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5. SHOWA Corporation Business Report FY ended 2015

Transferring Operations

Some production operations transferred from China to India
-The Company is studying the possibility of transferring part of the production operations currently handled in China to India. The Company's Shanghai subsidiary is currently producing the Company's entire requirement of rear shock absorbers called unit dampers for automobiles. These unit dampers are delivered to the global market. Because a higher Chinese yuan is negatively affecting the cost advantage of the China operation, the Company has decided to move production to a lower cost country. The Company is looking to establish a new plant in India, aiming to begin production in 2017. (From an article in the Nikkan Jidosha Shimbun on February 26, 2015)

Production of electric power steering systems consolidated in Mexico
-The Company will integrate production of electronic power steering (EPS) systems in North America into its new plant in Mexico. In and after 2015, the Company will terminate production at plants in Canada and the U.S. one by one in line with the redesigning of each model and shift production to Mexico. The Company plans to begin operations of the new plant with an annual production capacity of 500,000 units in Mexico in July 2015 for producing the Company's first dual-pinion type EPS systems. The Company intends to expand sales of the EPS systems while improving profitability of its business by integrating production of EPS systems into the new plant with enhanced capability. (From an article in the Nikkan Jidosha Shimbun on October 2, 2014)

Contracts

-Shock absorbers, steering gear-boxes, and gas-springs are being equipped on the Honda S660.

-Shock absorbers, S-SEES (Showa Super Empowering Efficient Suspension) (on the front-end), and gas springs are being equipped on the Mazda CX-3.

>>>Financial Forecast for the Next Fiscal Year (Sales, Operating Income etc.)

R&D Activities

Development of integrated-control technology for steering wheels and shock absorbers
-The Company will develop a new technology to integrate the control of a vehicle's steering system and shock absorbers. The technology will be designed to automatically control the damping force of the shock absorbers according to the movement of the steering wheel. This is expected to offer higher levels of driving safety and riding comfort. The Company plans to complete the development project by 2020, as it believes such advanced control system is vital for the future autonomous driving technology. In order to achieve autonomous driving, it should be necessary to develop mechanisms for optimally controlling the vehicle in various situations. The new integrated control system is expected to embody the Company's expertise in both power steering systems and shock absorber technologies. (From an article in the Nikkan Jidosha Shimbun on October 22, 2014)

Development and sales of variable shock absorbers
-The Company will increase sales of variable shock absorbers to 30% of total sales of shock absorbers for automobiles in 2020, and further to 100% in 2030. Shock absorbers improve riding comfort and driving stability of vehicles. The Company is developing mechanical and electronic variable shock absorbers. In order to reduce costs at an early stage, the Company will first develop mechanical types and replace existing products with them. The Company's Sensitive Frequency Response Damper (SFRD), a mechanical variable shock absorber, was first mounted on Honda's Accord Hybrid. The Company will continue to develop next-generation variable shock absorbers for compact cars such as the Honda Fit. For luxury vehicles, it will develop more sophisticated electronic types that can be used without a dedicated sensor. Currently, U.S. and European automakers install variable shock absorbers only on their luxury models. The installation ratio of variable types on new models remains at around 5%. Sachs, a brand of ZF Friedrichshafen AG of Germany, takes a lead as a supplier of mechanical shock absorbers. Honda currently installs Sachs' products on its Odyssey and Vezel cars. (From an article in the Nikkan Jidosha Shimbun on September 5, 2014)

Skyhook damper using wheel-speed sensor
-The Company has developed an innovative and cost-efficient skyhook damping technology that utilizes wheel-speed sensors. Skyhook damping technologies use electric sensors to control the dampers in order to improve riding comfort and driving stability. Conventional skyhook control systems use eight dedicated sensors on each damper to detect both the spring's vertical movement and the damper's stroke speeds. The new system, however, can make use of information obtained through wheel-speed sensors for such purposes. Because vehicles with electronic stability control systems and anti-lock braking systems come equipped with wheel-speed sensors, the new skyhook damping technology eliminates the need for adding any sensors. With this breakthrough, the Company hopes to expand the application of skyhook damping systems to mini vehicles and compact cars where cost is of great importance. (From an article in the Nikkan Jidosha Shimbun on May 22, 2014)

Established R&D center in China
-The Company announced that it has held an opening ceremony for its new development base SHOWA (Guangzhou) Auto Parts R&D Co., Ltd., in Guangzhou, Guangdong Province, China. The Company aims to establish a stable business structure and boost its sales in China by enhancing its development capabilities for new product development, sales expansion, local procurement, and quality assurance, as well as promptly performing development activities that meet the needs of its customers. (From a press release on February 4, 2015)

Established R&D and sales functions in Germany
-The Company announced that it has opened a new branch, Showa UK Ltd. Europe R&D Office, in Langen, Germany, which is engaged in development and sales activities. (From a press release on May 16, 2014)

R&D Technical Centers

-The 7.6% year-on-year increase in capital investments during the fiscal year that ended March 2015 is attributable to the launch of new steering-system operations in Mexico and installing more facilities and equipment in Thailand to increase production capacity.

Planned Capital Investments

-The total amount of capital investment planned for FY ending March, 2016, was JPY 25,637 million. The following outlines major construction projects for new facilities.

(Note 1) Since the investments are mainly made under projects to enhance capabilities and rationalize operations, any actual increase in capacities, once the projects are completed, are forecast to be slight.
(Note 2) Due to difficulty in calculating production capacity growth after completion, the figure is not provided here.