SHOWA CORPORATION Business report FY2006

Business Highlights

Financial overview ( in millions of JPY )
- FY2006 FY2005 R. C. (%) Factors
Overall
Sales 261,897 250,448 7.2% see note 1) below
Operating income 17,698 17,175 3.0% see note 2) below
Ordinary profit 18,766 17,716 4.1% -
Current net income 9,083 10,451 13.7% -
Automotive components
Sales 255,985 244,818 7.3% -
Operating income 16,566 15,985 3.1% -
( R.C. : Rate of Change )
Factors
1) Despite shrinking demand in the domestic automotive industry that reduced the company's sales at home, overall production increased in order to support rising exports to Asia, especially to China. The Company also made strong efforts to improve its global business structure in terms of production, procurement, and sales. As a result, its group-wide sales reached 261,897 million yen, up 4.6 percent from what they were the previous year.

2) Despite increased material prices and labor costs, operating income rose 3.0 percent year-on-year to 17,698 million yen, due to greater sales, reduced costs, and improved production efficiency.

Sales by Geographical Region
<Japan>
- Sales of automotive components increased, while those of motorcycle products decreased.
- Sales stood at 139,789 million yen, a dip of 0.6 percent year-on-year; operating income was 7,385 million won, a fall of 18.3 percent year-on-year.

<North America>
- Revenue at the U.S. subsidiary decreased due to a fall in sales of automotive products.
- Sales at the Company's Canadian subsidiary also dropped because it won less business to supply suspension sub-assemblies and propeller shafts.
- Overall sales in North America stood at 81,112 million yen (a decrease of 0.4 percent year-on-year), while operating income totaled 2,620 million yen (a fall of 14.7 percent year-on-year).

<Europe>
- Sales of automotive components decreased at the U.K. subsidiary.
- Sales rose in Spain, supported by greater sales of motorcycle products.
- Overall sales in Europe were 18,786 million yen, a rise of 5.7 percent year-on-year. Operating income in the region jumped 292.8 percent from the previous year to 558 million yen.

<Southeast Asia>
- Business at the Indonesian subsidiary was slower, due to weakened sales of motorcycle shock absorbers in the first half of fiscal 2006, although there were signs of a recovery in the second half. Despite this fall, overall sales increased slightly year-on-year in yen terms, supported by gains from favorable exchange rate translation.

- The Company's Thai subsidiary achieved greater revenue compared to that of the previous year, thanks to rising demand for power steering products, of which an increasing number are being made in-house. Sales of motorcycle shock absorbers also rose, thanks to strong sales of vehicles, in which the Company's products are used.

<Other Areas>
-Sales at at the Brazilian company increased from what they were last year, due an increase in sales of motorcycle products.
- Sales at the Chinese subsidiary jumped year-on-year, thanks to stronger sales of auto parts.
- Overall sales in these Other Areas totaled 32,940 million yen ( an increase of 36.3 percent year-on-year); and operating income was 3,06 million yen, a rise of 55.8 year-on-year).

Overseas Development


Reinforcing its production structure
- The Company accelerates its capital investment in China and the U.S. in order to expand its local production capabilities of four-wheeled vehicle parts. In fiscal 2007, the company will increase its yearly investment in China and the U.S. by a little more than 1.5 billion yen and a little less than 1.8 billion yen, respectively, from the previous year and start producing more components in-house for its locally-produced power steering and shock absorbers.

- The Company increases power steering production in Asia. The company will establish a new electric power steering (EPS) production base in India to achieve an annual production capacity of approx. 400,000 units by 2010. In China, it will build an additional EPS assembly operation and an integrated manufacturing system for hydraulic power steering.

- The Company announced launches a full-scale local production of major components for hydraulic power steerings in North America. While processing sintered parts for oil pumps internally at its plant in Ontario, Canada, Showa will also transfer assembly of pumps to Canada from the U.S., to consolidate its production system. Showa will begin production in spring 2007, planning to supply 2,960,000 units in 2009.

>>See Investment for details

In-house production
- The Company will soon step up its local parts procurement in China in accordance with the expansion of power steering production in China. The company will transfer its in-house parts production technology developed in Japan to its local manufacturing site, and examine possibilities of purchasing some items from local suppliers-mainly Japanese affiliated suppliers-to begin procuring some parts in China instead of importing from Japan. Its initial target is to increase the local parts procurement rate to 40% within three years and the ratio will be gradually expanded to enhance the company's competitiveness. As for the parts produced in-house, the company will transfer more technologies such as gear machining and quenching technologies. Also, considering the items available from Japanese suppliers in China, such as casting, sealing and bearings, the company will establish a rule to select in-house production parts and bought out parts. The company will also examine possibility of procuring some parts from Chinese local suppliers. (From a story in the Nikkan Jidosha Shimbun on Jun 27, 2006)

- The Company will raise to 30 percent the ratio of components it manufactures in-house in its products. While Showa's domestic facilities, the hubs of its production technology, basically make components in-house, a majority of the Company's plants overseas are more or less dependent on Tier 2 suppliers for production of key parts. The group's in-house production rate also greatly varies by product. The Company decided to make more components at its both domestic and overseas plants, believing such measure will lead to streamlining quality management processes and other systems. Starting out with the U.S., in which it will install new equipment to boost in-house production ratio of shock absorber components by 2007, the company intends to take similar measures in other countries for various products. Plans also include the acquisition of production technology used at domestic suppliers to which it has been outsourcing production. The technology will then be introduced to its factories outside Japan. (From an article in the Nikkan Jidosha Shimbun on Feb.05, 2007)

R&D structure
- The Company reinforces its development function in North America, to which it will shift development of a propeller shaft, a main component of the drive system, designed for the U.S. market. The company will complete setup of test facilities as well as increase the number of engineers by the end of fiscal 2006. In North America, the company started to deliver propeller shafts produced in its Canadian plant to DaimlerChrysler in January 2006.

See R&D fpr details

R&D

In million yen FY2006 FY 2005 FY2004
Automobile parts 6,738 7,200 6,384
Others 223 233 216
Total 6,962 7,433 6,601

Automobile parts business:
- Promoted cost reduction initiatives such as product revisions that improve the competitiveness of existing products.
- Reinforced its R&D function engaged in developing fundamental technology on examining and determining suitability of materials, for example, in order to build up its capabilities to procure products locally at global sites.
- The Company built a new facility to conduct research and development of motorcycle components.

<R&D activities for the year ended March, 2007>
Strengthening its R&D function
The Company will reinforce its development function in North America, to which it will shift development of a propeller shaft, a main component of the drive system, designed for the U.S. market. The Company will complete setup of test facilities as well as increase the number of engineers by the end of fiscal 2006. In North America, the Company started to deliver propeller shafts produced in its Canadian plant to DaimlerChrysler in January 2006. It aims to enhance its competitive edge by setting up a comprehensive system from development to production there, expecting growing new businesses focused on SUVs. Currently 30 engineers are working there. The Company has already shifted designing of a shock absorber and tuning of a power steering from Japan to the U.S., followed by development of a propeller shaft. By localizing development of such major products, The Company intends to expand the follow-up system for its current customers, Honda and DaimlerChrysler as well as to integrate development and production divisions for shortening development period and improving efficiencies. (From a story in the Nikkan Jidosha Shimbun on June 14, 2006)

Investment Activities

In million yen FY2006 FY 2005 FY2004
Automobile parts 17,214 10,436 8,650
Others 162 1,310 37
Total 17,377 11,747 8,688
In common 23 29 39
Consolidated 17,400 11,777 8,728

<Capital investments for the year ended March, 2007>

The Company worked on improving its competitive edge in terms of both technology and costs. In an effort to enhance its technical capability, the Company built a new facility to handle in-house production of dies; as well as a new research building to develop motorcycle products. The Group also completed a new plant overseas to upgrade its production capacity.

Capital Investment
The Company will accelerate its capital investment in China and the U.S. in order to expand its local production capabilities of four-wheeled vehicle parts. In fiscal 2007, the Company will increase its yearly investment in China and the U.S. by a little more than 1.5 billion yen and a little less than 1.8 billion yen, respectively, from the previous year and start producing more components in-house for its locally-produced power steering and shock absorbers. The gradual decrease in the percentage of components procured from Japan will allow the Company to improve profitability, and the upgrade of local production technology will lead to reinforcement of its global production structure. In China, the Company has already begun a production of new components including resin gears for electric power steering. Also at its new hydraulic power steering plant in Wuhan, scheduled to start operation early next year, it will establish an integrated manufacturing system that is capable of conducting all processes including casting, coating and pumping. The new plant's initial yearly production volume is 80,000 and will be increased to 230,000 by 2010. In the U.S., the Company will increase the percentage of components produced in-house for locally-produced shock absorbers from approximately 20% to 30% by beginning a production of stamped parts, springs and sintered parts locally. (From a story in the Nikkan Jidosha Shimbun on Apr. 26, 2006)

The Company will increase power steering production in Asia. The Company will establish a new electric power steering (EPS) production base in India to achieve an annual production capacity of approx. 400,000 units by 2010. In China, it will build an additional EPS assembly operation and an integrated manufacturing system for hydraulic power steering. According to Showa, the breakeven point of power steering production is the annual 100,000 units per line. Production in India will start as the estimated production volume has exceeded the breakeven point. In China, the current production capacity will be reinforced. The new EPS India plant will be built with 950 million yen investment in Faridabad, a suburb of the capitol, New Delhi. It is scheduled to start operation in April 2007 with an initial annual production of 100,000 units, which will be raised to 386,000 units by 2010. Cast parts and gears will be produced in-house. In China, the supplier is conducting operations as molding gears to produce and assemble components at its Sichuan EPS plant. It will also start EPS assembly at its new plant in Chengdu this month, with targeted annual production of 80,000 units for 2006 and 230,000 units for 2010. A new hydraulic power steering plant will be built at Wuhan to start operation in January 2007. With 2.5 billion yen investment, the integrated manufacturing system covering casting, plating and assembling operations will be established. The annual production is projected at 120,000 units for 2007 and 200,000 units for 2010. (From a story in the Nikkan Jidosha Shimbun on May 1, 2006)

The Company will launch a full-scale local production of major components for hydraulic power steerings in North America. While processing sintered parts for oil pumps internally at its plant in Ontario, Canada, Showa will also transfer assembly of pumps to Canada from the U.S., to consolidate its production system. Showa will begin production in spring 2007, planning to supply 2,960,000 units in 2009. Total investment will be 1.27 billion yen, which is broken down to 690 million for facilities and 580 million for buildings. Showa has produced hydraulic pumps at its Gotenba factory and shipped them to the North American market. However, active demand for electric power steerings in Japan forced the Company to increase production of them, while major customers of hydraulic power steerings are currently located in North America. Considering such market situation, Showa will transfer production of pumps to North America to devote available capacity in Japan to production of electric power steerings. (From an article in the Nikkan Jidosha Shimbun on Oct.27, 2006)

The Company has decided to invest in fiscal 2007 some 7-8 billion yen in plant and equipment, an increase of 50 percent compared with the amount it normally spends. Focus will be on plant investment outside Japan, primarily in North America and China in order to establish a stronger foothold in each region so as to support plans of Honda, Showa's main customer, and other Japanese automakers to hike production overseas.(From an article in the Nikkan Jidosha Shimbun on Feb.26, 2007)

< Newly added facilities >
* The total amount of capital investment planned for the year ended March, 2007 was 26,104 million yen. The following outlines major construction projects for new facilities.
Type of facility Planned investment
(total)
(million JPY)
Construction start month Planned completion
Saitama Plant(Gyoda City, Saitama, Japan)
Business Segment: Automobile parts, etc.
Production facilities for automobile parts 4,946 Apr., 2006 Mar., 2008
Gotenba Plant (Gotenba, Shizuoka, Japan)
Business Segment: Automobile parts
Production facilities for automobile parts 4,358 May., 2006 Feb., 2008
P.T. Showa Indonesia Manufacturing (Cikarang-Bekasi, Indonesia)
Business Segment: Automobile parts
Production facilities for automobile, motorcycle parts 2,314 Aug., 2006 Dec., 2007
American Showa, Inc., Sunbury Factory (Ohio, USA)
Business Segment: Automobile parts
Production facilities for automobile parts 3,143 Oct., 2006 Dec., 2007
American Showa, Inc., Blanchester Factory (Ohio, USA)
Business Segment: Automobile parts
Production facilities for automobile parts 2,587 Oct., 2006 Dec., 2007
Guangzhou Showa Automparts Co., Ltd. (Wuhan, China)
Business Segment: Automobile parts
Production facilities for automobile, motorcycle parts 1,394 Mar., 2006 Dec., 2007