Business Risks

This section explains risk factors that may affect the USS Group concerning sales and earnings, the stock price, financial position, or other items. Forward-looking statements in this section are the judgments of the USS Group as of the end of March 2023.

In Japan, the USS Group must comply with the Secondhand Articles Dealers Act, laws concerning the environment and recycling, and other laws and regulations. Although we use numerous legal procedures to protect our rights, there may be a new regulation in the future that cannot be foreseen at this time. If the USS Group receives a notice concerning a violation of law or regulation, the resulting restriction on business activities may have an effect on results of operations.

Activities to attract new members, retain current members and encourage members to participate in auctions are vital to the business operations of the USS Group. There may be problems involving these activities in any of the following cases or in other events.

• A competitor starts to offer a type of service, facility or other benefit that the USS Group does not provide.
• The number of consigned vehicles and the number of contract completions at auction sites are low compared to competitors.
• The behavior of a USS Group executive or employee damages the reputation of the group.
• A major source of vehicles sold at USS Group auctions decides to use a different sales channel.

Maintaining a consistent supply of vehicles is critical to the operation of the automobile auction business. An insufficient number of vehicles may make it impossible to hold an auction of an appropriate scale.

Currently, there is a somewhat significant reliance on high-volume sources of vehicles consigned at auctions. We discount auction fees for these providers of vehicles to encourage them to continue using our auctions. If we revise auction fees or make other changes to the terms for consigning vehicles, there may be an effect on the number of vehicles consigned by these high-volume sources of vehicles and others. In addition, there is no assurance that we can continue to receive consignments for the number of vehicles required to conduct auctions. Any of these risk factors may have an effect on results of operations.

In the past, there have been downturns in the contract completion rate, which is the percentage of vehicles consigned at auctions that are sold. A decrease in this rate may have an effect on the number of vehicles consigned at USS Group auctions.

There are limits on the ability to enlarge current USS Group facilities, such as by adding vehicle parking and storage space. Adding space requires purchasing or leasing land, building multi-level structures and other measures that require large expenditures.

The USS Group has grown by building new auction sites and acquiring other used vehicle auction companies. We may continue to build auction sites and use acquisitions and business alliances for growth. These activities are vulnerable to the following risk factors.

• At newly constructed or acquired auction sites, we may not be able to attract a sufficient number of auction members or vehicles to be auctioned.
• For acquisitions and mergers, there may be problems involving contingent liabilities, off-balance-sheet liabilities or management, issues involving rights, and other sources of uncertainty remaining after the transaction.
• There may be an increase in the amount of management activities required to properly supervise a larger and more complex organization as the scale of business operations grows.
• The expansion or relocation of auction sites requires numerous regulatory approvals. If there are difficulties obtaining any of these approvals, we may be forced to postpone or cancel expansion or relocation plans.

We may be required to reduce to the amount that can be recovered the book values of goodwill resulting from acquisitions and other assets when we determine that future cash flows will not be sufficient to recover the book value of a particular asset. This write-down is recognized as an impairment loss. If there is an impairment loss based on the outlook for future cash flows associated with a particular asset, there may be an effect on the USS Group's business operations, results of operations and financial position.

The used vehicle purchase and sale market in Japan is mature and there are no prospects for significant growth. The USS Group must develop a used vehicle purchase and sale system that provides benefits to participants in these auctions as well as make people aware of this system. If we are unable to compete successfully and to increase our market share, our profitability and growth rate may decline and there could be other consequences.

For many years, we have maintained a large share of the used vehicle auction market in every area where we operate an auction site. However, one or more competitors may grow rapidly or use mergers or business alliances for growth, resulting in large-scale facilities, services or other benefits that the USS Group cannot match. There is also the risk of an automaker or other company using its own sales company network to establish a new channel for the sale of used vehicles, which could result in a powerful competitor. More intense competition is likely to have negative effects on the growth and profitability of the USS Group. Furthermore, there is no assurance that the fees charged by the USS Group will always be lower than the fees of competitors.

The markets for on-site used vehicle auctions and for the provision of auction information using satellite TV and the internet are characterized by rapid changes in technologies and in the demands of customers. The future success of the USS Group will depend on the ability to respond to technological innovations and progress, more intense competition involving services, and an even higher level of customer requirements. If we are unable to adapt to these changes, there may be effects on our business operations, financial position and results of operations. Furthermore, if a competing auction site starts using an even more advanced e-transaction or other technology, the USS Group may be forced to make substantial expenditures to remain competitive. Pressure on our finances caused by these expenditures could force us to alter business plans or have an effect on our financial position of results of operations. In addition, there is no assurance that we will be able to use these new technologies in order to provide competitive services.

The USS Group Management Headquarters is responsible for the oversight of the operations of all consolidated subsidiaries. Although we back up data and have other safety measures, an IT system failure or other problem could have an effect on this centralized management of group business operations.

The auctions of the USS Group are open only to registered members. Most of these members operate a used car sales business. Information about these members includes personal information, which we manage strictly in accordance with our personal information protection policy. If there is a leak or other incident involving this personal information, the resulting loss of trust in the USS Group could have a negative effect on results of operations.

A business site of the USS Group may be damaged by an earthquake, typhoon, tsunami or other natural disaster or by a fire or other event. This damage may cause the suspension of all or part of the operations of the business site, preventing us from providing services or conducting sales. Furthermore, substantial expenditures may be required for repairs to buildings, equipment and other facilities, resulting in a significant negative effect on the USS Group's business operations, financial position and results of operations.

The health and safety of auction members and employees are the highest priorities of the USS Group, and are continuing to conduct business operations while taking the actions to protect people from becoming infected. However, demands or other measures by the national government or local governments may force us to suspend all face-to-face services. In this case, we would need to switch entirely to auctions using the internet and other external bidding systems or to suspend all auction operations.

In addition, there is a risk of a rapid decline in the number of used vehicles sold at auctions in Japan due to a downturn in exports of used vehicles from Japan because of slow new car sales and closed borders of countries that normally import these used vehicles.

There is also the risk of the COVID-19 pandemic having a negative impact on the performance and finances of the businesses of auction members. If these members are unable to continue business operations, we may no longer receive vehicles to be auctioned from these members and there could be difficulty collecting amounts owed to us by these members.

This list of business risk does not include all of the risk factors that may affect the USS Group because there are also risk factors that cannot be foreseen.