Kobelco Construction Machinery Co., Ltd.

November 9, 2006
Kobelco Construction Machinery's Half-year Financial Results for Fiscal Year 2006 (April 1, 2006-September 30, 2006)

[General Market Conditions]

The domestic market for construction machinery, especially hydraulic excavators, continued to be strong in the first half of fiscal year 2006 with demand continuing to increase, compared to the same period last year. Although public work projects remained sluggish, robust private capital investment stimulated demand. In addition, the decrease in the domestic stock of machines due to exports of used equipment created demand for new machines.

Overseas markets were also strong. Markets in North America and Europe continued to expand, though housing construction in North America began to slow down. Furthermore, the markets in China and other emerging countries grew sharply due to infrastructure construction and natural resource development.

Under these conditions, the Kobelco Construction Machinery Group was able to substantially increase the number of machines sold domestically and overseas, especially in fast-growing China, on the back of increased global demand. In addition, Kobelco launched new models meeting Tier 3 exhaust emission regulations.

In April, the Ogaki Factory was established to integrate Kobelco's production systems of mini excavators and enhance cost competitiveness. Also, Kobelco has been making efforts to increase the production volume of hydraulic excavators at the Hiroshima Factory This has been an ongoing issue as increased demand exceeded its production capabilities. Kobelco also faced new challenges such as losing opportunities to provide products due to the difficulty of procuring parts and increased production costs.

In its half-year financial results for fiscal year 2006 (April 2006-September 2006), Kobelco marked record highs for net sales, operating income, ordinary income and net income, on a consolidated basis.

Consolidated Financial Results in First-half of FY2006

In millions of yen Net sales Operating income Ordinary income Net income
Consolidated FY2006
92,945 3,442 3,913 2,724
59,467 2,169 2,868 2,633
Figures in brackets [ ] show the percentage change as compared with the same period last year.
Figures in parentheses ( ) denote minuses.

Domestic consolidated sales rose 14.3% to 53.4 billion yen and overseas sales rose 25.4% to 57.9 billion yen. Total sales rose 19.8% to 111.3 billion yen.

In order to achieve Kobelco's FY2006-FY2008 Medium-term Management Plan started this year, the Kobelco Group is working to create a business enterprise that can weather changes under a new banner slogan, "That's Kobelco! Your First Choice."

From the standpoint of Corporate Social Responsibility (CSR), the Kobelco Group has worked actively on various contributions to society, such as donating hydraulic excavators to the area devastated by the earthquake that hit central Java, Indonesia in May this year. At the same time, Kobelco made efforts to further promote CSR activities through establishment of CSR funds and development of an in-house CSR-promoting structure.

[First-half FY2006: Review by Geographical Area]


Domestic demand for new hydraulic excavators and mini excavators, KCM's flagship products, grew by 10% compared to the same period last year, and the number of machines that Kobelco sold increased considerably. Private investment was active, and, as the number of machines in stock decreased, demand for new machines increased from the need for replacement. KCM also reinforced the purchase and sales of used machines, responding to the growing demand for used machines in overseas markets.

Also, as environmental standards tighten, Kobelco has successively launched two environmentally-friendly models starting in June this year: the SK125W, a wheel excavator which acquired regulatory approval of on-road Tier 3 exhaust emissions for the first time in the Japanese industry; and the SK200/330, a hydraulic excavator that meets the requirements of the New Emission Control Law, also a first in the Japanese industry.

To respond to the global increase in demand for mini excavators, Kobelco established the Ogaki Plant in Gifu prefecture in April this year to integrate the production systems of mini excavators and further enhance cost competitiveness. At the Hiroshima Plant, Kobelco focused on increasing the production of hydraulic excavators by utilizing spare capacity generated when the production of mini excavators was shifted to Ogaki. However, new challenges in production have arisen because the procurement status of parts is very tight and Kobelco's production capacity cannot meet increased demand.


In the fast-growing Chinese market, Hanzhou Kobelco Construction Machinery Co., Ltd. (Hangzhou, Zhejiang Province), which formally began volume production in October last year, and the first plant, Chendu Kobelco Construction Machinery Co., Ltd. operated smoothly under the two-location production system. As a result, Kobelco was able to respond to demand both inland and on the coast and increase its production and sales volume far beyond the initial forecast. Kobelco increased its market share as well.

In building an optimum global production system, the second production plant in China, which is now intensively producing the fabricated components of excavators, has started to provide some of those parts (arms and crawler frames) to the plants within the Kobelco Group in Japan and the United States.

As for sales and services, Kobelco has started operating five service centers and integrated sales and servicing functions to respond to customers needs.

Overseas (excluding China)

Based on its global alliance with CNH, Kobelco made efforts in 1) enhancing business focusing on the Asia-Pacific region, which is Kobelco's main territory, and 2) further reinforcing joint ventures with CNH in North America and Europe.

In the Asia-Pacific area, demand in Southeast Asia was uneven; demand decreased in Thailand due to political unrest, while demand in Indonesia recovered from a previous adjustment phase. Kobelco was able to continue increasing its share in these areas, through the aggressive expansion of its networks and strong sales promotion.

In the joint venture with alliance partner CNH Global N.V., Kobelco made progress with licensing its technology to overseas plants to make machines that meet Tier 3 exhaust emission regulations in Europe and the United States. In addition, Kobelco increased the number of hydraulic excavators provided to CNH on OEM, seizing an opportunity provided by the steady markets in Europe and the United States, the fast-growing Russian and Middle Eastern markets that are expanding with infrastructure construction and resource development, and other emerging markets.

[Outlook for Fiscal 2006]

In the second half of FY2006, there is concern over the forecast of the U.S. economy and its lagging housing construction market, as well as crude oil prices, and currency fluctuation. However, it is anticipated that the world construction equipment market will continue to be strong, led by the dynamic growth of markets in China, where demand has exploded due to infrastructure construction and resource development, and other emerging countries, such as BRICs (Brazil, Russia, India and China).

In this context, the Kobelco Construction Machinery Group will focus on a creating a business enterprise that can weather changes-a priority under the FY2006-FY2008 Medium-term Management Plan. In particular, Kobelco will make efforts to overcome the challenges that arose in the first half of FY2006 and further enhance its production and procurement capabilities as the top priorities for the future.

Full-year Consolidated Forecast for FY2006

In millions of yen Net sales Operating
Net income
Consolidated 220,000
Figures in brackets [ ] show the percentage change as compared with the same period last year.
Figures in parentheses ( ) denote minuses.
The currency exchange rates set for the second half of FY2006: $1=¥110, 1Euro=¥135

*The above forecast is based on the data available as of the date of this announcement. The actual results may significantly differ according to various factors in the future.