Outside Director Dialog

The business results for the fiscal year ended March 31, 2022 were in a final surplus for the first time in four years. First of all, what are your reviews of business performance and what are NTN's current challenges?

Komatsu：

In the fiscal year ended March 31, 2022, we downwardly revised the plan formulated at the beginning of the fiscal year, but we were able to ultimately achieve results that exceeded the planned values at the beginning of the fiscal year. Stock prices have also risen, and in this regard, I highly evaluate the hard work of management and employees. On the other hand, there are concerns about future net income. Selling the head office building and disposing of cross-shareholdings resulted in making a profit. As a result, in the event of deterioration in business performance in the future or the event of unforeseen circumstances, the buffer for avoiding net loss was small by recording extraordinary gains. There are many borrowings, and our financial position is not strong, so we need to maintain a sense of crisis. The biggest challenge in improving our financial position and operating cash flow is the large amount of inventory. Considering the possibility that interest rates will rise in the future, we have too many inventories in excess of 200 billion yen for a company of our size, and our interest burden will also increase. If we can significantly reduce our inventory, we will improve our operating cash flow and asset efficiency, and we will be able to secure funds that can be used for investment in the future, making us a very good company. Of course, at this point in time, we are making a company-wide effort to shrink inventories, but I want everyone to have a mindset that allows them to choose to reduce inventories even if they lose their current trade. To make such a decision easier, I think it would be better for the frontline responsible persons and managers to be aware of operating cash flow as a KPI at the same level as profits and sales.

Tsuda：

We have long recognized inventory as an issue and are in the process of production reform. Although it is difficult to see the results due to various factors, such as the recent logistics disruption and the lock-down in Shanghai, we are working with a sense of urgency. In terms of performance, we set an operating income of 23 billion yen for the fiscal year ending March 31, 2023, but the key is whether or not cost increases can be passed on in line with the surge in the prices of steel and other raw materials. On the other hand, we also need to make further efforts to reduce costs. If we refuse supply because the cost cannot be passed on, and if our competitors take it over, it means that it was not cost competitive in the first place. We must place some emphasis on cost reductions. This is a strategy of raising prices in sales, reducing costs in manufacturing, and focusing on both. In addition, the lack of good profit margins in the U.S. and Europe is a major issue. In addition to the loss-making structure in the U.S. in the first place, the sharp rise in labor costs has had a major impact. Moreover, because the market in Europe is mature, we must abandon unprofitable items and promote rationalization. We are currently forming a specialized team to work on drastic measures.

Nishimura：

I will make some additional comments in response to my two colleagues and say that it is worth noting that the inventory is too much. From the standpoint of an Audit Committee member, I look around the factory, which is the front line of production reform. Reducing the inventory means that production will be halted if a certain quantity of finished products is secured, and the people on the front line feel very worried about this. If production is halted, surplus man-hours will naturally be generated. In what kind of situations will this surplus man-hour be used? For example, I think it is effective to allocate the man-hours for cost reduction, such as changing the man-hours for external production to in-house production or taking on new challenges in the form of other or new assignment. Continuing with conventional production methods will make it easy for the front lines, but the era of selling a product once it has been made has already become a thing of the past, and it is important to produce goods in the proper manner. With the progress of EVs, automobile companies are entering an era in which their main products are changing steadily, and proper production is required. Especially if we have too much excess inventory and it becomes defective inventory, this will lead to the worst possible outcome. I think it is essential that management and front-line staff work together to implement reforms to ensure appropriate inventory levels. In addition, as Director Tsuda mentioned, passing on cost increases to customers is only a way to pass on rising raw material costs, and cost reduction activities are essential to securing further incomes. Furthermore, in order to achieve operating income of 23 billion yen in the current fiscal year, I feel it is necessary to review the allocation of resources, including a fundamental review of the portfolio in the automotive market, aftermarket, and industrial machinery market.

Komatsu：

Of course, both our management and executives are aware of these management issues, and we are motivated to carry them out. The direction is not wrong. The only concern is speed. As our financial strength is falling, the risk of rising interest rates is rising due to ongoing inflation, and I think we need to accelerate the speed of companywide reforms to reduce inventories to appropriate levels. I think that everyone in the company has a sufficient sense of crisis, but even if we steadily implement the right measures, if we fail to keep up with the changes in the environment, we will be forced to take a tough response. Therefore, in addition to the content of the reforms, I would like to emphasize "speed."

A roadmap for realizing a "NAMERAKA Society" has been formulated. Please tell us about your outlook and issues for sustainability activities in the future.

Nishimura：

As the Group advocates achieving carbon neutrality by the fiscal year 2035, I am paying attention to what measures the Group will take with regard to this. Of course, we will curb electricity consumption and use renewable energy. I believe that there is a place for us to thrive in the development of carbon-free materials that take the global environment into consideration. For example, making biomaterials derived from plants and using them in new bearings, or working to develop lightweight, hard, and rugged materials such as graphene, can be a message to the outside, and if they can be used in other industries, our degree of social contribution will be high. I feel that we have the foundation and human resources for such research. I would like to see the company launch such new development projects in collaboration with government agencies and other efforts to contribute to the achievement of carbon neutrality by the fiscal year 2035.

Tsuda：

I am also paying attention to what happens to large-scale wind power generation. We produce large bearings and deliver them to overseas manufacturers, but Europe and China are advancing in this field while Japan is lagging behind. Since Japan's energy policy is also greatly involved in achieving carbon neutrality, we must look at national policies and find our solution. It's quite a difficult challenge.
Human rights have also recently become a major issue. I think all Japanese companies are facing this issue, but because Japan is a homogeneous society, I don't think we have had a high awareness of human rights for many years. In reality, human rights issues have recently become increasingly focused around the world, and Japanese companies have finally begun to raise their awareness. It is difficult for some suppliers to understand the extent to which they are aware of this issue. Overseas business sites are making more progress, so it is important to be able to conduct business activities that give consideration to human rights as a whole while carefully capturing global information.

Komatsu：

The issues of carbon neutrality and human rights are exactly as both my colleagues mentioned. In addition, I am concerned that diversity is not advancing very much. I didn't have much opportunity to talk face-to-face with female employees because of the new coronavirus, but from now on, I would like to actively listen to their stories. In a Japanese company with a long history, male managers intend to give consideration to working women, but it is often the case that it is difficult to promote women because their evaluation is biased without realizing it. I prefer to have more women in managerial positions and reserves, and in the end, I think it is best to have female directors from within, and I would like to start working toward that. In addition, we are currently reviewing our personnel system, but if the current system is one in which seniority-based ranks are raised, women will inevitably lag behind. If we become a system that can be promoted regardless of age, gender, or work style, I think diversity reform will progress.

Tsuda：

Director Komatsu will chair the Board of Directors. I think it is rare for Japanese companies to have the chairman of the Board of Directors as an Outside Director and a woman, but I expect it to contribute to the promotion of diversity in the company.

Russia's invasion of Ukraine has disrupted the value chain, and companies are facing a crisis, such as soaring energy prices. In addition, the yen is depreciating rapidly due to the monetary policies of each country. Please tell us your opinion on NTN's approach to this unstable situation and the exchange rate situation.

Komatsu：

The soaring energy prices certainly create a difficult situation, but on the contrary, I think it is an opportunity to break the business practice of "bargain sale" that has been entrenched in Japan for many years. Passing on rising purchasing costs to prices is commonplace in countries other than Japan. I would like us to change our mindset and continue negotiations with the belief that it is a matter of course. If we are able to pass on cost increases, we will be able to manage our company's supply in a flexible manner by looking at the balance between supply and demand and building a value chain in a situation where our company has an advantage. I would like us to change a crisis into an opportunity and work on it.
The value chain disruption can also be viewed as an opportunity. In order to avoid dependence on procurement in a particular region, we may be moving to procure from Japan as well. It is important to have the financial strength and the capacity to respond to this situation. To this end, we must be able to make management decisions to pass on cost increases even if we lose business. Also, in a crisis situation, it will be important to have a sense of speed to think while running in terms of how to utilize the manufacturing and sales personnel that had been assigned to the lost business.

Nishimura：

As Director Komatsu said, what we need to do now is consider how to maintain physical strength. President Ukai is also working with a sense of urgency to improve our financial position as one of the important measures in the Medium-term Management Plan. There are a great deal of tasks that need to be done, such as efforts to increase the operating margins, conversion of product portfolios, and reduction of fixed and proportional costs. If we do not manage our business with true power and some amount of margin, we will be unable to take the next first action. As the external environment continues to change, we believe that improving our corporate structure will be a major point in determining how we can respond to these changes. In addition to reducing fixed costs, as I mentioned earlier, human problems are inevitable. I think the Board of Directors should discuss whether there are any surplus man-hours, and if so, whether these man-hours can be diverted to DX or new businesses, and whether investment in human capital is required to achieve it.

Tsuda：

The depreciation of the yen is positive for business performance in the short term, but we do not know how it will move in the future. Under such an uncertain situation, blocking may progress for making individual products in each country. We need to carefully look at whether we can compete well in each country and region's markets and whether we are cost competitive. It is not an age in which anything can be made in cheap regions overseas. I think this is a good opportunity to review the situation in Japan.

Finally, what contributions will you, as an Outside Director, make to NTN?

Nishimura：

I have been appointed as a Director, and my second term has ended. There was also a change in the President, so I would like to talk about the changes over the past year. First of all, speaking about a positive point, the conclusion of the meeting was clarified under the strong leadership of President Ukai. As a result, I feel that the actions to be taken have been thoroughly communicated in an easy-to-understand manner, and that the actions have become quicker. In addition, in order to achieve the goals of the Medium-Term Management Plan, each Executive Officer has come to work together and team management is beginning to move forward.
On the other hand, there are two disappointing points. The first point is that while top-down is thoroughly implemented, bottom-up is insufficient. What I feel at the production reform site is that there is a lack of commitment to the results of the reforms. There is a goal of halving inventory and halving the cost of anything, and it is difficult to see the attitude that everyone is aligned on the same vector towards this goal, and I feel that the activities are biased toward some people.
We will become a strong company when the frontline employees themselves think and devise ways to reduce inventories, reduce costs, effectively use assets, and take other steps to make progress with reforms and become self-confident, and establish a culture of promoting further business reforms on a daily basis. To this end, the role of leaders on the frontline is extremely important. To move forward with confidence without fear of failure, and to trust subordinates. Furthermore, if management, production sites and sales sites can have a sense of unity, reforms will proceed even further.
The second point is that there are fewer "buffers" between operations conducted by different divisions. This sometimes gives rise to gaps in handovers between operations. This can result in situations in which it is unclear where responsibility lies. This is due to a lack of understanding among people concerning the value of their own operations. As in any business, if you are proud of your work and have an awareness of raising its value, I think the number of gaps will decrease.
I go around the site as an auditor. In production reform activities, we have had some success and achieved profitability at Kamiina Works by halving inventories. Horizontally turning this around should raise morale more. I believe my role as an Outside Director is to create an environment in which such successful examples can be shared with everyone while supporting Executive Officers.

Komatsu：

I agree with Director Nishimura on the positive change discussed. I think it was a year in which the change in NTN's management and the strength of President Ukai's leadership were recognized.
With regard to our contribution to NTN, in addition to promoting diversity, I would like to thoroughly monitor various aspects. As I mentioned earlier, I believe that what we intend to do and the direction we will take are correct. It would not be a problem to proceed as it is. What I am worried about is the ability to execute and again, speed. With regard to execution, I recognize that my role is to monitor the progress of the roadmap at meetings of the Board of Directors and other occasions and to clarify the reasons, countermeasures, and deadlines for any areas that have not been achieved or that have been delayed. Regarding the speed, I will always ask them whether this speed will be acceptable. I would also like to assist with the establishment of a framework for monitoring on a company-wide basis in a timely and appropriate manner.

Tsuda：

Six years have passed since I became a Director. Meanwhile, in terms of governance, we adopted a Company with a Nominating Committee, etc., and the President was also replaced. From this year, the chairman of the Board of Directors will be an Outside Director. I think I was able to contribute as the chairman of the Nomination Committee as an Outside Director.
Furthermore, I feel the company has changed in terms of its improvement in the areas of accountability and transparency, which are required by every organization. You cannot run a business if you cannot explain it to us, the Outside Directors, and obtain our understanding. I believe that this has contributed to enhancing the provision of information to society and to providing sufficient explanations to employees. In the past, the Executive Officer system also had positions such as "Senior Managing Director" and "Managing Director" that made it difficult to understand why a situation arises, but now all positions except the President have been unified into Executive Officers. In conjunction with this, the basic compensation of Executive Officers has also become more transparent, as can be understood by calculating according to the content of jurisdiction. "Why?" or "I don't know well" can also lead to employee dissatisfaction. It was six years that I worked while being conscious of fulfilling accountability and increasing transparency. In that respect, I feel that we are evolving. After that, there is nothing to say if it is accompanied by achievements. As an Outside Director, I will continue to look closely at management with high hopes for NTN.