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5. Denso Corporation Business Report FY ended Mar. 2018

Denso Corporation Business Report FY ended Mar. 2018

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

Factors
-By customer, sales to its 20 major customers excluding Hyundai and Kia increased.
Sales to Toyota, Daihatsu, Hino, Honda, GM, Suzuki, Subaru, Nissan, Isuzu, Mitsubishi Motors, Volvo and JRL showed double-digit year-over-year (y/y) increases.
-By product, sales of ADAS and mobility systems including connected and cockpit-related products significantly increased by 32.1% y/y.

Joint Ventures, Investments, Capital Alliance

The Company actively introduces new technologies through equity participation and making other companies its subsidiaries with the aim of embodying its business plans.


CREATIONLINE（equity participation): A Japanese company, which excels in software development technologies such as cloud and open source software. This equity participation will enable the Company to harness the skills of CREATIONLINE’s IT engineers, who are developing advanced technologies key to growing connectivity-related business. The Company will also participate in various open source communities organized or co-organized by CREATIONLINE to strengthen its own world-class software-oriented development system. (February 2018)

GMS: Global Mobility Service（equity participation): A Japanese venture company developing technolgies for remote start-up and control equipment of vehicles. (April 2017)

ActiveScaler (equity participation): A U.S.-based venture company developing Managed Mobility as-a-Service (MaaS) systems powered by artificial intelligence (AI). (January 2018)

InfiniteKey, Inc. (acquisition)：A U.S. venture that owns automotive smart key patents. Denso intends to utilize InfiniteKey's technology to establish new mobility businesses like ride-sharing and utilization of vehicles as courier service boxes. The company will develop new technology and businesses for commercialization by 2019. (October 2017)

TRI-AD:Toyota Research Institute-Advanced Development（equity participation): A new company in Japan in charge of advanced development for automated driving. Owned 5% by the Company. (March 2018)

Automotive Edge Computing Consortium: The Company, Ericsson, Intel Corporation, NTT, NTT DOCOMO, Toyota InfoTechnology Center Co., Ltd. and Toyota announced that they have initiated the formation of the Automotive Edge Computing Consortium. The objective of the consortium is to develop a base for connected cars to support such services as intelligent driving, the creation of maps with real-time data and driving assistance based on cloud computing. Specifically, the consortium will focus on increasing network capacity to accommodate automotive big data in a reasonable fashion between vehicles and the cloud by means of edge computing and more efficient network design. In the coming months, the founding member companies will initiate activities to invite relevant global technology leaders and expand the consortium. (August 2017)

Renesas Electronics (equity participation): The Company announced that it will increase its shareholding in Renesas to 5% from 0.5%. The Company purchases in-vehicle microcontrollerss and other semiconductors from Renesas. (March 2018)

On the Road (equity participation): A software company in Nagoya City. The Company invested in On the Road to strengthen its technical development for Mobility as a Service (MaaS). (April 2018)

TrafficCast（collaboration): A U.S.-based company providing travel time forecasting, road speed monitoring and other traffic-related information using advanced digital traffic data. The aim of the collaboration is to strengthen V2X communications for connected cars and autonomous vehicles. (October 2017)

Toshiba Information Systems (equity participation）:　A Japanese company. The Company acquired 20% of Toshiba Information Systems' stakes to strengthen and speed up its development for autonomous driving and electrification system built-in software. (January 2018)

Denso Next (new company）: The Company and NEC Platforms established Denso Next, a JV of autonomotive information communication devices 51% owned by the Company and 49% by NEC Platforms. In 2016, the two companies started collaboration in the fields of advanced driver assistance and autonomous driving that utilizes artificial intelligence. They aim to develop automotive center displays and other human machine interfaces by combining each company's strength. Denso Next started operations in December 2017.

Mr. Takuya Oikawa (technical adviser contract): Mr. Oikawa is an experienced global software product development leader. By signing a technical advisor contract with Mr. Oikawa, Denso aims to strengthen its information communication technologies (ICT) including the use of cloud and open source software.


Symbio (collaboration): The Company and Symbio, a software company, jointly developed an innovation center in Symbio's premises in Espoo, Finland. The aim of the joint innovation center is to combine Denso's leading automotive technology know-how with Symbio's expertise. (November 2017)

Global Positioning Augmentation Service (GPAS) (new company): Hitachi Zosen, Hitachi Autmotive Systems, JRC, Development Bank of Japan and Denso established Global Positioning Augmentation Service to commercialize precision satellite positioning service. Denso will have a 10.87% stake in GPAS. GPAS will provide global service mainly in the Asia and Oceania regions. (June 2017)

Toshiba (collaboration): The Company announced that it will strengthen collaboration with Toshiba in such fields as IoT-based manufacturing, ADAS and autonomous driving. The two companies have already worked together in the areas of AI technologies used in image recognition systems and lithium-ion battery packs for automobiles. (May 2017)

FotoNation (collaboration): An Irish company. The Company and FotoNation collaborate in the field of image processing technology necessary for the detection of driver's conditions. By developing accurate detection not influenced by sunlight or the driver's sunglasses, Denso aims to enhancing its Driver Status Monitor for commercial vehicles and market it for passenger vehicles with an autonomous driving function. (October 2017)

Denso Ten (formerly Fujitsu Ten) (equity participation): In November 2017, the Company acquired shares in Fujitsu Ten from Fujitsu, raising its equity ratio to 51%. As a result, Fujitsu Ten became a consolidated subsidiary of Denso, being renamed as Denso Ten. Meanwhile, Fujitsu's stake in Denso Ten decreased to 14%. Toyota's stake in Denso Ten remained unchanged at 35%. Denso and Denso Ten will strengthen their cooperation in such fields as in-vehicle ECUs, millimeter radar and autonomous driving, aiming to enhance competitiveness of Toyota Group.

NSITEXE (new company): The Company announced that it will establish NSITEXE, Inc., for the development and design of semiconductor intellectual property (IP), in Tokyo in September. The new company will develop next-generation processors called "DFP". DFP can perform parallel processing more compex than that of image recognition device graphics processing units using one-tenth of electric power. It will enter into development partnerships with companies like ThinCI Inc. in Silicon Valley in the U.S., and ARM Limited in the U.K. (August 2017)

Metawave Corporation (equity participation): A U.S. startup company that develops cutting-edge, millimeter-wave radar sensing technologies. Denso will harness Metawave's technolobgies to accelerate the development of next-generation millimeter radar technologies and commercialize the sensors in 2025 or later. Metawave has strength in the development of antennas to trasmit and receive radio waves, and holds a master patent of the technology to reduce the antenna size or change the form. (May 2018)



Ibiden (equity participation):The alliance is aimed at developing next-generation exhaust systems. The Company became the second largest shareholder in Ibiden with a stake of 5.48%. The two companies will also consider collaboration in the area of vehicle electrification. (May 2017)

Battery JV in India（new company): Suzuki, Toshiba and Denso established a new company in India to manufacture automotive lithium-ion battery packs. The participation ratio is 50% for Suzuki, 40% for Toshiba and 10% for the Company. The new JV will realize stable supply of lithum-ion battery packs and promote environmentally-friendly cars in India, where the reduction of environmental burdens is a key issue. Battery production is scheduled to begin by the end of 2019.

EV C.A. Spirit (new company): A joint venture set up with Mazda and Toyota for the joint development of the basic structure of EVs. (October 2017)

ASMO (business integration): The Company integrated its subsidiary ASMO in order to develop mechanically and electrically integrated products necessary for technology development of high-precision, high value-added motors. ASMO will accelerate preparation for automotive electrification
as Denso's new motor business division. (April 2018)

FLOSFIA (equity participation）:A tech startup spun from Kyoto University. The aim of the equity participation is to jointly develop corundum structured gallium oxide for use in next-generation power semiconductor devices. The Company is planning to commercialize the material for automotive applications in 2025 or later. Corundum structured gallium oxide is considered as a next-generation power semiconductor material that will replace silicon carbide (SiC) for its high electric breakdown field strength. The use of the material in inverters is expected to to reduce the energy loss, cost, size, and weight of inverters. (January 2018)

Orders

All-new Lexus LS:
-Newly developed stereo vision image sensor adopts a 3D image processing technology to detect obstacles and
empty road spaces for driving. It will support the recognition part of the Lexus LS's obstacle avoidance function during autonomous driving, which was achieved for the first time in the world by the model.
-The Company developed a new head-up display (HUD) with a nearly 24-inch projection. The new HUD offers a substantially expanded projection size compared to a 10-inch projection of Denso's conventional HUDs. The new HUD supports a new display function to display pedestrians ahead through external sensors on the vehicle. The HUD projects images onto a windshield using a projector mounted on a dashboard. THe new HUD features a thin-film transister (TFT) liquid crystal display (LCD) and projects a large screen of 24 inches (600 mm x 150 mm) three meters ahead of the driver. The TFT LCD is a full-color LCD used for devices like television sets and allows the HUD to display optimal color tones. (From an article in the Nikkan Jidosha Shimbun on November 2, 2017)

Alphard and Vellfire
-The Company developed a new standard vision sensor that detects pedestrians at night, cyclists, and other road users. The new sensor improves recognition performance at night with a unique lens and the enhanced ability to receive light even in low-light situations. Working in conjunction with a millimeter-wave radar sensor, the new vision sensor allows automobiles to recognize pedestrians even in residential areas at night time and automatically activate emergency braking if necessary. The new sensor is about 40% smaller than previous models and makes installation easier. It is equipped with an imaging device that uses technologies developed by Sony Corporation, which has a large market share in this field. (From an article in the Nikkan Jidosha Shimbun on February 9, 2018)

Suzuki Spacia
-The Company developed the first windshield projector heads-up display for mini vehicles. The Company reduced the number of parts and designed the display for the limited instrument panel space of mini vehicles. (From an article in the Nikkan Jidosha Shimbun on December 28, 2017)

Toyota Camry
-The Company developed a 24-GHz submillimeter-wave rear and side radar sensor. The Company previously commercialized a sensor to detect objects in front of the vehicle, and this is the first time it has developed a submillimeter-wave rear and side radar sensor. The sensor, which is approximately 10 centimeters in length and width, is built into the rear bumper of the vehicle. Denso will contribute to enhanced safety of vehicles by expanding its sensor portfolio. (From an article in the Nikkan Jidosha Shimbun on August 30, 2017)

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

-The Japan segment accounts for about 88% of the total R&D expenditure for the FY ended March 2018, meaning it is the center of the Company's R&D operations.

Major R&D locations in Japan

Strengthening of R&D structure

-The Company announced that it will open a new office Global R&D Tokyo in Minato-ku, Tokyo to promote R&D for advanced driver assistance (ADAS) technologies, automated driving, and connected vehicles. The new office is intended to: strengthen the company's open innovation in the field of automated driving; secure human resources with expertise on AI or advanced IT; hire software engineers; and demonstrate automated driving in urban settings. The new office will start with a staff of 200 people. Denso plans to increase the workforce of its R&D staff in Tokyo to between 1,000 and 2,000 people including subcontractors through the early 2020s by hiring new recruits and midcareer employees and cooperating with its partner companies. (February 2018)

-The Company announced that it will start research and development of advanced technologies like autonomous driving, cyber-security, and artificial intelligence, in Israel. The company will collaborate with local start-up companies and begin R&D in April. The Company will place an engineer in Tel Aviv to start from searching information. This will be the company's second satellite R&D operation after the one in Helsinki, Finland, which was started in 2017 to grasp rapidly changing technical development. (From an article in the Nikkan Jidosha Shimbun on March 29, 2018)

-The Company announced that it will establish a new Global Strategy Center on April 1. It aims to strengthen strategy planning and implementation functions throughout the company. The Company will establish seven new divisions for the Engineering Research & Development Center, including an Advanced Mobility Systems R&D Division, MaaS (Mobility as a Service) R&D Division, Material Research Division, and AI Research Division. It will accelerate advanced research and development. (From an article in the Nikkan Jidosha Shimbun on February 20, 2018)

-The Company changed the name of its fundamental research center to the "Advanced Research and Innovation Center" in July. Denso regards the facility as a core office with the future of the company on its shoulders. In April 2018, the company will relocate Soken, Inc., its research subsidiary that has competencies in internal-combustion engines and mechanisms from Nishio City, Aichi Prefecture, to a site adjacent to the research center. Denso will enhance cooperation between the subsidiary and the research center to develop new technologies by combining mechanisms and electronics. The center's research themes include electronics like artificial intelligence and silicon carbides, as well as human machine interfaces, and bio technologies. (From an article in the Nikkan Jidosha Shimbun on September 4, 2017)

Product Development

Integrated HMI platform
-The Company announced that it has jointly developed an integrated HMI (Human Machine Interface) platform with Canada-based BlackBerry Limited (BlackBerry). The integrated HMI platform is the world's first to manage information inside an automobile cockpit. The new integrated platform controls operating systems incorporated in a meter screen, center display, heads-up display, and other HMI products on a single microcontroller. The new platform coordinates these HMI products and produces benefits such as effectively bringing information to the driver's attention. The cost for microcontrollers built in accordance with the new platform will be 20% lower than the cost for conventionally built separate microcontrollers. The new integrated HMI platform will appear in successive car models scheduled for release after 2019. (From an article in the Nikkan Jidosha Shimbun on December 15, 2017)

Electrification
-The Company developed a new silicon carbide (SiC) semiconductor power device. By using SiC that generates less heat than other materials, energy loss is reduced to one-third of other materials. To use SiC in a vehicle environment, the Company established special purification technology of the materials to crystallize high quality SiC crystals.

-An industry-academia group that includes Tohoku University and University of Tsukuba and led by Denso succeeded in a project aiming for the high-purity synthesis of a regularly arranged FeNi superlattice magnetic material for the first time ever. In the project, the Technology Research Association of Magnetic Materials for High-Efficiency Motors is working on the development of high-performance magnets that don't use dysprosium and neodymium, which are not ideal due to a risk of scarcity. The FeNi superlattice, an L10 type alloy of regularly arranged iron and nickel, was found in iron meteorites. While it contains no rare earth material, it is thought to have high magnetic properties. The group will further develop the material shape and processing methods to obtain high performance for motor permanent magnets. (From an article in the Nikkan Jidosha Shimbun on November 16, 2017)

Connected vehicles
-The Company and Toyota Tsusho Corporation announced that they have started a demonstration test using quantum computers for a traffic information service in Thailand. The two companies are aiming to establish applications for providing real-time traffic jam information and optimal routes for emergency vehicles by introducing quantum computer analytic technology to a traffic information service. In the demonstration test, a quantum computer processes large amounts of vehicle location and driving data in real time. About 130,000 taxis and trucks equipped with special devices are used to obtain position data, which is processed in the quantum computer. The Company intends this will lead to the proposal of new applications to solve traffic congestions and create preference routes for emergency vehicles. (From an article in the Nikkan Jidosha Shimbun on December 19, 2017)

-The Company started a demonstration test of its parking guide system for pedestrians at an underground parking space operated by Central Park Co., Ltd. in Nagoya City. The parking guidance system shows vacancy information and routes to parking locations by utilizing special applications and ultrasonic beacons to users indoors where GPS signals are unavailable. Denso will test the system until the end of March 2018, and is aiming to commercialize it as an indoor location information system by the end of March 2019. (From an article in the Nikkan Jidosha Shimbun on November 28, 2017)

Advanced safety and autonomous driving
-Out of "recognition, decision-making, and control" capabilities required for autonomous driving, the Company has started the development of a semiconductor designed to recognize objects based on sensor-detected information on par with human beings, as well as a semiconductors capable of making split-second decisions at the same level. Denso is developing a semiconductor that predicts the behaviors of obstacles and recognizes driving space using artificial intelligence, with an aim to begin mass-producing it around 2020. The company will develop a semiconductor that makes decisions like instantaneously finding a route to avoid collision in an emergency. The semiconductor will utilize data flow processor technology for parallel execution of different calculations efficiently. It can lower power consumption to below one tenth that of graphics processing units. Denso aims to put it to practical use in the early 2020s. (From an article in the Nikkan Jidosha Shimbun on August 9, 2017)

-The Company announced that it will enter the market for automatic parking assist services including valet parking. From June 2018 to the end of fiscal year 2018 (ends March 2019), the company will conduct demonstration tests to evaluate in-vehicle sensor performance necessary for automatic parking using Mitsuino-Repark pay-by-the-hour parking lots operated by Mitsui Fudosan Realty Co., Ltd. and identify problems. From FY 2019, Denso will go one step further from sensor technology development to research the creation of new services using the automatic parking assist technology. In the demonstration tests, Denso will reserve Mitsuino-Repark parking lots for about one week to conduct technical verification of image sensors, sonar, and millimeter radar necessary for an automatic parking system. It will also verify the functions required for in-vehicle equipment in consideration of vehicle behaviors in a parking lot. In the course of the demonstration, Denso will also verify the integration the system with infrastructure equipment. Denso says crucial technologies including in-vehicle sensor technology will be put into commercial application within a few years. (From an article in the Nikkan Jidosha Shimbun on December 6, 2017)

Other
-The Company commercialized the world's first combination nitrogen oxide (NOx) and air fuel (AF) ratio sensor. NOx sensors and AF ratio sensors are installed in exhaust gas components to precisely measure NOx and AF ratio, and provide feedback for accurate engine control. Denso integrated these two sensors into one device to reduce costs and mounting space. The new sensor has been adopted for Toyota Motor Corporation's diesel commercial vehicles for countries outside Japan. Denso is aiming to increase order intake by offering the sensor for other vehicles including gasoline vehicles. (From an article in the Nikkan Jidosha Shimbun on May 26, 2017)

-In the fiscal year ended March 2018, the Company's capital expenditure mainly focused on increasing production, development of next-generation models, switching to new products, and R&D to develop new products.

-In the FY ending March 2019, the Company will make capital investments to increase production, make next-generation models and switch to new products.

-The Company announced that its subsidiary, Denso Fukushima Corporation will expand its plant. Denso Fukushima will build a new plant for production of gasoline engine fuel products like fuel pumps and injectors. The plant will be Denso Group's second plant for these products in Japan. The plant expansion is being carried out to meet increasing demand in Tohoku area and spread risk of centralized production in the Mikawa Area. Production will start in October 2018. (From an article in the Nikkan Jidosha Shimbun on May 20, 2017)

-The Company announced that it will invest USD 75.5 million and add more than 130 employees to its Michigan and Ohio operations. The majority of the investment, USD 75 million, will be spent over the next three years at the company’s North American regional headquarters in Southfield, Michigan. Denso plans to expand and renovate the research and development facilities there and add 120 employees to develop autonomous vehicles, safety and cybersecurity technology. The remaining USD 500,000 will be spent in Dublin, Ohio, to renovate a 10,000-square-foot satellite office. (Detroit News article on July 31, 2017)

-The Company announced that it will invest USD 190 million to expand its operations in Athens, Tennessee, creating 320 additional jobs. The Athens facility produces fuel injectors, fuel pumps, oxygen sensors, ignition coils, monolithic carriers and spark plugs. The new investment will add four production lines in Athens: a new gasoline direct injection (GDI) production line, one low-pressure fuel pump line and two high-pressure fuel pump lines. Adding to Denso’s cumulative USD 3 billion in the state, this latest strategic investment is a continuation of Denso’s commitment to make Tennessee a primary manufacturing center in North America. The company employs approximately 4,500 people in the state at its Athens, Maryville, and Jackson locations. In 2017, Denso announced a USD 1 billion investment in its Maryville facility focusing on electrification and safety systems. (From Tennessee Department of Economic Development release on February 28, 2018)