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5. Sumitomo Riko Co., Ltd. (Formerly, Tokai Rubber Industries) Business Report FY ended Mar. 2016

Sumitomo Riko Co., Ltd. (Formerly, Tokai Rubber Industries) Business Report FY ended Mar. 2016

Contracts

-The Company has received orders for automotive anti-vibration rubbers and hoses from Daimler AG of Germany for the first time. The Company plans to start supplying the products in 2018 for Daimler's midsize cars produced in Europe. The Company has been working on joint projects for new orders with its German subsidiary, Anvis Group GmbH, and its Italian subsidiary, Dytech-Dynamic Fluid Technologies S.p.A. The Company plans to actively offer proposals to automakers by utilizing its subsidiaries' sales channels and business network with automakers, and its own manufacturing capability. It will make further efforts to increase new orders from automakers outside Japan. (From an article in the Nikkan Jidosha Shimbun on December 16, 2015)

Advancing global operations

-In a press conference in Nagoya, Japan on July 6, the Company announced the Company’s strategy to achieve “true globalization” by boosting business with non-Japanese automakers. Currently, sales to non-Japanese automakers account for only 20% of the Company’s overall sales. The Company plans to increase the percentage to 50% by 2020. The Company is fully capable of meeting demand from European and U.S. companies, as it has already established a well-balanced global production network through a series of mergers and acquisitions. The Company will actively market its products to foreign OEMs including the Detroit 3. It is also eager to establish a significant presence in China, the world’s largest auto market. (From an article in the Nikkan Jidosha Shimbun on July 8, 2015)

-The Company opened its new global headquarters on January 4, 2016. The new office is located in JP Tower, next to JR Nagoya Station in central Nagoya City, Aichi Prefecture. The Company has transferred various head office functions from its head office in Komaki City, Aichi Prefecture, to the new headquarters, including, General Affairs, Human Resources, Accounting, Finance, Public Relations, Corporate Planning, and Global Sales Planning. With its new global headquarters, the Company will strengthen and advance its business administration, and respond to globalization. Officially, the Company's head office remains in Komaki City. The Company now has an organization with its global headquarters in Nagoya, and the head office and plant in Komaki.(From an article in the Nikkan Jidosha Shimbun on January 5, 2016)

-The Company is aiming to lead the global market for automotive hoses in 2020 by increasing its share to 20%. The Company is looking to continue the synergy effect accompanying the merger and acquisition of four companies in 2013, and become number one in automotive hoses, similar to how it already leads the market for automotive anti-vibration rubber. The Comapny Group had a 13% share of the automotive hose market in FY2014, and it expects to have a 14% share in FY 2015. (From an article in the Nikkan Jidosha Shimbun on February 19, 2016)

-Finished establishing product development and manufacturing facilities in 5 major regions in the world (Japan, Americas, Europe & Africa, China & Korea and Asia).

Joint Ventures

-The Company will construct a new kneaded rubber plant in China. The Company will establish a Chinese joint venture (JV) with Daeheung Rubber & Technology Co., Ltd. (Daeheung R&T) of South Korea, and plans to start operations in August 2016. The new company will be capitalized at USD 8 million (JPY 1 billion). The Company will own 40% of the JV and Daeheung R&T will own 60%. The total investment will be USD 16 million (JPY 2 billion). The JV will have a total floor space of 14,500 square meters and will be built on a 13,200 square-meter site in Jiangsu Province, China. The JV is expected to generate sales of CNY 83 million (JPY 1.7 billion) for the fiscal year to end in March 2017 (FY 2016). The Company raised its stake in Daeheung R&T to 30% in December 2014, to make it an equity-method affiliate. Since then, this is the two companies' first project to intensify cooperation. (From an article in the Nikkan Jidosha Shimbun on August 5, 2015)

Mid-term Management Plan
Looking back at 2015 VISION (2015V)

-The Company is conducting its business based on its mid-term plan it formed in November 2011, the 2015 Vision, which ended at the close of the 2015 fiscal year. Business performance results for the fiscal year that ended in March 2016, in relation to targeted business objectives, are provided below.

-Consolidated sales in the fiscal year that ended in March 2016 have initially surpassed targeted objectives, as a result of initiatives implemented and the robust growth of business operations.

-In the fiscal year that ended in March 2016, the Company failed to meet the objectives it set for consolidated operating income. The following are some of the major reasons.

• In 2013, the Company turned some companies in Europe and South America into consolidated subsidiaries. However, the markets where these companies operate continued to deteriorate.
• The Company posted reorganization expenses to streamline and reorganize unprofitable operations/businesses.
• The Company stepped up investments in advance tech R&D activities.
• Business performance at the general industrial products business significantly decreased as a result of declining capital investments in infrastructure in emerging countries, especially China.

「2020 VISION (2020V)」
-On May 23, 2016, the Company announced its new "Sumitomo Riko Group Vision 2020" mid-term business plan. The Company has set a JPY 1 trillion sales target for 2029, the year it will celebrate its 100th anniversary. During the next five years until 2020, it will focus on maintaining steady growth and boosting profitability to strengthen its foothold for achieving this. The sales target for FY 2020 is set at JPY 530 billion, and fresh momentum will be required to double revenue by 2029. Currently, sales from anti-vibration rubber and other automotive products account for 80% of the company's overall sales, and the Company is aiming to produce new vehicle components that can contribute to boosting the division's sales. As part of its initiatives, it will establish a new R&D center that will specialize in auto parts development. The center is scheduled to open in July 2016. (From an article in the Nikkan Jidosha Shimbun on May 24, 2016)

-The Company was basically able to achieve its goal of becoming a top global mega-supplier, as result of following the basic improvements under its mid-term management plan “2015V”. In order to further grow the entire Group, the Company realizes that increasing new business with non-Japanese OEMs is crucial. In this regard, the Company is putting all its efforts into improving the business performance of Dytech and Anvis that play a vital role in expanding sales channels.

Major initiatives:

• Anvis: The reorganization has been completed, so greater profitability is anticipated in the future.
• Dytech: Improvement in business performance is slow, amidst the weak automotive market in South America, which is a fundamental market for the company. As a result, the company is continuing to strengthen its operating structure and streamline in order to become a leaner company, taking advantage of the synergy effects from the merged operations.
• Anti vibration rubber business: A second production plant is being constructed in Mexico, which is scheduled to go online in February 2017. In June 2016, SumiRiko Yamagata Co., Ltd, located in Yonezawa City, Yamagata Pref., Japan launched operations.
• Hose business: A new company and production plant is being established in Poland, which is scheduled to come online in the fall of 2016.
• Seal business: Sumiriko FC Seal, Ltd., which was established in the spring of 2015, is delivering products to the Toyota "Mirai" (fuel-cell vehicle), of which production has been increased.

-Sales in the fiscal year ending in March 2017 are forecast to decrease 3.4% y/y. Sales in Japan are expected to increase in line with higher vehicle unit production volumes; however, outside Japan, even though demand in the USA and China remains strong, currency translation due to the strong Japanese yen will ultimately impact results. In addition, demand in South America is anticipated to be weak as a result of lower automotive production volumes.

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

-The Company has plans to spend JPY 14.5 billion yen for R&D expenses in the fiscal year that ends in March 2017.

-Under the 2020V mid-term management plan, the Company plans to invest JPY 80.0 billion over five years, between the fiscal year that ends in March 2017 and the fiscal year that ends in March 2021.

R&D Structure

-The Company's R&D functions are being carried out by the materials R&D department that is advancing the Group's core technologies, and the new-business development department responsible for developing future products, with each of the departments collaborating with one another.

R&D Activities

- Recent achievements by its R&D functions include high-performance rubber capable of maintaining tight seals for long periods of time in wide-ranging heat ranges, from high to low temperatures, by making use of the Company's proprietary technology on compounding. In addition, the Company fused its precision-machining technology, which it acquired as a result of developing automotive anti-vibration rubber, and also developed a rubber "cell gasket", i.e., a rubber seal material for fuel-cell stacks, which are being equipped on fuel-cell vehicles.

-The Company is working on advanced technology that complies with environmental regulations, improves ride comfort, and responds and can respond to global markets.

Product Development

Plastic fuel filler pipe
-The Company has developed a new plastic fuel filler pipe, which is 40% lighter than parts made from metal. The new fuel filler pipe will be used for the first time in a high-end model that will be launched by a Japanese OEM this spring. Thanks to improved design and processing technology, the new plastic pipe will be offered at a price equivalent to metal products. Although some models use plastic filler pipes, metallic filler pipes are more common for reasons like cost and collision safety performance. With the recent adoption of its new product as a start, the Company will actively promote it as a lighter component that leads to improved fuel efficiency. (From an article in the Nikkan Jidosha Shimbun on February 26, 2016)

Eco-friendly vacuum sensing hose
-In the fiscal year that ended in March 2016, the Company jointly with Toyota Motor Corporation and Zeon Corporation developed an eco-friendly vacuum sensing hose made from biohydrin rubber. This newest hose designed for engines/drivetrains must be highly resistant to oil and heat and also be durable. This is the first hose in the world to use biohydrin for engines/drivetrains. Biohydrin uses plants as a raw material. Since plants grow while absorbing CO2 in the atmosphere, biohydrin in the hose reduces the amount of CO2 being emitted by 20% during the hose’s lifespan, the from the time it is produced until it is discarded. Nevertheless, this hose containing biohydrin has the same level of quality and as hoses made from petroleum-based hydrins, and can be just as easily produced.

-During the fiscal year ended March 2016, the automotive parts division invested mainly in production equipment to manufacture anti-vibration rubber and hoses at home and abroad.

-Under the 2020V mid-term management plan, the Company plans to spend JPY 180.0 billion in capital investments over five years, from the fiscal year that ends in March 2017 through the fiscal year that ends in March 2021.

Investment in Japan

-The Company established a wholly-owned subsidiary to manufacture and sell automotive anti-vibration rubber in April 2015. The new company, SumiRiko Yamagata Company Limited (SRK-YG), plans to open its plant in Yamagata Prefecture, which will become operational in June 2016. With an investment of about JPY 2 billion (USD 16 million), the new plant will cover a land area of approximately 52,000 square meters and a floor area of approximately 9,400 square meters. Sales are expected to reach JPY 3 billion (USD 24 million) in the fiscal year ending March 2019. (From a press release on July 7, 2015)

-The Company has established a new fuel cell (FC) gasket manufacturing company. Sumiriko FC Seal , Ltd. The Company has already started mass production of fuel cell gaskets, rubber seal components used in FC stacks of Toyota "Mirai" fuel cell vehicles (FCV). The FCV market is expected to grow further in the future and there is a potential of increase in demand for core components of FCVs. Therefore, the Company is shifting the production and sales functions of this particular component to the new company in order to ensure stable supply and business expansion. (From an article in the Nikkan Jidosha Shimbun on May 12, 2015)

Investment Outside Japan

-The Company announced that it has established a new wholly-owned subsidiary to manufacture and sell automotive hoses in Sosnowiec, Poland. Capitalized at PLN 21 million (approximately EUR 4.9 million), the new company called SumiRiko Automotive Hose Poland Sp. z o. o. (SRK-HP) will set up its plant, which is scheduled to become operational in October 2016. The new plant will have a land area of approximately 35,000 square meters and a floor area of approximately 10,000 square meters. Approximately EUR 10 million will be invested in this project. There are expected to be about 200 employees, and sales are expected to reach EUR 24 million by March 2021. SRK-HP aims to expand business with Japanese automakers in Europe, while Dytech-Dynamic Fluid Technologies S.p.A., which was acquired by the Company in 2013, is focusing on increasing business with European automakers. (From a press release on February 26, 2016)


-The Company will build a new plant in Mexico to produce anti-vibration rubber for automotive applications. The new plant is slated to start its operations in February 2017 with a production capacity to generate sales of USD 60 million or JPY 7.2 billion. The Company already has a plant with the same level of production capacity in Mexico and an addition of the second plant will allow the Company to double its local supply capacity. Demand for anti-vibration rubber is expected to grow in the Mexico in the future as many Japanese automakers enter the market. By increasing its production volume at an early stage, the Company intends to expand its sales. The new plant will be built in El Marques in the state of Queretaro, close to the Company's first plant. (From an article in the Nikkan Jidosha Shimbun on September 16, 2015)