A new start for recovery of trust
I am deeply grateful for the special consideration given by all stakeholders who continuously support the business of Fujikura Group.
In August 2018, it was found that some impropriety cases had occurred in quality control for some Fujikura Group products. I would like to apologize once again for the loss of trust this caused to our valued customers, shareholders, and other stakeholders, as a result of falsification of quality-control data and other incidents involved.
These quality problems represented a manifestation of vulnerabilities in our risk management, so we needed to ensure measures to prevent their recurrence and to improve the monitoring and supervision functions of the Audit and Supervisory Committee and the Board of Directors, in order to enhance our management foundations further. As governance reforms necessary for these purposes, in April 2019 we reorganized the Quality Control Units and Internal Audit Divisions that until then had been under the jurisdiction of individual In-house Companies into independent sections under my direct jurisdiction, to secure quality-related compliance on a Groupwide basis. In June, we added one more outside director. We plan to make steady progress on improving governance and strengthening our quality-control structure through steadily implementing measures to prevent recurrence of these cases.
Taking to heart the fact that quality is the lifeblood of a manufacturer,I, as President & CEO, recognize it as my highest priority to rebuild relations of trust with our customers, trading partners, shareholders, local communities, and various other stakeholders, through formulation and implementation of measures to prevent recurrence of these quality impropriety cases as well as further strengthening our compliance systems.
In 2019, we will strive to improve the Fujikura brand, in order to achieve the goals of the 2020 Mid-Term Business Plan. To do so, I believe that we will need to think corporate value from the various perspectives of the major stakeholders such as customers, employees, and shareholders.
First, we think about corporate value from the perspective of our customers. Specifically, we have established the CS (Customer Satisfaction) Improvement Department under the direct supervision of the President, as we build strong, long-term relationships and regain trust in the brand strength of Fujikura, a technology leader.
Second, we think about corporate value from the perspective of our employees. We understand the work-style reforms is recent trend. However, I am considering job satisfaction (working reward reform) should be our goal.Through maintaining and improving employee motivation and creating environments in which it is easier to work, we will carry out initiatives focusing on enabling employees to do their work autonomously and with pride.
Third, we will think about corporate value from the perspective of our shareholders. Together with enhancing corporate governance and increasing transparency in management, we will strive to make our financial constitution sounder and restore our earning power.
We improve the Fujikura brand through increasing corporate value from these three perspectives.
Progress toward future growth amid tough business conditions
In addition to regaining trust, another of the management missions entrusted to me is that of achieving the goals of the Mid-Term Business Plan.
Three years have passed since I took office as Fujikura's President & CEO in April 2016. Since then, I have aimed to make the Company one that has potential for the future by balancing both high earning power and a strong reformation , to make the Fujikura Group an enterprise that creates customer value as we work toward achieving the goals of the 2020 Mid-Term Business Plan.
However,the business situation which we are facing is still very difficult. In addition to the effects of intensification of competition in domestic and international markets, including those for optical components for data-center use and the domestic wires-and-cables market, other challenges such as cost increases due to rapid rises in raw-material costs related to power-line construction in Bangladesh and rapid decreases in demand for FPCs and connectors for smartphone use resulted in decreased earnings in FY2018. Various other negative factors included rising non-operating costs such as interest on debt, accompanying increased borrowing in connection with capital investment in FPCs and fiber optics, losses on investment arising from poor performance of the power business in Brazil, and extraordinary losses such as those related to the impropriety cases in quality control.
At the same time, our efforts to support future growth started to bear some fruit. In our ultra-high-density SWR® and WTC® fiber-optic cables, strategic products in the telecommunications business, we succeeded in developing WTC® cable bundling 6,912 fiber cores, to connect hyperscale data centers, while also reducing the minimum diameter per optical fiber from 250 μm to 200 μm. These have enabled us to achieve rapid business expansion in data-center-related markets. In Europe, we developed the Air Blown Wrapping Tube CableTM, an optical fiber ribbon cable suited to the construction method unique to the European market of using air pressure to lay cables. We already have begun delivering this product to European carriers. Through this and other means, we have been able to capture demand in the new growth market of fiber-optic network construction in Europe.
In the electronics business, we believe that we have achieved to differentiate ourselves from the competition thanks to our high quality and outstanding productivity. Through digital innovation in manufacturing utilizing AI, IoT, and other technologies, we will increase profitability by manufacturing highly challenging products while maintaining high levels of quality in order to improve our profit ratio.
In the automotive products business, we are making progress on responding to needs for CASE (connected, automated driving, shared/service, electric) technologies, joining together with the electronics business, which has the highest level of affinity to this business, to strengthen our automotive solutions in preparation for CASE demand through the Electronics, Automotive & Connector Business Company.
In addition, in recent years there has been increasing demand from society for responding to climate change. As our long-term vision for responding to climate change, in 2016 we formulated the Fujikura Group Environmental Long-Term Vision 2050, under which we are taking on four challenges toward minimization of our environmental impact, with an eye toward the future in 2050. Furthermore, to sort out the financial impacts of climate-related risks and opportunities, we announced our support for the TCFD and joined the RE100, an international initiative to promote renewable energy.
Due to rapidly changing business environment, our achievements and remaining challenges seems cancelling each other. However we will make progress toward achievement of our goals by demonstrating to the maximum the sources of the Fujikura Group's competitive advantage: our strong relations of trust with customers, our high technological capabilities, and our adaptability to societal changes.
Managing and strengthening our earning power through ROIC management
In addition to promoting understanding of the costs of raising capital, we also strongly advocate throughout the Group thorough management of profits and assets keeping ROIC in mind. In addition, further strengthening our financial constitution is another theme essential to these initiatives. Our debt/equity (D/E) ratio at the end of March 2019 stood at 1.17 times due to increased capital investment in the electronics and optical-related businesses, which represent growth fields in our existing businesses. Our policies call for reducing this figure to less than 1.0 times in the near future and aiming for a figure of 0.66 times as the goal of the Mid-Term Business Plan.
In addition, while investment in R&D stands less than 3% of consolidated net sales at present, by increasing operating margin to roughly 8% or 10% we plan to invest adequately in R&D, which drives Fujikura's reformation and is essential to our growth strategies.
To make steady progress on these growth strategies, it is essential to accurately ascertain and analyze the business conditions and market conditions of each of the Fujikura Group's businesses and develop practical business measures based on doing so. To Fujikura, for which the overseas sales ratio has reached 65% (in the fiscal year ended March 2019), accurately analyzing trends in international markets, particularly the international situation, including increasingly severe trade confliction between the U.S. and China, can be described as an important theme impacting future growth.
To achieve our targets, we will stabilize and grow profits in our core businesses through increasing their profitability, increase Groupwide profitability through investing those profits in new businesses, and create new value by delivering the best solutions to social challenges. I believe that my mission is to realize a sustainable Fujikura Group by building this cycle.
The Fujikura Group's value creation from the perspective of general consumers
The Fujikura Group's management objective is to contribute to the realization of a better society through unceasing value creation. However, the meaning of the term "value" has changed greatly from past to present. Below, we will look at what Fujikura considers value and the kinds of strategies and measures it uses to create such value.
In the past, for a long time Fujikura delivered products combining high quality and reliability, such as wires and cables for electric power use and fiber-optic cables, to power companies and telecommunications carriers. What was most important at that time was that Fujikura's products fully satisfy customers' required quality and specifications. Customer value probably could be said to have been inherent to these products. But today, the Fujikura Group delivers more than just the value of objects.
What Fujikura considers vital in resolving social challenges is the need to remember the perspective of the end users beyond our customers—that is, general consumers. While generally speaking the Fujikura Group's businesses are B2B businesses, today, for example, efforts toward realization of fifth-generation mobile telecommunications systems (5G) are accelerating through both public- and private-sector initiatives. It is general consumers who will enjoy the conveniences of 5G technology, such as improved security in society, advances in self-driving vehicles, and progress in remote healthcare services. To the Fujikura Group, value creation refers to thinking together with our customers about the ideal future society and prospects for consumers' lifestyles, based on thinking about what services truly are needed, and how to respond to various issues and needs related to everyday living, from the perspective of general consumers, and then creating the products and services that will be needed for these purposes.
Doing so also is related to resolving various social challenges in contemporary society, as called for in the Sustainable Development Goals (SDGs). The Fujikura Group will contribute to achievement of the SDGs by putting to use the outstanding technologies and knowledge it has built up through "Tsunagu" technologies to deliver optimal solutions to social challenges—that is, value in both tangible and intangible forms.
Pursuing customer delight (CD) above and beyond customer satisfaction (CS)
Our value-creation goal is customer delight (CD), above and beyond customer satisfaction (CS).
If CS refers to meeting customer expectations, then CD could be said to refer to exceeding those expectations. To deliver products and services that exceed expectations, it is essential that not only sales staff but engineers as well proactively venture outside of the Company and interact with consumers in general, to identify potential wants. In the process of full-fledged implementation of the Fujikura Group's efforts to realize CD, I would like us to establish quickly a positive spiral in which employees worry and think about social challenges from the same point of view as consumers, to experience the series of processes from discovering wants to providing solutions for them, thus increasing their motivation and, as a result, increasing corporate value.
I would like to introduce to you one effort intended to realize CD. In the industrial cables business in which the Fujikura Group is involved, a decrease in the productive population has proved to be a major cause of a very tight market for electrical engineering technicians. This has become a pressing issue in society. In urban development projects as well, there are frequent cases of office buildings on which construction is complete remaining unfinished due to the inability to complete electrical construction work as a result of a shortage of technicians. In light of this situation, the Fujikura Group has developed coupler power cables that can be connected with a single touch, with no need for troublesome construction work. This helps to increase the efficiency of construction and shorten delivery times because there is no need for engineering technicians. I am confident that this represents an epochal initiative based on keeping in mind not only the needs of construction contractors but also those of ordinary consumers, who benefit greatly from urban redevelopment and construction of office buildings.
In addition, we have secured from International Business Machines Corporation (IBM) of the U.S. a license to and technical support for millimeter-wave Radio Frequency Integrated Circuit (RF-IC, or high-frequency IC) technology related to 5G applications, and we are making progress on development of integrated-circuit products (phased-array antenna modules) compatible with the 28 GHz band, known as a high-frequency millimeter-wavelength band. As we aim to commercialize high-frequency modules by installing wireless equipment in base stations to enable high-frequency wireless communication, we expect this to become a business on a scale of billions of yen in the future. In module development, we will utilize the high-frequency design technologies, glass materials, and other materials and technologies that we have built up through our fiber-optics products.
It is ordinary consumers, beyond our own customers, who will benefit from the ultra-high speeds, multiple simultaneous connections, and ultra-low delays of 5G technology. In these ways, we are aiming to realize CD through Fujikura's "Tsunagu" technologies.
Our 2030 Vision toward a comfortable, sustainable future society
Next, I would like to describe my vision of the Fujikura Group's future and the growth strategies that will serve as the process for realizing it.
First of all, we formulated our vision of the Fujikura Group's future, 2030 Vision, in March 2017 and announced it both internally and externally.
This vision calls for helping to resolve social challenges and build a comfortable, sustainable future society through “Tsunagu” solutions as well as realizing sustained increases in corporate value.
This vision envisions the four market areas of Advanced Communication, Energy & Industry, Life-Assistance, and Vehicle.
In the Advanced Communication field, our policy is to strive to build next-generation telecommunications systems centered on 5G.
In Energy & Industry, we plan to utilize the diagnostics technologies—including those for diagnostics of wear to power cables and of expected lifespans—and various types of expertise that Fujikura possesses to expand preventive-maintenance services for power infrastructure and production equipment.
The Life-Assistance field is built around healthcare. In the areas of advanced medical care and remote healthcare services, we will utilize the IT expertise that Fujikura has built up while also driving progress in endoscopy through integration of fiber optics with CMOS imaging sensors, to contribute to extending people's healthy life expectancy.
Lastly, in the Vehicle field we will consider ways to secure new business opportunities as well as creating suitable business units and organizations while focusing on the four CASE trends.
Even more important to the Fujikura Group's growth strategies is the creation of new value that people have not enjoyed before, as a manufacturing company. We must build a virtuous cycle in which uncovering customers' wants leads to creation of new technologies and establishment of new business models, which in turn leads to increase in corporate value leading to provision of value to stakeholders. With regard to creation of new technologies and establishment of new business models in particular, since utilization of internal resources alone will not be enough we will carry out full-fledged open-innovation efforts in cooperation with outside partners. By using collaboration with outside partners to fill in the gaps in technological areas where Fujikura does not yet do business, we will provide comprehensive solutions for various social challenges.
The Fujikura Group's superconductivity technologies, contributing to technological advances in the healthcare field
We feel that our high-temperature superconducting wires have great potential for contributing to technological advances in the healthcare field, as called for under the Life-Assistance field in the 2030 Vision.
In July 2019, we succeeded in developing mass-production technologies for the world's highest-performance rare-earth high-temperature superconducting wires. In the healthcare field, superconductivity technologies are used in applications such as magnetic resonance imaging (MRI) devices and pullers for silicon crystal furnaces. However, due to the high cost of conventional superconductive magnet system using liquid helium, there were high expectations for development of new technology to replace them. Since Fujikura's rare-earth high-temperature superconducting wires meet these needs, we expect them to see market growth and deployment to new applications in the future. Fujikura has continued R&D in the field of superconductivity for many years, continually investing management resources such as funding and human resources. I would like to report to all of you today that this successful development of mass-production technologies has enabled our efforts in the field of superconductivity to advance from the investment phase to the payback phase.
Securing objectivity and transparency in management decision-making by increasing our numbers of outside directors
Next, I would like to talk about strengthening our efforts in the areas of the environment, society, and governance (ESG), one of the basic policies of our Mid-Term Business Plan.
To realize our growth strategies, in June 2017 Fujikura shifted from a "company with company auditors" to a "company with audit and supervisory committee", advanced the decision-making of the Board of Directors, delegated authority to executive directors, and enhanced the supervisory functions of the Board of Directors. In June 2019, we increased the number of outside directors to five, both increasing the transparency of discussions in the Board of Directors and making the Board more effective. Outside directors are appointed who have a wide range of experiences, including those with corporate management experience, attorneys, and certified public accountants. In deliberations in the Board of Directors, the outside directors offer a wide range of opinions, realizing lively debate through means including offering objective points of view and analyzing the risks of management decisions.
In addition, as discretionary committees we have established the Nominating Advisory Committee and the Remuneration Advisory Committee, the membership of each of which includes a majority of outside directors, as we aim for highly transparent management. Each of these committees is chaired by an outside director, securing objectivity and transparency in the processes of appointment of directors and decision-making on remuneration.
Furthermore, to increase corporate value continually over the medium to long term through constructive dialogue with our shareholders and investors, we will promote efforts such as implementation of such dialogue by members of top management, including myself.
Employees are company's treasure. Their health is an important factor
I consider our employees to be treasure to the Company. Fundamental to this conviction is Fujikura Gakuen, a social welfare corporation founded as a foundation in 1919 by Harukichi Nakauchi, the blood younger brother of our founder, by donating from his own personal assets to found a facility to accept people with mental disabilities, at a time when such facilities were almost nonexistent. His desire to contribute to society has been carried on through the years with the support of successive generations of our predecessors since Fujikura Gakuen's founding. Through supporting Fujikura Gakuen, I am learning the importance of valuing human beings as well as an attitude of taking on social challenges. In 2019, Fujikura Gakuen marked the centenary of its founding. The Fujikura Group will continue to consider support for Fujikura Gakuen to be the starting point of its activities to contribute to society.
In recognition of the importance of carrying on our heritage of valuing human beings, I stress essential safety and health management in particular.
With regard to essential safety, I stress repeatedly to employees the fact that safety is the essence of our corporate value. Vowing never to forget past accidents, we have designated April 11 of each year as the "Safety Pledge Day." To realize essential safety, we have adopted a risk-assessment system that focuses mainly on reducing all risks of labor accidents to acceptable levels and eradicating serious accidents.
In promoting health management, we recognize the health of our employees to be an important management asset. Based on this point of view, we are adopting and promoting a wide range of health-improvement programs, including utilization of databases on health-examination results and implementing stress checks. In May of this year, we established Fujikura Social Health Research Institute Ltd. to collect, analyze, and put to use employee health data, beginning efforts to increase our corporate value based on health management.
Toward the next stage, based on relations of trust with our customers
The Fujikura Group considers it to be its unchanging mission to pursue value creation for our customers and contributions to society through "Tsunagu" technologies. This word "Tsunagu" (Japanese for "connecting") is used with three meanings.
First, it expresses how, through development and manufacture of wires and cables, Fujikura has continued to provide products and services that connect devices with each other, devices with people, and people with each other.
Second, it means that through Fujikura's communication of unique value to society through provision of products and services, we ourselves connect with each of the individuals who make up society.
Third, it expresses our strong resolve to contribute to the future progress of society, by passing along our technologies and businesses from the past to the present, and from the present to the future.
Over the period of three and one-half years from when I was appointed President to today, I have continued to express the same message to our employees: "Visit our customers, and think, and worry, with them in the same ways and from the same point of view." It is this approach that powers our ability to uncover customers' wants. When those working in not only sales but also development and production sections engage in dialogue with corporate customers, end users, and consumers in general, they are able to identify what these stakeholders truly desire, or potential wants of which they are not yet cognizant. I am confident that this is where we will find the starting points to the next challenges that Fujikura will take on.
Fujikura's greatest asset is the relations of deep trust we have built up with our customers over our history of more than 130 years. While devoting ourselves to maintaining our strong ties with our customers in the future as well, we will move forward to our next stages of growth and increasing corporate value. We greatly appreciate our stakeholders’ continued understanding and support of the Fujikura Group.