertisement display
• Rules regarding the liberalization of the retail sale of electricity
• Rules regarding financial business
• Rules regarding utilizing personal data
• Rules regarding platformer

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.

The KDDI Group conducts business activities in Japan and overseas, and complies with the laws and regulations of each country. And the KDDI Group protects the intellectual property rights of our products, technologies or services and strives not to infringe the intellectual property rights of third parties.

Litigation stemming from alleged infringement of intellectual property and other rights associated with the 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 and career development support, although the training process takes time for the desired effects to manifest. Going forward, the KDDI Group faces the risk of a substantial increase in personnel development costs.

In addition, although the KDDI Group strives labor management in accordance with laws and regulations, if the company cannot take appropriate measures in the future, the company brand image and credibility may be affected, which could adversely affect the KDDI Group's financial condition and business performance.

The KDDI Group provides a defined-benefit pension plan (fund type) and a retirement allowance plan (internal reserve). Some consolidated subsidiaries have defined-contribution pension plans. 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 current consolidated fiscal year, the KDDI Group posted impairment loss on certain assets that are unable to recover future investment due to the decline in profitability.
In accordance with IFRS, the KDDI Group appropriately judges the signs of impairment and conducts impairment tests, etc.
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.