Kobe Steel’s Fiscal 2016-2020 Group Medium-Term Management Plan

1. Introduction

2. Growth Strategy for the Three Core Business Areas

2.1. Materials Businesses

2.1.1. Initiatives for Weight Savings in Transportation

• With fuel consumption and CO₂ regulations becoming stricter in the automotive field, the need for lighter automobiles is anticipated to grow in the future, while enhanced safety requirements are increasing. In addition to raising the competitiveness of ultra-high strength steel and aluminum, noted for their outstanding balance of weight savings and cost, Kobe Steel plans to expand its share of the global market and firmly secure growth in the automotive field, leveraged by its original solution technologies (the joining of dissimilar metals, etc.) for multi-materials.
  • Strategic investments in Japan and overseas
    Kobe Steel will consider strategic investments on the scale of 100 billion yen to strengthen mother factories in Japan, the source of its competitiveness, and growth initiatives in overseas markets (North America and China).
• In the aerospace field, which is expected to grow, Kobe Steel plans to strengthen upstream operations (melting, forging and casting) for its titanium, aluminum and magnesium products. It will also promote research and development necessary for entry and expansion into downstream operations (machining, surface treatment and painting). By establishing an integrated system for upstream and downstream operations, Kobe Steel will be able to meet user needs by building a complete supply chain in Japan, aiming to become a supplier with a presence in Asia.

2.1.2. Improving Profits in the Steel Business (Profit Improvement Effect from Fiscal 2015 to Fiscal 2020)

• In addition to consolidating upstream operations to Kakogawa Works in fiscal 2017 (cost reductions of 15 billion yen per year or more), Kobe Steel plans to implement additional profit improvement and on-site cost reductions (over 30 billion yen per year). Together with growth in the transportation field (over 25 billion yen), these initiatives are expected to increase profits.

2.2. Machinery Businesses

2.2.1. Initiatives in the Energy Field

• To expand the compressor business, Kobe Steel plans to enter the market for large-sized centrifugal compressors in the nonstandard compressor business. (Kobe Steel plans to open one of the world’s largest test facilities in April 2017 for this purpose.) In addition, Kobe Steel plans to expand its standard compressor business through global development, strengthened product competitiveness and strengthened manufacturing infrastructure, aiming to establish a position as the top group in Asia.
• In the hydrogen-related business, Kobe Steel aims to strengthen its competitiveness in the domestic and overseas markets and expand sales of units for hydrogen stations by constructing a comprehensive test center for hydrogen stations and carrying out demonstration tests on hydrogen stations to establish differentiated technologies.

2.2.2. Strengthening Profitability in the Construction Machinery Business

• In the Chinese excavator business, Kobe Steel plans to take decisive action on structural change to strengthen profitability by reviewing production capacity and promoting cross sourcing by reviewing the functions of two locations (supplying machines and components in Japan, the United States and Southeast Asia and maintaining capacity utilization). In April 2016, the U.S. excavator factory starts up. Sales are anticipated to expand in Europe, the United States and India. In addition, through the merger of Kobelco Construction Machinery and Kobelco Cranes on April 1, 2016, Kobe Steel aims to establish a strong business base and a company with a global presence. (Global market share for excavators: 10%. Global market share for small to medium-sized crawler cranes: 40%. Global market share for large-sized crawler cranes: 15%.)

2.3. Electric Power Business

• Kobe Steel plans to continue the stable operation of its current IPP business, Kobelco Power Kobe, Inc., and proceed with two new power generation projects in Moka and Kobe. In fiscal 2022, Kobe Steel will have a total power generation capacity of 3.95 million kW, establishing a stable profit base.

3. Strengthening the Business Base

3.1. Strengthening Corporate Governance

• Kobe Steel plans to transition to a company with an audit and supervisory committee, review the members of the board of directors, establish independent outside directors meetings, and strengthen the business execution system to strengthen corporate governance.

3.2. Human Resource Development

• Promoting diversity and implementing changes in working styles, Kobe Steel will focus on creating a safe, employee-friendly working environment. In addition, Kobe Steel aims to secure and cultivate employees who will drive growth in the Kobe Steel Group.

3.3. Strengthening Technology Development Capabilities and Manufacturing Capabilities

• Kobe Steel plans to undertake the creation of products and processes that provide customer value through differentiated technologies that strengthen the competitiveness of major products and in the automotive, aerospace and energy fields. In addition, by strengthening product quality, on-site capabilities and data utilization, Kobe Steel plans to strengthen its production infrastructure and raise the level of its monozukuri-ryoku (manufacturing capabilities).

4. Financial Strategy

• In principle, the basic policy is to finance large strategic investments and regular investments that support the business base by business cash flows. However, to maintain financial discipline when the business environment worsens, while steadily carrying out growth investments, Kobe Steel will consider cash generation measures such as asset sales targeting a maximum of 100 billion yen, improvements in working capital and other measures.

5. Numerical Targets

Targets for the Final Year of Plan (Fiscal 2020)

1. Ordinary income/total assets

2. Interest-bearing debt/net worth

3. Forecast made in the third-quarter financial results announcement (February 2, 2016)

Dividend Policy

• Kobe Steel’s basic policy is to provide continuous and stable dividends to its shareholders. Dividends are decided taking into account the Company’s financial condition, future capital needs, the business performance of each quarter, and dividend payout ratio.
• For the time being, priority will be placed on investments necessary for future growth to improve profitability, raise the overall corporate value of the Group, and thereby improve the common interest of shareholders.
• For the time being, the consolidated payout ratio is aimed at 15 to 25 percent.

Reference

Specific Measures by Business Segment

1. Iron & Steel

• Strengthening the profitability of the steel products business by strengthening safety and production infrastructure and successfully completing the consolidation of upstream operations, as well as through the accumulation of profit improvement measures
• Promotion of product strategies for steel products centered on the transportation field (automobiles) and strengthening of the global supply system (start of production of special steel wire rod in Thailand, achieving maximum sales volume by increasing sales of high strength steel sheet in North America and China)
• Promotion of growth strategies of processed materials by leveraging the product appeal and strength of steel castings and forgings, titanium and steel powder centered on the transportation field (ships, airplanes and automobiles)

2. Welding

• Maintaining a dominant share in the domestic market by strengthening regional and marketing activities, expanding sales to the shipbuilding industry and in steel frame applications
• Strengthening the ASEAN and China businesses by launching new products that match market needs and improving sales capabilities
• Pursuit of the solution business by promoting the development of basic elemental technologies and initiatives for automation in welding in shipbuilding and steel frames

3. Aluminum & Copper

• Pursuit of growth in the transportation field (automotive panels, suspensions, bumpers, castings and forgings for aerospace, automotive copper strip, etc.)
• Strengthening and maintaining current core businesses (can stock, disk materials)
• Strengthening the business base by improving technological excellence and monozukuri-ryoku (manufacturing capabilities)

4. Machinery

• Expansion of the nonstandard compressor business through entry into new fields (large-sized centrifugal compressors) and new applications (LNG carriers, hydrogen)
• Expansion of the standard compressor business through the launching of global strategic products and development in Asia
• Pursuit of a high profit structure in the industrial machinery business by strengthening cost competitiveness and optimizing the product mix

5. Engineering

• Strengthening initiatives in the waste treatment business associated with the decommissioning of nuclear reactors
• Increasing orders in the water treatment- and waste treatment-related businesses and strengthening profitability
• Strengthening initiatives directed at the creation of new businesses
• Further coordination of the engineering business in the Group

6. Construction Machinery Segment

• Implementation of structural reforms in the China business for excavators
• Business development and supply of products and solutions through organic coordination in business fields that utilize ICT (information and communications technology)
• Maintaining a presence in the small and medium-sized markets for crawler cranes. Establishment of a business base in the re-entered large-sized crane market.

7. Electric Power

• Continuing the stable operation of the current IPP business and securing stable profits
• Completion of the Moka project and smooth start-up of operations
• Steady implementation of the Kobe project