A Message from the President | AnnualReport2012 | DENSO
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ANNUAL REPORT 2012

A Message from the President

Steadfastly implementing our Global Mid-term Policy to create sustained growth, we will transform social changes into business opportunities.

Review of Three-Year Structural Reform Plan

Following the collapse of Lehman Brothers, and facing numerous changes in conditions surrounding the automobile industry brought on by the global financial crisis, the DENSO Group formulated its Structural Reform Plan in fiscal 2010. Under the plan, we pursued initiatives centered on "building a leaner and stronger corporate structure" and "establishing an approach for future growth." Since then, we have made steady progress with respect to building the new structure. In fiscal 2012, for example, our fixed costs were around ¥100 billion lower than the peak of fiscal 2008. These sorts of achievements have shown through in our results.

As for our approach for future growth, from the perspectives of product and technological development in the field of fuel economy, we developed and marketed products for stop/start systems and new technologies contributing to a reduction in fuel consumption in gasoline engines of around 20% compared with conventional technologies. For emerging countries where the markets are expanding, we developed products that meet market needs, established technical centers, and reinforced our regional R&D systems.

As a result, we developed low-cost products and were able to win a wide range of new orders in emerging countries, especially in Asia. In addition, we embraced challenges in new businesses outside the automobile industry. Specifically, we further expanded our businesses by finding applications for technologies that we have built up ourselves. We also entered the fields of home and car energy management, and health and medical treatment. In the year under review, the final year of the plan, we forged ahead with structural reforms and focused on building a foundation for five and ten years into the future.

DENSO Group's Global Mid-term Policy

Amid rapid changes in business conditions in the automobile industry, the speed of technological innovation is gathering more and more pace. Furthermore, automakers are forming alliances with IT companies and others, not just each other, prompting a rush of new entries into the sector. Viewing such changes as opportunities, at the end of fiscal 2012 we formulated the DENSO Group's Global Mid-term Policy that prescribes the three overall strategies of meeting the challenge of expanding business to achieve sustained growth, evolving into the world's first continually creative company, and driving global collaboration across the Group and implementing speedy management.

In the DENSO Group's Global Mid-term Policy, for fiscal 2016 we are targeting consolidated net sales of ¥4 trillion and an operating margin of 8%. For a start, we will aim for sales growth in excess of vehicle production growth. Efforts to broaden sales are an important factor in this process, and therefore we will promote technological development to support sales expansion while at the same time strengthening cost-competitiveness. At the business segment level, in the rapidly growing Asia & Oceania region, we will target substantial sales increases. At the client level, in addition to the Toyota Group, a mainstay client for a long time, we will boost sales to other customers while focusing on the aftermarket business and new businesses. Based on this mid-term policy, we will actively embrace the business expansion challenge as we seek to become a corporation that delivers sustained growth.

Going forward in line with the DENSO Group's Global Mid-term Policy, we aim to pursue the three core initiatives of developing world-first products, acting quickly to achieve our objectives, and driving global collaboration across the Group worldwide. Below is an explanation of these core initiatives.

1. Striving for World-Class Excellence

DENSO's technological prowess forms the wellspring of its competitiveness. With this in mind, we will provide society with new levels of value by strengthening our ability to consistently develop "world-first" technologies. Moreover, product concept realization and creation of products go hand in hand. Accordingly, we will build optimal production systems for winning against global competition, to make our factories extremely cost competitive. In order to maintain competitiveness amid the current difficult strong-yen environment, we will create domestic factories that manufacture products with outstandingly low costs so we are competitive against imported products and our exports are competitive against local products. In these ways, we will strive to maintain production volumes and employment in Japan.

2. Swing into Action

Seeking to deliver maximum outcomes with limited resources, we will reorganize work processes and reform our corporate culture to facilitate independent thinking and decision-making. This should make us quicker as an organization.

3. Innovation through Global Collaboration

Maintaining a presence in regions close to markets is a key factor in addressing diversified needs and supplying world-first products in a speedy manner. In order to demonstrate increasingly greater synergies as a group, we will step up collaboration between the parent company and other DENSO Group members on a global scale.

In fiscal 2016, the final year of the DENSO Group's Global Mid-term Policy, we are targeting consolidated net sales of ¥4 trillion and an operating margin of 8%. For a start, we will emphasize sales growth in excess of vehicle production growth. Efforts to broaden sales are an important factor in this process, and therefore we will promote technological development to support sales expansion while strengthening cost-competitiveness. In the rapidly growth Asia & Oceania region, we will target substantial sales increases. At the client level, in addition to the Toyota Group, a mainstay client for a long time, we will boost sales to other customers while focusing on the aftermarket business and new businesses. Guided by the mid-term policy, we will actively embrace the business expansion challenge as we seek to become a corporation that delivers sustained growth.

(For more details, please see DENSO Group's Global Mid-term Policy)

Fiscal 2012 Review and Fiscal 2013 Outlook

In the year under review, production declined significantly in April and May following the Great East Japan Earthquake. Nevertheless, the DENSO Group stood united in an effort to overcome the situation, and by July production had recovered to pre-disaster levels. In the second half of the fiscal year, production was impacted temporarily by flooding in Thailand, but efforts to respond to production increases by clients enabled us to raise our production volume above the previous fiscal year level. With respect to sales and earnings, we posted year-on-year increases in Japan, but decreases in other regions. Operating income declined in North America and Asia & Oceania due to the impact of natural disasters, foreign exchange losses stemming from the strong yen, and forward-looking investments in technical centers and other areas.

In the year ahead, the Japanese automobile industry is expected to see a year-on-year increase in demand due to the benefits of demand from post-disaster restoration. We anticipate more brisk demand driven by emerging countries. Overall, therefore, we forecast an increase in sales compared with the previous year. While the near-term outlook appears healthy, our performance may be affected by the termination of eco-car subsidies in Japan in the latter half of the period, as well as instability in Europe, among other macroeconomic factors.

Shareholder Returns

We strive to meet the expectations of all shareholders through consistent increases in cash dividends, giving due consideration to a comprehensive range of factors, including consolidated performance and the dividend payout ratio. In light of our recent performance and the operating environment, we declared an annual dividend of ¥46.00 per share for fiscal 2012, unchanged from the previous year.

Going forward, we will step up efforts to enhance returns for all shareholders.

Dividends per Share

July 2012
Nobuaki Katoh
Nobuaki Katoh
President and CEO