Dialogue
with the Outside Board Members

Schmelzeis　 Amid the ripple effects occurring from the Trump administration’s tariff policies, DENSO has taken appropriate measures to the greatest extent it can as one corporate entity. In anticipation of various future scenarios, the Company is also engaging with its customers and suppliers to build a structure enabling an agile response to such scenarios across the supply chain. For matters that are difficult to address by one company alone, DENSO is advancing collaboration with government and industrial organizations. Overall, DENSO’s response to the challenging operating environment has exceeded my expectations. While maintaining the strategic direction of its business portfolio reshuffling, I believe the Company’s management is demonstrating appropriate leadership, including by adjusting the pace of investment in accordance with the discrepancies that have occurred between DENSO’s previous assumptions, such as the global acceleration of the shift to electrification, and the current situation, where the pace has actually slowed down.

Mitsuya　 The Company has a firm awareness of the factors it can and cannot control and is making the utmost effort to minimize the negative impacts of these factors on the supply chain. Without overreacting to pessimistic information or, conversely, placing too high of expectations on policy changes or the progress of negotiations between nations, DENSO has maintained a stable approach while always looking one step ahead and taking into consideration the global trends of today.

Kushida　 The United States has reversed its stance on such policies as CO₂ emissions reductions and the promotion of electric vehicles. In Europe as well, we have seen some change on a corporate level also diverging from placing the highest priority on environmental issues. It remains uncertain whether these global trends will fully revert to their previous course once the Trump administration comes to a close. In the end, we are dealing with the issue of international cost burden, and we must always be aware of the fact that short-term adjustments will be needed. DENSO fully understands this reality. Based on its sense of responsibility to the automotive supply chain and its pride as a leading Tier 1 company, I believe DENSO, on the whole, is responding appropriately to the current state of affairs.

Mitsuya　 DENSO has made sufficient adjustments to respond to changes in the external operating environment, including restructuring its organization and applying knowledge and technologies horizontally across the Group. At the same time, the Company’s overarching strategy of expanding the possibilities of automotive manufacturing using its own technologies will remain unchanged moving forward. DENSO is also pursuing interesting ideas through its investments in the agricultural sector, which currently faces various challenges in scaling up farming and enhancing productivity.

Kushida　 DENSO has positioned semiconductors and software as focused fields and is stepping up initiatives in these fields accordingly. This decision has been driven by ongoing trends in advancing vehicle technology and providing greater added value. Although car prices have been increasing in recent years, consumers are becoming more concerned with whether these higher prices are justified and whether they receive greater value commensurate with these higher prices. I personally believe that vehicles do in fact deliver greater value that justifies their higher price. Moreover, the source of that value is shifting from mechanical functions to core components such as semiconductors and software, areas in which DENSO excels. Even though DENSO is a B2B auto component manufacturer, we cannot compete on manufacturing efficiency alone in the current era. We absolutely must consider the kind of value we aim to deliver to consumers and society at large. I therefore would like to see DENSO work to recruit and develop the kind of talent that can lead the way with value creation through proactive and flexible thinking.

Schmelzeis　 I also believe that human resources hold the key to DENSO’s sustainable growth. To secure talent capable of leading Monozukuri activities as they shift from the domain of hardware to software, DENSO should be proactive in the promotion of its human resource strategy and seek to achieve differentiation through collaboration with external organizations.

Mitsuya　 The Company will need to be innovative with its recruitment methods if it aims to secure outstanding digital talent. I believe that the shift from regulation-driven Monozukuri to market-driven Monozukuri led by President Hayashi is an extremely important move, and I aim to support its success moving forward.

Kushida　 In terms of securing outstanding talent, it was great to see DENSO implement solid pay raises in fiscal 2026. These pay raises were less a response to recent inflation and more a reflection of DENSO’s clear focus on enhancing employee engagement and investing in human capital.

Schmelzeis　 DENSO’s approach represents a clear departure from the conventional manufacturing mindset of simply curtailing labor costs. It also demonstrates a sound management approach aimed at value co-creation with all stakeholders, from employees to external business partners.

Mitsuya　 One particularly noteworthy development was the announcement of a stock-based incentive system for general employees, which will be introduced at DENSO CORPORATION during fiscal 2026. This system brings together employees and management under the shared goal of enhancing corporate value and ensures that employees also reap the benefits of the Company’s growth. It is a highly commendable effort by a leading company in the Japanese automotive industry.

Mitsuya　 In 2024, the chairman of the Board, Koji Arima, stepped down from his concurrent role as CEO, thereby further separating the roles of management supervision and business execution. Since then, discussions at Board meetings have become further invigorated. As chairman, Mr. Arima is able to organize key discussion points at Board meetings, and through his exchanges with President Hayashi, head of business execution, their shared knowledge has been extremely valuable in helping us understand the background of issues being discussed. This in turn has enabled deeper, more substantive discussion. All of the investment projects proposed at Board meetings have met DENSO’s clear criteria for investment decision-making. However, there have been cases where an investment project was rejected because we, as independent outside Board members, opposed the project after carefully assessing the associated risks.

Schmelzeis　 Each outside Board member is given plenty of time to speak at Board meetings, and if the response to our questions from the executive side lacks concrete detail, Chairman Arima strictly presses them on the matter. Compared with other companies, DENSO maintains a healthy and robust level of discussion at Board meetings.

Kushida　 The ultimate purpose of efforts to enhance governance is to achieve sustainable growth for a company and enhance its corporate value. The question is, are the governance reforms being pursued by corporations today actually achieving that purpose? Recent actions by regulatory authorities seem to stem from frustration over the lack of progress with these reforms, prompting them to issue more far-reaching guidance. Both the requests for the disclosure of sustainability information by the Financial Services Agency and the Guidelines for Corporate Takeovers by the Ministry of Economy, Trade and Industry focus squarely on the substance of management. In this sense, these regulatory authorities are shifting their focus from the formal structures of governance to the essence of management itself. Reforms by DENSO should also reflect this shift. The Company has been working on a continuous basis to improve the effectiveness of the Board of Directors, and I believe it has made a great deal of progress in establishing a framework for sound decision-making. On the other hand, DENSO’s market capitalization has largely been flat. We need to consider what further steps are necessary to ensure that the progress of governance reforms is appropriately reflected in the Company’s share price.

Schmelzeis　 Over the past year or two, our discussions at Board meetings have become more focused on substantive management strategies. In terms of performance, DENSO has achieved record highs in revenue and various profit metrics, and its approach to disclosing growth indicators aimed at further enhancing corporate value is commendable. If the Company is able to achieve its targets for these indicators, an important remaining challenge will likely be how it communicates this success to capital markets.

Mitsuya　 In light of the challenging operating environment of the automotive industry, there is no denying that DENSO will often be evaluated as being simply a part of this industry, given its relationship with automakers. For this reason, it is crucial that DENSO actively promotes its philosophy, uniqueness, and growth potential, so that it can achieve differentiation.

Schmelzeis　 In 2023, the DENSO Group unveiled its policy to reduce cross-shareholdings, primarily those held within the Toyota Group, and has steadily made progress in that regard. Since then, the Company has continued to maintain good relationships with Toyota Motor Corporation and other Group companies, steadily pursuing initiatives such as joint development. As new technologies developed through joint development will ultimately belong to DENSO, the Company stands to gain significantly from these collaborations.

Mitsuya　 Toyota Motor Corporation has extremely strict standards for quality. The question is how DENSO can meet these standards and make proposals that go beyond expectations. DENSO and Toyota have a partnership on equal footing, one in which they both strive to build better automobiles by challenging and inspiring each other. In 2020, the production of electronic components at Toyota’s Hirose Plant was consolidated within DENSO, and the plant has since become an R&D hub bringing together and passing on the insight of both companies. This plant is a representative example of the nature of DENSO’s partnership with Toyota.

Kushida　 I view cross-shareholdings as simply a byproduct of building a business relationship. DENSO has been and still is an irreplaceable member of the Toyota Group, while Toyota is DENSO’s largest customer and most important business partner. I do not believe that DENSO’s policy to reduce cross-shareholdings will have any adverse effect on this relationship. Listed companies are public institutions within society, and it is only natural that they should meet appropriate governance standards and achieve profitability and capital efficiency. The era in which cross-shareholdings served as a safety net in the event a company failed to make these achievements is now coming to an end.

Mitsuya　 The next Mid-term Policy will establish connections with the C ompany’s material issues (Materiality). As D ENSO updates its Materiality, we have been holding discus sions to ensure that the opinions of various stakeholders are reflected.

Kushida　 These discussions have been highly productive. Materiality ought to have strong connections with a company’s long-term corporate value. Focusing exclusively on social issues in isolation can reduce Materiality discussions to a formality. What matters is establishing a growth strategy focused on long-term value creation and then managing and disclosing its progress appropriately. Doing so should gain the favor of capital markets.

Schmelzeis　 If a company keeps adding more and more numerical targets and comes to view achieving them as its ultimate mission without considering how they relate to its Materiality, the company will not be able to engage in sound management. I believe that Materiality should serve as a reference point to ensure that DENSO stays aligned with its priorities and to assess the soundness of its management.

Mitsuya　 Yes, if we become overly obsessed with the details and bind ourselves by KPI figures, we would lose sight of the bigger picture. We must never forget our stance on long-term value creation.

Mitsuya　 AI utilization and information security are topics that are often brought up at Board meetings. AI has already proven very effective in standardizing output and making it more efficient, but there is still great potential to utilize AI from the perspective of originality and competitive differentiation. To that extent, we are currently exploring more effective machine and deep learning methods and examining where to position AI within our overall operations.

Schmelzeis　 In addition to back-office operations, DENSO should consider commercializing AI and introducing it in its front-office operations, provided that security conditions are met. Particularly, in competing with other companies, DENSO should draw on its strengths in offering safety, security, comfort, and convenience. At the moment, the Company has commenced efforts toward product development that combines rulebased AI, which operates with a high level of accuracy based on predetermined conditions, and data-driven AI, which is capable of handling complex and unpredictable issues through machine learning. Looking ahead, DENSO should aim to fully leverage these technologies at a secure level to pursue the provision of safety and security, which are strengths of the Company that are needed in the market.

Kushida　 DENSO has built its success on leveraging its technological capabilities to win out over intense international competition. Rather than being content with its current strong performance, DENSO must continue to carry out the efforts needed to maintain its competitive edge in R&D and communicate these efforts both internally and externally. In addition, it is important to convey to a broad range of stakeholders the kind of value DENSO aims to provide society in an easy-to-understand manner.

Schmelzeis　 There are likely very few companies that engage in successful management under the current operating environment, which is complex and constantly changing. The reasons for DENSO’s success have been the value it creates in terms of reducing environmental burden and offering safety and security. By clearly explaining the details of this value creation, DENSO should be able to improve its external evaluation.

Mitsuya　 DENSO has always been a company that has created unprecedented products and services that have helped shape the future. When speaking with personnel in our business divisions, they have mentioned how they are genuinely excited about proposing various solutions to address real-world challenges. Rather than simply producing an order received, DENSO seeks to create technologies and solutions that do not yet exist, and we ought to communicate this innovative nature of DENSO to both internal and external audiences.
Also, moving forward, there will be more instances where swift decision-making is needed by the Board of Directors. As outside members of the Board, we will continue to hone our skills so that we can help DENSO confidently make bold and accurate decisions.

Schmelzeis　 DENSO must continue to compete and succeed with a greater sense of speed.

Kushida　 It will be important to link Companywide efforts for greater speed with DENSO’s corporate culture of passionately pursuing innovation. If something does not yet exist in this world, DENSO has the ability to create it from scratch. This innovative approach will continue to underpin DENSO’s corporate value enhancement moving forward.