2020 New Year's Message from President and CEO Mitsugu Yamaguchi

January 6, 2020

Kobe Steel, Ltd.

On January 6, the first working day of 2020, President and CEO Mitsugu Yamaguchi gave a New Year's message to all Kobe Steel Group employees. Here is an abridged version of his remarks translated from the Japanese.

Happy New Year! At the start of 2020, please let me share my thoughts with you.

Looking back at 2019

Last year, the Reiwa era began in the spring with the ascension of the new emperor to the throne, and Japan hosted the Rugby World Cup games in the autumn, which created a tremendous amount of excitement. On the other hand, Japan was hit by a series of major natural disasters, such as large typhoons and torrential rains, which caused severe damage to various parts of the country. I sincerely hope for the earliest possible recovery of the people, companies and regions suffering from these disasters.

Last year, we continued to make Groupwide efforts to implement measures to prevent a recurrence of the quality misconduct and to restore trust. Concerning the litigations related to the quality misconduct, Kobe Steel was convicted of violating the Unfair Competition Prevention Act in Japan. In North America, we understand that investigations by the U.S. Department of Justice have come to a conclusion, and the class action cases are approaching conclusions as well.

The business environment surrounding the Kobe Steel Group has become very challenging. The Japanese economy had been gradually recovering since 2017, owing to a pick-up in personal consumption and active capital investments. However, since the middle of 2019, demand has shown clear signs of stagnation, particularly in the automotive, shipbuilding and semiconductor industries, due to the worsening U.S.-China trade dispute and Japan-Korea relations, as well as other factors.

Under these economic circumstances, we are facing very difficult business results in fiscal 2019. Looking at the Group’s performance by business segment, in Iron & Steel, profits have been declining, affected by sluggish demand from the automotive, shipbuilding and other sectors, as well as by higher variable costs including material costs. As for the Aluminum & Copper segment, profitability has significantly declined, due to production trouble at our overseas aluminum forged suspension plant and start-up delays at new facilities, in addition to slow demand recovery for semiconductors and sluggish demand for automotive terminals. Also, in the Construction Machinery segment, which had driven the performance of the Kobe Steel Group for the past several years, the profit level has fallen owing to factors including the appreciation of the yen against the euro and Chinese renminbi, as well as intensified competition in China and Southeast Asia. As a result, although the Machinery, Engineering, Welding, Electric Power and other business segments have been striving hard, sales and income have declined significantly from the original forecast. Currently, amid deepening uncertainty over the future, our largest and urgent challenge in 2020 is to restore profitability in the materials businesses.

Looking at 2020

Fiscal 2020 marks the final year of KOBELCO VISION “G+.” Since 2016, the Kobe Steel Group has moved forward with measures including consolidating upstream processes in the steel business, rebuilding the construction machinery business in China, investing strategically to promote automotive weight reduction, and launching new projects in the electric power business. However, the external environment surrounding the Group has changed substantially, with rising raw materials and energy prices, production trouble, the revelation of the quality misconduct issue, and other factors.

To deal with these new challenges, last May we launched the Rolling of the Medium-Term Management Plan to address the key issues and set measures for the two years remaining in the Medium-Term Management Plan. First, we will seek to expand sales of high value-added products through such means as solution proposals. At the same time, we will strengthen our monozukuri capabilities, which have been a big challenge, by preventing production trouble and improving productivity at each manufacturing location. Also, we must solidify our profit base through the start-up and stable operation of the No. 1 and No. 2 units of the Moka Power Plant, in addition to early profits from strategic investment projects including those overseas. Furthermore, we will continue to make efforts to strengthen our group governance, including the restructuring of Group companies, as a measure to improve the efficiency of our management resources and to bolster our business foundation.

As a part of this strategy, we plan to reorganize the material businesses in April this year. Through this reorganization, we will strengthen our strategy for reducing the weight of automobiles and our capabilities to offer solution proposals. Also, we aim to strengthen and streamline management functions by linking common elemental technologies and quality management across divisions, as well as by sharing common functions in procurement, information systems, and distribution. In order to fully achieve these challenges by the next Medium-Term Management Plan, we will continue to work on such issues as safety, quality, environment, compliance, work style reforms and diversity, which form the foundation for our continued viability. We have been able to reap results from the earnest efforts led by the departments concerned at each business location. Examples include the application of health and safety guidelines, the practical use of awareness cameras, activities of the Quality Caravan Team, training courses including e-learning, the QC Circle Conference, and other initiatives. Please make continued efforts to raise the level of our foundation for corporate viability including safety, quality and environment. Let us improve the work quality and corporate quality in each department and at each business location.

The Kobe Steel Group has created distinctive businesses in its history of more than 100 years since its founding in 1905. The range of our materials businesses and machinery businesses is very broad in particular. There are synergies that can only be created based on the diversity of individual businesses constituting these two business fields. Also, these businesses are supported by various stakeholders, such as business partners and companies inside and outside Japan with whom we have nurtured relationships of trust over the years, in addition to the employees who continue to undertake bold challenges in R&D and at production sites. Furthermore, the Kobe Steel Group offers customers a broad range of products, including difficult-to-substitute materials and components in the materials businesses and environmentally friendly and energy-saving products in the machinery businesses. Our electric power business also bears a large social responsibility as it offers a high public service through the supply of electric power, which is vital for social infrastructure.

The very wellspring of our corporate value is the technology integration of these businesses, the supply of high value-added products, the relationship of trust with stakeholders, and the responsibility to provide social infrastructure as well as gaining the trust of society. Because of the current business environment that presents many challenges, we will further strengthen our business growth strategy based on the three core business areas of materials, machinery, and electric power. We will also concentrate our management resources on growth fields that are likely to expand over the medium to long term. By taking these measures and adding distinctive value to the Group, we aim to further expand and develop our businesses as well as make contributions to society.

Concluding Remarks

I myself and our management team will redouble our efforts and ingenuity toward restoring trust and improving our business performance, pivoting on the Next 100 Project. My visits to hold dialogues with employees at business locations, which I started since becoming president, will continue. Let us aim to create a company with an open atmosphere where you can take pride and have passion by sharing ideas and concerns through active and open communication within and between the departments.

In coming to a close, I wish the 2020 Tokyo Olympics and Paralympics every success. I am also hoping for a year with few earthquakes, heavy rains and other disasters. Looking forward to a bright year full of vigor, I sincerely wish all employees and their families, as well as the many people who are associated with our Group, a wonderful New Year.

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