Risk Factors

Among the various risk factors that may have an effect on the management performance and financial position of Makita, those that are believed likely to have a material impact on investor judgment are described below.

Note that items referring to the future reflect Makita's forecasts and assumptions as of March 31, 2009.

1. Makita’s sales are affected by the levels of construction activities and capital investments in its markets.

   The demand for power tools, Makita’s main products, is affected to a large extent by the levels of construction activities, capital investment and consumption trends in the relevant regions.
   Generally speaking, the levels of construction activities and capital investment and consumption trends depend largely on the economic conditions in the market.
   As a result, when economic conditions weaken in the principal markets for Makita’s activities, including Japan, Western Europe, Eastern Europe and Russia, North America, Asia, Central and South America, the Middle East, and Oceania, this may have an adverse impact on Makita’s financial condition and results of operations.
   In addition, fluctuations in prices of crude oil or mineral resources and volatility in the stock market may affect construction demand, public investment, capital expenditure and consumption trends, which in turn, may have a negative impact on Makita’s financial condition.
   The downturn of the world economy stemming from the financial crisis in 2008 resulted in a decline in construction investments and lower level of consumption. As a result, competition in the markets intensified, and an increase in inventories and a downward pressure of product prices significantly affected Makita’s sales and profits starting in the second half of FY 2009. If such economic condition persists, it may further impact Makita’s sales, resulting in an increase in the ratio of selling, general and administrative expenses and a decline in Makita’s profitability.
   Further more, if such economic conditions persist, Makita may need to reorganize or restructure production facilities and sales and distribution
   bases, which may have an adverse impact on Makita’s financial condition and results of operations.

2. Currency exchange rate fluctuations may affect Makita’s financial results.

   The functional currency for all of Makita’s significant foreign operations is the local currency. The transactions denominated in local currencies of Makita’s subsidiaries around the world are translated into Japanese yen using the average market conversion rate during each financial period. Assets and liabilities of overseas subsidiaries denominated in their local currencies are translated at the exchange rate in effect at each fiscal year-end, and income and expenses are translated at the average rates of exchange prevailing during each fiscal year. The local currencies of the overseas subsidiaries are regarded as their functional currencies.
   Currently, over 80% of Makita’s overall production and sales are generated overseas and a significant portion thereof are dominated in currencies other than Japanese yen. Consequently, fluctuations in exchange rates may have a significant impact on Makita’s results of operations, assets and liabilities and shareholders’ equity when translated into Japanese yen.
   Among others, Makita is affected by fluctuations in the value of the euro, the U.S. dollar and Chinese Renmin yuan, the euro and the U.S. dollar are the primary foreign currency on which Makita bases its foreign sales and the U.S. dollar and Chinese Renmin yuan are the primary foreign currency on which Makita bases its foreign costs and liabilities. In an effort to minimize the impact of short-term exchange rate fluctuations between major currencies, mainly the euro, the U.S. dollar, and the Japanese yen, Makita engages in hedging transactions.
   However, medium-to long-term fluctuations of exchange rates may affect Makita’s ability to execute procurement, production, logistics, and sales activities as planned and may have an adverse impact on Makita’s financial condition and results of operations.
   In particular, currency exchange rates are increasingly affected by other currency exchange rates, and fluctuations in certain currency exchange rates may affect exchange rates among other currencies, which may significantly affect Makita’s financial condition and results of operations. In FY 2009, Makita’s consolidated results of operations after the translation of foreign currencies into Japanese yen were significantly affected by fluctuations in exchange rates due to the rapid appreciation of the Japanese yen against other currencies in the second half of FY 2009. Further appreciation of the Japanese yen, especially against the euro, may have an adverse impact on Makita’s financial condition and results of operations.

3. Makita faces intense competition in the global market for its power tools for professional use.

   The global market for power tools for professional use is highly competitive. Factors that affect competition in the markets for Makita’s products include the quality, functionality of products, technological developments, the pace of new product development, price, reliability of products, such as durability, after-sale service and the rise of new competitors. While Makita strives to ensure its position as a leading international supplier of power tools for professional use, there is no guarantee that it will be able to effectively maintain its competitiveness in the future. If Makita is unable to compete effectively, it may lose market share and its earnings may be adversely affected. Given the current downturn of the world economy, competition is expected to further intensify globally due to excess inventory and production capacity, leading to downward pressure on the prices of Makita’s products, which may adversely impact Makita’s financial condition and results of operations.

4. Makita’s overseas activities and entry into overseas markets entail risks, which may have a material adverse effect on Makita’s business activities.

   Makita derives a significant majority of its sales from markets located outside of Japan, including Western Europe, Eastern Europe and Russia,North America, Asia, Central and South America, the Middle East, and Oceania. During FY 2009, approximately 84% of Makita’s consolidated net sales were derived from products sold overseas. Moreover, approximately 81% of global production volume was derived from overseas production. The high percentage of overseas sales and production gives rise to a number of risks. If such risks materialize, they may have a material adverse impact on Makita’s financial condition and results of operations. Such risks include the following:

   1. Unexpected changes in laws and regulations;
   2. Disadvantageous political and economic factors;

   3. The outflow of technical know-how and knowledge due to increased personnel turnover enabling Makita's competitors to strengthen their position;

   4. Potentially unfavorable tax systems and tariffs;
   5. Terrorism, war, and other factors that lead to social turbulence; and
   6. The interruption of or disruption to Makita’s operation due to labor disputes.

   In particular, under the current deteriorating economic condition, countries to which Makita exports its products may adopt new protectionist trade policies or strengthen its tariff policy. Such policy change may have the impact of reducing Makita’s exports and sales, and may have an adverse impact on Makita’s financial condition and results of operations.

5. If Makita is not able to develop attractive products, Makita’s sales activities may be adversely affected.

   Makita’s principal competitive strengths are its diverse range of high-quality, high-performance power tools for professional use, and the strong reputation of the MAKITA brand supported by its strong global sales and after-service network, both of which depend in part on Makita’s ability to continue to develop attractive and innovative products that are well received by the market. There is no assurance that Makita will be able to continue to develop such products. If Makita is no longer able to develop new products that meet the changing needs and correspond to market price for high-end, professional users, in a timely manner, it may have an adverse impact on Makita’s financial condition and results of operations.

6. Geographic concentration of Makita’s main offices and facilities may have adverse effects on Makita’s business activities.

   Makita’s principal management functions, including its headquarters, and most suppliers on which it relies for supplying major parts are located in Aichi Prefecture (“Aichi”), Japan.
   Makita’s manufacturing facilities in Aichi and Kunshan, Jiangsu Province, China, account for 19.4% and 60.4%, respectively, of Makita’s total production volume on a consolidated basis during FY 2009. Due to this geographic concentration of Makita’s major functions, including plants and other operations in certain regions of Japan and China, Makita’s performance may be significantly affected by the occurrence of any major natural disasters and other catastrophic events, including earthquakes, floods, fires, power outages, and suspension of water supplies. In addition, Makita’s facilities in China may also be affected by changes in political and legal environments, changes in economic conditions, revisions in tariff rates, appreciation of Japanese yen, labor disputes, epidemics, power outages resulting from inadequacies in infrastructure, and other factors. In the event that such developments cannot be foreseen or measures taken to alleviate their damaging impact are inadequate, it may have an adverse impact on Makita’s financial condition and results of operations.

7. If Makita fails to maintain cooperative relationships with its significant customers or if such significant customers reduce their purchase and sale of Makita’s products, Makita’s sales may be seriously affected.

   Although Makita does not have any customer that exceeds 10% of its consolidated sales, it has significant customers in each country. If Makita loses these customers and is unable to develop new sales channels to take their place, or if any such customer faces significant financial difficulties or accumulates a considerable amount of bad debt, sales to such customers may decline and have an adverse impact on Makita’s financial condition and results of operations. Under the current deteriorating economic condition stemming from the financial crisis, Makita’s significant customers are reducing sales activities, experiencing a sharp decline in sales and an increase in bad debt, which may deteriorate their cash flow and have an adverse impact on Makita’s net sales and profits.
   In addition, if significant customers of Makita select power tools of Chinese manufacturers or select products other than those produced by Makita and sell such products under their own brand instead of Makita’s products, this may have an adverse impact on Makita’s financial condition and results of operations.

8. If any of Makita’s suppliers fail to deliver materials or parts required for production as scheduled, Makita’s production activities may be adversely affected.

   Makita’s production activities are greatly dependent on the on-schedule delivery of materials and parts from its suppliers. Purchases of production-use materials from Chinese manufacturers have increased in recent years. When launching new products, sales commencement dates can slip if Chinese manufacturing technology does not satisfy our demands, or if it takes an inordinate amount of time in order to satisfy our demands. There is a concern that this can result in lost sales opportunities.
   Makita purchases its significant component parts for its products from sole suppliers. There is no assurance that Makita will be able to find alternate suppliers that can provide materials and parts of similar quality and price in a sufficient quantity and in a timely manner. If the supplier cannot deliver the required quality and quantity of parts on schedule due to reasons including natural disasters, government regulations, its production capacity, weakened business or financial condition, this may have an adverse effect on Makita’s production schedules and cause a delay in Makita’s own product deliveries. This may cause Makita to lose some customers or require Makita to purchase replacement materials or parts from alternate sources at a higher price. Any of these occurrences may have an adverse impact on Makita’s financial condition and results of operations.

9. Makita may not be able to protect its intellectual property rights and could incur significant liabilities, litigation costs or licensing expenses or be prevented from selling its products if it is determined to be infringing the intellectual property of third parties.

   In regions where Makita’s sales and production are significant, Makita applies for patents, designs and trademarks, and strives to protect intellectual property rights proactively. However, Makita may not be able to eliminate completely third party products that infringe on the intellectual property rights of Makita or third party products similar to Makita’s product. This may have a negative influence on Makita’s results of operations.
   Moreover, while Makita believes that it does not infringe on intellectual property rights of third parties, it is subject to infringement claims from third parties. When infringement of intellectual property rights is claimed by a third party, the obligation to pay damage may arise or an injunction in production and sales of a product may be ordered. This may have an adverse impact on Makita’s financial condition and results of operations.

10. If the procurement of raw materials used by Makita becomes difficult or prices of these raw materials rise sharply, this may have an adverse effect on Makita’s performance.

    Makita purchases raw materials and components, including silicon steel plates, aluminum, steel products, copper wire, and electronic parts to manufacture power tools. In recent years, demand for these materials in China has risen substantially. If Makita is unable to obtain the necessary quantities of these materials, especially in China and Japan, this may have an adverse effect on production schedules. As many of Makita’s suppliers are currently working to reduce their production capacity, in the event that demand rapidly recovers from the current level of low activity, delivery of raw materials and components by the suppliers may be delayed. This in turn may cause significant delay in Makita’s production schedule. In addition, the limitation of the suppliers’ production capacity may be a factor for increased prices of materials and components needed for manufacturing Makita products. If the increase in prices of such materials cannot be absorbed by Makita’s productivity or through other internal cost cutting efforts and/or if prices of final products cannot be raised sufficiently, this may have an adverse impact on Makita’s financial condition and results of operations.

11. Product liability litigation or recalls may harm Makita’s financial statements and reputation.

    Makita is developing a variety of products including power tools under the safety standard of each country, and is manufacturing them globally based on the quality standards of the factory. However, a large-scale recall and a large-scale product liability lawsuit may significantly damage Makita’s brand image and reputation.
    In addition, the related cost and time incurred through the recall or lawsuit may affect business performance and financial condition of Makita in case insurance policy does not cover the related cost.

12. Fluctuations in stock market prices may adversely affect Makita’s financial statements.

    Makita holds certain investments in Japanese equities and investments in trust, and records these investments as marketable securities and investment securities on its consolidated financial statements. The value of these investments change based on fluctuations in the quoted market prices. Fluctuations in the value of these securities may have an adverse impact on Makita’s financial condition and results of operations.

13. Environmental or other government regulations may have a material adverse impact on Makita’s business activities.

    Makita believes it maintains strict compliance with environmental, commercial, export and import, tax, safety and other regulations that are applicable to its activities in all the countries and areas in which it operates.
    If Makita is unable to continue its compliance with existing regulations or is unable to comply with any new or amended regulations, it may be subject to fines and other penalties and its activities may be significantly restricted. The costs related to compliance with any new or amended regulations may also result in significant increases in overall costs and may have an adverse impact on Makita’s financial condition and results of operations.

14. Investor confidence and the value of Makita’s ADRs and ordinary shares may be adversely impacted if Makita’s management concludes that Makita’s internal control over financial reporting is not effective or if Makita’s independent registered public accounting firm is unable to provide adequate attestation over the effectiveness of the internal control over Makita’s financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002.

    The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report in its Annual Report that contains an assessment by management of the effectiveness of corporate internal control over financial reporting. In addition, Makita’s independent registered public accounting firm is required to attest to the effectiveness of Makita’s internal control over financial reporting. If Makita’s management concludes that Makita’s internal control over financial reporting is not effective, or if Makita’s independent registered public accounting firm is not satisfied with Makita’s internal control over its financial reporting or the level at which its controls are documented, designed, operated or reviewed, and declines to attest or issues a report that is qualified, there could be an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of Makita’s financial statements, which ultimately could negatively impact the market price of Makita’s ADRs and ordinary shares.

15. If Makita’s operational network halts or malfunctions, Makita’s production and shipment schedule may be adversely affected.

    Makita’s headquarters and its major sales and R&D bases are located in Japan, and its procurement, manufacturing, sales and product development site are located worldwide. In addition, Makita’s major manufacturing facilities are concentrated in China and Japan. These sites are connected globally through an operational network. If Makita’s information system computer network halts or malfunctions due to any natural disaster, such as earthquakes, fires and floods, wars, or terrorist acts, or computer viruses, such an event may delay production and shipments of Makita’s products. This may have an adverse impact on Makita’s financial condition and results of operations.

16. If Makita is unable to retain talented personnel, this may have an adverse affect on Makita’s competitiveness and results of operations.

    Makita considers the retention and development of talented personnel with the expertise and technological skills is critical to its competitiveness. However, competition for recruiting such personnel has become increasingly challenging. Makita also considers important the development and retention of personnel in management challenging in Makita’s nearly 50 group companies. However, the competition to retain such excellent personnel is difficult in Japan, where the rapid aging of the population resulting from a decline in the birthrate is accelerating and the employment environment has been rapidly changing due to a declining labor population.
    Given such a labor and social climate, if the employment, retention or the development of talented human resources cannot be satisfied in accordance with Makita’s management plan, the Group’s business development, results of operations and growth prospects could be affected on a long-term basis.