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5. The Yokohama Rubber Co., Ltd. Business Report FY ended Dec. 2015

The Yokohama Rubber Co., Ltd. Business Report FY ended Dec. 2015

Acquisition

-In Jul. 2016, the Company announced that it has completed its acquisition of a 100% stake in the Dutch Alliance Tire Group B.V. (ATG). Yokohama Rubber's consolidated financial statements will include ATG's accounts for the period July - September 2016. In March, the Company announced that it would acquire ATG, a manufacturer of tires for forestry, construction, and agricultural machinery. It's expected to boost sales at the Japanese tire supplier's commercial vehicle tire division by 60%. The Company also anticipates creating synergies worth USD 15 million (approximately JPY 1.7 billion) in operating profit by 2019 through production streamlining and joint purchasing. ATG offers tires under three brands: Alliance, Galaxy, and Primex. It has a significant presence especially in the agricultural equipment tire market, with its share in the two major markets of the U.S. and Europe reaching approximately 10%.


-In Jan. 2015, the Company announced that it has acquired 100% of equity shares in a tire bead wire supplier that had been spun off by Fuji Seiko Co., Ltd. (Hashima, Gifu Pref.). The Company has not disclosed how much it paid for this deal. The acquisition is expected to improve the tire supplier’s bead production technology, which will help it produce products with higher quality and better performances at low cost. (From an article in the Nikkan Jidosha Shimbun on January 8, 2015)

Dissolution of Joint Venture

-In Mar. 2016, the Company and Continental AG announced that they have agreed to dissolve their Japanese joint venture, Yokohama Continental Tire Co., Ltd. (YCC), by the end of March 2016. YCC was established in 2002 to help Japanese and Korean automakers procure tires on a global basis. For 14 years, Yokohama Rubber and Continental have been expanding their global production networks and have made solid progress. The two companies will now separately focus on further expanding their respective businesses. (From a press release on March 8, 2016)

Possible Production Partnership

-In May 2015, the Company and Kumho Tire Co., Inc. of Korea are discussing collaboration on tire production in China. The plan is to manufacture Yokohama-brand tires at Kumho Tire's China plants. The two tire suppliers already have a technical alliance to collaborate on tire development, but this is the first time that they consider a production partnership. According to the public relations of Yokohama Rubber, they have not decided any details such as what kind of tires (passenger car tires, commercial vehicle tires, etc.) Kumho will produce for Yokohama or when to begin production. (From an article in the Nikkan Jidosha Shimbun on May 20, 2015)

Established Procurement Hub in Singapore

-In Apr. 2015, the Company announced that it established Yokohama Rubber Singapore Pte. The decision to establish a local subsidiary is in line with the Yokohama Group’s plan to raise the efficiency of its raw material procurement function on a global basis. The new subsidiary initially will be engaged in procuring natural rubber for Yokohama Rubber's Japan plants, but the plan is to expand its natural rubber procurement business to also cover the needs of the Yokohama Rubber Group's overseas plants. In the future, operations will be expanded to include the procurement of raw materials other than natural rubber. The new subsidiary also plans to strengthen raw material inventory controls as part of its efforts to establish a more stable and efficient global procurement structure. (From a press release on May 14, 2016)

Contracts

-Major original equipment contracts in 2015:

Mid-term Management Plan

Mid-term Management Plan "GD100 Phase IV (2015～2017)"
-The Company announced Phase IV of its Grand Design 100 midterm management plan covering from 2015 through 2017. The Company aims to increase the share of its overseas sales of original equipment tires from current 35% to 70% by 2020. Through a total capital investment of JPY 120 billion during this phase, the Company plans to boost its tire production capacity by 21 million units to 89 million units per year by 2020. The Company intends to enhance its competitiveness in the global market, aiming to boost its sales and profitability. In the final year of the plan, the Company aims to achieve sales of JPY 770 billion, up 23.3% from the 2014 level, operating income of JPY 80 billion, up 35.4% from the 2014 level, and operating profit margin of 10.4%, up 1.0 percentage point from the 2014 level. (From an article in the Nikkan Jidosha Shimbun on February 14, 2015)

Growth Strategy for Tire Operations

Growth Strategy for MB (Industrial products) Operations

-On 10 Aug. 2016, the Company announced that it has revised its consolidated financial projection for the fiscal year ending in December 2016 downward. The Company reduced its projected net sales by JPY 52 billion to JPY 600 billion; operating income by JPY 17 billion to JPY 38 billion; and net profit by JPY 14 billion to JPY 20 billion. This revision is due to the strong yen, and lower-than-expected sales of the Company's main tire business in Russia; and North, Central, and South America. It also reflects stagnant demand for the Company's Multiple Business, and amortization of goodwill and other expenses related to the acquisition of the Dutch Alliance Tire Group B.V., which was completed in July. (From an article in the Nikkan Jidosha Shimbun on August 12, 2016)

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

R&D Structure

-Research and development of basic technology will be conducted by the Research Division, while that of new products will be carried out at the Tire Division, the MB (Industrial products) Division and the Technical Division.

Tire Operations

-The Company announced that it has held an opening ceremony for a new testing facility for its winter tires in Asahikawa, Hokkaido, Japan. The new facility called Tire Test Center of Hokkaido (TTCH) covers a land area of 906,462 square meters. It has a one-kilometer-long straight snow track, a flat ice track, a hill track, a snow and ice circle, and a handling track. The new test track will allow the company to conduct tests with passenger cars at a speed of over 100km/h as well as braking, starting and acceleration tests with truck and buses on various road conditions such as winding and sloping roads. (From a press release on January 26, 2016)


-The Company announced on August 31 that it will establish a tire research & development center in North Carolina, U.S., and start R&D activities there this September. With the establishment of the new center, the Company will double the current size of its North American R&D staff and accelerate the development of new tire products suitable for the North American market. The Company presently conducts R&D on tires for the North American market in several U.S. states and Japan, but it will consolidate these activities at the new center to strengthen its R&D framework. The new center will initially engage in the design of new tires for consumer applications, and gradually expand its activities to include design, testing, and evaluation of tires for industrial and construction machinery, as well as technical service and quality assurance. The Company will consider additional investment in its facilities in line with the expansion of the breadth of its R&D activities. (From an article in the Nikkan Jidosha Shimbun on September 1, 2016)

Joint Development

New tire simulation technology for multi-objective design exploration of rubber materials
-The Company announced that it has developed a new tire simulation technology for multi-objective design exploration of rubber materials. The conventional simulation methods use existing rubber materials. By utilizing a new computational scheme for large-scale viscoelastic simulations jointly developed with a French research institution, Yokohama Rubber developed the new technology that allows the Company to control the morphology of rubber material models that are based on virtual morphologies. With this innovative technology, Yokohama Rubber aims to develop high-performance tires by improving fuel consumption, safety, rigidity, and other factors, which are normally difficult to achieve simultaneously. (From an article in the Nikkan Jidosha Shimbun on December 4, 2015)

Synthesizing isoprene from biomass (biotic resources)
-The Company, the National Research and Development Agency RIKEN, and Zeon Corporation have succeeded in synthesizing isoprene from biomass (biotic resources). Isoprene is a raw material and is used to produce synthetic rubber (polyisoprene rubber) for vehicle tires. Industrial isoprene is currently produced as a byproduct of the naphtha cracking process. Yokohama Rubber, RIKEN, and Zeon have been engaged in producing synthetic rubbers from biomass since 2013. They aim to commercialize this technology by the early 2020s. (From a press release on September 3, 2015)

Synthesizing butadiene from biomass (biotic resources)
-The Company and Tokyo Institute of Technology have jointly developed a new technology to synthesize butadiene, a raw material for synthetic rubber, from biomass (living resources). They will continue the development for mass production, aiming to commercialize the new technology in the early 2020s. The new technology will reduce dependence on oil and fossil fuels, thus contributing to the reduction of loads on the environment. The tire manufacturer and the institute successfully developed a catalyst which enables butadiene to be directly synthesized from cellulose. Cellulose is a polysaccharide and the main constituent of plant cell walls. Butadiene is currently produced as a by‐product of oil refining and is used to produce synthetic rubber (butadiene rubber) for automobile tires. Butadiene is the second most used synthetic rubber after styrene-butadiene rubber. (From an article in the Nikkan Jidosha Shimbun on July 31, 2015)

R&D Activities

Aeroacoustic simulation technology
-The Company's researchers, together with a team of researchers led by Professor Kozo Fujii at the Institute of Space and Astronautical Science (ISAS), the research arm of the Japan Aerospace Exploration Agency (JAXA), succeeded in the world's first simulation of near real-scale flow structures (turbulence) around a tire rolling on a road surface and the acoustic waves (noise) generated from these structures. In Oct. 2016, this aeroacoustic simulation technology received HPCI (High Performance Computing Infrastructure) Excellent achievement research project award.

New aerodynamic technology for tire
-In Oct. 2015, the Company announced that it has developed a new tire design technology that lowers aerodynamic drag and reduces the vehicle's lift. The new design that features fin-shaped protuberances on the tire's outer sidewall is expected to reduce aerodynamic drag by 3%. The Company will accelerate the development of this fuel-efficient tire technology to put it into practical use as early as possible. (From an article in the Nikkan Jidosha Shimbun on October 16, 2015)

New Products

Tire Operations
-The Company will use common tread patterns to original equipment tires and aftermarket tires for European and Chinese markets. The Company will change its tire development approach so that the tread pattern of original equipment tires is developed in advance, and use the same tread pattern to aftermarket tires. Conventionally, original equipment tires are developed to meet the target performance of new vehicles, and original equipment tires and aftermarket tires even under the same name have different tread patterns. The Company is aiming to expand its aftermarket tire sales by unifying tread patterns in European and Chinese markets, where the need for original equipment tires in the aftermarket is high. (From an article in the Nikkan Jidosha Shimbun on April 28, 2016)

Breakdown of capital investments in the fiscal year that ended in Dec. 2015:

• Tire business at plants in Japan: In responding to changes in demand, the Company spent JPY 14.0 billion in capital investments to maximize its production capacity to the fullest, strengthen its logistics functions, and improve product quality.
• Tire business in plants outside Japan: The Company spent JPY 14.8 billion, mainly in North America, to install new equipment for manufacturing truck and bus tires, and at its plants in the Philippines and China to increase production facilities as a means to increase production capacity.
• MB (Industrial products) business: The Company invested JPY 4.2 billion to boost its production capacity for hoses and improve product quality.

Investments in Japan

Tire Operations
-The Company announced that it will increase production capacity for large passenger-car tires at its plant in Shinshiro City, Aichi Prefecture by about 20% from the current level. The total investment will be JPY 3.7 billion. The Company plans to start up a new line at the plant in June 2017 and bring it to full operation by April 2018. The capacity expansion is for high-performance tires (18-inch diameter and larger). The Company is increasing its deliveries of large tires fitted as original equipment on Mercedes-Benz and Audi cars, and this has led to the need for boosted production. Global demand for large tires is projected to increase thanks to the popularity of SUVs and growing demand for larger original equipment tires. Large tires are highly profitable, and since their prices rarely drop, the Company will increase its supply capacity for these tires in an effort to improve profitability. (From an article in the Nikkan Jidosha Shimbun on February 16, 2016)

MB (Industrial products) Operations
-The Company announced that it has held a groundbreaking ceremony for a new factory at its Toyooka Plant in Nagano Prefecture, Japan, as part of its project to integrate its two plants in the prefecture and strengthen its hose and coupling business. In Nagano Prefecture, the Company currently manufactures metal couplings at the Takamori Plant and assembles hoses and metal couplings at the Toyooka Plant. The new factory is scheduled to be completed by November 2016. The Company plans to transfer production equipment from the Takamori Plant to the new factory and complete the consolidation of the Takamori Plant and the Toyooka Plant by February 2017. JPY 2 billion (approximately USD 16 million) will be invested in this project which includes purchasing land and constructing the new building. (From a press release on November 2, 2015)

Investments Outside Japan

Tire Operations

-The Company has started to plan building a new plant of passenger car tires in North America. Yokohama Rubber intends to build the new plant at the site of its truck and bus tire plant in Mississippi, the U.S. which started operations in 2015. In North America where demand for automobiles is strong, the Company produces passenger car tires at its Salem, Virginia plant, and also supplies them from its plants in the Philippines and other countries outside North America. Demand for automotive tires in North America is expected to increase even further. Thus, the Company will build the new plant to expand its local supply capacity, and aims to increase sales in its largest market, North America. (From an article in the Nikkan Jidosha Shimbun on October 15, 2015)


-The Company will raise the local content ratio of raw materials excluding natural rubber for its tire production in Russia, from current 50% to 70% by 2017. The Company will recruit new local suppliers to raise the local content. The Russian currency has been weakening due to the country's worsening economic situation. The Company will maintain the competitiveness of its Russian plant by enhancing local procurement of the raw materials that the plant currently imports from other countries, and hopes to expand sales. (From an article in the Nikkan Jidosha Shimbun on June 18, 2015)

-The Company announced that its Russian passenger car tire plant began production of original-equipment tires for the first time. The Russian plant produces the Geolandar G91 tires for the Nissan "X-Trail" sports utility vehicles (SUVs) and the BluEarth E75 tires for the Nissan "Teana" mid-size sedans. These tires are supplied to Nissan Motor Corporation's local car assembly plant. (From an article in the Nikkan Jidosha Shimbun on January 19, 2015)

MB (Industrial products) Operations

-Kentucky Governor Matt Bevin announced that Yokohama Industries Americas Inc. plans to invest USD 5.2 million in new equipment at its plant in Versailles, Kentucky. The project will add two new production lines at Yokohama's Hose Division plant which produces hose assemblies for vehicle air conditioning, power steering and transmission oil cooler systems. (Kentucky Cabinet for Economic Development release from September 29, 2016)