November 6, 2009
Kobelco Construction Machinery’s Semiannual Financial Results for Fiscal Year 2009 (April 1, 2009 - September 30, 2009)

[General Market Conditions]

The domestic construction machinery market declined sharply, affected by the global recession that started in autumn last year, in such areas as public investment, private-sector construction investment and private-sector capital investment. Market conditions have been severe and due to uncertainty about the future, there is a persisting stance among customers to reduce investment. In addition, the used equipment market continued to be weak along with cooling demand for new equipment, although exports to some destinations such as China recovered partially. Regarding the aggregate demand for hydraulic excavators in the first half of fiscal 2009, the situation was severe with demand for heavy excavators declining more than 60% and that for mini excavators declining nearly 50%.

With regard to the overseas construction machinery markets, they too, were hit directly by the global recession. In particular, demand in the developed regions such as North America and Europe has been lagging. The Chinese market has been the most solid market among all the markets in the world as reconstruction from the Great Sichuan Earthquake has been carried out in earnest and the economic stimulus measures amounting to 4 trillion RMB have been gradually taking effect. China has now grown into the world’s largest market for construction equipment.

Demand in Southeast Asia, which had been at a low level due to the freezing of funding, is recovering steadily along with the recovery of financing activities. Asia has been increasing its presence in the global market.

While demand remains low in three major areas - Japan, the United States and Europe - Kobelco Construction Machinery Group was able to minimize the impact of the downward wave of the world economy with its new low-fuel-consumption models, which have been favorably received by customers, and by effectively filling customers’ needs in the Chinese and Southeast Asian markets. In a challenging market environment, Kobelco was able to increase its market shares in the domestic market and the buoyant Chinese market over the same period of the previous year.

During the first half of FY2009, while freezing large-scale capital investments amid the unprecedented economic crisis, Kobelco laid down solid stepping stones in growing markets and made investments aimed at improving distribution for enhanced competitiveness. It carried out cost-reduction measures and activities to improve productivity 30% with the cooperation of suppliers. Kobelco also made strenuous efforts to reduce spending.

Regarding the stepping stones toward the future, the relocation of plants in Chengdu, Sichuan Province in China progressed smoothly. Preliminary operations at the new facility began in October this year, and an opening ceremony will take place in late December this year. In the Indian market, which is expected to become the second largest market following China, a sales subsidiary was established in November 2006, which had been exploring business opportunities in both sales and service. In October this year, Kobelco announced it would build a plant to manufacture hydraulic excavators locally and make a full-scale entry into the Indian market. Construction will start in April next year and sales of locally manufactured machines will start in 2011.

Kobelco reformed domestic distribution as well. On October 26, construction of a shipment building at the Itsukaichi Port in Hiroshima, Hiroshima Prefecture was completed, which was decisive in consolidating domestic distribution. In addition, the results of various activities, such as consistent productivity improvement activities for enhancement of competitiveness, were becoming evident.

Kobelco incurred impairment loss of approximately 3 billion yen in connection with the deteriorated performance of a European subsidiary, a joint venture with CNH, our global partner. This put pressure on corporate profits.

As a result, Kobelco Construction Machinery’s semiannual financial results for FY2009 (April 2009 – September 2009) were as follows.

Semiannual Financial Results for FY2009

Notes:
Figures less than one million were rounded down.
Figures in brackets [ ] show the percentage change as compared with the same period of the previous year.
Figures in parentheses ( ) denote decreases.

With regard to consolidated net sales, domestic sales were 34.3 billion yen (a 35.0% decrease over the same period of the previous year), and overseas sales were 69.6 billion yen (a 32.5% decrease from the same period of the previous year), bringing the total consolidated net sales to 104.3 billion yen (a 33.4% decrease from the same period of the previous year.) Overseas consolidated sales accounted for 66.7% of the total consolidated sales; the percentage increased further from the same period of the previous year (65.8%).

First half of FY2009: Review by Geographic Area

Japan

In Japan, three pillars supporting the market - public investment, private-sector construction investment and private-sector capital investment - slowed down. Customers in the domestic market have been holding back investment due to the condition of the world economy and their anxiety over the future. Sales volume decreased significantly as compared with the same period of the previous year. Measures to improve efficiency have been taken in order to cope with the worsening sales environment. In April this year, five domestic sales subsidiaries were unified into two sales subsidiaries, one covering eastern Japan and the other western Japan. Although Kobelco products have been gradually recognized for their low fuel consumption, it was not effective enough to compensate for the decline in aggregate demand.

China

In the Chinese market, although aggregate demand in the first half of 2009 (January - June, 2009) decreased about 10% over the same period of the previous year, the effects of the full-fledged reconstruction from the Great Sichuan Earthquake and the economic stimulus measures amounting to 4 trillion RMB have become evident.

While sales decreased in other regions of the world, net sales in the first half of 2009 increased 11.3% over the same period of the previous year. China is the only market where sales during this term exceeded the sales in the first half of the previous year, when sales were buoyant in all parts of the world. As a result, the Chinese market is outstanding among all the regional markets.

Overseas (excluding China)

Additionally, in the APAC region, which is Kobelco’s main territory, the impact of the global recession was unavoidable. Demand decreased steeply, affected by the abrupt withdrawal of the funds provided to emerging countries from all over the world. However, as the funds from the world that had been frozen started to gradually become available, demand in logging related businesses, palm oil plantation and coal and mine development have been recovering gradually mainly in countries such as Indonesia.

In regions such as Europe, the United States and Russia, which are covered by CNH, demand continues to be sluggish due to deep-rooted financial insecurity and a strong feeling of economic uncertainty.

Composition of the Global Market

In the first half of FY2009, the composition of the global market has changed significantly. Looking at the changes in net sales of each area, in the first half of the previous year, sales in developed regions such as Japan, the United States and Europe accounted for 49.0%, and sales in China, Southeast Asia, Australia, and other countries accounted for 51.0% of total net sales. In the first half of this fiscal year, however, sales in the former regions accounted for 35.4% and that in the latter regions accounted for 64.6% of total net sales. The composition of the global market has shifted, with emerging markets in Asia, especially China, overwhelmingly increasing their proportions.

When comparing the proportion of each market in the total net sales in the first half of FY2008 and FY2009, the portion of the Japanese market decreased slightly from 34.2% to 33.3%; the portion of the Chinese market increased significantly from 29.3% to 49.0%; portions of the Southeast Asian market and the Australian market declined slightly; and portions of the North American market and European market decreased sharply. The significant event in this term is the rapidly increasing portion of China in total net sales. The Chinese market, which is recovering quickly along with the recovery of the country’s economy, has become increasingly significant.

Key Issues in the Future and Outlook for FY2009

From the second half of FY2009, it is expected that the economy will bottom out as the result of the economic measures taken by each country’s government and markets will show some recovery in Japan and the United States. However, it is expected that the European market will continue to be sluggish. Kobelco sees therefore that the weakness of the markets in Japan, the United States, and Europe, which had been our major markets, will continue for some time.

In the Japanese market, Kobelco will focus its efforts on the sales of environment related products, which are expected to continue to grow, and make efforts to secure sales through capitalizing on its technological capabilities, which are highly valued by customers who recognize the low fuel consumption feature of Kobelco products.

The Chinese market has grown into the world’s largest market. While there may be some upward and downward waves due to the tightening of the economy and economic cycles, the Chinese market is expected to continue to expand for the foreseeable future. In addition to demand arising from the reconstruction from the Sichuan earthquake and the 4 trillion RMB economic stimulus measures, which tend to draw more attention, activities aimed at correcting income disparity such as inviting industries to inland areas from the coastal areas and development of infrastructure are also projected to continue on a medium and long-term basis. In China, local companies are growing and competition is anticipated to become increasingly fierce. From now on, Kobelco will strengthen its business foundation and enhance competitiveness through expanding its product lineup, stepping up its sales capabilities, and improving its service network.

Kobelco looks forward to the growth potential of Indonesia, India and other Asian markets. Business talks have been reenergized in Southeast Asia along with the stabilization of the financial market. The pressing task for Kobelco is to take solid measures to take root in the expanding markets.

Moreover, Kobelco intends to steadily incorporate the outcome of its cost reduction activities and 30% productivity improvement activities into its business.

In this uncertain and fast-changing business environment, Kobelco will formulate the next Medium-Term Business Plan based on its medium to long-term vision aimed at achieving lasting growth of the business. While faced with many issues to tackle, Kobelco will take on various tasks such as enhancing technological capabilities to produce differentiated products; pursuing low fuel consumption and reliability further; reducing costs; reforming distribution; laying down solid stepping stones in the growing markets in emerging countries; and enhancing its competitiveness.

Forecast for FY2009

Notes:
Figures in brackets [ ] show the percentage change as compared with the previous year.
Figures in parentheses ( ) denote decreases.
The currency exchange rate assumption set for the second half of FY2009: US$1=95 yen;
1 Euro=133 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.