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5. Denso Corporation Business Report FY ended Mar. 2017

Denso Corporation Business Report FY ended Mar. 2017

-The Company adopted the International Finance Reporting Standards (IFRS) starting from the fiscal year that ended in March 2016.

Factor
1)Sales and income (without currency translation). Figures in the brackets [ ] show the previous year’s results.
By customer on a local currency basis:
-Sales to the Toyota Group increased 1.3% year-on-year, thanks to increased production volumes of new vehicles in Japan, North America, and Asia.
-Sales to non-Toyota Group customers mostly decreased.

• Honda (-6.8% y/y) [+3.4%]
• Mazda (-1.9%) [+0.0%]
• FCA (-5.6%) [+5.9%]
• Ford (-5.3%) [+7.0%]

By product:

• Powertrain (1.1% decrease y/y)　[+6.2%]
• Thermal systems (3.8% decrease y/y) [+5.1%]
• Information and Safety systems (9.2% increase y/y) [+15.3%]
• Electronic systems (1.3% increase y/y) [+6.5%]
• Motors (1.0% decrease y/y) [+5.4%]

Highlight of FY ended March 31, 2017
-The Company held press conferences in Nagoya and Tokyo to show its work in eight new fields including security, information solutions and biotechnology. Denso aims to build a business structure with these fields that does not heavily depend on trends in new car sales. After the Lehman financial crisis in 2008 the company decided not to solely depend on the automotive business, but to try new fields even to a limited extent and launched the New Business Planning Office in January 2011. In fiscal year 2015 (ended in March 2016), Denso's sales from the new operations hit JPY 65 billion, which accounted for only 1.5% of its consolidated sales of JPY 4.52 trillion. The company aims to increase sales from the new businesses to JPY 100 billion in FY 2020 while making the profits from the eight individual operations stable. Denso used to be the top Japanese washing machine manufacturer in terms of sales, but it has now limited products that are directly sold to consumers. Unlike B-to-B parts business in which efforts are only concentrated on supplying good products, the new operations are mainly B-to-C business. Whether the new businesses succeed or not will largely depend on marketing. (From an article in the Nikkan Jidosha Shimbun on September 15, 2016)

-The Company and Toshiba Corporation (Toshiba) announced that they have reached a basic agreement on the joint development of artificial intelligence (AI) for automotive image recognition systems. The two companies will use deep neural network (DNN) technology, an algorithm modeled after human brain neural networks, in image processing. The use of DNN will realize highly accurate recognition processing that is equal to or better than human brains. They are aiming at practical use of the DNN image recognition technology, and realize advanced driver assistance systems and autonomous driving technologies. To achieve autonomous driving, various situations must be recognized, including obstacles, road signs, driving space, and anticipated dangers. In conventional image recognition using pattern recognition and machine learning, objects that need to be recognized must be artificially characterized and learnt in advance. In the DNN image recognition, the characteristics of many different objects will be automatically identified and learnt, and the detection accuracy is dramatically improved. (From an article in the Nikkan Jidosha Shimbun on October 18, 2016)

-The Company and NEC Corporation (NEC) announced their collaboration in the fields of advanced driver assistance, autonomous driving, and production. In these fields, the two companies will jointly develop new products by combining Denso's advanced safety technology and NEC's artificial intelligence that contributes to hazard prediction. DENSO and NEC will establish a flexible development system through utilization of the NEC Group's system. They will also consider collaboration in the establishment of a new product development system that will ensure highly advanced information security even if Internet of Things (IoT) becomes prevalent, and collaboration in the application of NEC's IoT technology to Denso's production. (From an article in the Nikkan Jidosha Shimbun on December 27, 2016)

Joint venture, investment capital and business alliance

-The Company, Toyota Motor Corporation (Toyota), and Fujitsu Limited (Fujitsu) announced that they have reached an basic agreement on changing the capital structure of Fujitsu Ten Limited (Fujitsu Ten), a car navigation system maker. Denso will become Fujitsu Ten's largest shareholder by acquiring 51% of its stock. The three companies will sign a final agreement by the end of the fiscal year ending in March 2017. Through the capital structure change, the companies are aiming to enhance the development of human machine interfaces, the key to the provision of advanced driver assistance and autonomous driving. In the current capital structure, Fujitsu has an investment stake of 55%, Toyota 35%, and Denso 10%. After the structural change, Denso will own 51%, Toyota 35%, and Fujitsu 14%. (From an article in the Nikkan Jidosha Shimbun on September 10, 2016)

-The Company announced that it will acquire the remaining stake in Daishin Seiki Co., Ltd., its consolidated subsidiary that produces and sells automotive fuel-injection parts. The Denso Group is aiming to enhance its business agility, ensure sustainable growth through more effective utilization of management resources, and improve corporate value by converting the company into its wholly owned subsidiary. Denso currently owns a 99.35% stake in Daishin Seiki and will purchase the remaining stake through stock swap. Each Daishin Seiki share will be converted into 7.9 shares of Denso stock. The contract was signed on February 2, and the acquisition will be effective on March 17, 2017. (From an article in the Nikkan Jidosha Shimbun on February 3, 2017)

-The Company announced that it will build a new plant to expand production including instrument clusters at its wholly-owned subsidiary Denso Iwate Corporation (in Kanegasaki Town, Iwate Prefecture). Construction will start in October 2017 and be completed in October 2018. Production will begin in May 2019 and increase in stages. Denso will invest approximately JPY 10 billion and the number of employees required will increase from 616 at present to around 1,000 by 2020. Denso Iwate will expand its production lineup from semiconductor wafers to electronics products for automobiles. (From an article in the Nikkan Jidosha Shimbun on March 30, 2017)



-DENSO International America announced that it has entered into an investment agreement with THINCI Inc., a California-based deep-learning, vision processing startup. THINCI is developing innovative machine learning technology that enables the application of deep learning and vision processing in the automotive industry. DENSO endeavors to accelerate the final development and integration of THINCI’s silicon and software technology into electronic systems to support ADAS and autonomous driving, improve the efficiency of thermal systems, and optimize the output of vehicle powertrains. THINCI Inc. is based in El Dorado Hills, California, with teams in California and Hyderabad, India. THINCI developed silicon architecture capable of processing large amounts of data as fast as a human, and the software infrastructure necessary for the silicon to process this data. (From a press release on October 6, 2016)

Sales Network Developments

-DENSO Sales (Thailand) Co., Ltd. (DSTH) officially opened the new branch at L.P.N. Tower, Yannawa, Bangkok, on September 28, 2016, in order to expand its reach and serve the needs of customers in Bangkok. The opening ceremony was attended by executives and associates of DSTH and DENSO International Asia Co., Ltd., DENSO Thailand Workers' Union, and business partners. (From a press release on September 28, 2016)

Contracts

-Toyota Motor Corporation announced the commercial availability of a new, smaller catalyst that uses 20% less precious metals in approximately 20% less volume, while maintaining the same exhaust gas purification performance.
The design, developed by Toyota and Denso Corporation, is the world's first integrally-molded Flow Adjustable Design Cell (FLAD) substrate, with a different cell cross-sectional area at the inner portion compared to that at the outer portion.
The two companies improved uniformity of exhaust gas flow within the catalyst by optimizing the ratios of cross-sectional areas of cells at the inner and outer portions, and their corresponding densities.
Currently, substrates in exhaust gas purifying catalysts are made of ceramic (cordierite), which utilizes a honeycomb structure consisting of square or hexagonal cells.
The cell walls within this substrate are washcoated with catalytic materials, such as platinum (Pt), rhodium (Rh), palladium (Pd) and other precious metals.
The newly developed FLAD substrate structure has a different cell cross-sectional area at the inner portion, which receives more washcoating materials and has a higher gas flowrate, compared to that at the outer portion, which receives less washcoating materials and has a lower gas flowrate, thereby achieving optimal efficiency.
The new exhaust catalysts will gradually be installed in new vehicle models, beginning with the Lexus LC 500h later in 2017. (Toyota press release on February 22, 2017)

Focus of future business segments

-Amidst the paradigm change of “innovations that happen once every 100 years”, such as in the automotive industry in reference to electrification, autonomous driving, connected sharing and other innovations, the Company is aiming to create and provide new value in terms of mobility in the second stage of development of our mobile society, focusing on the following four areas in the automotive business involving electrification, advanced driver assistance systems (ADAS), automated driving (AD), and connectivity.

Electrification segment
-The Company is developing core products for hybrid vehicles such as invertors, motors, battery ECUs, etc., and making them more compact and higher performance, in order to lower the cost of hybrid vehicles and make them mainstream.
-Based on its expertise in creating electric products over the years, the Company is working to refine and improve them, optimize energy management, rapidly improve fuel efficiency, and achieve energy savings.

Environment segment
-Taking into consideration the rapid growth in electric-power-driven systems, the Company aims at achieving JPY 3 trillion in sales in powertrain systems in 2025

Safety and security segment
-With a sense of urgency in developing driving-environment-recognition technology in the field of ADAS and autonomous driving, the Company is working to strengthen partnerships and achieve a truly mobile society that can ensure the safety and security of people.
-The Company is working on developing the world’s smallest stereo image sensor based on an integrated ECU.
-The Company is working on a collision-avoidance system designed to avoid unseen or “invisible drivers” by gathering information about the vehicle’s surroundings
-By making solid advances, the Company targets achieving JPY 1 trillion in sales in 2020 in its safety and security business. In addition, the Company forecasts winning product orders worth JPY 189.0 billion in the ADAS segment in 2020 and aims to achieve JPY 200.0 billion in sales.

Connectivity segment
-With rapid changes taking place in our mobile society that connects cars, humans, roads, objects, and services, the Company intends to reduce CO2 emissions and fully control information such as both car and driver conditions, through low-energy driving assistance services and enhanced safety systems and services, in order to grow its Out-Car business.

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

-In the fiscal year that ended in March 2017, the Company spent 85% of R&D expenses in in Japan. However, in aiming to create a more mobile society worldwide, the Company intends to strengthen R&D functions outside Japan as well.

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

　
-At the Company's financial results meeting on October 28, President Koji Arima indicated the company will continue a high level of investment in research and development, saying, "Investment in research and development will absolutely be maintained at 9% of sales revenue." Denso plans to achieve JPY 4.38 trillion in sales revenue and spend JPY 415 billion, or 9.5% of it, on R&D through March 2017 (International Financial Reporting Standards). The company will invest JPY 124.5 billion, 30% out of its R&D spending, in the autonomous driving field, in which competition has been heating up in recent years. Denso's R&D spending ratios to sales revenues have been maintained at around 9%, with 8.8% in FY 2015 and 9.2% in FY 2014. President Arima expressed the company's policy to increase R&D expenses in relation to sales expansion, noting that, "The most important thing is technological advancement. Without it, we cannot survive." (From an article in the Nikkan Jidosha Shimbun on October 29, 2016)

-The Company opened its Nukata Testing Center to the media on December 8. The company installed Japan's only indoor "natural environment test road" that can recreate driving conditions like nighttime and rain within its premises in 2014. The company can perform real driving tests under set conditions without being affected by inclement weather or other such factors. Denso uses the facility for quality improvement to ensure accurate operation of sensors that are used in advanced driver assistance systems and autonomous driving technology. (From an article in the Nikkan Jidosha Shimbun on December 9, 2016)


-The Company announced that it will conduct joint research with U.K.-based Imagination Technologies Ltd. (Imagination Technologies) on the "hardware multi-threading" that enables central processing units (CPUs) to execute multiple concurrent processes. While this function has already been used in devices like personal computers, the aim of the joint research is to achieve high durability suitable for automotive CPUs. The two companies will implement their research results for autonomous driving and other purposes in the second half of 2020. Imagination Technologies is a maker focused on the design, development, and licensing of computer integrated circuits, with a proven track record in multi-threading development. It has had a collaborative relationship with Denso for ten years. (From an article in the Nikkan Jidosha Shimbun on November 15, 2016)

Product Development

Development of two plant-derived plastic materials
-The Company announced that it has developed two plant-derived plastic materials and put them into use in some of its products. Non-fossil plant-derived plastics are inexhaustible resources and do not increase the total amount of carbon dioxide in the atmosphere when thermally recycled. Denso has been working on the development and commercialization of these environmentally-friendly materials. The company developed a bio-polycarbonate (PC) made from starch. The new PC exhibits high surface hardness and superior color-forming properties, and as a result does not need to be painted before being used. It has been adopted for plastic bezels used in Toyota Motor Corporation's genuine car navigation systems, and replaced conventional petroleum-derived PCs. Denso has also developed a urethane resin based on the molecular structure of castor oil and used it as a protector for connectors in automotive exhaust gas sensors. Resins used in control units for exhaust gas sensors have traditionally been expensive silicone-type resins. The new urethane resin developed by Denso is the world first to achieve a heat resistance of up to 150°C. At the same time, it reduces costs. (From an article in the Nikkan Jidosha Shimbun on March 22, 2017)

Development of world's smallest automotive stereo vision sensor
-The Company announced that it has developed the world's smallest automotive stereo vision sensor, which has been adopted for the "Smart Assist III," a crash avoidance system used in the new Tanto released by Daihatsu Motor Co., Ltd. in November. The new stereo vision sensor has a width of 125 mm, a height of 35 mm, and a depth of 85 mm. It uses two right and left cameras to detect traffic lanes and obstacles ahead of the vehicle. The sensor offers highly accurate measurement of the distance to target objects with stereo cameras, and supports functions like automatic braking that avoid collisions with vehicles and pedestrians, lane departure warning, and auto high beam systems. Denso reduced the distance between the two cameras by half from conventional ones to 80 mm, for mounting on mini vehicles that have limited space. Although the measurable distance to targets becomes shorter as the distance between the two cameras becomes shorter, Denso solved this problem by combining highly accurate lens distortion correction and stereo matching technologies. (From an article in the Nikkan Jidosha Shimbun on December 28, 2016)

Forward-direction Vision Sensor
-The Company announced that it has improved the recognition performance of its automotive vision sensors by adopting Sony Semiconductor Solutions Corporation's (Sony Semiconductor Solutions) image sensors. Automotive vision sensors recognize objects ahead and white lines on roads with cameras, and Denso's new vision sensors can detect pedestrians at night. In the Japanese and European New Car Assessment Programs, night-time pedestrians will be added to the scope of collision avoidance performance evaluation standards for automatic brakes. Denso has developed vision sensors that will satisfy the new standards. Sony Semiconductor Solutions has the largest share in the global image sensor market (including home electronics). Their image sensors can precisely photograph subjects in dark conditions like nighttime. Denso has adopted these image sensors, and enhanced performance in areas for use in vehicles like ease of installation and resistance to heat and vibrations. (From an article in the Nikkan Jidosha Shimbun on October 26, 2016)

-In the fiscal year that ended in March 2017, the Company made capital investments to increase production, prepare for next-year models, cutover to new products, and develop new products.

-During the fiscal year ending March 2018, the Company will continue to work on the efficiency of investment, while promote the rational investment.