Nippon Steel & Sumitomo Metal (NPSCY) Risk Factors

In order to maintain the sustainable growth of our business, we depend on the leadership of our key management personnel as well as our ability to attract, employ and retain skilled professionals, including management professionals, and highly qualified employees with relevant experience. Furthermore, we must be able to successfully recruit, train and develop new hires. If we are unable to successfully execute our human resource strategies and experience unforeseen increases in employee departures or are unable to successfully groom replacement candidates for our management personnel in a timely manner, we may lose valuable know-how or other organizational resources, which could harm our ability to compete effectively. Additionally, unforeseen costs in connection with increased competition for talented personnel, increased employee regulation, or issues related to workplace health and safety arising from improper labor management may negatively affect our financial condition and results of operations.

We are highly dependent on our Steelmaking and Steel Fabrication segment, which accounts for a significant majority of our total revenue and gross profit. While we intend to increase sales of our non-steel businesses, we may fail to do so. In addition, our strategy to expand our overseas steel production capabilities to capture the projected long-term growth in global steel demand, particularly in emerging markets, may increase our reliance on our Steelmaking and Steel Fabrication segment. So long as we remain dependent on our Steelmaking and Steel Fabrication segment, the realization of risks affecting the steel industry-such as regional and global macroeconomic conditions, excess capacity, oversupply, destocking cycles, the competitive environment, unfair trade practices, protracted low steel prices, significant increases in market prices of raw materials and competition from other materials-could have an especially material adverse effect on our business, financial condition and results of operations.

Our manufacturing operations and steel works in Japan and overseas are subject to the risk of earthquakes and other natural disasters, including typhoons, tsunamis, tidal waves, floods and volcanic eruptions. For example, for the year ended March 31, 2019, we incurred ¥22.3 billion in losses from weather-related natural disasters, including heavy rainfall in western Japan on July 6, Typhoon Jebi on September 4 and Typhoon Trami on September 30, that resulted from restoration repairs, the disposal of machinery and other related costs. We also suffered a significant impact from the 2011 Great East Japan Earthquake and the following tsunami. Not only were our Kashima steel works and Kamaishi steel works directly damaged by the earthquake and tsunami, but the increase in raw material costs and drop in demand for steel products following the disaster, driven in part by disruption to the operations of steel consumers in Japan, had a significant impact on our business operations and financial results, causing our predecessor entities to incur over ¥100 billion in losses in the aggregate. In the event of another major natural disaster affecting our manufacturing facilities, we may experience catastrophic loss, operations at such production sites may be halted, shipments of products may be suspended or delayed, a significant reduction or loss of revenues may be experienced, or other problems may adversely affect our operations.

We operate globally. Our business straddles multiple jurisdictions and complex regulatory frameworks at time of increased enforcement activity and enforcement initiatives worldwide. Such regulatory frameworks, including economic sanctions, are constantly evolving, and we may, as a result, become subject to increasing limitations on our business activities or the risk of penalties or other sanctions for non-compliance. In addition, our governance and compliance processes, which include the review of internal controls over financial reporting, may not prevent us from violating law or accounting or governance standards. Furthermore, we face various private lawsuits and other claims in connection with our business activities around the world. We are one of the largest steel producers in the world. As a result, we may be subject to exacting scrutiny from regulatory authorities and private parties, particularly regarding our trade practices and dealings with customers and counterparties. As a result of our position in steel markets and our historically acquisitive growth strategy, we could be subject to governmental investigations and lawsuits based on antitrust laws. Such governmental investigations or penalties or private lawsuits could require us to incur significant expenditures or result in liabilities or governmental orders that could have a material adverse effect on our business or reputation, which may negatively affect our operating results, financial condition and prospects.

We sell products to major manufacturers engaged in the manufacture and sales of a wide range of end products and to other customers. Our customers may be dissatisfied with products we sell for various reasons including that our products had defects, including false data, or otherwise did not meet the customers' expectations. Claims from such dissatisfied customers may adversely affect our business operations and financial results. Furthermore, there could be significant consequential damages resulting from defects in our products that are sold to, and used in, certain safety-critical applications, such as, for example, pipes used in gas or oil pipelines and in automotive applications. In addition, product quality issues with any of our products, or the products of other steel manufacturers, particularly other steel manufactures in Japan, could result in additional costs and reputational harm. For example, in October 2017, a large Japanese steel and materials manufacturer admitted that it had falsified data about copper, aluminum and steel it supplied to makers of planes, cars and other end products. If our customers suspect, for example, that other steel companies in Japan, including us, have undertaken similar practices, we may incur increased expenses to assure quality of our products to our customers or experience a decrease in demand for our steel products, each of which could materially harm our financial condition and future operating results.

Taxes payable by companies in many of the countries in which we operate are substantial and include value-added taxes, excise duties, profit taxes, payroll-related taxes, property taxes and other taxes. Tax laws and regulations in some of these countries may be subject to frequent change, varying interpretation and inconsistent enforcement. Ineffective tax collection systems and national or local government budget requirements may increase the likelihood of the imposition of arbitrary or onerous taxes and penalties, which could have a material adverse effect on our financial condition and results of operations. In addition to the usual tax burden imposed on taxpayers generally, these conditions create uncertainty as to the tax implications of various business decisions. This uncertainty could expose us to significant fines and penalties and to enforcement measures despite our best efforts at compliance, and could result in a greater than expected tax burden. Also, if tax rates increase in any of the jurisdictions in which we operate, or treaties between those jurisdictions are modified in an adverse manner, our cash flows, liquidity and ability to pay dividends could be negatively affected.

We are subject to a broad range of environmental laws and regulations in each of the jurisdictions in which we operate. These laws and regulations impose increasingly stringent environmental protection standards regarding, among others, wastewater storage, treatment and discharges, the use and handling of hazardous or toxic materials, waste disposal practices and the remediation of environmental contamination. The costs of complying with, and the imposition of liabilities pursuant to, current and future environmental laws and regulations could potentially be significant, and compliance with new and more stringent obligations in the future may require us to make additional capital expenditures or modify our operating practices. Failure to comply can result in civil and or criminal penalties being imposed, the suspension of permits, requirements to curtail or suspend operations and lawsuits by third parties. Despite our efforts to comply with environmental laws and regulations, environmental incidents or accidents may occur that negatively affect our reputation or the operations of key facilities. Integrated steel processing involves carbon and creates CO2, which distinguishes integrated steel producers from mini-mills and many other industries, where CO2 generation is primarily linked to energy use. The European Union has established greenhouse gas regulations and is revising its emission trading system for the period after 2020 in a manner that may require steel producers, including us, to incur additional costs to acquire emissions allowances. In 2015, Japan set a target for reducing greenhouse gas emissions by 26% by 2030 and the United States has required reporting of greenhouse gas emissions from certain large sources since 2011, with emissions trading regimes and other initiatives being pursued at the state and regional level. See Item 4.B "Business Overview-Regulation." We are also subject to a broad range of health and safety laws and regulations in each of the jurisdictions in which we operate. These laws and regulations, as interpreted by relevant agencies and the courts, have in recent years imposed increasingly stringent health and safety protection standards. The costs of complying with, and the imposition of liabilities pursuant to, health and safety laws and regulations could be significant, and failure to comply could result in the assessment of civil and criminal penalties, the suspension of permits or operations and lawsuits by third parties. In addition, under certain circumstances authorities could require our facilities to curtail or suspend operations based on health and safety concerns. New or more stringent environmental, safety and health standards could require us to make increased capital expenditures or make modifications in operating practices or projects. As a result, the amount and timing of future environmental and related expenditures may vary substantially from those currently anticipated. These additional costs may also have a negative impact on the profitability of the projects we intend to implement or may make such projects economically unfeasible. We could also be exposed to civil liabilities, administrative penalties, criminal sanctions and closure orders for non-compliance with these regulations, as well as encounter delays in obtaining environmental or other operating licenses. Waste disposal and emission practices may result in the need for us to clean up or retrofit our facilities at substantial costs or substantial liabilities. Environmental regulatory restrictions imposed by foreign markets to which we export our products may also materially and adversely affect our export sales.

Our operations depend on the secure and reliable performance of our information technology systems. An increasing number of companies have recently experienced intrusion attempts or breaches of their information technology security, some of which have involved sophisticated and highly targeted attacks on their computer networks. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement in a timely manner effective and efficient countermeasures. While we have adopted procedures and controls to protect our information and operating technology, including sensitive proprietary information and confidential and personal data, there can be no assurance that a system or network failure, or security breach, will be prevented. If unauthorized parties attempt or manage to bring down our website or gain access into our information technology systems, they may be able to misappropriate confidential information, cause interruptions in our operations, damage our computers or process control systems or otherwise damage our reputation and business. Any compromise of the security of the our information technology systems could result in interruptions to our systems, a loss of confidence in our security measures, reputational damage and subject us to litigation, civil or criminal penalties and adverse publicity that could adversely affect our reputation, financial condition and results of operations. Furthermore, we expect that the costs of maintaining adequate cybersecurity to combat the leakage of information in this environment will continue to rise, and such costs could also adversely affect our financial condition and operations.