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5. Akebono Brake Industry Co., Ltd. Business Report FY ended Mar. 2017

Akebono Brake Industry Co., Ltd. Business Report FY ended Mar. 2017

Financial Overview

(in millions of JPY)

Recent Development Outside Japan

-The Company announces that it reorganizes consolidated subsidiaries in Europe and this reorganization will result in extraordinary loss of JPY 0.7 billion at Akebono. This aim is to achieve “establishing global networks based on product-based business units” and “expanding high performance brake business and recreating European operations” as primary goals in its mid-term plan, “akebono New Frontier 30-2016”. Akebono will directly manage the local entities in France, Germany and Slovakia, previously managed by the Belgium based regional head quarters, Akebono Brake Europe N.V. (AENV) which is a 100% subsidiary of Akebono. AENV will sell its share in the 3 local entities (EUR 9.5 million as a total of the 3 entities) to Akebono which will directly own their shares/interests. After the selling, AENV will enter into the process of dissolution while the local 3 entities will continue operations. (From a press release on March 16, 2017)

-The Company will establish an integrated aluminum brake caliper production system that carries out processed from aluminum melting through processing and assembly, in Europe by the middle of 2018. Currently, the company produces castings in the U.S. and sends them to its Slovak plant for processing and assembly, which then supplies the brake calipers for automakers in Europe. Akebono Brake Industry plans establish conditions so it is able to start local procurement of castings to cut transport expenses and strengthen cost competitiveness. In addition to producing brake pads in France, Akebono Brake Industry established its first European brake caliper plant in Slovakia and started operations there in 2014. (From an article in the Nikkan Jidosha Shimbun on February 8, 2017)

-The Company will consolidate its North American drum brake production at its plant in Mexico in 2017. The company will shift production of drum brakes from its two plants in the U.S. to the Mexico plant. Including exports bound for the U.S., the Mexico plant produces 2 million drum brake units annually . The company will enhance its cost competitiveness through consolidating its production since labor costs are lower in Mexico than in advanced nations. At the same time, the company will review all of the production items at its U.S. plants in an effort to improve productivity. (From an article in the Nikkan Jidosha Shimbun on June 21, 2016)

-The Company announced that it will take drastic measures to turn around its ailing North American business that has suffered large deficits. With the aim of bringing back the division to profitability by the next fiscal year that ends in March 2018, the company will facilitate the restructuring of the operations to establish a solid production, sales and management structure that can deliver steady profits.
Due to extremely high demand from customers, production problems occurred at Akebono Brake Corporation (ABC) headquartered in Michigan, U.S. ABC has thereby incurred high additional costs, which impaired the profitability of Akebono's North American business. The company is poised to move ahead with its plans to achieve a turnaround as soon as possible. (From an article in the Nikkan Jidosha Shimbun on May 10, 2016)

Recent Development inside Japan

-The Company announced that it has completed expansion work on its test course in Iwaki City, Fukushima Prefecture. The test course was damaged by the Great East Japan Earthquake in March 2011. It underwent repair work for facilities like its high-speed circuit afterward, and its name was changed from "Proving Ground" to "Ai-Ring" in December 2012. Later, the test course underwent an expansion of its comprehensive test roads and had new rough road test tracks installed. It was also equipped with functions for evaluating noise, vibration, and harshness that were transferred from the company's other facility. Investment in the expansion work amounted to JPY 3.6 billion including a "Business Location for the Industrial Recovery of Fukushima" subsidy. The Ai-Ring allows development and evaluation of brakes under conditions similar to actual operating conditions. The upgraded test course will speed up brake development by enabling everything from dynamometer evaluation to actual vehicle testing at the same site. (From an article in the Nikkan Jidosha Shimbun on November 2, 2016)

Absorption

-On April 1, 2016, the Company absorbed three wholly owned subsidiaries (Akebono Brake Industrial Machinery & Rolling Stock Component Sales Co.; APS Corporation; and Akebono Sensor Technology Co.), merging their operations into its own and becoming the surviving company.

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

Mid-term Management Plan

-The Company announced its mid-term management plan, called "Global 30", which outlines long-term plans that are set to end at the close of fiscal year 2020, which ends in March 2021. Targets under the Plan is to raise the Company's global market share of disc brake pads sold to OEMs to 30%.

-Specific achievements were reached in the first year of the akebono New Frontier 30 – 2016 new mid-term management plan in which the fiscal year ending in March 2018 is the final year, in aiming to achieve Global 30.

-Sales target of JPY 250.0 billion was achieved; however, the Company greatly missed achieving its operating profit target of JPY 20.0 billion. Other achievements are listed below.

1) Differentiate Company’s technology designed for the future

• Launch business in the high-performance-brake segment
• Set up global supply structure
• Start delivering products that are environmentally compliant
• Verify operational framework of R&D functions for electric-brake operations, while continuing R&D activities

2) Strive to radically lower costs and expand outside Japan

• Consolidate brake-drum operations by transferring operations from Iwatsuki Works in Saitama Prefecture to the Sanyo Plant in Okayama Prefecture.
• In expanding operations in North America, production issues arose because of inability to cope with a sudden increase in demand, so streamlining came to a stop.

3) Speed up global operations by migrating from focus on “Japan-USA” to “Japan, USA, Europe, and Asia”

• Hire more globally capable human resources
• Established production plant in Slovakia in 2015, which launched commercial operations. This is following the launch of plants in Vietnam and Mexico.

-The Company has established its new mid-term business plan "akebono New Frontier 30 - 2016," which covers the three year period until fiscal year 2018 (ends in March 2019). Under the new plan, The Company aims at getting back into the black, from an operating loss of JPY 3.8 billion recorded in FY 2015 to a FY 2018 consolidated operating income of JPY 10.0 billion. The Company aims to rebuild its North American operations by taking drastic measures centered on organizational reform in order to make North America a pillar of revenue. In addition, the Company will set up product specific business divisions to enhance the profitability of each product and enhance its global competitiveness. The new plan's goal is to facilitate sustainable growth, rather than focusing on expanding sales. The goals of the mid-term plan include rebuilding North American operations, establishing global networks through installation of product specific business divisions, expanding HP (high performance) business, and creating new businesses in Europe. Through achieving these goals, the Company aims to develop new business fields and strengthen its business foundation. (From an article in the Nikkan Jidosha Shimbun on May 26, 2016)

-Forecast for FY ending in March 2018: JPY 10,500 million

R&D Structure

R&D Activities

-Develop new technologies, which include new friction materials for various brake systems and next-generation brakes by utilizing the Company's expertise in the areas of friction and vibration and their analysis and control technologies.
-Acquire greater expertise in the areas of noise and vibration and develop new technologies based on the Company's sharing and standardizing initiatives. Development projects include green materials and other environmental technologies to reduce drag and cut product weight.
-Develop technology, such as that on electric-brakes, that is capable of being applied to autonomous driving; and develop bakes for high-performance vehicles.

<Japan/U.S.>
Friction materials for brakes
-Develop new copper free friction materials that comply with recently enacted environmental regulations on friction materials in several U.S. states, including Washington.
-Development of high-quality products (mainly high-performance brake-pads for passenger cars and low-cost brake-pads) that provide superior performance in terms of noise and vibration, and which reduce wheel dust (a phenomenon that has recently become the focus of attention), and which use safe frictional materials that take environmental concerns into account.

Disc brakes/drum brakes
-Work on developing brakes that are designed for high-performance vehicles, that are environmentally friendly, and that can be applied to autonomous driving.
-In developing aluminum alloy opposed-piston brakes for high-performance vehicles, apply technology gained from developing brakes for F1 racing cars and work on commercializing them.

Electrified technology
-Electric brakes that can be controlled by electric signals coming from small electric motors placed in the brakes.
-Development of technology on electric parking systems in which only the parking function has been electrified.


-Development of friction materials that meet strict, environmental regulations in Europe.
-Development of hybrid materials, incorporating characteristics suited to both the quiet-running cars preferred by the Japanese and U.S markets and the high performance vehicles popular in the European market.

<China/Thailand>
Friction materials
-Develop and produce new products through local procurement and local production to best meet the needs of emerging markets in terms of both cost and performances.

Disc brakes
-Research and analysis on market needs and how products are being used, to develop products that can be delivered at low cost but which still provide needed features and performance

Product Development

Developed Brake Mechanism Not Using Friction Materials
-The Company announced on August 10 that it has developed a new "MR fluid brake" mechanism that does not use friction materials. The new mechanism generates braking force by utilizing the properties of MR fluid that changes its state from liquid to semisolid in response to magnetic force. General friction brakes produce wear powder from frictional materials during braking. The new brake mechanism generates no powder and thereby substantially reduces the burden on the environment. The company has already made a prototype and is aiming to achieve practical utilization of it as a brake system for ultra-micro electric vehicles in 2020. The MR fluid brake has MR fluid that is charged between a disk fixed to the vehicle and a disk rotating with the hub bearing. In response to a magnetic field generated by currents flowing through an electromagnet coil disposed inside the mechanism, magnetic particles in the MR fluid form clusters between the disks. Since one of the disks keeps rotating with the hub bearing, some clustered particles are broken and then connect to neighboring particles. Repetition of such movement generates resistance to the rotating disk and provides braking force. (From an article in the Nikkan Jidosha Shimbun on August 12, 2016)

Developed Electric Parking Brake (EPB)
-The Company will develop and commercialize an electric parking brake (EPB) by around 2019. The company already completed the development of hardware for the EPB, such as a motor gear unit and other key components, and will accelerate the development of software for the EPB. EPBs are available in drum and disc types. At present, disc-type EPBs are dominant and are produced by suppliers like Advics, Co., Ltd. (Advics), ZF TRW Automotive Holdings Corp., and Continental AG (Continental). As for drum-type EPBs, Advics has a commercial version, and Nissin Kogyo Co., Ltd. and Continental plan to begin sales of their products in 2017. Akebono Brake is developing EPBs of both types, but it will concentrate on the development of a drum-type EPB because less competitors enter the drum-type EPB business. Drum-type EPBs are increasingly equipped in mini vehicles and compact cars. Among Japanese medium/heavy-duty truck makers, need for drum-type EPBs is growing to ensure safety. Akebono Brake will develop a high-quality, low-cost, and highly competitive EPB for Japanese and North American OEMs by utilizing related technologies it has developed, with the aim of receiving orders primarily from customers for their mini vehicles or medium/heavy-duty trucks in a few years. (From an article in the Nikkan Jidosha Shimbun on August 2, 2016)

-Breakdown of capital investments:

• Japan: JPY 3,747 million
• North America: JPY 9,454 million
• Europe: JPY 1,603 million
• Indonesia: JPY 1,100
• China: JPY 2,019 million
• Thailand: JPY 747 million

-Major investment projects are as follows:

• Japan: Build a test course (Ai-Ring)
• North America: Increase production capacity of products for high-performance vehicles and GM
• Europe: Add production facilities of products for high-performance vehicles
• Indonesia, China: Boost production capacity to respond to increasing number of product orders
• Thailand: Increase production capacity and facilities at casting plant.

-Capital expenditure for FY ending Mar. 2018 is planned to be JPY 15 billion.