2021_2q_omron_e

32/33 Questioner(2)

Questioner 2: I have 2 questions. My first question is about your expectation to hit a new record high for annual IAB sales in China. Could you elaborate on what will drive this? On slide 7, you show IAB sales for Greater China rose 19% Y/Y in H1. Earlier, you referred to programs by the Chinese government to support development of new infrastructure as well as batteries, EVs and photovoltaic panels. Can you talk about what proportion of the 19% growth is coming from the Focus domains? Could you also provide more color about how you were able to generate this strong growth? Is it the result of changes made to measures being implemented in China? Were there specific initiatives that have been particularly successful? A. (Nitto) In terms of the domains that grew, certainly semiconductor-related investments contributed significantly. Also within Digital, investment activity levels were very high for rechargeable batteries in China, for a meaningful contribution. In Automotive, the investment environment for gasoline engine vehicles was very tough but investments for EVs, effectively battery-related investments, were quite strong. Our success in winning business in these areas contributed to the strong growth. In Infrastructure, investments related to solar power generation were also strong, on the back of government support programs. Overall, our success reflects our ongoing efforts to concentrate on tapping into such areas and strengthen relationships with customers through the innovative-Automation initiative. We have long been focused on strategically engaging with our customers and are now seeing many of our efforts simultaneously start to bear fruit in the form of revenue recognition at this time. Based on our own estimates, we believe we have been more successful than many of our competitors in winning business during this period, although we do not believe that we were the top player. Q: Understood. I suspect that everyone would be very interested in the growth rates or changes in revenue share for what you previously referred to as the 4 focus domains. Is it possible to provide more information, please? A. The strongest growth is coming from Digital. The growth in Food & Beverage may be best described as moderate, as is the case for Infrastructure as well, although both are up on a Y/Y basis. However, the real driver was Digital. Q. Thank you. My next question is a high level question. Thank you for the most recent integrated report. I read the interview with you, CFO Nitto, and have some questions with regard to the Long-term Vision and Medium-term Management Plan, both of which end this fiscal year. As you think about moving to your next plans, I would like to ask about how you view OMRON’s business portfolio and how you think it will evolve. In the interview, you indicated that the business portfolio should be reviewed on an ongoing basis. As you look to the future, do you think OMRON will or should make changes to the metrics and priorities it uses to evaluate its businesses? A. (Nitto) Thank you for reading the interview! With regard to portfolio management, I believe businesses are living, evolving things, so a portfolio should be constantly reviewed and adjusted on an ongoing basis. This remains my view. We do not have plans to change the criteria we use to evaluate our businesses, which we show on this slide. We believe ROIC is a key metric. We believe it is important for businesses to consistently generate returns that exceed the cost of capital over time, so this is the baseline. That said, from the perspective of driving future growth, we probably need to incorporate more businesses that have the potential to grow strongly in the future but are still at an investment phase and therefore currently have a low ROIC. We should probably also re-examine businesses that currently meet the ROIC criteria but where the future potential may be limited. A good example of this is AEC which we sold last fiscal year. This is why we are constantly reviewing the portfolio. At this time, we do not believe that there is an immediate need to consider major portfolio changes at the segment level. However, within the 4 major business segments, there are still individual business units where profitability is challenged or where we would like to increase the level of investments. We will apply the criteria discussed earlier to assess the individual businesses and adjust the portfolio on an ongoing basis. Q. I would like to confirm one point, please. Earlier, you had indicated that you were seeing new opportunities emerge as a result of the COVID-19 outbreak. Is there no need to think that there will be a significant increase in the number of business units from the current 60? Also, with regard to ROIC management, you have various KPIs or drivers of improvement. In hindsight, are there things where you feel you could have done more? (I recognize that it is probably different from business to business.) To the extent that you see issues, could you share them with us? A. At this stage, it is unlikely we would increase the number of business units significantly. That said, OMRON does not believe in limiting itself only to its current domains. Instead, we have always sought to leverage our core competence of Sensing and Control plus Think to create solutions for emerging social needs. This has led us into new domains. This stance is fundamental to OMRON. From this perspective, we are therefore always looking at new opportunities. Where we believe the opportunities are promising, these domains have been incorporated into the portfolio as new businesses. We will continue to do this. However, we have no intention of adding business units that do not have future potential or the potential for higher margins, merely for the sake of growth. When we think about the future, we are seeing a shift from a focus on material goods to experiences. It is important to take this process of evolution into account when assessing the portfolio. In terms of learnings in hindsight with regard to the metrics we apply, frankly, perhaps we could have invested more to support growth through this process. I do feel there may have been more we could have done in the form of investments for businesses in box B where growth is expected but current profitability may be modest. On this point, I feel that the process is still a work in progress. The big challenge for OMRON is how to grow topline in not just the current domains but also taking new domains into account while also maintaining high profitability: effectively growing the high-margin businesses. I believe this is the next challenge. As we think about the next 10 years, I do feel that we need to do something new to address this. Q. Thank you.