Risk Factors

Advantest’s business depends largely upon capital expenditures of semiconductor industrial, design and manufacturing companies, fabless semiconductor companies, foundries and test houses. These companies, in turn, determine their capital expenditures and investment levels largely based on current and anticipated market demand for semiconductors and products incorporating semiconductors. Such demand is influenced significantly by overall condition of the global economy. Historically, a reduction rate of capital expenditures of semiconductor manufacturers during downturns in the semiconductor industry, including investments in semiconductor test systems, has typically been much greater than a reduction rate of worldwide semiconductor sales. The semiconductor industry has been highly cyclical with recurring periods of excess inventory, which often have had a severe effect on the semiconductor industry’s demand for semiconductor test systems, including those of Advantest. As the complexity of semiconductors has increased in recent years, the need to ensure reliability has increased, and the difficulty of improving test efficiency has also increased. Advantest expects that demand for testers will continue to increase in the future. However, there is a risk of fluctuations in demand for semiconductors and testers due to the impact on the global economy caused by major changes in the international political situation and the spread of serious infectious diseases.

The significant volatility in demand for semiconductors is affected by various factors such as:

• the overall state of the global economy;
• trends in the semiconductor industry;
• levels of investment in communications infrastructure and trends of demand in communication devices such as smartphones and wearable devices;
• demand in personal data center, computer and server industries;
• consumer demand for digital consumer products such as TVs, game devices, VR (Virtual Reality) / AR (Augmented Reality) devices;
• trends in the industrial equipment market, including automotive, robotics and medical equipment
• trends in the high performance semiconductor market by expanding AI/Artificial Intelligence, image recognition and speech recognition services using neural networks

Demand in the semiconductor market and Advantest’s performance in the current fiscal year are described in "4. Management’s Discussion and Analysis (1) Analysis of Results of Operations" Advantest believes that its results are significantly affected by the significant volatility of demand in the semiconductor industry. If there is a significant downturn in the semiconductor industry, Advantest’s financial condition and results of operations will be adversely affected including the write-down of inventories due to excess inventory.

To reduce this risk, Advantest is going to be flexible to meet fluctuations in demand by expanding its business into adjacent semiconductor value chain markets such as semiconductor design, evaluation processes and system level test processes. Additionally, Advantest is promoting the use of outsource manufacturing for productions while continuing to strengthen services for the development of a recurring types of business and new businesses.

Advantest’s business is subject to risks associated with conducting business internationally because it manufactures and sells its products, and purchases parts and components from, around the world. In FY2022, 85.5% of Advantest’s total net sales were shipped to Asia (excluding Japan), the majority of which were to Taiwan, the People’s Republic of China and South Korea. Additionally 7.7% were shipped to the Americas and 3.1% to Europe. Advantest anticipates that net sales from international operations will continue to represent a substantial portion of its total net sales. In addition, some of Advantest’s distribution and support subsidiaries are located in the Americas, Europe, and Asian countries, including Taiwan, Singapore, South Korea and China, and some of Advantest’s suppliers and factories are also located overseas, such as South Korea, Malaysia and the United States of America. Accordingly, Advantest’s future results could be harmed by a variety of factors, including:

• risks with respect to a loss of demand for Advantest’s products, inability to supply products and services, or a decline in supply capacity due to inability to procure parts due to import and export restrictions and distorted licensing systems in response to protectionist policies such as the trade friction between the United States of America and China;
• political and economic instability, including economic and political disruptions, disputes, natural calamities, epidemics or other risks related to countries where Advantest procures its components and parts or manufactures and sells its products;
• risks with respect to disrupting the movement of people and the flow of goods and bringing the entire economy to a standstill caused by epidemics, including infections, spread throughout the world as the global economy develops;
• risks with respect to procurement due to the closure or reduced operation of suppliers’ production facilities in specific regions and the limited means of transportation caused by the pandemic;
• risks with respect to social and political crises and issues resulting from deterioration in the political, economic relationships, struggle for supremacy, terrorism, war or other conflicts between countries;
• potentially negative consequences from changes in tax laws or disagreement with National Tax Bureau;
• risks with respect to international taxation, including transfer pricing regulations;
• difficulty in staffing and managing widespread operations;
• differing protection of intellectual property;
• difficulties in collecting accounts receivable because of distance and different legal rules;
• risks with respect to decline in the quality of procurement and manufacturing where Advantest’s suppliers or manufacturing facilities are located in countries that do not have developed infrastructures in mechanical processing and assembly;
• risks with respect to delays or stagnation in the manufacture and shipment of products by the shutdown of suppliers and production plants, the occurrence of major local disasters caused by global warming and climate change;
• risk with respect to suspension of production by suppliers due to environmental regulations of each country and local environmental authorities;
• risks with respect to increases in cost, delays in delivery or expenses in repairing products where low quality and counterfeit products are mixed into the supply chain;
• risks with respect to human rights violations in the supply chain;

To reduce this risk, Advantest collects information on risks at overseas sites in a timely manner. In addition, Advantest is further strengthening its relationships with customers and suppliers. Advantest will also promote activities to build an ethical supply chain that also considers the environment and human rights, while visualizing supply chain risks, entering into supply contracts for highly customized parts and components, and expanding procurement channels and production sites in order to build a system that is less susceptible to economic and political trends. With regard to human rights issues in the supply chain, Advantest has established a procurement policy and are working to reduce risks by encouraging suppliers to understand human rights and labor safety initiatives.

Advantest uses chemicals in the manufacturing of its products, processing and distribution of which are subject to environmental related laws, regulations and rules of Japanese governmental agencies, as well as by various industry organizations and other regulatory bodies in other countries. These regulatory bodies may strengthen existing regulations governing chemicals used by Advantest and may also begin to regulate other chemicals used by Advantest. While Advantest is taking measures to eliminate toxic substances included in parts used to manufacture its products, Advantest uses solder, which contains lead for mounting electronic parts and components for its products except for some of them, in order to ensure the reliability of its products as a matter of priority. Further, as a method to cool some of its semiconductor and component test systems and mechatronics systems, Advantest uses fluorinated liquid which use is not currently regulated by laws. Advantest believes that it is complying with regulations with respect to the use of chemicals by promoting environmental policies for its products with the focus on ensuring the safety and the reliability of its products; however, Advantest must prepare to adapt to regulatory requirements in all relevant countries as requirements change. Advantest may be required to incur significant cost in adapting to new requirements. Any failure by Advantest to comply with applicable government or industry regulations could result in restrictions on its ability to carry on with or expand sales of its products. Regarding global environmental issues, in the event that greenhouse gas emission regulations, energy efficiency regulations, European circular economics regulations, carbon taxes, and other environmental laws and regulations become stricter in the future, there is a possibility that a large amount of expenses will be incurred in response to these regulations.

To reduce this risk, Advantest seeks to find alternative technology as well as monitor environmental regulations for chemical materials and legal regulation.

Advantest faces stiff competition throughout the world. Advantest’s primary competitors in the semiconductor and component test system market include, among others, Teradyne, Inc., Cohu, Inc., YIK Corp., UniTest Inc. and EXICON Ltd. In the mechatronics system related market, Advantest also competes with Cohu, Inc., TechWing, Inc., and Hon. Precision, Inc. in test handler devices, and with TSE Co., Ltd., ESA Electronics Pte. Ltd., TFE Inc. and ISC. Ltd. in device interfaces. Some of these competitors have greater financial and other resources than Advantest.

Advantest faces many challenges in its businesses, including increased pressure from customers to produce semiconductor and component test systems, mechatronics systems that reduce testing costs, and catering to customers that have developed internal test solutions. Due to the characteristics of recurring types of business (equivalent to the running cost of the customer), there are numerous demands for cost reductions in device interfaces. If a competitor acquires a vendor that supplies core technology components, or if the PCB design/manufacturing technology that is essential to achieving high performance is leaked to a competitor, Advantest would lose its product performance advantage and pricing control, hence making it difficult to maintain or secure business.

To compete effectively and maintain and expand its market share, Advantest must continue to enhance its business processes to lower the cost of its products or introduce enhancements that lower overall testing costs. Advantest also expects its competitors to continue to introduce new products with improvements in price and performance, as well as increasing their customer service and support offerings, and expects new market participants to launch low-price testers. Significant increases in competition may weaken Advantest’s earnings.

To reduce this risk, Advantest strives to maintain product competitiveness by understanding its customer needs, analyzing the competitive landscape, and provide unique technologies as well as value-added solutions.

(1)

Interruptions to business / reduced efficiency due to possible infection of employees of the Advantest Group, customers, and/or suppliers

(2)

Problems caused by long-term restrictions on movement and lockdowns around the world

i)

Declines in product supply capacity due to shortages of manufacturing personnel at the Advantest Group / subcontractors

ii)

Decreased ability to provide customer support due to restrictions on movement

iii)

Declines in product supply capacity due to global supply chain disruptions causing difficulties in the procurement of materials and components

(3)

Decreases in end-product demand and spillover effects to the electronics industry as a whole, and a slowdown in the semiconductor and semiconductor manufacturing equipment markets

(4)

Potential significant mid-term changes in the structure of the semiconductor industry resulting from changes in customer supply chains

(5)

Changes in Advantest’s business environment due to changes in human behavior and society in the post-COVID-19

To reduce this risk, Advantest’s Risk Management Group , which is under the direct control of the president, takes the lead in conducting activities including (1) an implementation of measures that places the highest priority on the safety and health of employees, through telecommuting and banning of business trips, (2) online support for customers, (3) global understanding of production, sales, inventory and logistics conditions, (4) Business Continuity Plan in place if Advantest has infected person, (5) interchange information of best practices and support material among group companies, and (6) cash management, in order to respond to infectious diseases.

Advantest’s main domestic facilities for research and development for its Semiconductor and Component Test Systems and Mechatronics System Segments production, as well as Advantest’s service bases, are located in Gunma Prefecture, Saitama Prefecture and Miyagi Prefecture in Japan. In addition, the main system server and the network hub are maintained in system centers approved by the Information System Management System, or ISMS, and local servers are located in certain operations offices in Japan.

Japan is a region that is susceptible to frequent earthquakes. If Advantest’s facilities, particularly its semiconductor and component test system manufacturing factories, were to experience a catastrophic loss from, but not limited to, earthquakes or floods, it would materially disrupt Advantest’s operations, delay production, shipments and revenue, and may result in large expenses to repair or replace the facilities. Advantest has insurance to cover most potential losses at its manufacturing facilities, other than those that result from earthquakes. However, this insurance may not be adequate to cover all possible losses. Similar disruptions to Advantest’s business may occur if the facilities of Advantest’s subcontractors and suppliers or if the facilities of Advantest’s information system network were to experience a catastrophic loss.

Advantest has prepared itself for crises such as large-scale natural disasters, and each department of Advantest has documented its own disaster-response procedures and manuals. Furthermore, in order to prevent any disruption of its core businesses, or in case of suspension, to re-start the suspended businesses, including the recovery of important facilities, in the shortest possible time, Advantest formulated and implemented a “Business Continuity Plan.” However, if such Business Continuity Plan is not effective, Advantest’s core businesses could be disrupted at a time of crisis, such as large-scale natural disasters, and could take a substantial amount of time to recover.

To reduce this risk, Advantest has developed a business continuity plan to ensure that business operations are not interfered with decentralizing production facilities and suppliers. Additionally, Advantest stores corporate records and data in a cloud system.

If there is any indication of impairment for property, plant and equipment, goodwill and intangible assets, the assets are tested for impairment. Goodwill is tested for impairment both annually and when there is any indication of impairment.

An impairment loss is recognized if the recoverable amount of an asset, cash-generating unit (CGU) or CGU group is less than its carrying amount. Especially, goodwill and intangible assets resulting from acquisitions could have a material adverse effect on Advantest’s financial condition and results of operations if the discount rate increases due to interest rate hikes or if significant impairment losses are recorded without the expected synergies.

Advantest also holds investment securities for the purpose of promoting capital and business alliance. A significant decline in stock prices or significant deterioration in the financial condition of the company issuing the shares could have a material adverse effect on Advantest’s financial condition and results of operations.

To reduce this risk, when acquiring a business through M&A and other means, investments should be made taking into consideration the time it will take to recover the capital cost. Furthermore, after the acquisition, Advantest will be able to organically function in terms of strategy, sales network, management system, employee awareness and information systems. In order to achieve synergies, Advantest will execute Post Merger Integration (PMI) plan and aim to realize the effects as soon as possible.

Advantest sells its products to several industries that are characterized by rapid technological changes, frequent introduction of new products and services, varying and unpredictable product lifecycles and evolving industry standards. Advantest anticipates that future demand for its products will be driven, in large part, by technological innovation in semiconductor technology, which creates new testing requirements that are not adequately addressed by currently installed semiconductor test systems. Customer needs in response to these technological innovations, and their needs for greater cost-effectiveness and efficiency to respond to the market environment, include:

• test solutions of SoC semiconductors that incorporate more advanced memory semiconductors, logic, analog and sensor circuits;
• test solutions of power semiconductors that control small and large motor drives;
• solutions for complex SoC devices incorporating heterogeneous chips, such as logic and memory, in a single advanced package e.g. 3D integration through Chiplet Packaging technology;
• solutions of parametric test for measuring and verifying electrical and timing characteristics for the characterization and monitoring of leading-edge semiconductor wafers.
• mechatronics-related products which transport devices faster, more accurately and more stably;
• test solutions of testing technologies that employ self test-circuit designs incorporated into semiconductor chips;
• test solutions of testing technologies that employ test circuit designs for device under test (DUT);
• test solutions of system level testing that guarantee performance of the final products;
• test solutions of testing temperatures for dynamic and delicate control of the test environment;
• prompt response and quick repair in the event of system failure;
• total solutions that allow customers to reduce their testing costs
• solution by electron-beam metrology to enable reliable pattern critical dimension measurement or defect review on a leading-edge photomask; and
• jigs and tools that meet the customer's latest device under test and test specifications.

Advantest also believes demand for its products, including semiconductor and component test systems, is strongly affected by the level of demands for personal computers, high-speed wireless and wireline data services, digital consumer products, electric vehicle, advanced driver assistance system (ADAS) and communication devices, such as smartphones, wearable devices, and data center. It is likely that advances in technologies used in those products and services will require new testing systems. Without the timely introduction of semiconductor test systems which is capable of effectively testing and measuring equipment that use these new technologies, existing Advantest’s products and services may become technologically obsolete over time.

A failure by Advantest to meet its customers’ technical requirements at competitive prices or to deliver conforming equipment in a timely manner may result in its products being replaced by those of a competitor or an alternative technology solutions of competitors. Furthermore, Advantest’s inability to secure sufficient personnel resource to provide products that meet requested performance criteria at acceptable prices when required by its customers would severely damage its reputation with such customers and may adversely affect future sales efforts with respect to such customers.

To reduce this risk, Advantest seeks to identify the next technological innovations, new products, and rapid creation of new markets by holding technology exchange events with leading customers and providing opportunities to exchange information on leading-edge solutions. In addition, Advantest conducts basic research on elemental technologies for the next generation with an eye to the future, and production engineering from the initial stages of product development to prepare for mass production. Furthermore, through a business alliance with PDF Solutions, Advantest conducts research on new products that take into account potential demand by utilizing data analysis of semiconductor manufacturing processes to grasp customer needs in a timely manner.

The market for test systems for memory semiconductors in the Semiconductor and Component Test System Segment is highly concentrated, with a small number of large semiconductor manufacturers, foundries and test houses accounting for a large portion of total sales in the semiconductor and component test system industry. Advantest believes that this market concentration could become even more severe in the future as larger semiconductor device manufacturers, foundries and test houses acquire semiconductor market participants, and as corporate restructuring, such as elimination and consolidation of businesses, progresses. Advantest’s ability to increase sales will depend in large part upon its ability to obtain or increase orders from large-volume customers. Furthermore, in the event there is an over-supply of semiconductor and component test system products on the second-hand market reflecting, among others, restructuring within the industry, or delay to meet the specific needs of Advantest’s customers, Advantest faces an additional risk of losing its sales opportunities.

To reduce this risk, Advantest develops products for a variety of applications to strengthen customer partnerships and avoid missed opportunities. On the other hand, Advantest aims to expand its business domain by launching new businesses and M&A.

Advantest continues to make capital expenditures. Advantest may not be able to recover the capital expenditures for such projects within the assumed timeframe, or at all, if it cannot achieve the assumed volume of sales due to customers cutting back on capital expenditures or if intense competition with competitors results in a reduction in unit prices. In such event, the asset would be subject to impairment, which may have an adverse impact on Advantest’s profitability.

To reduce this risk, Advantest decides capital expenditures after the review of return on investment based upon capital cost. Advantest also continues to monitor the expected growth rate, which is an investment effect and continue to consider the optimal future investment decision.

Enhancements to existing products and the development of new generations of products are, in most cases, costly processes. Furthermore, because the decision to purchase semiconductor and component test systems products and mechatronics systems generally involves a significant commitment of capital, the sale of this equipment typically involves a lengthy sales period and requires Advantest to expend substantial funds and sales efforts to secure the sale. Advantest’s enhancements or new generations of products may not generate net sales in excess of development and sales costs if, for example, these new enhancements or products are quickly rendered obsolete by changing customer preferences, the introduction by Advantest’s competitors of products embodying new technologies or features, the introduction by Advantest’s customers of new products that require different testing functions or the failure of the market for Advantest’s customer’s products to grow at the rate, or to the levels, anticipated by Advantest. In some cases, Advantest must anticipate industry trends and develop products in advance of the commercialization of its customers’ products. This requires Advantest to make significant investments in product development well before it determines the commercial viability of these innovations. If Advantest’s customers fail to introduce their devices in a timely manner or the market rejects their devices, Advantest may not recover its investments in product development through sales in significant volume.

To reduce this risk, Advantest attempts to improve return on investment by developing product roadmaps that meet customer needs through technology exchange meetings, improving development efficiency through the creation of product platforms, and strengthening marketing through proactive evaluation of investment returns with ROIC and innovative product development.

The increase in material costs and the price pressure on Advantest’s businesses is adversely affecting Advantest’s operating margins. In recent years, many parts manufacturers, who are Advantest’s business partners, have raised parts prices due to soaring material costs. On the other hand, semiconductor manufacturers, which are Advantest’s customers, seek to absorb the soaring material costs by improving productivity and reducing test costs, while the price pressure on Advantest’s product lines remains strong. In recent years, the number of customers adopting multiple-vendor system has increased, and it is making Advantest face further price pressure. If price pressure further increases in the future, Advantest’s financial condition and results of operations may be adversely affected.

To reduce this risk, Advantest attempts to maintain product price at a level that satisfies their customers by providing proprietary technologies and solutions of high added value. At the same time, Advantest works continuously to improve profitability by reducing production costs.

The majority of Advantest’s net sales are derived from products sold to customers located outside of Japan. Of Advantest’s FY2022 net sales, 96.3% were from products sold to overseas customers. Approximately 78% of Advantest’s net sales in FY2022 were derived from currencies other than the Japanese yen, predominantly the U.S. dollar. If the Japanese yen becomes strong relative to foreign currencies (mostly the U.S. dollar), it may adversely affect Advantest’s sales because it cannot necessarily pass on product price. With respect to the Euro, if the Japanese yen weakens, there may be a negative impact on Advantest’s profitability since there are currently more costs incurred in Euro than net sales derived in Euro.

In addition, significant fluctuations in the exchange rate between the Japanese yen and foreign currencies, especially the U.S. dollar, could require Advantest to lower its prices with respect to foreign sales of its products that are priced in Japanese yen, and reduce the Japanese yen equivalent amounts of its foreign sales for products that are based in U.S. dollars or other foreign currencies, thereby reducing its profitability overall. These fluctuations could also cause prospective customers to push out or delay orders because of the increased relative cost of Advantest’s products. In the past, there have been significant fluctuations in the exchange rate between the Japanese yen and the foreign currencies in which Advantest’s sales are denominated.

Furthermore, Advantest’s consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in which subsidiaries of Advantest prepare their financial statements against the Japanese yen. Foreign exchange rate fluctuations may have an effect on those amounts not denominated in yen which are translated into yen for Advantest’s consolidated financial statements, and depending on the direction of the foreign exchange fluctuation, it may have an adverse effect on Advantest’s reported financial position, results of operations and net assets.

To reduce this risk, in addition to rebalancing currency holdings, Advantest strives to reduce the impact of currency fluctuations through the use of foreign exchange contracts and other financial instruments, and balance sheet management to ensure that foreign currency denominated financial assets and liabilities are offset.

Advantest’s success depends on its continued ability to develop and manage relationships with its major customers. A small number of such major customers currently account for a significant portion of its net sales. Sales to Advantest’s five largest customers accounted for approximately 34% for FY2021 and approximaely 28% for FY2022. The success and loss of one or more of these major customers, changes in their capital expenditures or failure of their main products could materially harm Advantest’s business. Furthermore, if Advantest’s major customers experience deterioration in their financial position and are unable to fulfill their payment obligations to Advantest in accordance with the applicable terms, Advantest’s business, results of operations and financial position may be adversely affected.

To reduce this risk, Advantest seeks to gain broad customer base by entering new markets and developing new customers and emerging market, while paying attention to operating efficiency.

As for the working capital requirements, Advantest shall appropriate the cash and deposits earned from its operating activities. In the event that it becomes necessary to raise funds due to an acquisition or a sudden downturn in economic conditions, it may issue bonds or borrow funds from financial institutions. In the event of financial market instability or a reduction in Advantest’s credit rating due to a deterioration of creditworthiness, there is no guarantee that Advantest will be able to procure funds in a timely manner, which could affect the results of operations and financial position.

To reduce this risk, Advantest has built a strong financial position and secured sufficient liquidity by utilizing measures such as a committed credit line to withstand sharp demand fluctuations.
Furthermore, Advantest maintains a good relationship with several financial institutions to enable immediate financing when necessary.

If the succession plans do not work for our group's executive officers, including Group CEO, and key positions (executive officer class) in each unit, management stability and sustainability may not be ensured.

To reduce this risk, Advantest deliberates and executes the succession plan for the Group CEO at the Nomination and Compensation Committee, taking into account the perspective of the management team, which consists of senior executive officers, with regard to (1) arrangement of required human capital requirements, (2) selection of candidates, (3) evaluation of candidates, (4) narrowing down candidates and (5) development of candidates. Furthermore, the Board of Directors receives reports from the Nomination and Compensation Committee on requirements for succession planning for the positions, and proactively discusses them. Succession plans for key positions such as leaders of each business unit and function unit are reviewed annually by a study committee headed by the Group CEO. In addition, in accordance with the policies established by a study committee, the responsible department designs and implements training and development plans for candidates, reporting status to the Nomination and Compensation Committee and the Board of Directors as appropriate.

Advantest may experience damage to its brand power or less credibility due to the degradation of safety, reliability, or product performance as well as acts that may violate laws and regulations or social ethics. These would result in a suspension of trading, sanctions, or other social measures.

Advantest manufactures its products in accordance with internationally accepted quality control standards such as ISO9001. However, Advantest cannot guarantee that there are no defects in its products. Advantest maintains product liability insurance but cannot guarantee that such insurance will sufficiently cover the ultimate amount of damages with respect to Advantest’s liabilities. Therefore, shipping stoppage and delivery delay due to quality defects of parts or manufacturing defects of products, large-scale accidents due to product defects or any discovery of defects in its products could harm Advantest’s reputation for not adequately addressing defects, could cause Advantest to incur higher costs, and could result in claims for damages.

To reduce this risk, Advantest undertakes design review at the initial design stage and cross-references with the quality assurance division to provide products with high reliability. Advantest also established the Compliance Department to maintain its credibility and perform activities to raise awareness of legal compliance that have been carried out.

Digital Transformation is an initiative to increase the competitiveness of companies with data and digital technologies. There are high expectations for digital transformation in a wide range of fields, including the utilization using IoT and artificial intelligence to revolutionize manufacturing floor, the creation of new value through the sharing of data between production facilities and logistics, and the response to changes in the business environment brought about by the COVID-19.

However, as proceeding with Digital Transformation if Advantest is unable to make full use of data due to the aging, complexity, and black-boxing of existing IT systems, or if funds and human resources are devoted to the maintenance of existing systems, and resources cannot be allocated to IT investment that utilizes new digital technologies, it loses competitiveness, the maintenance cost of the old system becomes high, or system problems and data loss may occur due to the retirement or aging of persons in charge system maintenance operation, and Advantest’s business results could have a material adverse effect.

To reduce this risk, Advantest reviews IT systems and promotes applications continuity and alternatives to new market technologies. Advantest is also working to expand the Digital Workplace (Workplaces created by digital technologies) concept worldwide and connect it to opportunities for organizations to innovate.

Advantest relies on various information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, including confidential data, personal information and to carry out and support a variety of business activities, including manufacturing, research and development, supply chain management, sales and accounting. Advantest has the Information Security Committee to create policies on information security measures. The IT section builds and operates the information and technology network and system based on the above-mentioned policies. However, attacks by hackers or computer viruses, wrongful use of the information security system, careless use, accidents or disasters could undermine the defenses established by Advantest and disrupt business continuity, which could not only risk leakage or tampering of information but could also result in a legal claim, litigation, damages liability or an obligation to pay fines. If this were to occur, Advantest’s reputation could be harmed, Advantest could incur substantial costs, and it may have a material adverse effect upon Advantest’s financial condition and results of operation.

To reduce this risk, Advantest constantly monitors cyber-attacks to enhance their detection and strives to improve employee awareness through regular information security education.

Advantest relies on suppliers to perform some of the assembly requirements for its products. In addition, many of the components used in Advantest’s semiconductor and component test systems and mechatronics systems are produced by suppliers based on Advantest’s specifications. Advantest’s reliance on these suppliers may give it less control over the manufacturing process and exposes it to significant risks, especially inadequate manufacturing capacity, late delivery, substandard quality, lack of labor availability and high costs. In addition, Advantest depends on a sole source or a limited number of suppliers for a portion of its components and parts and purchases most parts and components on individual orders without entering into long-term supply agreements.

If a supplier becomes unable to provide components or parts in the volumes needed and at acceptable prices, or if a supplier withdraws from business thereby stopping production or sales of custom or general components and parts that Advantest uses or will use in the future, or a large-scale natural disaster or electricity shortage occurs, Advantest would have to identify and procure acceptable replacements. Advantest may lose its capacity to supply test systems if it becomes unable to procure acceptable replacements.

If the market for semiconductor and component test systems and mechatronics systems were to suddenly expand, Advantest would require significant increases in production capabilities including personnel, as well as materials, components and supplies from suppliers. The process of selecting suppliers and of identifying suitable replacement components and parts is a time-consuming process, and failure to do so may result in Advantest being unable to deliver products meeting customer requirements in a timely manner. The failure of Advantest to adjust to large increases in demand for its products could result in the loss of existing large customers or the loss of opportunities to build strong relationships with potential large customers with whom Advantest have few or no business as well as the potential for order cancellations or changes to product delivery timings. Such failure may adversely affect Advantest’s future market share and financial condition and results of operations including the write-down of inventories.

To reduce this risk, Advantest conducts activities, in accordance with rules for product design best practices, taking into account the latest technology, determined by Advantest internal working group. By doing so, Advantest is able to create and update a standard parts list of multiple potential suppliers, taking into account the parts lifecycle, while also looking to standardize parts and designs, and to build systems which are not overly reliant on specific suppliers. Furthermore, when selecting suppliers for components and parts, Advantest takes various risks into consideration and search for the best partners, and continuously evaluate and review them. On top of these measures, aiming to realize more lean supply chain, Advantest negotiates with main suppliers not only to conclude a contract of minimum volume supply agreement, but also to secure half-finished materials such as die bank, in which supplier completes substantial time required for wafer process, and keep wafers or diced chips to fulfill demand increase.

In order to develop business in the rapidly changing electronics industry, Advantest needs to secure a diverse range of human capital possessing familiarity with R&D, manufacturing, marketing, sales and maintenance services and other technical experts. In addition, Advantest believes it is important to continuously develop and maintain a diverse range of  human capital with excellent capabilities in business strategy and organizational management.

However, the competition for continuously hiring and retaining the necessary personnel is fierce. If Advantest becomes less attractive to employees due to a delay of improvements in the working environment, or less competitive compensation levels, it would result in the outflow of human capital. Additionally, if employee training is inadequate or if transmission of knowledge and skills is insufficient for the ageing or retirement of human capital, it could have a material adverse effect upon Advantest’s business operations and business results.

To reduce this risk, Advantest aims to recruit and secure diverse and experienced human capital on a wide-ranging global basis. To achieve this, based on our management strategies, Basic Policy Regarding Human Capital Development and  Internal Environment Development Policy, Advantest is working to stabilize our human capital through the formulation of mid- to long-term recruitment plans (new graduates and mid-career hires), activities to promote our mission, vision, and corporate values, efforts to improve the working environment and increase engagement, ensuring externally competitive compensation levels, investing in employee development and creating a system for transmission on knowledge and skills.

Advantest may be unknowingly infringing on the intellectual property rights of third parties and may be held responsible for doing so. If Advantest were to lose an appeal, it may be forced to pay significant damages, pay license fees, modify its products or processes, stop making products or stop using processes.

In order to reduce this risk, Advantest makes an effort to conduct research on intellectual property to not infringe on other companies’ intellectual property throughout the R&D stage and prior to product shipment.

Additionally, Advantest relies on patents, utility model rights, design rights, trademarks and copyrights obtained in various countries to actively protect its proprietary rights. In general, it is difficult for Advantest to gain access to, and investigate, products believed to be infringing intellectual property rights. Nonetheless, Advantest believes it is important to protect its intellectual property rights from third party infringement and will continue to monitor breaching of its intellectual property. Furthermore, Advantest will also communicate compliance to its customers.