Dialogue with an Analyst

Sakamaki   In November 2023, three Toyota Group companies—namely, Toyota Motor Corporation, Toyota Industries Corporation, and AISIN CORPORATION—announced the disposal of their DENSO shares. Subsequently, DENSO also announced that it would dispose of all its shares of Toyota Industries and AISIN. What is causing these changes?

Matsui   I have always had doubts about the business practice of cross-shareholding. When I became the officer in charge of financial strategy in 2016, we began systematically disposing of shareholdings. We reached a point where any further reduction in our cross-shareholdings would inevitably involve tackling the issue of our Toyota Group company shares. What is important to us is strong governance, capital efficiency, and shareholder-oriented business management. In order to accelerate investment in growth and develop competitive businesses, we must be prepared to transform existing industrial structures. Even though capital ties may to some small degree strengthen intra-group unity, the rationale for a subsidiary to hold shares of other group companies is weak and out of step with the times.

Based on our commitment to unwinding cross-shareholdings, we steadfastly discussed the matter with each company over the span of two years. Recently, we reached a general agreement on cross-shareholdings. DENSO shares were disposed of first to precipitate a trend toward the dissolution of cross-shareholdings. In fiscal 2024, we disposed of all our shares in eight companies, including seven Toyota Group companies, and this trend will not be reversed.

Sakamaki   Although I had been aware of this trend, I was actually surprised when I heard the news. I was very impressed both by the scale of the disposal and by the fact that DENSO actually took the lead in carrying it out.

Sakamaki   Recently, you mentioned acquiring a substantial amount of treasury stock. Many thought this would entail buying back all the DENSO shares disposed of in the unwinding of cross-shareholdings. In reality, however, only a portion of the shares were bought back.

Matsui   Regarding the use of cash, we must give priority to investing in growth. The unwinding was also a perfect opportunity to adjust our shareholder composition. Increasing the number of non-Japanese institutional investors and individual shareholders, who have different investment patterns, has been a major management task for some time. The achievement of an optimal balance between these two types of investor will stabilize our share price and lower the cost of capital.

Therefore, in the fall of 2023 we made our shares appealing to a wider group of investors by executing a four-for-one stock split and allocating 80% of the DENSO shares available for disposal to individual investors. As a result, DENSO’s individual shareholders have increased by approximately 100,000 compared with their level at the end of the previous fiscal year. We will continue efforts to gain support from a broadened base of shareholders.

Sakamaki   What will you do with the cross-shareholdings that remain in your possession?

Matsui   Decisively and without exception, we will reduce cross-shareholdings in line with the disposal policy determined annually by the Board of Directors. As we have previously explained, by the end of this year at the latest we will dispose of the shares of all the component companies of the Toyota Group with respect to which an announcement was made in November 2023 on our policy of reducing cross-shareholdings, or we will set out concrete steps toward their ultimate disposal. While our shares of Toyota Motor itself are not defined as cross-shareholdings, we are including them in our considerations on cross-shareholding reduction rather than making them an exception. Outside the Toyota Group, in May 2024 we disposed of more than half of our stake in Renesas Electronics Corporation. How has the market viewed these efforts?

Sakamaki   DENSO is seen as having stiffened its resolve to dispose of cross-shareholdings. At least that is how I view DENSO.

Matsui   Both Toyota Motor and Renesas Electronics are very important partners for us. Even if our capital relationships cease, I am confident that we will be able to maintain and further strengthen our existing relationships. In principle, we will dispose of all cross-shareholdings except those that are reasonable to hold in terms of business strategy.

Sakamaki   How will you use the huge amount of cash generated through the disposal of shares in other companies?

Matsui   The cross-shareholdings and other assets to be disposed of amount to roughly ¥2 trillion. The proceeds will be used to invest in growth and return profits to shareholders. Our growth investments will expand businesses by extending them along two vectors: from internal combustion engine products toward CASE-related products and from automotive fields toward non-automotive fields.

In particular, we are currently focusing on the field of power semiconductors, which are indispensable for the electrification of cars. We have technologies and products for next-generation power semiconductors. However, we believe that we can further strengthen our position in this field by stepping up the pace of vertical integration efforts, including active consideration of large-scale M&As. As this field presents us with potential not only for expansion in the automotive industry but also for horizontal expansion into industrial equipment and other fields, we want to grow the semiconductor business into a new earnings mainstay. In determining the feasibility of M&As, however, we use more than 100 different hurdle rates. Rather than acquiring companies at high prices, we will consider M&As that can generate the most powerful synergies.

Next after the power semiconductor field is the software field. As cars become more electrified and sophisticated, in-vehicle systems must be controlled in complex, coordinated ways. Software is key to such control. Accordingly, we will focus on acquiring and training personnel capable of designing larger-scale software that is challenging to realize.

In parallel with active investment in the aforementioned fields, we will endeavor to enhance shareholder returns even further by keeping DOE (dividend on equity ratio) in mind and steadily raising the level of dividends. Also, given our currently undervalued share price, we will continue considering flexible, large-scale acquisitions of treasury stock. Through these measures, we intend to reduce the equity ratio to around 50% and create a more leveraged capital structure.

Sakamaki   In the past, DENSO was plagued by a chronic decline in capital efficiency due to the accumulation of cash. However, now that you have clearly set out your policy, my expectations have changed, and I believe that sustained improvement in ROE is likely in the future. I think the views of investors are changing as well.

Sakamaki   The key to the future of the automotive industry is the trend toward software-defined vehicles (SDVs). If the key to the value of cars shifts from hardware to software, and added value begins to stem from a different set of processes, companies like Tesla, Inc. could emerge in Japan. When thinking about exactly where such companies might come from, I get the strong impression that DENSO has this type of potential.

Matsui   Software creation is a business that requires the investment of enormous resources and straddles multiple original equipment manufacturers (OEMs) (automotive manufacturers). For OEMs to realistically go beyond the vertically integrated business models that they have created would be quite difficult. Only Tier 1 companies capable of developing comprehensive systems can create such software, and we are just such a company. As well as having a strong financial position and technological capabilities, we have built a track record through the accomplishment of many projects. Moreover, we are adept at designing business models.

With the aim of creating future value in a wide range of fields beyond the boundaries of an automotive component manufacturer, I want to enable as many people as possible to see that DENSO is a company with solid growth potential.

Sakamaki   Japan’s automotive industry has long been a contributor to the country’s economy. Unfortunately, however, Japan has not developed any other industries with similar international competitiveness. Recent years have made this absence even more conspicuous. As Japanese society as a whole loses its dynamism, the emergence of a company that is from the very same automotive industry and that breaks through existing industrial structures would be immeasurably significant. I look forward to seeing DENSO make even more dramatic advances globally and growing into a new driver of Japan’s economy.