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5. Sumitomo Riko Co., Ltd. (Formerly, Tokai Rubber Industries) Business Report FY ended Mar. 2017

Sumitomo Riko Co., Ltd. (Formerly, Tokai Rubber Industries) Business Report FY ended Mar. 2017

Recent Development in Japan

-The Company announced that Sumiriko-Yamagata Co., Ltd. (SRK-YG), a new manufacturing and sales company for automotive anti-vibration rubber in Yonezawa City, Yamagata Prefecture, has begun operations on some of its production lines. SRK-YG is the company Group's first production base in Japan's Tohoku region and will supply parts to OEMs in Tohoku and the northern Kanto region. The company invested JPY 495 million to establish the wholly-owned subsidiary in April 2015 and built a new 9,400 square-meter plant with an investment of JPY 2 billion. SRK-YG plans to increase its workforce to 100 people in fiscal year 2017 (ending in March 2018) and achieve sales of JPY 3 billion in FY 2018. (From an article in the Nikkan Jidosha Shimbun on June 17, 2016)

-The Company held a ceremony to commemorate the opening of a new plant that will be operated by Sumiriko-Yamagata Co., Ltd., a manufacturing and sales company for automotive anti-vibration rubber, in Yonezawa City, Yamagata Prefecture. The plant is the company Group's first production facility in Japan's Tohoku region and will supply parts to OEMs in Tohoku and the northern Kanto region. Sumitomo Riko invested approximately 2 billion yen to build the 9,400-square-meter plant. Part of the production line started operation in June. The ceremony was held to commemorate the launch of full-scale production from October. Sumitomo Riko is planning to produce automotive anti-vibration rubber for 300,000 vehicles per year in fiscal year 2018 (ends in March 2019). Its workforce will be increased to 100 people in FY 2017. (From an article in the Nikkan Jidosha Shimbun on October 12, 2016)

-SumiRiko Yamagata Co. Ltd. of The Company Group is planning to increase the local procurement rate of metals and resins for anti-vibration rubber in the Tohoku region to around 80% in the medium- to long-term. SumiRiko Yamagata currently procures parts mainly from companies in the Chubu and Kanto regions. The company is aiming to save distribution costs, while contributing to the local economy by increasing procurement from the Tohoku area where SumiRiko Yamagata's plant is located. (From an article in the Nikkan Jidosha Shimbun on October 26, 2016)

Recent Development Outside Japan

-The Company announced the opening of a USD 20 million plant, it's second in Queretaro, Mexico. The plant is SumiRiko's third production site in Mexico. The company also operates a hose manufacturing facility in Chihuahua. The new facility will supply anti-vibration rubber products to Mazda, Honda and Infiniti. SumiRiko estimates that annual sales from the new plant will total USD 20 million. (From a Mexico-Now article on May 3, 2017)

-The Company will establish a second global automotive sales headquarters for expansion of sales to non-Japanese automakers. The new headquarters will be based in Frankfurt, Germany. The company is aiming to reinforce its relationship with European, U.S., Chinese, and Indian automakers, and increase its intake of orders. In 2013, Sumitomo Riko acquired Anvis Group GmbH, a German automotive anti-vibration rubber maker, and Dytech Dynamic Fluid Technologies S.p.A., an Italian automotive hose maker, and its trading opportunities with non-Japanese automakers are increasing. By establishing the second headquarters in Europe, the company will enhance its sales activity. (From an article in the Nikkan Jidosha Shimbun on January 25, 2017)

-The Company announced that its new anti-vibration rubber plant, which was established to supply OEM production facilities in Mexico, began operations in December 2016. Concerning U.S. President-elect Donald Trump's strong criticism of automakers' production in Mexico, Sumitomo Riko's public relations department commented that the company is not planning any major changes to the investment plans it has set until now, but is watching the moves of automakers closely, and will make reasonable decisions when needed on matters including planned future capital investments for production increases. The new plant in Mexico, which is located in the state of Queretaro, is the company's second anti-vibration rubber producing subsidiary in Mexico. To respond to an increase in vehicle production in Mexico, Sumitomo Riko invested USD 21 million (approximately JPY 2.4 billion) to supply more anti-vibration rubber to the plants of Japanese, U.S., and European automakers located in the country. (From an article in the Nikkan Jidosha Shimbun on January 10, 2017)

-Dytech-Dynamic Fluid Technologies S.p.A., a member of The Company Group, has announced strategic reorganization initiatives through factory concentration of Airasca and Chivasso into one factory in Chivasso. Dytech began labor-management consultation in October. (From a press release on November 25, 2016)

-The Company intends to increase the operating revenue of its two overseas anti-vibration rubber manufacturing subsidiaries in fiscal year 2016 (ends in March 2017) more than five times to JPY 1.1 billion from FY 2015. The company's Brazilian subsidiary has received a new order for anti-vibration rubber products from a Japanese carmaker. Sumitomo Riko's European subsidiary expects a dramatic improvement in revenue through efforts to rationalize production and win new orders. Going forward, Sumitomo Riko will continue solidifying the business base of its foreign subsidiaries and work to receive new orders as it aims to secure a larger share in the global market. (From an article in the Nikkan Jidosha Shimbun on June 30, 2016)

Mid-term Management Plan

「2020 VISION (2020V)」

(1) Strengthen environmental technology
In the area of environmental products, the Company is working to develop gaskets for fuel-cell vehicles; high-grade transparent, heat-blocking, insulating film for windows; and technology that complies with environmental regulations such as fuel-vapor emissions. It is making lightweight products, reducing CO2 emissions and environmental impact, and the use of water resources in conducting business activities.

(2) Develop innovative products
Making use of IoT and information-processing technology, the Company is working to reduce the Group’s total investment, work processes, and lead-time to half while doubling productivity and reducing work-related accidents and injuries to zero.

(3) Win new customers
The Company is working to win new customers by effectively using the Company’s global network that includes 105 business operations in 23 countries, the automotive new-product-development center that was recently established, and sales activities designed to expand business in the global market. In addition, it will work to win new customers by expanding operations outside Japan in the non-automotive segment

Initiatives in the automotive products business during FY2017

• Anvis: It began to make a profit from the fiscal year that ended in March 2016 due to an effective business reorganization. It forecasts achieving sustained profits going forward.
• Dytech: In working to improve business results, the company is reorganizing its business operations. One example is the consolidation of the Airasca Plant’s operations (in Turin, Italy) to the Chivasso Plant in the outskirts of Turin, as a means of enhancing productivity.
• In responding to growing demand in North America, a new production plant of S-Riko de Querétaro, S.A.P.I. de C.V. in Mexico launched operations.
• SumiRiko Yamagata Co., Ltd. (in Yamagata Prefecture) started commercial production in June 2016.
• In enhancing sales channels to non-Japanese OEMs, the Company established its Second Global Automotive Management Headquarters; in Frankfurt, Germany.
• The Company established a new automotive product development center, in order to develop and enhance new products that are not connected to the three existing product areas, i.e., antivibration rubber, hoses, and urethane (noise insulating interior products). The Company is developing devices that detect the drivers’ vital conditions such as respiration and heartbeat. These devices are designed to stop dangerous situations from happening. In addition, it is developing environmentally friendly products and technology designed for electric vehicles and fuel-cell vehicles.

Financial Targets for the FY Ending in March 2021

• Sales: JPY 530 billion
• Operating Profit: JPY 32.0 billion
• Ordinary Profit Margin: 6.0%
• ROA (Return on Assets): 7.0%
• ROE (Return on Equity): 8.0%

Sales Targets by Business Segment (FY ending in March 2021)

• Automotive: JPY 430.0 billion
• Electronics: JPY 40.0 billion
• Infrastructure: JPY 40.0 billion
• Housing, Environment, Health and Nursing: JPY 20.0 billion

-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 Sumitomo Riko 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)

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

-The Company has plans to spend JPY 15.0 billion yen for R&D expenses in the fiscal year that ends in March 2018.

-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

-Working under “win more new customers”, which is one of the initiatives under the Company’s 2020 management strategy, the Company is developing devices that detect occupants’ vital conditions. One example is a smart-rubber (SR) sensor in automotive seats that can detect the body pressure of drivers when the drivers are seated. By detecting changes in the driver’s vital conditions such as respiration and heartbeat, the sensor is designed to stop dangerous situations from happening. In addition, it is developing environmentally friendly products and technology designed for electric vehicles and fuel-cell vehicles.

-During the fiscal year ended March 2017, the automotive parts division invested mainly in production equipment to manufacture anti-vibration rubber and hoses at home and abroad.

-In the fiscal year that ends in March 2018, the Company plans to spend a total of JPY 31.0 billion yen in capital investments, with plans to spend JPY 25.0 billion of that amount for the automotive parts business.

-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.