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5. The Yokohama Rubber Co., Ltd. Business Report FY ended Dec. 2016

The Yokohama Rubber Co., Ltd. Business Report FY ended Dec. 2016

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%.


-The Company announced that it completed the acquisition of Aichi Tire Industry Co., Ltd. on March 15, 2017. Aichi Tire produces tires for industrial machinery as well as rubber products for industrial use in Kasugai and Komaki, Aichi Prefecture. It generated approximately JPY 7.4 billion in sales in the fiscal year ended March 31, 2016. Expanding business in the area of commercial tires is part of Yokohama Rubber’s strategy in its current mid-term business plan. (From a press release on March 15, 2017)

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)

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 2016:

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)

-On December 14 Hikomitsu Noji, President of The Yokohama Rubber Co., Ltd., explained the company's management plan for 2017 and business expansion strategy at a press conference held in Tokyo. Noji stated that "We will accelerate an expansion of global supply for original equipment tires, and launch the most ambitious new replacement tires over the next few years." The company has set a goal for expanding global supply of original equipment tires in its "GD100 phase IV" mid-term management plan (2015-2017), and is aiming to increase its intake of orders mainly for European high-grade vehicles from makers like Porsche and Mercedes-Benz. Yokohama Rubber will increase its share in the global original equipment tire market "by responding to needs of automakers promptly, and with its strength in customer confidence founded on usage track records." The company will also link this expansion to sales of replacement tires. (From an article in the Nikkan Jidosha Shimbun on December 16, 2016)

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

Jointly Developed New Three-dimensional Analysis Technology for Adhesive Degradation
-On May 22 the Company announced that it collaborated with the Jinnai Laboratory at the Institute of Multidisciplinary Research for Advanced Materials, Tohoku University and Hitachi High-Technologies Corporation to jointly develop three-dimensional analysis technology for adhesive degradation of tire rubber and steel codes. This technology will be utilized for the research on ingredient composition and new materials for the development of highly durable tires. Hitachi High-Technologies' NX9000 FIB-SEM real-time three-dimensional analytical system was used for the development of the analysis technology. The combination of this technology and the image processing technology developed by the Jinnai Laboratory enabled the precise identification of the location of degraded adhesive interfaces and analysis of the composition changes on an element level caused by degradation. (From an article in the Nikkan Jidosha Shimbun on May 23, 2017)

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 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. 2016:

• Tire production plants in Japan: The Company made capital investments to increase its production facilities in Japan, in order to respond to the market launch of new products, increase tire sizes (in inches), and enhance tire performance. It also invested to raise productivity and product quality. Tire production plants outside Japan: The Company invested in its plants overseas to boost their production capacities.
  
• MB (Industrial products) business: The Company invested JPY 5.2 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)

Investments Outside Japan

Tire Operations

-The Company will establish a development structure in North America. The company will send development department managers and other staff to North America in March, and delegate product development authority to them. Sequential preparations will then be made, including equipment necessary for development. The new center will be built as an annex of a production facility, and the tire manufacturer will now begin the task of selecting a location, with the Mississippi Plant that began operations in 2015 among the candidates. . The market for SUVs is strong in North America., and in addition to increasing sales of profitable large-diameter tires, there is also demand for products like all‐season tires that is particular to North America. The company will establish the new development center to meet local needs in an effort to expand sales of its products. (From an article in the Nikkan Jidosha Shimbun on February 13, 2016)


-The Company announced that its Russian Plant started production of aftermarket tires for the European market. The Russian economy has worsened due to the falling price of resources and depreciation of the country's currency, and the Russian plant was operating at low utilization rates because of decreased demand for tires. The plant started to utilize the redundant production capacity to produce aftermarket tires for the European market in order to raise utilization rates. Export from Russia to European countries is advantageous thanks to the depreciation of the Russian ruble against the Euro as Yokohama Rubber is aiming to improve the profitability of its Russian business. The company will increase its exports of tires for the European market based on the demand trends in Russia, and also consider supply of original-equipment tires for the market. The company is prepared to reduce production of tires for Russia at its plants in Japan and the Philippines. (From an article in the Nikkan Jidosha Shimbun on December 20, 2016)


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)