Medium-term Management Plan "Grand Design 100" Phase IV
Grand Design 100 Vision, Basic Policy and Summary of Phase III
Phase IV Financial Targets and Theme
Phase IV Issues and Approach
Strategy
closing
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We launched Grand Design 100 in 2006 as a roadmap for the 12 years to our centennial in 2017. The plan comprises four three-year phases. This year is the first year of the concluding three-year phase of Grand Design 100.

We adopted Grand Design 100 as a framework for evoking a distinctive global identity in building corporate value and in building a strong market presence by our centennial in 2017. Our original targets as established in 2006 were to achieve annual net sales of ¥1 trillion and operating income of ¥100 billion by 2017 and thus achieve an operating profit margin of 10% by that year. To achieve those targets, we are working in the spirit of the Grand Design 100 basic policy. That is, we are dedicating ourselves to delivering the best products at competitive prices and on time, to asserting world-class strengths in technologies for protecting the environment, and to fostering a customer-oriented corporate culture that honors rigorous standards of corporate ethics.

Our earnings performance benefited during the three years of Phase III from a generally favorable business environment. The yen weakened during most of Phase III, starting in the latter half of 2012, and raw material prices trended downward.

We exceeded our aggregate, three-year targets in Phase III for operating income, with a result of ¥165.4 billion, and for the operating profit margin, with a result of 9.3%. And we posted record figures for operating income and for net income in each year of Phase III. Our aggregate, three-year net sales in Phase III totaled ¥1,786.6 billion, just shy of our target.

Another gratifying development in Phase III was the improved performance that we achieved in our Multiple Business operations, which handle diversified products. Those operations displayed renewed growth momentum in sales and in earnings. Our Phase III performance was less satisfactory in our tire operations. We lagged in responding to escalating price competition in our principal tire markets. And our sales were sluggish in North America, in Europe, and in Russia.

In conclusion, we were only partly successful in fulfilling our theme for Phase III: Robust and Responsive Growth. Our earnings growth was robust in a favorable environment. But we were less responsive than we should have been.

We also exceeded our Phase III target for expanding our production capacity for tires. Our capacity increased by 8.20 million tires during the three years of Phase III, to 67.59 million tires at 2014 year-end. Accounting for most of the increase were plant-expansion projects in the Philippines and Thailand and plant-construction projects in China, India, and Russia.
The overseas percentage of our total production capacity for tires increased to 46% at 2014 year-end, from 38% at 2011 year-end.

Here is an overview of the expansion of our global operations during the three years of Phase III. We inaugurated the production of passenger car tires during Phase III at new plants in India and in Russia and at a new plant adjacent to our truck and bus tire plant in Suzhou, China. And as I have mentioned, we expanded capacity at our tire plants in the Philippines and in Thailand. In addition, we began work during Phase III on a plant in Mississippi for producing truck and bus tires. And we acquired a Japanese manufacturer of tire bead. We also moved to fortify our tire operations during Phase III by starting work on a winter tire test course in Hokkaido and by opening a winter tire test course in Sweden.

We expanded plants and built new plants during Phase III in our Multiple Business operations, too. And we acquired an Italian manufacturer of marine hoses.

Here is a comparison of our financial targets and our financial performance in Phase III. We achieved record highs for net sales, operating income, and operating profit margin in 2012, 2013, and 2014. Our interest-bearing debt increased in reflection of our stepped-up investment. But it remained well below our specified ceiling at 2014 year-end. Our debt/equity ratio was also well below our specified ceiling at the end of Phase III.

On the other hand, our operating return on assets and our asset turnover slipped slightly below our targets in the closing year of Phase III. That, too, was a reflection of our stepped-up investment.

Here are lists of our primary qualitative initiatives in Phase III of Grand Design 100 for upgrading our human resources management and for strengthening our operations by revamping our organization. In human resources, we continued an overseas training program launched in 2009 for new employees to foster globally competent personnel. We established Yokohama Business Association Corporation to provide work for employees after our mandatory retirement age until the age of 70. And we qualified to display the Japan Ministry of Health, Labor and Welfare’s mark for companies that offer systematic employee support for childcare. In organizational moves to strengthen our operations, we integrated our Japanese tire-retreading operations, we merged two of our industrial products companies in the United States, we consolidated our Japanese production of high-pressure hoses, and we transferred our Sports Business to our subsidiary PRGR Co., Ltd.

Our chief financial targets in Phase IV are to increase our annual net sales to ¥770.0 billion and our operating income to ¥80.0 billion by 2017 and to thereby raise our operating profit margin to 10.4% by that year. We also aim in Phase IV to raise our net return on assets to at least 5% and our net return on equity to at least 12% by 2017 and to lower our debt/equity ratio to less than 0.8 by 2017 year-end.

Grand Design 100 is the successor to our Grand Design10 management plan, which began in fiscal 2003 and renewed our focus on growth. And as you can see here, we plan to raise the pace of our growth in Phase IV of Grand Design 100.

We adopted the themes of Profitable Growth for Phase I of Grand Design 100, Quality Growth for Phase II, and Robust and Responsive Growth for Phase III. Our work in those first three phases of Grand Design 100 fostered growth momentum and growth potential in individual units and in our organization overall. In Phase IV, we will work in the spirit of All for Growth—Focusing Our Energy on Growth to consolidate that momentum and potential. That will include working to resolve issues that have arisen during the first three phases, to culminate Grand Design 100 on a positive note, and to set the stage for new progress in our company’s second century.

We expect continued economic expansion in the United States in Phase IV, but we are concerned about the possibility of slowing economic growth in Europe and in China. And we contend with various risks in Russia, which is an important market for our company. Uncertainly clouds the economic outlook for the world’s emerging markets. Also uncertain is whether the prices for crude oil and natural rubber will remain low. And we will need to monitor closely the different approaches that nations are taking in financial policy and the results of those approaches.

In Japan, the weakened yen makes Japanese exports more competitive, but dampening that economic benefit are higher prices for imports. Economic growth will presumably gain momentum as the Abe government’s economic policies gain traction and as preparations for the 2020 Tokyo Olympics get under way. On the other hand, the hike in the national sales tax scheduled for 2017 is already causing trepidation.

Developments in the tire and rubber industry present several challenges. We need to cope with new tire labeling requirements and toughened environmental regulations amid a global upturn in environmental awareness. Demand for automobiles and thus for tires is poised to continue growing as declining prices for gasoline stimulate an increase in driving. But we face mounting competition from emerging tire manufacturers that are newly assertive in technological capabilities and in business scale.

We therefore need to respond flexibly to changes in the business environment and to hedge our risk exposure. And we need to differentiate our products advantageously with original technology and thereby capitalize on business opportunities.

An issue that arose in Phase III was that our sales grew somewhat less rapidly than our production capacity. In Phase IV, we need to reaffirm the basics of our business and offer new value through Yokohama-like products that will appeal to customers. That will mean becoming faster and more responsive in addressing changes in the market environment, becoming more customer oriented in every way, working in product planning and development to assert more Yokohama-like products, and fortifying our supply framework for fulfilling customer expectations and for keeping up with vigorous demand.

Here is the basic approach that we will abide by in Phase IV. We will maximize customer value and expand our global scope with an eye to remaining a leader in the tire and rubber industry for another 100 years. That will include channeling all our activity companywide into maximizing customer satisfaction; offering distinctive, Yokohama-like products; and undertaking vigorous investment based on a strong financial position. I will now describe for you how we will apply this approach in our tire strategy, in our Multiple Business strategy, in technology strategy, and in common strategy for all operations.

We are working to provide fun and vitality through tires by serving the world through unexcelled technology. Our approach centers on allocating more resources to winning business with automakers worldwide; on strengthening our presence in our principal markets; and on working strategically to expand our business in truck and bus tires and in off-the-road tires.

In support of that strategy, we have upgraded our supply chain management in Japan, and we are moving to globalize that function. We are also supporting our tire strategy by building a global network of product development centers and by working to lower overall costs.

In appealing to automakers, we will strive to assert leadership in fuel-saving technology and in other technologies to serve the automakers’ environmental, safety, and performance needs. We are counting on that effort to help us secure technological approvals from more automakers and to win fitments on more vehicles worldwide.

Our business in the original equipment sector has consisted mainly of deliveries to Japanese automakers, supplemented by fitments on premium European and US vehicle models. Recently, we have broadened our original equipment business with the start of deliveries to Changan Automobile, one of the Chinese Big Five automakers.

We are working to increase the overseas percentage of our original equipment business while expanding that business overall. Overseas deliveries accounted for about one-third of our business with automakers in 2014, and we aim to increase that share to more than half by 2017 and to around 70% by 2020. Our long-term goal is to build a 10% share of the global original equipment market, based on distinctive technological strengths.

What we mean by “principal markets” is large markets, such as the United States, and markets where we have an especially strong position, such as Russia. Authoritative projections place global tire demand in 2017 at 1,987 million tires. The largest markets are North America, Europe, and China, and we are therefore working to expand our presence in all of those markets. We have an especially strong position, meanwhile, in the Japanese and Russian markets, and we are working to expand our presence further in those markets.

Our approach in our principal markets includes establishing and expanding local production capabilities, upgrading our distribution channels, and fortifying our marketing. We continue working to build strong global brands and to cultivate Yokohama aficionados worldwide.

We have earmarked ¥120.0 billion for investment in expanding tire production capacity during the three years of Phase IV. That investment will increase our annual production capacity to 89 million tires by 2020 year-end, from the 74 million planned for 2017 year-end. Most of the expansion will be to serve demand locally in our principal markets. And a lot of the new capacity will come on line after the completion of Phase IV.

Expansion projects are under way at our Philippine and Thai tire plants and at our Suzhou passenger car tire plant in China. And we are considering new plants and plant expansions in North America, Russia, Europe, and China.

The plant that we are building in Mississippi to produce truck and bus tires occupies a 500 acre site—about 200 hectares. So we have ample land there to add more capacity as warranted.

We established the Commercial Tire Division in spring 2015 to speed decision making in regard to truck and bus tires and in regard to off-the-road tires. And the completion of our truck and bus tire plant in Mississippi will further localize our production in a principal market.

In off-the-road tires, we are asserting a high-value-added presence in radial tires at the large end of the size spectrum. We are developing 57-inch tires to supplement our 49- and 51-inch offerings.

Our strategy in our Multiple Business operations features a straightforward emphasis on deploying original technology to offer the world’s best products. That emphasis underlies our measures for expanding business globally in automotive components, for building on our market leadership in marine products, for strengthening our position in the construction and mining sectors worldwide, and for fostering growth in new ventures. We are counting on those and other measures to increase the Multiple Business share of our net sales to 25%.

Measures for expanding our business globally in automotive components will include building production and sales networks to serve automakers worldwide. Our global business in automotive components centers on hoses for air-conditioners, power steering systems, and other applications and automotive sealants for windows and other applications. We manufacture those products at plants in Japan, China, Taiwan, Thailand, the United States, and Mexico. Our plans call for expanding our production network and for applying high-value-added technologies in an expanded range of automotive applications.

In marine products, we have extremely large shares of the global markets for marine hoses for carrying crude oil and for pneumatic marine fenders for preventing harmful contact between ships. Our world-class product quality and our leading-edge technology make an important contribution to the safe transport of a crucial energy resource.

We manufacture marine hoses and marine fenders in Japan. We are building a plant to manufacture products in both categories in Indonesia. And in 2014, we acquired a manufacturer of marine hoses in Italy. We will work through that global production network and through our global marketing network to assert leadership in delivery and service in marine products.

Our Multiple Business presence in the construction and mining sectors consists of hydraulic hoses for construction and mining equipment and conveyor belts. The product quality of our hydraulic hoses has earned high regard among Japanese equipment manufacturers. We are moving to build on that reputation in cultivating business with construction equipment manufacturers worldwide. We are also moving to broaden our presence in overseas markets for replacement hoses, and we are building a global network of sales and service franchisees for that purpose.

In conveyor belts, our products offer superior durability and energy efficiency born of world-class technology. And we will exercise those strengths in appealing to customers with new kinds of value-added.

We are fostering growth in new ventures, meanwhile, by deploying original technologies. That includes entering new sectors and expanding business in established sectors. For example, we are establishing a foothold in the fuel-cell vehicle sector with hoses for hydrogen stations, and we are commercializing original technologies in an array of electronic materials.

Corporate acquisitions and alliances are part of our growth strategy in Multiple Business operations. We are taking a proactive approach to M&A and to alliances in sectors that offer convincing growth potential.

Phase IV of Grand Design 100 will mark a new phase for Yokohama technology. We have established a tradition of developing and commercializing technologies for safeguarding the environment, as in our fuel-saving BluEarth tires. In Phase IV, we will deploy original materials and technologies for addressing environmental issues on a new and higher plane.

That will include applying our advanced recycling technologies to improve resource efficiency and developing new materials and technologies through molecular engineering. It will include honing our fuel-saving technology in tires to achieve unprecedented fuel savings without compromising wet grip. It will include asserting Yokohama strengths in attaining a sound balance among tire characteristics and thereby responding better to customer needs and wants.

We will work in product development, in production, and in marketing to offer advances in product performance and in product quality that will earn the satisfaction of customers worldwide. With that goal in mind, we will unify tire specifications globally at a high level to allow for producing and supplying products of Yokohama quality anywhere at any time.
And we will strive to respond better to market needs by globalizing our R&D functions. That will include bolstering our R&D capabilities in China and establishing tire development centers in the United States and Thailand.

In laying a next-generation technological foundation, we will be flexible in exploring new possibilities. Joint R&D with other companies and organizations will speed our progress in developing next-generation technologies. Meanwhile, we will create next-generation Nanopower rubber through original strengths in materials technology and in advanced analysis and simulation.

First of all, we will take a proactive approach in regard to M&A and alliances. Our corporate acquisitions during the three years of Phase III included a Japanese manufacturer of tire bead and an Italian manufacturer of marine hoses. Also in Phase III, we concluded an agreement to provide China’s Shandong Xingda Tyre with technological support in off-the-road tires. And we concluded the cooperative R&D agreement with Kumho Tire.

Our Phase IV activity will feature an increased amenability to M&A and alliances for tapping external resources to fortify our position in product development, in manufacturing, and in marketing. We will explore every possibility for exercising our strengthened financial position in additional acquisitions.

We have achieved huge cost savings on our cumulative basis through our mudadori cost-cutting activities, which we inaugurated in 2006. During the three years of Phase III, we reduced costs about ¥30 billion through ongoing mudadori activities and through new activities for tackling designated priority themes. And we will broaden our approach in Phase IV through companywide activities for achieving larger cost reductions. In addition, we will work to reduce manufacturing costs 5% annually through cross-sector activities.

Another important facet of our common strategy for all our operations is strengthening our footing for global growth. That begins with fostering human resources that can function globally. We will therefore adopt international job rotation, including the promotion of non-Japanese to management positions. We will continue our program for providing all newly hired employees at the parent company with two months of overseas training. And we will phase in English-competence requirements for managers.

Standardizing financial procedures and information at Yokohama Group companies worldwide will be another undertaking in Phase IV. That will include devoting careful consideration to adopting the International Financial Reporting Standards (IFRS). And we will make an announcement if and when we decide to proceed with that adoption.

The ISO standards for different phases of corporate activity, meanwhile, furnish valuable guidelines. And we will adopt those guidelines for steering activity at our operations worldwide.

Our management vision for fulfilling corporate social responsibility calls for building a trusted identity as a contributing member of the global community. We work to fulfill our corporate responsibility in accordance with that vision and with the basic policy of Grand Design 100.
Our approach centers on 7 priorities established on the basis of the ISO 26000 7 core subjects and in reference to the 10 Principles of the United Nations Global Compact. I will describe our Phase IV plans in connection with two of our priorities in corporate social responsibility.

One Phase IV priority in fulfilling our corporate social responsibility is protecting the environment. We aim to deploy environmentally attentive features in all our products, as we have done with the fuel-saving BluEarth tires. We are working to plant 500,000 trees by 2017 at production operations worldwide and elsewhere in the Yokohama Forever Forest project. And we are taking measures at plants worldwide to preserve biodiversity in the plant vicinities.

A second Phase IV priority in fulfilling corporate social responsibility is community involvement and community development. We have taken part since 2012 in a project for building sylvan breakwaters in the Iwate Prefecture community of Otsuchi-cho. Those breakwaters are the brainchild of Dr. Akira Miyawaki, a plant ecologist and a professor emeritus at Yokohama National University. They are providing protection from tsunamis in the wake of earthquakes.

In the same spirit, we assist host communities and disaster-afflicted communities worldwide with material and financial donations and with support for education. And we foster good community relations at each of our plants around the world by engaging in diverse interchange. We will continue working in Phase IV to reduce the environmental impact of our products and operations and to contribute broadly to social sustainability.

That concludes my summary of Phase IV of our Grand Design 100 medium-term management plan. I hope that you will see that Phase IV is a springboard to our next century of progress, as well the culmination of the plan we have tackled since 2006 as Grand Design 100. Thus are we mobilizing our entire organization in the spirit of All for Growth to achieve our Phase IV targets. Thank you.