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5. Taiho Kogyo Co., Ltd Business Report FY ended Mar. 2015

Taiho Kogyo Co., Ltd Business Report FY ended Mar. 2015

New Products

-In FY2014, the Company began commercial production of new, plastic-coated bearings; light-weight compressor bushes for air conditioning units; and turbocharger products. In addition, the Company started using two, new, mass-production methods: a rotational casting method used for aluminum die-casting, and a low-cost, plastic-coating method used for bearings.

Plastic-coated engine bearings　　 >>>Engine bearing with resin coating (exhibited at 2015 JSAE)
-The Company will double its production capacity of plastic-coated engine bearings to 70 million units per year by fiscal year 2015. As part of this plan, Taiho Gifu Corporation, a subsidiary in Gifu Prefecture, Japan, will increase production lines from seven to ten, making full use of its site. In addition, the Company's facility in the U.S. plans to start producing the bearings by fiscal year 2015. Priced at less than JPY 100, a plastic-coated engine bearing contributes to improving vehicle fuel efficiency by 0.2% compared to standard bearings. In order to win more orders, the Company is continuing the development of plastic-coated bearings. They include less expensive product that is 20% lower in cost, and a more advanced product that will further improve fuel efficiency. (From an article in the Nikkan Jidosha Shimbun on April 15, 2014)

-In May 2014, the Company started producing its plastic-coated bearing RA series, using a new production method. In addition, in December 2013, it launched production of a new, coating material for its RC series, which is excellent in terms abrasion and wear resistance.

Turbo charger products　　 >>>Bearing for turbo charger >>>Vacuum pump (exhibited at 2015 JSAE)
-In May 2014, in response to the downsizing of turbocharged engines, the Company began producing a bearing for turbochargers; a wastegate valve actuator; and a vacuum pump for elbows and brake-boosters that are produced by the Company's proprietary, aluminum die-cast method.

Gaskets　　>>>Cylinder head gasket for diesel engine (exhibited at 2015 JSAE)
-Nippon Gasket, a subsidiary of the Company, will start producing gaskets for diesel engines in 2015. The company has received an order from Toyota Motor Corporation for the new GD engine that will be launched in 2015. This is the first time for Nippon Gasket to supply its gaskets for diesel engines on a full scale. The company has developed dedicated metal gaskets for diesel engines in view of the internal environment of diesel engines. Toyota is planning to install the GD engine on its next-generation IMV series. For the GD engine, Taiho Kogyo Co., Ltd., Nippon Gasket's parent company, will supply vacuum pumps while Toyota Industries Corporation will provide automotive turbochargers for the first time. These moves suggest that Toyota Group companies will actively tackle the diesel engine businesses. (From an article in the Nikkan Jidosha Shimbun on June 23, 2014)

Common Engine Bearing

-In January 2014, the Company announced that It will promote development of common engine bearings for Toyota Motor Corporation, which is now pursuing a new parts-sharing framework called Toyota New Global Architecture (TNGA). TNGA shares parts among vehicles using the same modules and platforms to save costs and manpower. Toyota is planning to introduce new engines based on the TNGA strategy in and after the fiscal year ending in March 2016. The Company will develop bearings for the TNGA engines, making sure that they comply with the designated design and specifications. Generally speaking, each of the engine bearings demonstrates different heat resistance, abrasion resistance and other properties, depending on the treatment given on the surface of its lining. The Company currently combines and uses some aluminum alloys for a lining from 30 to 40 different brass or phosphor bronze- based aluminum alloys. The Company will limit the new bearing's material to one aluminum alloy and make fewer variations in size. This will allow the manufacturer to purchase the material and produce the bearing in a large quantity, which will lead to the Company's higher cost competitiveness.

Mid-term Management Plan

VISION2015
-The Company has initiated its VISION 2015 mid-term management plan that covers FY March 2014 through FY March 2016. Its objective is to achieve gross operating revenue of JPY 110 billion and a 6.5% operating profit margin by the end of March 2016.

• Global expansion of products and manufacturing regions: accurately understand the global bearing market and appropriately supply the right products to the right geographical regions.
• Redefining product and manufacturing technology: expand technological expertise gained from conducting its main bearing business, to lubrication systems centered on tribology.
• Enhance human resources

-Expanding bearing business: Achieving a 20% share of the engine bearing market. Expand sales into other sectors besides the passenger-car market, achieving the top share (25%) of the global market in FY March 2016. In addition, adding seven to eight new production lines worldwide, increasing global production capacity to 40 million units.

-Expanding in sectors other than bearings

• EGR valves: Operating revenue for FY March 2013 was JPY 1,600 million. While the Company is currently supplying EGR valves mainly to large-size vehicles, it plans to expand this business in the future to include diesel-engine vehicles, aiming to achieve operating revenue of JPY 2,300 million in FY March 2016.
• Vacuum pumps: Operating revenue in the vacuum pump business was JPY 650 million for FY March 2013. The Company plans to expand its product line for low-fuel-consumption and diesel-engine vehicles. In FY March 2016, the Company plans to supply its products to new models of large-size passenger cars. By March 2016, the Company plans to supply vacuum pumps for low-cost vehicles designed for emerging markets by, for example, launching production in Thailand, aiming for operating revenue of JPY 3,000 million.

VISION2020
-During FY2015, the Company will achieve the objectives outlined in VISION 2015, its mid-term management plan announced in April 2013, and will start VISION 2020.

-Products for Vision 2020: further growing the operations of its core technology, tribology; growing its mainstream manufacturing technology, and increasing slide bearings, system products, sealing products, forged/molded products, and others.

• Bearings: Continue expanding sales of engine bearings, transmission bearings, and compressor bearings for automotive air-conditioning units. Further optimize existing bearings (engine bearings, piston pin bushes, crank washers) by reducing and controlling the amount of oil and reducing the temperature of oil. Expand the scope of lubrication systems.
• System products: Strengthen and grow the business, especially that dealing in vacuum pumps and exhaust-control systems, to where they are on par with bearings.
• Sealing products (Nippon Gasket): Aim for optimum design/architecture for various types of engines such as clean-diesel engines. Strengthen competitiveness globally in terms of quality and costs. Making use of sealing-material technology to further develop value-added products with new functions.

-The Company predicts its sales in FY2015 will increase 12.0% y/y, to JPY 110.0 billion.

-The Company predicts its ordinary profit in FY2015 will be JPY 6,600 million.

• Plus factors: increased sales (JPY 3,500 million), rationalization/streamlining (JPY 1,700 million)
• Minus factors: Depreciation costs (JPY 1,500 million), labor costs (JPY 1,200 million), negative currency translation (JPY 390 million)

-Sales of bearings in FY2014 were JPY 43.1 billion yen, accounting for 44% of total sales. Sales in Japan amounted to JPY 23.6 billion and sales outside Japan amounted to JPY 19.5 billion.

-The Company is predicting that bearing sales in FY2015 will be JPY 47.5 billion, still accounting for 44% of total sales. As a result of production increases outside Japan, the Company is predicting that sales in Japan will be JPY 23.8 billion and sales outside Japan will be almost the same, JPY 23.7 billion. The breakdown of sales is as follows: 24% to Toyota, 18% to Toyota affiliates, 21% to Japanese OEM other than Toyota, 13% to Chinese OEMs, 10% to Europe/USA OEMs, and 14% to others.

-Sales of products other than bearings: the Company is predicting that sales of gaskets will increase from JPY 11.7 billion to JPY 14.6 billion, because its subsidiary, Nippon Gasket, increased production in Thailand and China. In addition, the Company is positioning vacuum pumps and EGR valves as strategic products, so it predicts that sales of system products will increase from JPY 11.4 billion, to JPY 12.9 billion.

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

R&D Structure

-The Company set up its R&D structure so that it can address diverse issues under a consolidated framework consisting of several divisions such as the basic research division dealing with tribology (friction/wear/lubrication technology) and other themes; the product development division; and the production technology development division, all working at the Main Technology Building. The Company also has a friction technology research center, an engine experiment center, and a production technology development center.

R&D Activities

Bearings
-The Company's plastic coated bearings are being equipped on hybrid engines and engines with stop-start systems, responding to frequent stops and starts and reducing fuel consumption. In addition, the Company is developing and producing crank washers that are coated with plastic that has a significant low friction level.
>>>Engine bearing with resin coating (exhibited at 2015 JSAE)

-The Company will introduce a new bearing to the market by the second half of 2015. The new bearing is the industry-first bearing that can reduce the amount of lubricant used in engines and improve fuel efficiency. The new bearing is cut into a unique shape that keeps lubricant pooling on its friction surface. The unique form has overcome conventional bearings' disadvantage that permits lubricant to escape from friction surfaces. This leads to a reduction in the amount of lubricant and downsizing of oil pumps. In contrast to fuel saving equipment such as intercoolers and turbochargers that require additional cost of a few thousand to several tens of thousands of yen, the new bearing is priced low, yet effective in improvement of fuel economy. The Company has already received an order from an automaker and will start supplying the new bearing in the second half of 2015. (From an article in the Nikkan Jidosha Shimbun on February 12, 2015)

-In the bush segment, new, high-performance aluminum bearing materials and carbon bearing materials are under development.

-In the field of special bearings for compressors used in automotive air-conditioning units, the Company is developing and producing new, high-performance, light-weight, low-cost swash plates.

Die Castings
-By making use of CAE (computer aided engineering), the Company is optimizing both cooling and heating flows, achieving thin-walled casting and precision casting, supplying high-precision and low-cost products.

-Rotational casting method: The Company has developed the industry-first method to produce die-cast curved pipes and reduce production costs by 30%. The new method replaces the existing gravity casting method to produce auto parts. The Company has commercialized an air intake pipe for superchargers utilizing the method. In an existing die-casting, molds are removed from solidified pipes, while the new method removes solidified pipes from the mold using a robot. Compared with the existing gravity casting, the production cycle time has been shortened to 25% and the number of processes reduced to seven from ten. The product has been employed first in a new turbocharger which is installed on Toyota's Lexus NX. Currently, the company is producing 20,000 curved pipes per month at its headquarters plant in Toyota City, Aichi, Japan. It will propose the curved pipe to other automakers and supercharger manufacturers, while developing other engine parts utilizing the method to boost its sales. (From an article in the Nikkan Jidosha Shimbun on February 2, 2015)

System Products
-Electrically controlled EGR valves for commercial vehicles: The Company developed and launched production of second-generation EGR valves, which comply with the post new long-term exhaust gas regulations in Japan and the exhaust gas regulations in the U.S. (US13).

-The Company will make its vacuum pumps and EGR valves, strategic core products in its system component business, hoping to increase combined sales of the two items to JPY 10 billion by the fiscal year ending in March 2021 (FY 2020). The Company will make the two items available in series while having them conform to parts-sharing frameworks promoted by automakers. The Company will expand sales of the two products by increasing the lineups for small to large engines. The Company intends to increase the intake of orders for vacuum pumps and EGR valves to more than JPY 4.5 billion by FY 2017 and to JPY 4 billion by FY 2020, respectively. The Company aims to bolster its profit base with three pillars: its mainstay engine bearing, system component and lubrication management businesses. (From an article in the Nikkan Jidosha Shimbun on August 27, 2014)
>>>Vacuum pump (exhibited at 2015 JSAE)

Automotive Parts Business
-The following outlines investments the Company made in and outside Japan to change-over to new-products and to enhance, maintain, and/or revamp production capacity/facilities.

• Taiho Gifu Co., Ltd.: Invested mainly in bearing production facilities, in order to change-over to new products and increase production capacity.
• Taiho Corporation of America: Invested mainly in bearing production facilities, in order to change-over to new products and increase production capacity.

Investment Outside Japan

-The Company invested to expand the production plants and production capacity at its subsidiaries in the U.S., China, Indonesia, and Korea, in order to increase production of bearings in response to receiving more product orders.


-The Company launched production of systems products (vacuum pumps) outside Japan for the first time, at the Prachin Buri plant of Taiho Corporation of Thailand (TCT). The Thai plant was completed in February 2014 , launched production from February 2015, and started delivering products from April.

- Nippon Gasket's subsidiary, Nippon Gasket (Thailand) Co., Ltd., launched production of cylinder-head gaskets for diesel engines from April 2015, which are being equipped on Toyota's global vehicle series, the IMV.


- Nippon Gasket expanded the production plant of its subsidiary, Yantai Nippon Gasket Co., Ltd., which started producing cylinder-head gaskets for gasoline engines in October 2013.


- Taiho Corporation of Korea launched production of a new-design, light-weight compressor bearing shoe for automotive air-conditioning units in December 2014.


-The Company will expand its plant in Hungary by the fiscal year ending March 2016. A new plant will be constructed to double the production space to 16,000 square meters. The new plant will be used to expand production of bearings and other parts for the fuel injection system of diesel engines. Investment amount is expected to reach JPY 1.5 billion to JPY 2 billion. The Hungarian plant supplies engine bearings for the European market. The newly added space will be used for the expansion of production in the fiscal year ending March 2017 and onward.

Investment in Japan

-The Company consolidated its die operations into Taiho Seiki Co., Ltd. in April 2015.

Planned Capital Investments

-Plans are for launching production on production lines utilizing new production methods at Taiho Corporation of America in June 2015 (plastic coated bearings) and at PT. Taiho Nusantara in Indonesia from July (engine bearings).

-The Company plans to spend JPY 9,000 million yen to make capital improvements for FY ending Mar. 31, 2016. The breakdown is according the projects listed below.