November 9, 2010
Kobelco Construction Machinery’s Semiannual Financial Results for Fiscal Year 2010 (April 1, 2010 - September 30, 2010)

General Market Conditions

In the domestic construction machinery market, signs of recovery have begun to appear, following the global recession that began in autumn two years ago, which severely curbed investment. Although public investment still remains sluggish, renewal demand in Japan for new machines has gradually been recovering, centered on the rental business, with recovery in private-sector capital investment and the recession bottoming out. Regarding the aggregate demand for hydraulic excavators in the first half of fiscal 2010, demand increased from the same period last year by over 30% for heavy excavators and slightly under 20% for mini excavators.

With regard to the overseas construction machinery markets (in the January–June period), recovery in global demand has made some progress. In heavy excavators, aggregate demand in China and Southeast Asia doubled over the same period last year. Demand in the United States and Europe also started showing signs of bottoming out. Demand recovered from the same period last year, increasing over 20% in North America and a little less than 20% in Europe, where the financial turmoil still continues.

Emerging countries, in Southeast Asia in particular, saw major gains. In terms of excavators alone, China as a single nation has become a huge market accounting for slightly under 60% of the aggregate world demand.

Demand has shifted from major developed countries such as Japan, the United States and Europe to emerging countries, particularly China and Southeast Asia. On this background, the Kobelco Construction Machinery Group successfully took advantage of the boom-bust cycle, as its fuel-efficient state-of-the-art machines were highly evaluated. Market share increased in various areas, not only because fuel-efficient products were well received by customers, but, also as a result of improved parts service and expansion of a detailed service network.

Kobelco Construction Machinery Group started its Medium-Term Management Plan from the first half of fiscal 2010 and aims to:
- Specialize in hydraulic excavators – highly versatile machines with the highest growth.
- Focus its management resources on China and other rapidly growing emerging markets, in particular, the APAC region (including India), and place an emphasis on speed.

Based on these core concepts, the Group has been focusing on realizing its Management Plan for global growth, while tackling the following specific challenges: “Further grow business in China,” “Establish a foundation for business in India, the second pillar after China,” “Increase profits in Southeast Asia” and “Deploy globally the business model established in Japan.”

In the semiannual financial results for FY2010 (April-September 2010), Kobelco Construction Machinery marked record highs in net sales, operating income, ordinary income and net income for the term as shown below.

Financial Results for First Half of FY2010

Notes:
Figures less than 1 million were rounded down.
Figures in parentheses ( ) show the percentage changes over the same period of the previous year.

With regard to consolidated net sales, domestic sales were 40.1 billion yen (+ 15.6% year-on-year), and overseas sales were 135.4 billion yen (+ 94.7% year-on-year), bringing the total consolidated net sales to 175.6 billion yen (+ 68.3% year-on-year). Overseas consolidated sales accounted for 77.1% of the total consolidated sales. The percentage increased further from the same period of the previous year (66.7%).

First half of FY2010: Review by Geographic Area

Japan

In Japan, although public investment remained sluggish, customers’ cautious stance on investment improved and renewal demand for new domestic machines has recovered, centered on the rental business, against the backdrop of recovery in private-sector capital investment and the recession appearing to have bottomed out.

The domestic aggregate demand for heavy excavators increased over the same period last year by over 30%. Kobelco Construction Machinery sold over 50% more units over the same period last year, owing to its efforts to carefully respond to customers’ needs. The low-fuel consumption of Kobelco machines has become more widely recognized and these low-noise machines were registered under NETIS (New Technology Information System), which is administered by the Ministry of Land, Infrastructure, Transport and Tourism).

In addition, activities at the Hiroshima Factory to improve productivity by 30% (under the K30 Dynamite program), which began at the onset of the global recession, started bearing fruit. Profits were supported by productivity improvements and the increased production volume from recovery demand.

In order to enhance the function as a “control tower” for global production, while at the same time maintaining and strengthening its “monozukuri-ryoku,” or manufacturing capabilities, and development capabilities at its domestic bases, Kobelco restarted considering the plan of relocating the Hiroshima Factory to the city’s Itsukaichi district.

Kobelco will continue focusing on the domestic market and make further efforts to strengthen its revenue base by undertaking thorough productivity improvements at its production locations.

China

The aggregate demand in China in the first half of 2010 sharply increased about twofold over the same period last year. As a result of the 10-year extension of China’s Great Western Development strategy, demand remained strong due to infrastructure development in inland China in addition to the RMB 4-trillion economic stimulus package. As the new Kobelco plant that had relocated to a new location in Chengdu in December 2009 to double production capacity started full-scale operation in January 2010, we could successfully meet the rapidly growing demand for machines. We developed activities for enhancing the customer service system, while responding to the rapid demand increase at the same time.

As a result, sales grew 2.2 times over the same period last year, exceeding market growth. Kobelco also strengthened its service system and response to the sharp rise in demand. Specifically, we focused on improving major service centers directly owned by makers, and developing and building up the 4S (Sales, Spare parts, Service and Survey) dealers under our direct management.

Overseas (excluding China)

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

The APAC region has emerged from the global recession relatively earlier than other areas, and demand also started recovering as financing conditions for customers improved. In countries such as Indonesia, logging-related demand, and demand from coal and mining development began rapidly recovering.

In Indonesia, the largest market in Southeast Asia, Kobelco continued to expand its sales bases. Kobelco also increased and improved its service network, service staff, and parts warehouses. Marking its 10th anniversary, PT. Daya Kobelco Construction Machinery Indonesia, Kobelco’s sales company in Indonesia, is focusing on improving the presence of the KOBELCO brand.

Thai Kobelco Construction Machinery’s plant in Thailand has worked on expanding its production menu and improving its production system, which is helping to build up a global production network.

With regard to our plant in India, the project is going forward smoothly with production to start in January 2011 as scheduled.

Composition of the Global Market

In the first half of FY2010, the composition of the global market has changed more significantly than a year ago. Looking at the changes in net sales of each area, in the first half of this year, sales in developed regions such as Japan, the United States and Europe accounted for 25.3% (35.4% a year ago), and sales in China, Southeast Asia, Australia, and other emerging countries accounted for 74.7% (64.6% a year ago) of total net sales. The composition of the global market has shifted, with emerging markets in Asia, especially China, increasing their proportions.

In an era of expanding globalization, we will continue to maintain our stance of actively accessing growing markets, while maintaining market-based principles.

Key Issues in the Future and Outlook for FY2010

The self-sustaining growth of emerging countries based on their huge populations and resources works as an engine for growth in the world economy. We expect that for the time being the emerging countries will lead the construction machinery markets of the world.

Among rapidly growing emerging markets, the Kobelco Construction Machinery Group conducts business activities concentrating on the APAC region, including China, Southeast Asia and India.

As for global production, we now have clear ideas on initial goals for our medium and long term tasks as follows:
 1) Increase production at two bases in China
     (Inland area - Chengdu in Sichuan Province; Coastal area - Hangzhou in Zhejiang Province)
  2) Expand the production menu of the Thai Plant
     (Eastern Seaboard Industrial Park in Rayong Province).
 3) Begin full-scale operation in India
     (SRI CITY Industrial Estate in Andra Pradesh) (Scheduled in January 2011).

In the future, we will construct a global network for procurement, in addition to expanding our parts service and sales bases network.

In order to providing for lasting business development in this uncertain and tumultuous business environment, we will work on boosting our competitiveness based on the Medium-Term Management Plan by implementing measures such as enhancing technical development capabilites to produce differentiated products, further pursuing the reliability of Kobelco, reducing costs, reforming distribution, and enhancing our presence in expanding emerging markets.

Forecast for FY2010

Notes:
The currency exchange rate assumption set for the second half of FY2010:
US$1=85 yen; 1 Euro=110 yen.

Figures in parentheses ( ) show the percentage change compared with the previous year.

*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.