2017 New Year's Message from Chairman, President and CEO Hiroya Kawasaki

January 5, 2017

Kobe Steel, Ltd.

On January 5, the first working day of 2017, Chairman, President and CEO Hiroya Kawasaki gave a New Year's message to company employees. Here is a summary of his remarks translated from the Japanese.

Thorough compliance and safety:
The foundation for our continued viability

Happy New Year! At the start of 2017, please allow me to share my thoughts with you.

I would first like to mention the importance of thorough compliance. Compliance violations of quality, the lifeline for manufacturers, were discovered in the Kobe Steel Group. We have seriously reflected on this issue, and we will reconsider and rigorously revise our systems and rules to prevent future problems. In addition, by thoroughly raising awareness that our priority must be placed on compliance, we will correct the erroneous mindset that may lead to misconduct. Being in charge of management, I myself will take the lead to resolve the problems.

Concerning safety, the number of accidents and injuries has remained at the same level as the previous year. We must say that our various efforts have yet to yield the desired results. Maintaining safety is the basis of manufacturing, as well as the foundation for our continued viability, along with compliance. I would like to request all employees once again to work every day with the determination that safety is absolutely essential.

Looking Back on 2016:
Making full efforts toward securing profits

Last April, we set forth the new medium-term management plan, KOBELCO VISION “G+”. Since then, we have been proceeding with initiatives to establish a solid business enterprise centered on the three core business areas of materials, machinery, and electric power.

We had been expecting temporary challenges in the first two years of the current medium-term management plan, with the relining of the blast furnace at Kakogawa Works and the consolidation of upstream processes. However, the business environment surrounding us has become even more difficult than our expectations.

In the first half of fiscal 2016, a rapid appreciation of the yen pushed down our profits in the materials and machinery businesses, mainly in exports. Also, sales continued to be sluggish in the construction machinery business, affected by China’s economic slowdown. Furthermore, due to the higher price of coking coal, the performance of our steel business has further declined. Under these circumstances, we currently expect our consolidated ordinary income for fiscal 2016 to be 10 billion yen, and the future remains uncertain.

We must make all-out efforts to secure profits in the remaining three months of fiscal 2016. Our urgent issue is to pass on the increased cost from the higher price of coking coal to higher sales prices as soon as possible. Furthermore, everyone in the Kobe Steel Group must make steady steps by focusing on issues at hand in their respective positions. I believe each of these steps will certainly lead us to our Group’s future growth.

Looking at fiscal 2017:
Aiming at improving our stable earnings power

Looking down the road, we see no elements of optimism for raw materials and the Chinese economy. New uncertainties have emerged as well, such as the U.K.’s decision to leave the EU and the incoming Trump administration in the U.S.

Nevertheless, even under these challenging circumstances, we have been steadily implementing measures to enhance our cost competitiveness, capture further growth fields, and establish a stable profit base. Our efforts will not slow down. I strongly believe that smooth implementation of both "defensive” measures to rebuild our profit structure and "proactive” measures to expand our businesses in the growth fields are the key to solidify our business foundation and to achieve in becoming a strong business entity with stable earnings power.

As for defensive initiatives, we need to implement structural reforms such as the consolidation of upstream operations in the steel business and the restructuring of the construction machinery business in China. Through these measures, we must steadily earn profits and generate cash to secure funds for investment in growth. Particularly, the construction machinery business must establish a business base in which profitability is maintained even under a harsh market environment, by reinforcing governance through reforming our production system in China and by thoroughly undertaking marketing risk management.

In addition, last year we have been starting up a number of strategic projects, including a joint venture with Angang Steel in China to produce advanced cold-rolled high-strength steel sheet; the production of aluminum sheet for automotive body panels in Tianjin, China; a hydraulic excavator plant in North America; and a steel wire rod joint venture in Thailand. This year, we must achieve the smooth operation of these projects so that they can contribute to profits.

As for proactive initiatives, we will invest our resources in weight savings in transportation as well as energy and infrastructure to promote our growth strategy.

In the automotive field, the shift toward lighter cars is accelerating, with the increasing needs for fuel efficiency and enhanced safety. As our business lineup includes high-strength steel sheet, aluminum, and welding materials, expectations for our Group are growing. Focusing on our solution technology for multi-materials, we will implement strategic investments on the scale of 100 billion yen to secure our position as an automotive materials supplier.

In the aircraft field, as weight saving is also required to meet fuel consumption regulations, titanium use is gaining presence. We will start up a new titanium melting furnace, promote research and development in machine processing, and start to consider building a complete supply chain in Japan.

In the field of energy and infrastructure, we plan to enter the market for large-sized centrifugal compressors, which is currently dominated by only a few manufacturers. Our current objective is to receive orders consistently, making the most of a world-class test facility, which starts operation in April. In the hydrogen-related business, we will prepare for the expanding demand for fuel-cell vehicles by making full use of a comprehensive test center for hydrogen stations. Also, we must continue our effort to increase orders related to the Tokyo Olympics, whose specific plans are now being formulated.

In the electric power business, we are striving to maintain stable operation. We will solidify this segment’s position as the third core business by proceeding with the construction of the power plant in Moka, Tochigi Prefecture without delay. We are also making steady progress on the environmental impact assessment of the Kobe power generation project.

This year, we are entering the second year of KOBELCO VISION “G+”. With an increasingly harsh external environment surrounding us, we must be aware that our path ahead will continue to be challenging. However, I am confident that we can all start seeing a bright future from the second half of the current medium-term management plan. We must all share the same roadmap to achieve our targets, directly face issues that need to be resolved, and take action to overcome them.

Concluding Remarks

Safety, stable production, environmental considerations, disaster prevention, and thorough compliance are absolutely essential for the Kobe Steel Group’s stability and growth. All of us should first consider what we should do to prevent problems and take action. If a problem is found, please do your best to find it quickly and deal with it promptly.

I hope that all Group employees will take a large step forward to the future together with me. With strong determination and ability, we will definitely achieve the current medium-term management plan.

In coming to a close, I sincerely wish all employees and their families good health and much happiness in the New Year.

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