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5. Denso Corporation Business Report FY ended Mar. 2016

Denso Corporation Business Report FY ended Mar. 2016

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

Factor
1) Revenue
Sales by customers
-Sales to the Toyota Group were 2.0% higher year-on-year (y/y) due to strong production in North America and China and sales promotion of safety products in North America.
-Sales to all other customers were higher y/y due to the following reasons.

• Honda (+15.3%): Vehicle production increased in North America and China, and sales promotion of direct injection products.
• Mazda (+8.2%): Sales of diesel common rail system for SKYACTIV increased, and vehicle production increased
• FCA (+6.1%): Vehicle production increased in Europe, sales promotion of air-conditioning systems
• Ford (+50.3%): Sales increased in North America, China and Europe.　

Sales by products
-Powertrain (+5.9%): Vehicle production increased in North America and Europe, sales promotion of gasoline direct injection systems.
-Thermal products (+4.9%): Vehicle production increased in Europe and China.
-Information and safety products (+10.0%): Sales promotion of meters in North America. Sales of safety products increased in Japan and North America.

Highlight of FY ended March 31, 2016
-Continuation of 2018 Mid-term business plan
-Launch of "ADAS promotion department" to speed up development of advanced driving assistance technology.
-Tokyo branch office which moved and has enhanced it in January, 2016 is utilized strengthening advanced technology R&D and external partnerships involving industry/ academia collaboration.
-Global deployment of the "DANTOTSU (Be the best by far) " factory
-Innovation of manufacturing that utilized IoT

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 and new business sectors", and "Markets outside Japan".

<Environment, security, and safety> >>>For further information, refer to Product Development

Environment

• Enhanced efficiency of internal-combustion engine: Engine ECU (ABILCORE technology) fully burns up all fuel
• Enhancement of actual fuel economy: greater power saving and higher efficiency of heating and cooling air-conditioning units

Security, and safety

• Aiming to build an extremely safe mobile society： established ADAS (Advanced Driver Assistance System ）promotion department for autonomous driving.
• Preventative safety/driver assistance: device combining a millimeter wave radar and image sensor

-The Company announced its aim to increase annual sales of its information and safety systems, including driver assistance systems, to JPY 1 trillion by 2020 on the 25th. This is up 60% from the sales achieved in the fiscal year ending in March 2015. Demand for active safety systems, such as automatic braking and lane departure warning systems, is growing. Accordingly, the Company will step up its efforts to increase orders for its safety systems. In January 2016, the Company will establish the ADAS (advanced driver assistance system) promotion division in order to advance its technologies for autonomous driving by improving its active safety systems. The Company will also strengthen the development of its autonomous driving technologies, which it aims to commercialize by 2020, and will bolster strategic planning for achieving that goal. (From an article in the Nikkan Jidosha Shimbun on December 26, 2015)


-The Company will create a business model, in which maintenance providers propose preventive maintenance services to customers using scan tools, by the fiscal year ending in March 2019. The Company will create a system that predicts appropriate replacement timings by analyzing aging deterioration of parts of a car using the Company's DST-i diagnostic tool and big data on the car stored in the DST-Cloud service. Currently, the DST-Cloud service stores data on about 18,000 vehicles, and the Company will increase the number to over 100,000 vehicles in the medium term. At the same time, the Company will develop a method for data analysis. For the time being, the Company will establish a preventive maintenance service for O2 sensors. In the future, the Company will expand the business model to parts related to safety. (From an article in the Nikkan Jidosha Shimbun on May 28, 2015)

-The Company plans to expand its lineup of automotive aftermarket parts by procuring low-cost components from China and Southeast Asian countries. In its mid-term business plan covering from FY 2012 through FY 2015, the Company set a new standard for selling under its own brand low-cost, shorter lifetime components that meet the Company's quality standard. The low cost products will be procured from local suppliers mainly in emerging countries. The initiative is likely to be implemented to products such as oil filters, air cleaners, and cabin air filters. The Company plans to introduce the new product lineup in the Japanese market by March 2016. (From an article in the Nikkan Jidosha Shimbun on May 25, 2015)

-The Company plans to expand sales from its aftermarket business in Japan based on its long-term vision. The Company aims to increase the sales up to JPY 180 billion by the fiscal year ending in March 2021 (FY 2021), a 30% increase from the FY 2015 level. Although demands from new car sales and the number of owned vehicles are expected to level off, the Company intends to increase sales by actively releasing new products and services mainly for driving safety and advanced driver assistance systems. Thirteen new products will be launched for driving safety and security systems within FY 2016. From FY 2017 onward, the Company will continue to release new products by taking advantage of its unique communication technologies. (From an article in the Nikkan Jidosha Shimbun on May 20, 2015)


-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: Developing the "DANTOTSU (Be the best by far)" factory of "Non-stop" "No making failure" "Minimum energy consumption" by the introduction of IoT.

-In October 2015, the Company announced that the Company will establish a global production platform to link its factories and manufacturing lines around the world by 2018. Its 130 factories, 2,500 production lines and 150,000 production facilities worldwide will be connected utilizing the Internet of Things (IoT). The Company intends to significantly expedite technological innovation and improve product quality by sharing information on failures of the equipment, recovery status, wisdom and know-how on the factory floor in real time. (From an article in the Nikkan Jidosha Shimbun on October 30, 2015)

-The Company aims to establish a model plant in Japan within three years, pursuant to its new principles of plant downsizing and simplification. The Company has already introduced new downsized production lines to specific manufacturing processes at its existing plant and will install the downsized lines for the remaining processes. The Company will effectively use the additional space created by downsizing all the lines, and intends to improve cost efficiency by reviewing the number of production lines and the number of parts transportation and inventory control processes. The Company will also use the model plant to train its employees and accelerate introduction of the new production lines to its other plants. (From an article in the Nikkan Jidosha Shimbun on August 21, 2015)

Production and Sales outside Japan

-In the new third factory which operated from 2014, production launches of 10 products are completed in two years. Producing items are; Powertrain, Thermal products, Information and safety products and Electronics business within three factories. Improve efficiency of management functions by consolidating three plants into one.


-Hamanakodenso Co., Ltd., Denso Corporation's subsidiary for the development and production of horns and control valves, will boost its capacity to produce variable cam timing solenoids for engine valves. The company currently manufactures 6,000 units of variable cam timing solenoids per month solely at its home plant in Kosai City, Shizuoka Prefecture. It plans to expand its monthly capacity for the products to 400,000 units by 2017 by constructing a second line at the Kosai facility in 2016 and establishing two new production lines at its Mexican Plant by 2017. The two plants are expected to manufacture 200,000 units per month, respectively. (From an article in the Nikkan Jidosha Shimbun on December 21, 2015)

-Kyosan Denki Co., Ltd., a Denso group company that develops and manufactures fuel system components, will start production of solenoid valves for high-pressure fuel pumps of gasoline direct injection (GDI) engines in the spring of 2016. While Kyosan Denki produces solenoid valves for diesel engines, this is the first time for the company to produce solenoid valves for gasoline engines. The company will start installing new production lines at its plants in Japan and the U.S. at the end of 2015, and aims to achieve a total monthly output of 600,000 units worldwide by around 2020. (From an article in the Nikkan Jidosha Shimbun on October 20, 2015)

Joint venture, investment capital and business alliance

-The Company, eSOL Co., Ltd., and NEC Communication Systems, Ltd. announced that they will form a joint venture to develop and sell basic software and related tools for in-vehicle electronic systems. The software will be designed to support high-speed data communication, high-quality cybersecurity, and high-performance microcomputers in order to advance in-vehicle systems using cameras and sensors for automated driving and other control actions. The three companies will share their expertise though the joint venture to meet growing demand for such technology. The new company will be called AUBASS Co., Ltd. (named for "Automotive Basic Software Service"), and will be established in May 2016. It will be led by Shoji Izumi, General Manager of Denso's Electronic Systems Department, and employ 100 people. The joint venture will be capitalized at JPY 100 million, of which 51% will be provided by Denso, 35% will be provided by eSOL, and 14% will be provided by NEC Communication Systems. (From an article in the Nikkan Jidosha Shimbun on April 22, 2016)

-The Company has entered business capital alliance agreements with Morpho, Inc., an image processing software development company in Tokyo, Japan. Denso will acquire all of new shares that will be issued by Morpho. Denso will pay JPY 1.2 billion for new Morpho shares by January 7, 2016. With these shares, Denso will own a 5% stake in Morpho. Through the tie-up, Denso intends to advance its image processing technology and utilize it to autonomous driving research and development. In the image processing technology, Denso will develop surround monitoring systems such as electronic rear view mirrors. In the area of deep learning, the company will conduct basic research for autonomous driving. Denso and Morpho will implement joint projects without transferring their officers and employees. (From an article in the Nikkan Jidosha Shimbun on December 15, 2015)


-Denso International America, Inc. has entered into an investment agreement with Peloton Technology, a U.S.-based developer of platooning systems that advance safety and fuel savings for large truck transportation fleets. Denso and Intel Capital co-led the USD 16 million oversubscribed Series A investment round. Platooning technology uses vehicle-to-vehicle and vehicle-to-infrastructure (V2X) wireless communication and radar to pair trucks to travel closely together and thus create an aerodynamic system that is similar to drafting in race cars. The direct communication system provides a way for trucks to 'talk' with each other and safely follow another truck with the same features to improve braking and acceleration time, increase safety and reduce fuel costs. (From a press release on May 27, 2015)

Contracts

-The Company announced that its new hybrid technologies will be featured on the all-new Toyota "Prius" that will be released in December 2015. The series of new products were jointly developed with Toyota Motor Corporation. The new products include a power control unit and a motor stator. The new power control unit with an inverter regulates the current flow. By utilizing an improved cooling structure and a highly integrated semiconductor device, the power control unit is more than 30% smaller than that are used in the previous Prius. The motor stator, a key component of the motor, offers a more than 20% weight reduction. These smaller and lighter products are expected to further improve the "Prius'" environmental performance. (From an article in the Nikkan Jidosha Shimbun on October 31, 2015)

-The Company has started supplying its "i-ART" common rail system for Volvo Cars' newly developed 2.0-liter four-cylinder diesel engine. The i-ART common rail system controls the injection pressures of individual cylinders. Volvo Cars is the first automaker which adopts the i-ART into a passenger car and selects the combination of the i-ART with a super high injection pressure of 2500 bar. The i-ART common rail systems for Volvo are produced at the Company's plant in Hungary. The Company expects an annual supply volume of 150,000 to 200,000 units. (From an article in the Nikkan Jidosha Shimbun on July 24, 2015)

Award

-The Company's highly standardized HVAC unit won "Automotive News PACE Award" in 2015.

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

-In the fiscal year that ended in March 2016, operations outside of Japan accounted for 16% of R&D expenses. Through reorganizing its R&D structure, the Company plans to increase this percentage.

-The Company plans to spend JPY 415,000 million on R&D in FY ending March 2017, that is 4% increase since previous year and 9.2% of estimated revenue. The Company will increase its spending focusing on areas such as environmental and safety technologies, as needs for low-emissions technology, fuel-saving technology, and driver assistance systems such as automatic braking technologies grow in the market.

R&D Structure

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

Major R&D locations in Japan

　
-The Company will add development function to its Tokyo Office, which is currently engaged in public relations only. The office will be moved and expanded in January 2016 to conduct technological development in the safety fields and new businesses. The design function of advanced semiconductor circuits, which has been under the responsibility of the company's Tokyo Branch that opened in 2014, will be transferred to the new Tokyo Office in stages by the end of 2017. At the time of relocation, the Tokyo Office will have approximately 120 workers, which will be doubled to 240 by the end of 2017. The Tokyo Office is currently located in Minato-ku, Tokyo, and will be moved to the Tokyo Nihombashi Tower in Chuo-ku. The new office will have a floor space of approximately 2,700 square meters, more than six times larger than the present office space. (From an article in the Nikkan Jidosha Shimbun on June 10, 2015)

-The Company will relocate Nippon Soken, Inc., a Denso group company that conducts research and development on automotive products. Nippon Soken, currently operating in Nishio City, Aichi Prefecture, Japan, will be relocated to a new facility adjacent to Denso Research Laboratories in Nisshin City, Aichi Prefecture. The Company will start the relocation in April 2016 and complete it by the end of 2017. The Company purchased the building and land from NEC Corporation for JPY 6 billion. In addition to using these existing buildings, the Company will construct new facilities for prototype production and testing as well as powertrain testing. The Company also plans to increase the number of Nippon Soken's personnel from about 430 as of the end of March 2015 to some 500. (From an article in the Nikkan Jidosha Shimbun on April 16, 2015)

Product Development

A unique independent power supply network using micro-sized electric vehicle
-Toyota Group is exploring the possibilities of micro-sized electric vehicles (EVs). Denso Corporation has launched operations of micro-sized EVs within its Anjo Plant premises using its proprietary Pico Grid System, a unique independent power supply network. The system can charge micro-sized EV batteries using solar power only without commercial electric power. The EVs can also be used to supply electric power to equipment other than vehicles. Meanwhile, Toyota Auto Body Co., Ltd. will supply its Coms compact EVs to Japan Post Co., Ltd., for collection and delivery of postal mails. Toyota Group aims at improving energy efficiency and reducing environmental burden through expanding the possibilities of micro-sized EV, a new form of mobility. (From an article in the Nikkan Jidosha Shimbun on May 29, 2015)

Engine ECU (ABILCORE) Technology
-ABILCORE is derived from “core containing ability”. Compared to existing technology, it is better able to detect and analyze information about injector spray. As a result, it improves the precision of the amount and timing of injection, improving fuel economy by reaching the point to where ignition can be achieved through injecting only the minimum amount of spray needed.

Improving actual fuel economy
-The Company has formulated a mid-term policy for up to 2018. In accordance with the policy, the Company will strive to improve actual fuel economy to reduce environmental impact of automobiles. There is a 40% divergence between actual fuel economy and the catalog data of hybrid vehicles. The Company will bolster technology development to narrow the divergence to 20% by 2025. It hopes to develop “low-energy cooling technology” for summer and “heat-source generation technology” for winter. For example, this will lower energy consumption and improve actual fuel economy by efficiently supplying cooled air through using a cold storage evaporator and by recovering heat from outside air based on heat-pump technology. (From an article in the Nikkan Jidosha Shimbun on May 7, 2015)

New Power-control Unit (PCU)
-Power-control units are automotive products with inverters that adjust the flow of electricity flowing from the battery to the motor generator. This new one was developed for the redesigned Prius. By improving the cooling mechanism and integrating the electronic control circuit, this latest one is 33% more compact than existing ones being installed on the Prius. Jointly developed by Toyota, the stator in the high-speed rotating motor that makes use of the company’s proprietary, new winding method is 20% lighter than existing ones.


Drive Support Illumination　　
-The Company has developed the "Drive Support Illumination" for the new Toyota "Prius" that indicates vehicle information to drivers with a variety of lighting and colors. The Drive Support Illumination operates by linking to the vehicle information in real time. It is the first illumination of that kind as a genuine accessory for vehicles of Toyota Motor Corporation. The Drive Support Illumination will be sold at "Prius" dealers in Japan as a dealer option. The new product indicates the shift position and hybrid system information by the color and lighting state of LED lights. It is mounted on the meter visor, and drivers will get the information without changing the direction of eyes. (From an article in the Nikkan Jidosha Shimbun on December 15, 2015)

Front-camera-based active safety system　
-Toshiba Corporation announced that the company is deploying Toshiba's TMPV7506XBG image recognition processor (Visconti 2) in its front-camera-based active safety system. Vehicles equipped with Denso's camera system will reach the market in fall of 2015. Visconti 2 processes images from the camera to detect lanes, vehicles, pedestrians and traffic signs ahead. The processor is highly evaluated for its concurrent processing of multiple applications using Toshiba's unique image processing accelerator with low power consumption. (From an article in the Nikkan Jidosha Shimbun on October 7, 2015)

Preventative Safety Package　　
-The Company developed millimeter wave radar, image sensors and on-board package of ITS Connect. It is being used in the “Toyota Safety Sense P”, a preventative safety package featured on Toyota’s medium and high-end vehicles. It provides safety features such as collision-avoidance assistance in response to oncoming vehicles and pedestrians, all-vehicle speed adaptive cruise control (ACC), lane departure prevention, and night-vision assistance.

On-board package of ITS Connect
-ITS Connect is cooperative driving support system that uses the dedicated ITS frequency of 760 MHz for road-to-vehicle and vehicle-to-vehicle communications. When installed onboard vehicles, it uses wireless communications to prevent traffic accidents and help traffic flow more efficiently. Its main features are described below.

• It is a wireless communications device that exchanges information in real time with vehicles and road-side devices that are within a few hundred meters.
• It has a location-detection function for conveying the surroundings by determining the latitude and longitude of vehicles.
• The device can ascertain the surrounding conditions based on the information received through wireless communications and decide the appropriate response as to which driver-assistance function it should activate.

-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 2017, the Company will continue to work on the efficiency of investment, while promote the rational investment.

Investments Outside Japan

　
-Denso Korea Electronics Corporation, a Korean subsidiary of Denso, held a ceremony to celebrate the completion of its new plant in Changwon on April 21, 2015. The plant has 58,676 square meters of building area, which is built on 82,845 square meters of land. It will produce instrument panels, smart keys, air conditioner panels, head-up displays, and other components, and will supply them to global automakers. (From a press release on April 22, 2015)