November 6, 2008
Kobelco Construction Machinery’s Semiannual Financial Results for Fiscal Year 2008 (April 1, 2008 - September 30, 2008)

[General Market Conditions]

The domestic construction machinery market has been facing severe conditions due to low public investment, the decline in private sector housing investment, and lower motivation for capital investment in the private sector, which had been relatively strong. Furthermore, replacement demand was stagnant due to a reduction in the export of used equipment. Gross demand for hydraulic excavators has been low, dropping more than 20% over the same period the previous year.

With regard to the overseas construction machinery markets, financial instability, which started with the subprime loan issue in the U.S., has spread to other parts of the world, and decline in construction demand in Europe has become apparent. The Chinese market, which has been supported by constantly-growing vigorous demand, grew more than 30% over the same period of the previous year. However, the growth rate decreased slightly, affected by the economic loss caused by the Great Sichuan Earthquake and reduced housing construction on the coastal area. The Southeast Asian market, where direct impact of the subprime loan issue was small, continued to be strong in general.

While demand declined in three major areas, namely, in Japan, the US and Europe, the Kobelco Construction Machinery Group was able to increase sales in both the domestic and overseas markets over the same period of the previous year, with its new low-fuel-consumption models which are favorably received by customers, and by effectively capturing demand in the Chinese and Southeast Asian markets which have been relatively strong.

In summer this year, an integrated plant in Thailand that manufactures hydraulic excavators started operation, as the core production facility for the ASEAN market. In China, foundation work for the relocation of the Chengdu plant as a part of the city’s urban development plan commenced in June this year. These plans nearly complete the production systems in overseas markets where demand exists.

On the other hand, although sales prices have been revised in order to alleviate the impact of production cost increases due to the surge in material costs, the sharp cost increases have not been absorbed fully by such efforts.

As a result, Kobelco Construction Machinery’s semiannual financial results for Fiscal 2008 (April 2008 – September 2008) were as follows.

Semiannual Financial Results for FY2008

Note: Figures less than one million were rounded down.
Percentages denote change compared with the same period of the previous year.
Figures in parentheses [ ] denote decreases.

Domestic consolidated sales dropped 4.4% over the same period of the previous year to 53.4 billion yen and overseas consolidated sales rose 17.0% over the same period of the previous year to 103 billion yen. Total consolidated sales rose 8.6% to 156.5 billion yen. Overseas consolidated sales made up 65.8% of total consolidated sales, and the percentage of overseas sales increased further over the same period of the previous year on a consolidated basis.

[First half of FY2008: Review by Geographic Area]

Japan

In Japan, three pillars supporting the market – public investment, private sector construction investment and private sector capital investment – slowed due mainly to the impact of the revised Construction Standard Law and the review of the tax revenue earmarked for road construction. In addition, due to sharp increases in crude oil prices, material prices and other factors, anxiety over new investment has become apparent. The number of machines sold decreased considerably over the same period of the previous year.

Incidentally, Kobelco products have been gradually recognized for their low fuel consumption, and won the Good Design Award for achieving a significant reduction in fuel consumption and noise.

Although price increases have been made to cope with the increasingly difficult sales environment, sharp cost increases have not been fully absorbed by such efforts.

China

Even in the Chinese market which has been relatively strong, gross demand growth has decelerated, as suggested by the shift in the quarterly demand growth rate over the same period of the previous year, which was 53% for the first quarter, 13.2% for the second quarter and 9.8% for the third quarter. The real GDP (gross domestic product) had been growing at a double-digit rate since 2003, but the growth rate dropped to 9% in the most recent June-September quarter, indicating a slowdown in the economy.

China was hit by the Great Sichuan Earthquake in May this year. Fortunately, Kobelco’s business activities resumed smoothly without suffering severe damage. Plans call for Kobelco’s Chengdu plant to move to a new location in the city. In June this year, land leveling work started at the new site and foundation work is presently being carried out. It is expected that there will be a gradual shift in the nature of demand from recovery from the devastation of the quake to demand for reconstruction. Kobelco is working to meet that demand through its fully-prepared production system.

Kobelco was able to secure sales volume that exceeded the increase in gross demand through raising sales price in order to cope with the sharp rise in material costs.

The Chinese government is taking measures with flexible fiscal and monetary policies, and consumer spending is being boosted by agricultural reforms and wage increases in rural areas. Therefore, despite some uncertain factors, the Chinese market is expected to maintain comparatively steady growth.

Overseas (excluding China)

In the overseas markets, Kobelco made efforts to expand business focusing on the Asia-Pacific region, which is its main territory. Within the Asia-Pacific region, in Southeast Asia, an integrated plant for manufacturing hydraulic excavators started operation in summer this year in Thailand. This plant is considered the main manufacturing facility in the region. Southeast Asian countries have had small negative impact from the subprime loan issue which originated in the U.S., and thus gross demand increased by approximately 50% over the same period of the previous year.

In Europe, gross demand decreased more than 20% over the same period of the previous year.

Although total exports of excavators have been strong, this was because reduced exports to the United States and Europe have been offset by increased exports to China, Southeast Asia and other emerging markets.

[Key Issues in the Future and Outlook for Fiscal 2008]

In the second half of Fiscal 2008, housing investment is expected to continue slowing down not only in the US but also in Europe, Japan and China. It is possible that the deceleration of economic activities will not be limited to housing investment, but will occur extensively. Should the drop in the crude oil price continue, it would have some favorable impact, but it would affect resource development and alternative energy development. Other factors of concern include foreign exchange fluctuations and changes in material prices.

The Southeast Asian market was buoyant, supported by demand in the Indonesian palm business, logging business and mining business. However, even in this market, demand is declining in both the palm and logging businesses, with the mining business being an exception. In addition, because banks are unwilling to lend due to the shockwaves of the global financial turmoil, loan facilities are weakening, and sales activities are becoming stagnant. The situation is feared to worsen in the second half of FY2008.

Furthermore, in the European market, decline in real demand due to the financial crises is becoming apparent. Even in the Russian market which has been strong due to demand for crude oil and mineral resources, demand is decreasing sharply, affected by events such as the conflict in Georgia.

The global economy is moving from slowdown to recession. Each country has taken measures to dispel the financial insecurity, but it is now hoped that they will take new measures to boost demand, such as public investment which would have a more pervasive effect, as the next step.

Under this uncertain and fast-changing business environment, profitability is already worsening since entering the second half of FY2008, and it is expected that the situation will worsen further in the future. The Kobelco Construction Machinery Group will strive to grasp customer needs effectively in each area and expand sales of fuel-efficient, high-quality products, while at the same time making efforts to revise sales prices. In the field of manufacturing, it will focus on reducing total costs through reviewing increased material prices, improving production efficiency thoroughly and reexamining all production processes.

Kobelco will formulate the next Medium-Term Business Plan (FY2009 – FY2011) aiming at achieving sustained growth of the business, while dealing with the current difficult economic environment.

Forecast for FY2008

Notes:
Percentages denote the percentage change as compared with the previous year.
Figures in parentheses [ ] denote decreases.
Exchange rates set for the second half of FY2008: US$1=100 yen; 1 Euro=135 yen

*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 future factors.