May 12, 2010
Kobelco Construction Machinery’s Financial Results For Fiscal Year 2009 (April 1, 2009 – March 31, 2010)

General Market Conditions

The domestic construction machinery market continued to be highly weak on the whole, although regional construction demand was supported by public investments coming from governmental fiscal actions. The market declined sharply as the private sector continued to curtail investment and restrain purchases due to the uncertainty about the future, which stems partly from the change of government and the new administration’s policy to reduce public works. While the market declined, demand for machines with low fuel consumption became increasingly strong, and the image of Kobelco as a supplier of machines with excellent mileage further penetrated the market. Regarding the used equipment market, although the export environment was severe due to the appreciation of the yen, the prices of used equipment recovered due to a shortage of machines, as the purchase of new equipment declined. Due to these factors, the market remained weak.

With regard to the overseas construction machinery markets, conditions were extremely sluggish in developed countries such as the United States and European countries. On the other hand, in China, the 4-trillion-yuan fiscal package widely stimulated the economy, and the economy on the whole recovered rapidly, raising construction machinery demand. In addition, in newly emerging countries in Asia, construction investment increased solidly along with the financial recovery. While exports declined sharply in each country, the economy recovered steadily in countries like Indonesia where domestic demand accounts for a high percentage of the total demand. Construction demand, too, remained solid in these countries.

Current Kobelco products, which are compliant with the Tier-3 exhaust emission regulations, were highly evaluated in markets for their exceedingly low fuel consumption, and as a result, increased their market shares in China, in other Asian countries, and also in Japan.

Kobelco Construction Machinery Group has steadily set down stepping stones in growing markets and carried out activities to reduce cost and improve productivity which are aimed at strengthening competitiveness, while taking emergency measures, such us freezing large-scale capital investment, on the other front. In April 2009, five sales subsidiaries were unified into two sales subsidiaries in order to improve efficiency. During the first half term, inventory adjustments were completed in almost all regions including Japan and the APAC region. Normal production resumed from the second half of fiscal 2009.

In addition, Kobelco consolidated distribution by completing the construction of a shipping building in October 2009 on the land in the Itsukaichi district of Hiroshima City that had been purchased in April 2009 as the future site to relocate the factory. Overseas, the plant in Chengdu, Sichuan Province in inland China, where growth is remarkable, was expanded and relocated in December 2009. The plant in the new location with doubled production capacity started full-scale production in January 2010. Also, sales of hybrid machines with incredibly low fuel consumption started in January 2010. In February 2010, a groundbreaking ceremony was held for a construction of an integrated manufacturing plant in India, where future growth is expected.

Activities that have been carried out steadily with the aims of reducing variable costs (SSS: 5% reduction of variable costs) and improving productivity by 30% (K30 Dynamite) have started to bear fruit. At its manufacturing sites, Kobe Steel integrated “takumi no waza” (craftsman-like skills of senior employees) with the flexible thinking of younger employees.

Through these efforts involving all the employees in the Kobelco Construction Machiery Group, Kobelco managed to achieve a sharp V-shaped recovery with increased profits and decreased revenue.

As a result, Kobelco Construction Machinery’s financial results for FY2009 (April 2009 – March 2010) were as follows.
 

Financial Results for FY2009

Notes:
Figures in brackets [ ] show the percentage increase over the same period of the previous year.
Figures in parentheses ( ) denote declines.

With regard to consolidated net sales, domestic sales were 77.5 billion yen, a 25.0% decrease over the previous year. Overseas sales were 136.8 billion yen, a 12.8% decrease over the previous year. Overseas sales comprised 63.8% of the total consolidated sales, again an increase over the previous year. (Percentage of overseas sales: 58.7% in FY2007; 60.3% in FY2008)

Fiscal 2009: Review by Geographic Area

Japan

In Japan, although the previous government took the largest-ever economic measures which helped to avoid a recession, the new government’s policies such as reducing public works increased anxiety over the future, and therefore, demand for excavators and mini excavators remained at a low level. The aggregate demand for excavators dropped to approximately 10,000 units, which was half of the aggregate demand in the previous fiscal year. The domestic business as a whole was sluggish.

In this severe environment, Kobelco took measures to improve efficiency such as unifying the five domestic sales subsidiaries into two sales subsidiaries, one covering eastern Japan and the other western Japan, at the beginning of the fiscal year. While overall sales volume decreased substantially, the market share for excavators, Kobelco’s main product, increased as customers gradually recognized the benefit of the low fuel consumption of Kobelco machines.

Kobelco also tackled activities to improve productivity and reduce cost in order to strengthen its cost competitiveness. The activities aimed to improve productivity by 30% were called “K30 Dynamite.” Kobelco is working to achieve its targets. The improvement in the production lines, which is a result of collaboration between experienced and younger workers who together collected knowledge and ingenuity from manufacturing sites, is now clearly visible.

China

Although aggregate demand in China in the first half of 2009 (January-June) decreased about 10% over the same period of the previous year, the effects of the RMB 4-trillion economic stimulus package emerged gradually, and demand, which was concentrated in the period right after the Chinese Lunar New Year, did not decline as sharply in the second half of 2009 (July-December), as it did in previous years. Aggregate demand for the entire year increased 24% over the previous year to a little less than 70,000 units. Aggregate demand, including the demand for excavators made by fast-growing Chinese manufacturers, reached a little more than 90,000 units.

In December last year, Kobelco’s main plant in Chengdu in Sichuan Province, was relocated to a new location in the same city with double the production capacity. Full-scale operation began in January 2010. In addition to expanding its production capacity, Kobelco made efforts to enhance its parts business and service structure. With growing recognition of Kobelco as a supplier of machines with excellent mileage and its “full service network,” sales volume in China increased by 47%, which exceeded 24% growth in aggregate demand, leading to an increase in market share.

Most of the 4-trillion-yuan public investment, which was hammered out by the central government, will end in 2010. However, the demand for construction machinery, which started to take on a self-sustaining growth path, is expected to remain at a high level although there are uncertain factors such as tightening of the monetary policy.

Overseas (excluding China)

For the overseas market excluding China, in accordance with the global alliance with CNH, Kobelco developed its business focusing on the APAC region, which is its main territory.

Within the APAC area, sales decreased in Southeast Asia from the beginning of 2009 affected by the global financial crisis. With a steady recovery of GDP due to measures to stimulate domestic demand taken by each country’s government and active financing to support local business negotiations, demand and sales recovered steadily.

In Indonesia, in particular, the largest market in Southeast Asia, Kobelco enhanced its parts business and service structure, expanded sales, and increased its market share in areas with growth potential.

Thai Kobelco Construction Machinery Ltd.’s plant in Thailand, which is Kobelco’s manufacturing base in Southeast Asia, is in full operation.

With regard to the construction of a plant in India, which was announced in October last year, the project is going forward smoothly with production to start in January 2011.

The major management tasks are to put manufacturing, sales and service on track in three major locations in Asia: China, Southeast Asia and India.

In the United States and Europe, which are covered by CNH, demand remained low and conditions continued to be severe.

Key Issues in the Future and Outlook for FY2010

In March this year, Kobelco formulated its “Medium-Term Management Plan for Fiscal 2010-2012,” which starts from fiscal 2010. The key phrases in this plan are: “promotion of globalization” focusing on Asia where long-term growth is expected; “enhancement of technology development capabilities” which will serve as an engine for growth; and “enhancement of manufacturing capabilities.”

Overseas production already accounted for two-thirds of total production in fiscal 2009 in terms of the number of units produced. Production in Japan will continue to amount to around 30% of total production during the three-year period. One of the important points of the plan will be establishing a global engineering center at Kobelco’s Japan headquarters with the aim to achieve total optimization.

Kobelco Construction Machinery Group intends to go back to its roots in the manufacturing business and strengthen its “monozukuri-ryoku” or manufacturing capabilities. In addition to quality improvement, it will make further efforts in activities to improve productivity and reduce costs (Value Engineering) in cooperation with business partners. Regarding sales, the Group will strive to maximize the effects of combining its five sales subsidiaries into a two-sales-subsidiary structure, and also, further cultivate growing markets, China and emerging countries in Asia in particular, from a global perspective.

In five years, Kobelco’s vision is to generate consolidated net sales of 400 billion yen and an ordinary income margin of over 10%.

Forecast for Fiscal 2010

In fiscal 2010, demand is expected to continue to increase in China and Southeast Asia, remain low in Europe, but recover slightly in the United States and Japan. As a whole, demand is expected to return to a growth trend.

Actual figures will not be disclosed publicly in accordance with Kobe Steel Group policy. However, in view of the rapidly recovering markets, Kobelco aims to achieve ordinary income of more than double that of fiscal 2009.