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5. Denso Corporation Business Report FY ended 2015

-The Company adopted the International Finance Reporting Standards (IFRS) starting from the fiscal year that ended in March 2015.

Factor
1) Revenue
Sales by customer
-Sales to the Toyota Group were just slightly higher year-on-year (y/y) due to lower automotive production volumes.
-Sales to all other customers were higher y/y due to the following reasons.

• Honda: vehicle production increased in North America and Asia
• Suzuki: vehicle production increased in Japan, and sales of lithium-battery packs increased
• Mazda: sales of direct-injection systems for SKYACTIV increased, and sales of diesel products increased
• Hyundai-Kia: vehicle production increased in North America, air-conditioning systems increased
• Chrysler: Increased production of body chassis in North America.　

Sales by products
-Powertrain: sales increased due to higher sales of gasoline direct-injection systems for gasoline engines.
-Thermal products: Sales increased due to higher unit-production of vehicles in North America and Europe, and higher sales of car air-conditioning systems.
-Information and safety products:　Even though sales of navigation systems decreased, sales are forecast to increase due to higher sales of IVI (In-vehicle Infotainment) products and safety products.

2018 Mid-term Business Plan

-The Company's 2015 mid-term business plan, which covered FY 2012 to FY 2014,  ended, and in its place, the Company established its 2018 mid-term plan, which covers FY 2015 to FY 2017, and which is under the 2020 long-term business plan. The main objectives are: "Environment, security, and safety", "Mass-market sales/new business sectors", and "Markets outside Japan".

<Environment, security, and safety>   >>>For further information, refer to Product Development
-Parts for fuel-cell vehicles (FCVs)
-Common-rail systems for diesel-engine small cars.
-SiC power semi-conductors for hybrid vehicles (HVs) and electric vehicles (EVs)
-Millimeter-wave radar and image sensors
-Preventative safety technology and HMI technology

<Mass-market sales/new business sectors>
-The Company established the Aftermarket Fleet/New Business Sector Group in January 2015.

-In June 2014, the Company announced that it has acquired a 72.1 percent share in Ease Simulation Inc., a U.S.-based vehicle diagnostics and telematics company, for approximately JPY 700 million. Denso completed the acquisition on June 4, integrating Ease Simulation into its subsidiary. Partnering with Ease will help Denso develop and provide cloud-based diagnostics and telematics services to more than 90 percent of the U.S. light-vehicle fleet. Through this transaction, Denso is poised to expand its vehicle diagnostic and telematics business in North America, aiming to improve reliability and competitiveness in both the OEM and aftermarket segments. (From an article in the Nikkan Jidosha Shimbun on June 7, 2014)

<Markets outside Japan>
-R&D structure: The Company will set up technical centers in seven regions around the world in order to strengthen its global R&D structure.
>>>For further information, refer to R&D Structure

-Production structure: In strengthening its cost-competitiveness, the Company is setting up what it calls "the ultimate production plants" that will create products based on "the ultimate costs of goods". It is developing facilities that will ultimately be reduced in size and which will lower energy consumption to 1/N by eliminating waste by installing 1/N lines. The Company built a "Product Creation Building" that can achieve "the ultimate in technology" through the One Denso initiative. Functions, from prototype production up to product production have been consolidated In the Building. This Product Creation Building, which opened in December 2014, houses 13 departments and 1,600 employees.

Production and Sales outside Japan

<U.S.>
-In January 2015, the Company announced that it will expand its U.S.-based manufacturing subsidiary, Denso Manufacturing Athens Tennessee, Inc. Approximately USD 85 million (JPY 10.2 billion) will be invested in the project. The expanded facility will manufacture gasoline direct-injection (GDI) engine products such as injectors and pumps, starting in July 2016, in order to meet the growing demand in the North American market. The plant, which currently covers 46,000 square meters, will be extended by about 40 percent (20,800 square meters). The investment is expected to create 400 new jobs. (From an article in the Nikkan Jidosha Shimbun on January 30, 2015)

<Mexico>
-The Company will expand its presence in Mexico. Denso's manufacturing subsidiary, Denso Mexico S.A. De C.V. will expand its Apodaca plant to start producing transmission parts for the first time in Mexico in December 2015. The total investment in the expansion plan will be JPY 5.4 billion. In addition, Hamanakodenso Co., Ltd., a Denso-affiliated supplier in Kosai, Shizuoka Prefecture, has established the company's first plant in Nuevo Leon in Mexico. The new plant will produce solenoids for engines and airflow control units and will supply them to customers in North and South America. The plant is scheduled to start production in August 2016. Hamanakodenso will invest JPY 3.6 billion in the new plant. (From an article in the Nikkan Jidosha Shimbun on July 2, 2014)

<China>
-The Company has acquired a 34% stake of Hefei Dyne Auto Air Conditioner Co., Ltd., a compressor manufacturer for car air-conditioners in Anhui Province, China. The transaction was completed on June 24, 2014. Denso made the acquisition to expand its automotive aftermarket compressor business globally. Hefei Dyne will produce aftermarket compressors that are replaceable with products of Denso's competitors, and these products will be sold through Denso's global aftermarket business network. Valeo S.A. of France and other competitors have already deployed this business model, which uses aftermarket compressors that are replaceable with other companies' products. Denso will build its business foundation through Hefei Dyne to grab the compressor aftermarket demand from its rivals. (From an article in the Nikkan Jidosha Shimbun on August 28, 2014)

<Cambodia>
-In February 2015, the Company will construct a new plant in Cambodia by 2016. Denso currently rents a plant in the Phnom Penh Special Economic Zone, and will construct its own plant in the same Special Economic Zone. JPY 2.2 billion will be invested in the plant. The new plant will have a total floor area of 9,600 square meters, which is slightly more than six times that of the current plant. The new plant will start production of magnetos (motorcycle generators) and oil coolers in March 2016. The company will make full use of the new Cambodia plant as a satellite for its Thai plant, in an effort to increase its competitiveness in the Southeast Asian market. Denso Cambodia Co., Ltd. will operate the new plant. By 2020, Denso will increase the subsidiary's annual sales of to JPY 3 billion, which is about eight times the present level. (From an article in the Nikkan Jidosha Shimbun on February 21, 2015)

<Australia>
-In September 2014, the Company announced that it will discontinue manufacturing operations at its subsidiary, Denso Automotive Systems Australia Pty. Ltd. In Australia, Ford Motor announced its intention to withdraw from vehicle production in 2016, and General Motors and Toyota Motor also plan to cease their production operations in 2017. Denso has been supplying automotive parts, including air conditioning systems and radiators, to these three automakers. Denso's subsidiary will end production in line with its customers' closure timing. Meanwhile, it plans to maintain aftermarket and service operations. The number of employees will decrease from current approximately 400 to the level of 100. (From an article in the Nikkan Jidosha Shimbun on September 12, 2014)

Transfer the brake system production operations to Advics

-Toyota Motor Corporation announced that it will consolidate its production of brake systems and components, which is now handled at Denso Corporation and Aisin Seiki Co., Ltd. in central Japan, will be consolidated into a new plant of Advics Co., Ltd. in the Aisin Group. In February 2015, Aisin Seiki and Advics announced that they are constructing a new plant on the premises of Aisin Seiki's existing plant in Handa City, Aichi Prefecture. This project is in connection with a plan to transfer the brake system production operations of Aisin Seiki and Denso Corporation to Advics in 2016 onwards. The new plant is expected to be completed in January 2016, and Advics will produce electronic stability control systems, regenerative brake systems, and hydraulic boosters.  (From an article in the Nikkan Jidosha Shimbun on February 21, 2015 and November 29, 2014)

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

-In the fiscal year that ended in March 2015, operations outside of Japan accounted for 15% of R&D expenses. Through reorganizing its R&D structure, the Company plans to increase this percentage.
-In the fiscal year ending in March 2016, the Company plans to spend around JPY 400,000 million on R&D expenses, which is around the same amount that it spent in the fiscal year that ended in March 2015. The Company will continue strengthening product developments, focusing mainly on the environment and safety areas.
R&D Structure

R&D Structure

-The Company will set up technical centers in seven regions around the world in order to strengthen its global R&D structure.

-The Company plans to increase the number of its engineers in emerging countries to 600, an increase of 50% from the current level, by March 2016. The company will hire additional engineers at all four technical centers in China, India, Thailand and Brazil, and will increase the headcount by 50% each. With this move, the Company aims to strengthen its ability to gather technical information and perform application development locally in respective markets. (From an article in the Nikkan Jidosha Shimbun on October 16, 2014)

<Japan>　
-The Company announced that it has opened a new office in Tokyo, Japan to design and develop semiconductor circuits in the area of automotive safety and environmental technologies. The office, which currently has a workforce of 10 associates, is expected to employ approximately 30 people by July 2015 and approximately 100 people by the end of March 2021. (From a press release on August 6, 2014)

<U.S.>
-The Company will launch research and development activities in the areas of in-vehicle cyber network security, big data and autonomous driving system at its Silicon Valley, California office in the U.S. Silicon Valley is home to many leading corporations in the field of information and communication technology. Denso will cooperate with venture firms and expand R&D activities in phases. The Company plans to triple the personnel at the Silicon Valley office to 20 over the next three years. (From an article in the Nikkan Jidosha Shimbun on May 30, 2014)

Product Development

<Environmental sector>
Fuel cell vehicle (FCV) components
-The Company has developed an air conditioning system and three other components exclusively for Toyota Motor Corporation's all-new Mirai fuel cell vehicle (FCV) and has begun supplying them to the automaker. Other than the air conditioner, Denso has developed a fuel cell monitor, a high-pressure hydrogen sensor, and an electronic control unit (ECU) for refueling hydrogen. The Company expects that the components will contribute to improving fuel efficiency of the FCV and optimizing control of the core system. With these components, Denso entered the parts market for the mass-production FCV. The supplier also received orders for an electric water pump and a radiator that were originally designed for hybrid vehicles and later adapted to the FCV. Among the suppliers for the Mirai FCV, Denso has become one of the largest suppliers in terms of number of the components. (From an article in the Nikkan Jidosha Shimbun on December 27, 2014)

Common-rail system for diesel-engine small cars
-This system has an injector that improves the wide-spraying nozzle and the level of freedom in terms of gasoline injection. The injector alone itself improves fuel efficiency by 1%. It is being used in Mazda’s SKYACTIV technology that is being designed for the rebuilt Demio.

SiC power semiconductors
-In January 2015, Toyota Motor Corporation has developed a Camry hybrid prototype that has the power control unit (PCU) with new silicon carbide (SiC) power semiconductors. Road testing of the Camry prototype will begin primarily in Toyota City in early February 2015, and will continue for one year to evaluate performance of the SiC power semiconductors. By comparing the test results with data from silicon semiconductors currently in the mainstream, Toyota will assess the improvement to fuel efficiency achieved by the new SiC power semiconductors.

-In May 2014, Toyota Motor Corporation, in collaboration with Denso Corporation and Toyota Central R&D Labs., Inc. (Toyota CRDL), has developed a highly efficient, silicon carbide (SiC) power semiconductor for use in automotive power control units (PCUs). The SiC is used in wafers of PCUs to reduce power loss. By using the SiC power semiconductor, Toyota aims to improve fuel efficiency of hybrid vehicle (HV) by 10% and reduce a size of PCU by 80% compared to current PCUs with silicon-only power semiconductors. By 2020, the automaker will commercialize a PCU, which meets 70 to 80% of its development goal performance, and introduced it in the market. Toyota says it has become the first automaker in the world to develop SiC power semiconductors for HVs. (From an article in the Nikkan Jidosha Shimbun on January 30, 2015 and May 21, 2014)

-In October 2014, the Company and New Japan Radio Co., Ltd. have jointly developed a new silicon carbide (SiC) semiconductor power device for a new audio power amplifier. The new amplifier will be launched a in the second half of 2015, as an amplifier which offers the highest sound quality for high-grade audio systems. The new audio power amplifier is the first product into which Denso's SiC semiconductor power device is adopted. New Japan Radio will market the new product as a high-value-added audio power amplifier in its "MUSES" high sound quality semiconductor device series. (From an article in the Nikkan Jidosha Shimbun on October 17, 2014)

<Safety sector>
Active safety package　　
-Development of millimeter-wave radar and image sensors for the Toyota Safety Sense P preventative safety packaged designed for medium and high-end vehicles. This package will be equipped on vehicles marketed in Japan, North America, and Europe.

-Toyota Motor Corporation has selected Denso Corporation and Continental AG as its suppliers for “Toyota Safety Sense” active safety packages that will be launched from 2015. Toyota has developed a high-performance P package with Denso and a standard C package for mass-production models with Continental. The P package consists of a monocular camera and millimeter-wave radar while the C package comprises a monocular camera and laser radar. According to Toyota, the automaker has chosen the suppliers which have strengths in technologies that suit the concept of each package. (From an article in the Nikkan Jidosha Shimbun on November 28, 2014)

-The Company will mass-produce its active safety system packages consisting of emergency braking, lane departure warning and other driver assistance functions. The company has already supplied safety packages for some luxury vehicles, but its sales volume was limited to tens of thousands. Production and sales volumes are likely to increase significantly around 2015, because the company has recently won a safety package contract for a production vehicle. The scale of the program is expected to reach hundreds of thousands of units. Major components such as electronic control units will be produced at Denso's Kota Plant in Aichi Prefecture. The new program is expected to facilitate Denso's growth scenario through March 2021 that focuses on the development of safety technologies. In accordance with the strategy, the company aims to release a highly advanced driver assistance system that incorporates autonomous driving technology by March 2019. (From an article in the Nikkan Jidosha Shimbun on October 8, 2014)

-At the 21st World Congress Detroit 2014 that was held in September 2014, the Company exhibited and demonstrated preventive-safety technology, and also HMI technology that helps drivers communicate with cars.

Public road testing for automated driving technology
-July 2014, the Company announced that it commenced a public road testing for automated driving technologies in Aichi Prefecture, Japan, in late June 2014. This project is part of the program led by the Vehicle Safety Technology Project Team, which involves related companies and organizations in the prefecture. The test vehicle, the Toyota Lexus GS, features a detection system, which comprises a millimeter-wave radar, an imaging sensor, and camera systems installed on the vehicle's front, back, and both sides. By using the vehicle, Denso plans to test automated driving on a single lane, and to test automatic lane changes and other driving maneuvers. The project is taking place on the Minamichita Road (between Handa and Toyooka) and covers the period through the end of March 2015. Through this project, Denso, as the first Japanese auto parts supplier that performs such public road testing, aims to collect and accumulate problems that cannot be found on test tracks. (From an article in the Nikkan Jidosha Shimbun on July 15, 2014)

Driver Status Monitor for commercial vehicles
-In April 2014, the Company has developed its first Driver Status Monitor, which detects a driver's conditions based on photographic images of his/her face. The electronic control unit (ECU) in the Monitor detects a driver's face angle and eyelid movements and warns the driver in case of inattentiveness or drowsiness. Denso started to supply the monitor as standard equipment for two commercial vehicles: the Profia heavy-duty truck and the S'elega large-size sightseeing bus which were remodeled and launched by Hino Motors, Ltd. in February and on April 1, 2014, respectively. (From an article in the Nikkan Jidosha Shimbun on April 4, 2014)

Research project on the promotion of ITS in Thailand
-In July 2014, the Company has begun a collaborative research project on the promotion of Intelligent Transport System (ITS) with the government agencies in Thailand. The project aims at easing traffic congestion in the country. Using Vehicle-to-Infrastructure communications and other systems commercialized in Japan, a new system will be developed for Thailand. The system will then be evaluated and analyzed to determine its adaptability to the traffic conditions of Thailand. The collaboration will continue until March 2015, and its results will be used to promote ITS in Thailand. (From an article in the Nikkan Jidosha Shimbun on July 4, 2014)

<Powertrain Related Products>
High-ignitability spark plug with a flow-guide plate
-The Company is developing a high-ignitability spark plug with a flow-guide plate that is expected to ensure stable ignition performances of high-efficiency gasoline engines. Due to the growing use of lean combustion technologies, exhaust gas recirculation (EGR) systems, superchargers and other technologies, in-cylinder gas-flow velocity increases significantly on high-efficiency engines. The gas flow, however, is often prevented by the influence of the ground electrode, which negatively impacts ignition performances. Conventionally, manufacturers had to finely adjust the installation angle of the spark plug to avoid the influence of the ground electrode. Denso's new spark plug concept uses a flow-guide plate to guide gas flow to the center electrode efficiently. Smoothing gas flow is expected to enhance ignitability. In addition, the new spark plug concept can be installed easily. The company hopes to commercialize this technology around by 2019, both as a factory-installed component and a replacement part. Denso hopes the innovation will help new engine development and boost the company's sales. (From an article in the Nikkan Jidosha Shimbun on June 3, 2014)

-The Company invested in predominantly in R&D facilities in order to respond to production increases, prepare for next-generation products, be able to switch over to new products, and develop new products.

-During the fiscal year ending March 2016, the Company will continue to increase the footprint of its new products worldwide.

Investments Outside Japan

>>>For further details, refer to Production and Sales outside Japan
-Expanding production plant in Tennessee, U.S.A: The Company invested USD 85.0 million (JPY 10.2 billion) to increase the plant's floor space by 40%. From July 2016, the plant will produce products for gasoline direct-injection systems.
-Expanding operations in Mexico: The Company is expanding Plant No. 1 at Denso Mexico (DNMX), which will launch production of transmission parts in December 2015. The investment costs in the project are JPY 5.4 billion.
-Building new production plant in Cambodia: The Company will invest JPY 2.2 billion to build a production plant in Cambodia sometime in 2016. The plant, which will have 9,600 square meter of floor space, will produce magnetos and oil-coolers.