Cross-talk among Outside Directors and Executive Officers

Progress of the Medium-term Management Plan “DRIVE NTN100” Final and Tangible Results of Structural Reform

Yanagida：

In the Bearings and Other Businesses segments, the recovery of OEM was slower than expected due to market conditions. The business environment continues to grow more severe, including price offensives from Chinese manufacturers, but we are pursuing a structural reform to thoroughly eliminate waste and firmly generate profit through our future growth strategy. First, we are working continuously to rebuild a lean structure during the current Medium-term Management Plan period, so that we can also flexibly adjust our production structure in response to future changes in market conditions, and we are beginning to see some results. At the same time, we are working to expand our aftermarket business for the sake of growth. We are pursuing sales expansion through differentiation, leveraging the technical know-how we have cultivated over many years in OEM to provide services that solve customers’ problems. In addition, what will become important for future growth is to continuously create higher value-added products. We have launched a dedicated team and begun initiatives to achieve results in a short period of time, including issues we had previously been unable to resolve as well as new product development. We will further strengthen our technological development capabilities.

Tateoka：

In the CVJ & Axle Bearing Business as well, we are pursuing structural reform, with the comprehensive advancement of “business restructuring,” “design reform,” “procurement and logistics reform,” “production reform,” and “reduction of inventory assets” as our themes. Among these, we have worked to enhance operational visibility across our global operations. By gaining accurate understanding of people, materials, and capital on a site-by-site basis, the relationship between the issues we need to address, and the specific measures required has become clearer. In terms of business restructuring, we have made concrete progress in Europe, China, the Americas, and elsewhere, leading to the optimization of fixed costs. Going forward, we will continue to advance structural reform while further refining each of these measures. At the same time, we are looking forward to our next phase of growth. We are positioning North America, India, and Japan as priority regions, and are pursuing a growth strategy of expanding sales while securing profit, based on the characteristics of each region. To achieve this, we are taking an approach from both the production and sales sides — including deepening our partnerships with automakers — as well as making necessary investments accordingly.

Murakoshi：

I would identify three underlying factors driving the structural reform: “changes in the global competitive environment,” “persistently high fixed costs,” and “persistently high inventory-related assets.” Regarding the change in the competitive environment, bearings are a critical component in a wide range of products, but they are a category in which technological innovation is difficult to achieve. Given the difficulty of differentiation, the price offensive launched by Chinese manufacturers has been severe. Regarding fixed costs, in response to these environmental changes, our production and sales structure ultimately became oversized, which has manifested as a financial burden. Regarding inventory-related assets, in the course of optimizing in response to environmental changes, the challenge has been that inventory — which should essentially be treated as a variable cost — has become fixed in nature. Carrying approximately 220.0 billion yen in inventory-related assets against consolidated net sales of around 820.0 billion yen represents a significant financial burden. As the two Executive Officers have pointed out, we are making progress in reducing fixed costs through measures such as the reorganization of production sites, and I believe we are beginning to see tangible results in Europe, North America, and Japan as well. On the other hand, I see progress on inventory reduction as slower. Because NTN is a company with a long history, our factories have historically become fragmented by business and by product, and I believe a further step forward in reform is required. Regarding future growth, if we are to shift our focus toward the aftermarket, we need to transform our current situation, which has been centered on OEM and primarily oriented toward domestic manufacturers’ perspectives. Taking overseas competitors into account, we need to consider how we will develop the market, and how concretely we have built out our marketing, including our distributor strategy. We need to demonstrate the specifics of our future development more clearly.

Yanagida：

The aftermarket itself is an extremely diverse market, and it is first necessary to determine the scope of the market we are targeting at (segmentation and targeting). For example, some distributors have end users who order in single-box units, while other sales channels have users who require replacement bearings for large specialized equipment such as mining machinery, or for expensive machine tools and specially designed construction machinery. Since the quality and quantity required differ in each case, we need to take a market-oriented approach, understand market needs in detail and respond appropriately. Bearings are a critical component that significantly affects the stable operation of machinery and equipment, so we are working to solve customers’ problems and achieve differentiation through our bearing technology and know-how regarding the machinery in which they are used. Just as important as technical service is the ability to supply products quickly to every corner of the market. We are strengthening our capacity for immediate delivery globally through the expansion of new distributors and a common inventory strategy.

Tateoka：

In the CVJ & Axle Bearing Business as well, we recognize that our response to the automotive aftermarket has not been sufficient. We are now taking concrete steps based on the business characteristics of each country and region while maintaining a strong focus on the NTN brand. In regions where our product lineup remains insufficient, we are expanding our network of contract manufacturers, broadening our product offerings, and entering new market segments. Due to the fact that we have a strong history centered on OEM business for Japanese automakers, a shift toward a global perspective is important. As part of this, we will expand our sales channels beyond the markets of Europe and the U.S. to also include South America and Asia, by expanding contracts with major buying groups.

Wada：

From an outside perspective, I feel that NTN has yet to fully capitalize on the strengths it has cultivated over many years. NTN has technical capabilities cultivated over many years through OEM business for Japanese companies that demand strict quality standards. While it is necessary to actively promote these capabilities toward the areas the Company should focus on going forward, including the aftermarket, I feel this is still not sufficient. While pursuing reform that involves some pain will strengthen the Company financially, it may also, in one respect, create a negative impression. Precisely for that reason, I would like the Company to continue to communicate the technical capabilities it originally possesses, and how these are being further honed through structural reform.

Murakoshi：

It is necessary to hold a certain level of inventory in preparation for OEM maintenance and replacement demand. There is also work-in-process inventory that arises partway through the production process, and since numerous production and sales sites are involved, I understand that inventory management is genuinely difficult in some respects. However, in a period of rising interest rates such as the present, holding excessive inventory ties up funds and also leads to an increase in interest expense. I believe optimizing inventory has become an important management issue.

Yanagida：

We recognize the inventory reduction you have pointed out as a critical issue for the business division. Rather than simply building up inventory quantities out of an abundance of caution, we are having production and sales collaboration to thoroughly improve demand forecast accuracy in each responsible department, and rather than simply accepting that “this level of inventory can’t be helped,” we are strengthening an inventory strategy that leads to profit growth by reducing wasteful inventory while firmly securing the inventory needed to support sales expansion. In addition, the Bearing Business, which relies heavily on production in Japan, faces the challenge that close coordination between production and sales is difficult due to sales departments being scattered in various regions globally. We have begun integrating production-and-sales activities in cooperation with the top management of each region to strengthen our response to demand fluctuations.

Tateoka：

We regard inventory reduction, including changing mindsets on the frontline, as an issue we must continue to address. We are currently positioning inventory reduction as “production reform,” advancing an integrated reform that goes beyond mere equipment renewal to also encompass logistics reform and the optimization of inventory assets. These initiatives are gradually beginning to show results. Our approach is first to build a standardized framework in Japan, and then to roll it out globally. Regarding the technical capability that Ms. Wada pointed out, we also hope to channel this, through “production reform,” into a driving force for structural reform as a whole.

Deepening Governance through Clear Separation of Execution and Oversight

Murakoshi：

Our company is a Company with Nominating Committee, etc., under which substantial authority has been delegated to the executive side, and oversight and execution are clearly separated. Most matters relating to business execution are simply reported to the Board, but as an Outside Director, whenever I feel there is insufficient content in a report, I make it a point to encourage deeper discussion through questions. There are many important themes such as production reorganization, and by asking thorough, probing questions, I believe that, as a result, execution and oversight are able to engage in discussion with a strong sense of tension. At present, we are at a stage where concrete reform actions under the Medium-term Management Plan are frequently brought up as reporting matters. We have posed fairly rigorous questions from multiple angles regarding background and pace, and in a good sense, discussion time has been lengthening. That said, I do feel that the level of specificity in reports from the executive side is sometimes insufficient, depending on the case. We currently hold pre-briefings on important matters for resolution, and I believe we need to further deepen this process, such as by using these sessions to more precisely organize the content of reports and the key points for discussion.

Wada：

To deepen discussion at the Board of Directors and make it a more substantive forum for review, I believe it is important to further improve the quality and specificity of reports from the executive side. Rather than simply explaining results or progress, what is required is to share the logical thread of the strategic scenario — what the original aim was, what progress has been made against it, and what countermeasures will be taken if there is a delay. By firmly sharing the fundamental aspects and background of the strategy as a premise, the issues become clearer, and I believe this also enables the oversight side to engage in more accurate discussion.

Tateoka：

As you point out, we take very seriously the fact that, until now, there has tended to be too much emphasis on reporting results. Reporting on progress in line with the plan is important, but if we are to explain structural reform, the essence of this reform lies in displaying, in light of changes out in the open, what kind of business structure we are transforming into and what kind of improvement is expected as a result. We will strive to show the background more explicitly than before, and to explain the progress of measures taken and the issues that remain unaccomplished with greater precision.

Yanagida：

Through the rigorous points and opinions raised at the Board of Directors, I myself have been able to recognize issues that would not have been apparent from an internal perspective alone, and have gained significant insights for planning on the executive side as well. For example, there was a moment that made me realize that, because the target market for the Bearing Business itself is extremely diverse, our explanations from the executive side may have become overly broad and unfocused. I believe we need to prepare reports that convey the overall picture, the essential issues, and the countermeasures in a more organized manner. As a result of this, I feel that our own deliberations are becoming more refined and better able to get to the core of the matter. We will continue to work on improving the precision of our reporting going forward.

Expectations and Development toward Future Growth

Wada：

In response to the rapid catch-up by Chinese manufacturers, an important question is whether to strengthen our competitive advantage through technological excellence, or to step into areas where we can target a broader market. In the case of bearings, I believe we could consider not only improving basic performance but also new directions, including the evaluation of how bearings are actually operated. Precisely for that reason, how we envision the direction of growth is important. Rather than remaining focused solely on structural reform, I hope the executive side will develop initiatives with this kind of future in mind.

Murakoshi：

I believe the point Ms. Wada raised is an important one. For example, as robotics continues to advance, the scenes in which bearings are needed to smoothly control diverse movements should certainly expand. In that kind of future, we need to prepare ourselves so that the Company can stand in the competitive ring. The important premise for this is to thoroughly complete structural reform in the remaining one year of the Medium-term Management Plan, and to build a structure that leads to our next stage of growth. As the Board of Directors, we too will fulfill our oversight function toward achieving this.

Yanagida：

As Mr. Murakoshi pointed out, I believe it is important to fully complete structural reform within this coming year, and furthermore to continue maintaining an appropriate structure thereafter in response to changes in the business environment. First and foremost, our premise is to firmly build the foundation for our future growth strategy. We have already completed our review of the optimal production structure to meet demand. We will continue to maximize profit through thorough cost reduction. We have begun initiatives such as swift technology development adapted to market needs, differentiation through services that leverage our technical know-how, and efficient supply and inventory reduction through enhanced global production-sales coordination, and we will steadily translate these into results. In this final year of the Medium-term Management Plan, I would like to firmly confirm the direction for our next stage of growth.

Tateoka：

What I want to convey to the members of the business division is that a certain level of foundational work for structural reform has now been achieved. Going forward, we need to speed up on both fronts—market development and product development. As Ms. Wada pointed out, it is important to connect structural reform to the growth strategy that lies beyond it. We will share our direction globally and roll out further reform measures.