Outside Director Dialog

Though it is difficult to make a drastic change in a year, but I feel that the points of our remarks as Outside Directors last year are consciously discussed at the Board of Directors. We can mention the reform of global procurement as one of them. The variable cost reformation has improved greatly over the past year. Since it is just in the beginning stage, the key point will be how it will function going forward. Another is the Supply & Demand Center*. Regarding those two, I think that at least we came to the starting line over the past year.

＊Supply & Demand Center : Newly established in October 2018 to improve inventory turnover ratio, operational efficiency, and on-time delivery rate through integrated and centralized management while rebuilding the core IT system.

As Mr. Tsuda said, it is hard to make a drastic change in a year, but I feel that the Board of Directors has gradually changed according to our remarks during these 8 years of our services as Outside Directors. The appointment of Mr. Herve Brelaud* as the Operating Officer in charge of Procurement Headquarters this year is also a significant change. The talent within NTN had been conventionally appointed to such position. So, we would say that the appointment of the talent from SNR, a French subsidiary acquired by NTN, is a meaningful change. Following this appointment of European talent as the head of global procurement at the head office, I expect two changes. Firstly, this appointment should enable us to learn the way of thinking and approach from their point of view.
Secondly, perhaps there may have been certain hesitations particularly as an acquired subsidiary, however, now that such talent is a part of the head office, I expect improvements in the communication. Joining forces of human resources from both the NTN head office and overseas would lead to vitalization of our business in Europe.

＊Mr. Herve Brelaud is served as Deputy General Manager, Europe & Africa Region, and Vice President, NTN-SNR ROULEMENTS. He was appointed as the Operating Officer in charge of Procurement Headquarters in 2019.

We have had many discussions through TV conferences. But, there are some things that can be discovered only by meeting each other face-to-face. Another issue which I need to carefully observe as the Outside Director is whether we can globally develop the appropriate system of supply and demand or not. In October 2018, the Supply & Demand Center was established, including the rebuilding of the core IT system. Through this, if the comparison of costs in Japan and overseas can be confirmed within a single division, we can make our decisions globally including procurement. However, the problem is that, while procurement itself can operate smoothly once the framework is established, the supply and demand is a different matter. We need to coordinate between business divisions as well as between manufacturing and sales divisions. It is not like we can sit back and relax once the framework is established. Needs are different in each business site including subsidiaries in Japan and overseas. It is important to aim for total optimization, but this is the management issue which can’t be judged overnight, if we consider net sales and performance evaluation. Firstly, we need to get the Supply & Demand Center off the ground in Japan. Then, it may be another 2 or 3 years until we can extend it globally. The Supply & Demand Center is currently served as a "mediator" between business divisions, so there is a certain situation where a certain department is forced to be patient as a result of power relationship between business divisions. The capability of the Supply & Demand Center will be the key issue going forward.

That’s right. The most challenging task at the Supply & Demand Center is to coordinate different business approaches required by each business division. Regarding the automotive business, we can grasp the customers'needs yearly. So, the mass production according to the plan is possible. Meanwhile, the industrial machinery business rather tends to meet customers'specific needs by tailor-made services, compared with the automotive business, therefore a close communication with the manufacturing site is necessary. From the perspective of manufacturing site, the mass production such as automotive business is easy to proceed and easy to secure profits. So, such business tends to be prioritized. It is difficult to coordinate because slowing down this mass production system leads to low profitability. Also, though the aftermarket business shows high profitability, this is a result of the mass production effect coming from OEM of automotive business. What aftermarket business needs is diversified products in small production. But if we are to meet such needs as they are at the manufacturing site, then we can’t ensure profitability. To what extent we should meet such needs of aftermarket business; it is difficult to find the right balance. And this is where the judgment of the management is really put to the test. It is important to change our corporate culture which aims for mass production of high-quality products, the Supply & Demand Center plays one of the key roles for this change. The supply and demand were conventionally determined by each business division for the most parts, which is to say individual optimization. If we try to do this at the initiative of the Supply & Demand Center, some divisions can enjoy its merit, but it can be at the cost of some other divisions or manufacturing sites. This coordination is very difficult.

The weak financial performance for recent years is also the issue to be solved. Of course, there is an influence of some external factors, but the entire officers and employees must have a sense of crisis. That’s how serious it is. We have to think of the future on the assumption of current situation. We have to think in a shorter time span and manage our business with more sense of crisis.

We are facing the situation where we can increase sales by manufacturing all products as usual, but not profits.
We need to pursue issues, such as decision making between in-house production or outsourced, more strictly by profitfirst thinking. Moreover, we need to judge to what extent we should meet customers'needs. From customers'point of view, of course they prefer our products to be produced in-house.
However, in consideration of sales, sometimes we have to make other proposals convincing enough for them. Things are not what they used to be, shifting from small variety in mass production to more variety in small production. In such situation where sales increase but profit decrease, efficiency at manufacturing site is essential or otherwise we become exhausted. How to break through this difficult situation will be the key issue.

As you said, the question is whether the management has the fortitude to lose orders with low profitability or not.
Just because the sales decline as a result of placing priority on the total optimization, the evaluation of manufacturing divisions or manufacturing subsidiaries in charge of it should not be lowered. Even if sales should decline in the annual plan, we need to find the appropriate way of evaluation, such as comparing the results within the annual plan instead of year on year.

Newly emerging nations will eventually take the place of main manufacturers for simple bearings. Also for B-to-B market, high value-added special bearings, such as unitized bearings, will be in demand. Meanwhile, regarding new businesses, we have some promising products which may possibly have a potential for gaining a nationwide market share. Needs for products closed to end users, such as disaster response products in natural energy business, will see further growth. Though the scale of sales of green energy products business is not so big yet, it is important to increase the sales steadily. Also, it is important to find what customers want, which are seeds for survival in the next generation, by sharing customers'opinions and information the sales divisions have gotten in the course of promotion of bearings with the development divisions and technology divisions more proactively and globally.

I feel that it is quite difficult to cover the marketing for new businesses only by our human resources. At the same time, it is not realistic to hire many employees ahead of development of new businesses, so the partnership will become really important. We need to shift from doing all by ourselves to cooperating with partners. As I said last year, when we form partnership, we need a product attractive and superior enough to collaborate, and must choose partners who actually have it.

I also recognize the importance of partnership. Wrist Joint Module (i-WRIST) is a great example. The collaboration with the partner which has a brilliant visual technology enabled us to produce a competitive device which is useful for a product acceptance judgment at the final inspection of production site. This product also meets needs for manpower reduction in future. I think there are many other companies who think they can produce better products by combining our technological capability through partnerships.

Of course, new businesses are important, but the fact remains that we also need to prioritize the drastic improvement of profit from existing businesses. We need to analyze fundamental causes of decline of profit, and change existing businesses as well. Under the current circumstances where the amount of investment has ballooned due to the system investment, and personnel expenses have increased globally, if we carry on existing businesses in the same method and same manpower as before, our business will recede as a matter of course. We need to thoroughly analyze and discuss how manpower reduction has been carried out, and what our weaknesses are when compared to competitors, be it the procurement or the presence of situation where we have to choose unprofitable products in our product mix, etc. Though we did have a sufficient discussion at the time of formulation of our Medium-term Management Plan, the current status in some areas are out of its course, so we need to place the first priority on analyzing the current financial performance and taking measures for improvement. The situation where we are busy but profitability does not improve, and consequently the salary doesn’t increase and motivations of employees go down. I think that the Board of Directors needs to deliver a very powerful message regarding this. Capital investment for decrepit factories; for manpower reduction; and that requires configuration of core system such as the Supply & Demand Center; there are many capital investments we need to accomplish. Meanwhile, as external circumstances are worsening, it is really important to prioritize what we should invest under the estimated cash flow, whether we should place priority on investment even if the financial performance is severe, or we should refrain from investing in such case. So, these prioritizations are very important and I must say that steering our company has grown quite difficult.

It is a fact that we are going in a right direction, although you may not actually feel it in the midst of the management.

We can exchange frank and honest opinions in the Board of Directors, but on the other hand, I often feel that we take much time unnecessarily to discuss topics which we don’t have to. I have been thinking that we should remove such unnecessary topics. This being part of the reasons, we decided to make a transition in our organizational design from a Company with Board of Company Auditors to a Company with Nominating Committee, etc. this year.

This is a significant change. This shows the commitment to advance while valuing our roles as Outside Directors. I’m looking forward to what this change will bring. As Mr. Tsuda said, discussion at the Board of Directors so far in fact included many minor topics which should have been originally decided by execution divisions. It is important to separate functions of execution and supervision, and encourage execution divisions to responsibly make decisions on their own. Conventionally, our company has had the corporate culture where important matters were decided by the Board of Directors. However, we shifted from the attitude of waiting for top-down decisions to the organizational structure where execution divisions shall properly fulfill their responsibilities in execution. I expect that this change enables us to develop the environment where speedy corporate decision making allows employees to work proactively and raise their motivation.

That’s right. In the Board of Directors in the past, I felt the fact that decisions were made by everyone was one of the reasons why who bears the responsibility became unclear. Minor topics, such as whether each capital investment is reasonable or not, were included in the agenda of the Board of Directors, and we couldn’t spend enough time on really necessary discussions, such as what field we should focus more preferentially to improve profitability, and in what scale of invest framework. As I pointed out earlier, the Supply & Demand Center is served as a "mediator" between business divisions. I believe discussion on such issue at the Board of Directors will enable us to make a decision for the total optimization which can’t be judged by execution divisions. It will be important to concentrate on the intrinsic matters to be discussed at the Board of Directors, such as checking the progress of plans which were formulated in the past, or decision of our major policy, in addition to deciding on the criteria for evaluation, human resources, and compensation. However, creating the organizational structure alone will be meaningless. Only after putting our hearts into it, the new structure can carry its true meaning.

Previously, there were only 2 Outside Directors, but the Outside Audit & Supervisory Board Members will join our discussion as Outside Directors from now on. Since the Audit & Supervisory Board had its good function, we hope that participation of the Audit & Supervisory Board Members in the Board of Directors as Outside Directors will bring such good aspects into the Board of Directors and make it work.

Going forward, I believe the Board of Directors will become to function in such way as hearing opinions of execution divisions at the early stage before determining a budget before discussions. Also, as the number of Outside Officers increased to 5, I expect the Board of Directors to be proposal-based where discussions and requests of Outside Officers are presented to execution divisions and the Board of Directors.

"People, products, and money" are often mentioned as major management resources, but after all, human resources are the most important factor. We live in the world where the speed is increasingly becoming the top priority, and the most important factor is human resources. Personnel Department should grasp the performance of all employees, but furthermore, personnel decisions for ones who take the leadership in future is extremely important. The responsibility of the Manager of Personnel Department is tremendous. In order to make appropriate decisions, I want Personnel Department to have a great manpower. It is essential to ensure better human resources for survival of NTN in future, and 1 or 2 years are not enough to see results. We hope that we will be able to hear comments such as "human resources in NTN have changed" 5 or 10 years later.

We need to think about how we make use of external resources. In the same way as new businesses, we also need to consider different alternatives for human resources, not only developing within our company but also externally recruiting human resources who are capable of management. This approach is especially important in overseas subsidiaries. A company of our scale cannot be managed only by internal human resources. Also, such company tends to fall into a vicious practice of "following precedent," due to the lack of external point of view. In business, I always think that we should never just follow precedent, but it is external human resources who let us know whether our action is just following precedent or not. Therefore, it is important to interact with various companies and people outside. We should not fall into a vicious practice of "following precedent," and sometimes "swings and roundabouts" is necessary.

The reform of marketing is also required. Since the economy in Osaka is declining, the organization which puts out our antenna to grasp customers'needs becomes important. For example, the development divisions and Automotive Business Headquarters have moved to Tokyo where we can grasp customers'needs more easily. That’s a great decision. Although our company tends to prefer proceeding all processes by ourselves, we need to consider outsourcing as necessary, otherwise the increase is only in the number of employees while profitability decreases.

Under the circumstances where the work style reform is promoted to reduce overtime work, only requesting employees to reduce overtime work just results in making them feel more stressful. The work style reform is a kind of "Danshari", the corporate judgment of what is truly necessary for our company. It requires extremely important managerial judgment of what to choose and what to abandon. This is the current major issue for our company.

The number of Board of Directors decreases as a result of the transition to a Company with Nominating Committee, etc., and its function will change drastically, such as a decrease of number of proposals to be resolved by the Board of Directors. Previously, directors acted on behalf of responsible managers of execution divisions in all matters at the Board of Directors. However, we expect more opportunities for candidates for directors and executives in the next generation to report directly, as we proactively invite responsible managers of execution divisions and staff in charge. Through such discussions, we also would like to make the Board of Directors as a useful place to find great talents.