Initiatives for Realizing the Long-term Plan for 2010

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1 Feature Initiatives for Realizing the Long-term Plan for 2010 In accordance with our long-term plan first announced in 2006, we are eyeing consolidated net sales in excess of 4 trillion and an ROE of 10% by fiscal In striving to meet this ROE benchmark, we are seeking to improve the operating income margin as well. Profits, however, are expected to plateau momentarily in fiscal 2008 due to the increasingly large burden of upfront investments related to capital expenditures, recruitment, and other spending required for future growth. DENSO is nevertheless determined to meet its goals for fiscal To cope with anticipated conditions, the Company will accelerate the pace of initiatives outlined in the long-term plan in order to overcome the temporary lull in profit growth. In this year s feature, we introduce several programs and activities that DENSO is pursuing in an effort to make the long-term plan a reality. DENSO Corporation Annual Report

2 Feature 1 Achieving Future Growth DENSO is striving to link future business growth to the development of systems and components that anticipate societal needs in the four areas of the environment, safety, comfort, and convenience. The following is an introduction to just some of the initiatives under way in two of those areas, the environment and safety. Environmental Initiatives Across the globe, fuel efficiency standards to curb CO2 emissions and standards to restrict pollutants in exhaust gas are becoming tighter worldwide. Competition surrounding the development of environmental technologies, meanwhile, is intensifying. The use of ethanol and other environmentally friendly biofuels is also on the rise worldwide. By adding biofuels to its long-standing and comprehensive development of products for gasoline, diesel and hybrid powertrains, DENSO will meet the needs of automakers at every possible turn. Gasoline direct injection engines have proven effectiveness in boosting fuel efficiency. At DENSO, we are aiming to make this technology a more standard feature in gasolineengine vehicles through advances in components for fuel injection systems. Specifically, we are working to develop technologies that can continuously improve performance of the fuel pumps and injectors, while at the same time lowering costs. Where diesel vehicles are concerned, in the very near future DENSO is planning to launch a third-generation, 2,000-bar diesel common rail system that features lower emissions, better power output and improved fuel efficiency. For hybrids, although combining engines with electric motors has substantially enhanced fuel efficiency and power performance, such vehicles also require more components than conventional vehicles. This has led to calls for better performance and more compact size in every type of component, two areas that DENSO is currently addressing. Meanwhile, in response to the growing use of biofuels, DENSO is collaborating with automakers to gather information on fuels worldwide, while building a product development framework with an eye to launching products for these fuel markets. Diesel common rail system High output power control unit for hybrid vehicles 10 DENSO Corporation Annual Report 2007

3 Wireless safety unit Safety Initiatives Safe driving demands that drivers pay close attention to surrounding conditions, making accurate decisions accordingly. DENSO is contributing to traffic safety worldwide by developing systems that link people, vehicles and society. In this way, DENSO is aiming to give greater consideration to drivers while bringing a renewed sense of fulfillment to the driving experience. Two systems for achieving this goal are currently under development. First, we are helping to better link drivers to vehicles with driver assistance systems that monitor the state of the driver. These are technologies, in other words, for recognizing the driver s face, as well as measuring eye blinking and heart rate. Monitoring the state of the driver s eyes, for example, can give a sense of how drowsy they might be. Knowing beforehand the driver s level of inattention could assist in avoiding potential dangers that might be ahead. DENSO eventually hopes to apply this technology to a variety of different safety systems. Second, we are developing cooperative systems from the perspective of better linking drivers to society. DENSO is collaborating with automakers that are participating in national projects in Japan, the US and Europe. The objective is to create innovative road safety systems consisting of wireless communication between different vehicles on the road, roadside transmitters, and traffic control centers, as well as other types of infrastructure. These systems will play a major role in reducing traffic accidents such as preventing collisions at intersections and rear-end collisions at the end of traffic jams by informing drivers of crucial information in a timely manner. In addition to enhancing safety, these systems may also contribute to better environmental performance by reducing CO2 emissions through more sophisticated control of traffic flow and other benefits. Although the completion date for these systems is likely to be after 2010, DENSO is nonetheless taking an active role, recognizing that development activities in these safety system projects will enable it to leap ahead of other firms by being the first to develop and provide prototype dedicated short range communication (DSRC) devices which are wireless safety units (WSU) for the systems. Cooperative System Global Positioning Satellite (GPS) Hot Spot Network Vehicle to Hot Spot Traffic Management Center Vehicle to Vehicle Vehicle to Infrastructure Vehicle Roadside Infrastructure DENSO Corporation Annual Report

4 Feature 2 Improving Cost Competitiveness Until recently, Business Groups at DENSO were largely responsible for spearheading cost-reduction programs, with a focus mainly on their respective products. As part of long-term plan initiatives, however, each product-centric approach has been joined by an emphasis on cross-function approaches. In other words, we are aiming to further enhance cost competitiveness by promoting cost reductions on a company-wide scale with respect to raw materials, components, and fixed costs. Raw Materials As a means of coping with higher costs for raw materials, DENSO is promoting its All Material Cost Kaizen Activity. For example, we are working to reduce unit costs for raw materials by improving the way that central purchasing, local procurement promotion and other buying activities are carried out by procurement divisions. Engineering divisions, meanwhile, are taking steps to control the unit cost of products and components, as well as the volume of raw materials required, by reviewing basic specifications. Actions here include incorporating into designs ways of yielding more usable materials and replacing specialty materials with commonplace or multipurpose alternatives. Manufacturing divisions, for their part, are paring back the volume of raw materials used in manufacturing processes by lowering the defect ratio of components and reducing the amount of scrap. Measures have even been expanded to include the extensive collection, recycling and sale of any scrap that is produced. Components For purchased components, DENSO previously set price targets for every procurement region in an effort to reduce costs. Today, we have strengthened our capability to compare prices internationally and conduct cost analysis, with the goal of purchasing at the most competitive level possible on a global basis. Most notably, we are now reducing costs by promoting greater standardization and commonization of components and limiting the types of products bought in order to optimize procurement, as well as by cooperating with suppliers to improve production methods. 12 DENSO Corporation Annual Report 2007

5 Main Air conditioners, Engine ECUs Instrument clusters, Injectors Product Growth-driver Hybrid vehicle components, Common rail systems Low-cost Air conditioners, Starters Alternators Material All Material Cost Kaizen Activity Crossfunction approaches Components Cost comparison/analysis Maximize impact Respond to calls for lower prices from customers Preserve superior cost competitiveness versus rival manufactures Develop a full line up of products for low-priced vehicles Fixed costs Focus on high-ratio Group companies Fixed Costs Specifically targeting Group companies, DENSO is reviewing the work performed by indirect administrative and manufacturing divisions, while vigorously encouraging the use of shared regional services and greater integration of functions at regional headquarters. In doing so, we are looking to trim fixed costs by streamlining operations. Powerfully promoting an approach to cost reductions that is both product-centric and cross-functional will enable DENSO to consistently respond to calls for lower prices from its customers. In parallel, while preserving its superior cost competitiveness versus rival manufacturers, this approach will allow DENSO to develop a full lineup of products for low-priced vehicles. DENSO Corporation Annual Report

6 Feature 3 Promoting Efficiency Through Capital Investment Promoting Efficiency Through Capital Investment DENSO s earlier pursuit of efficiency through capital investment focused on realizing high productivity levels, primarily by increasing the automation of production lines and boosting line speed. However, there were inefficiencies in the previous production system for two main reasons: the large size of the equipment itself and inefficient machine movement, and the division of manufacturing plants and areas based on production processes, such as parts processing and assembly, resulting in waste in both inventories and transportation inside facilities. This situation prompted us to roll out programs to innovate our production lines. The aim here was to build and promote fully integrated production lines where the concept of CS3 (Compact, Simple, Slim, Speed) is thoroughly entrenched. Compact: A compact production system that still preserves the Simple, Slim and Speed aspects of the CS3 concept. Simple: System construction that is simple, yet realizes high quality. Slim: Net processing ratio that produces high added value and no waste. Speed: Swift preparation and production using only the required amounts for each product. In previous innovation efforts, we achieved substantial reductions in costs in our processing and assembly equipment by using innovative approaches to integrate component parts, and through the construction of compact assembly lines. In contrast, innovation measures were delayed in supply and transport equipment, despite such equipment accounting for 30% of total production line costs. 14 DENSO Corporation Annual Report 2007

7 Increase Efficiency of Capital Investment Budget Control Plan Technology Innovation Do Budget management Review evaluation method Simplification and standardization of products Optimization of facilities Processing, assembly: Introduction of CS3 Supply, transport: Simplification of goods flow Local procurement Enhance Processing Level of innovation Technology innovation Processing Assembly Model production line Innovation in conjunction with processing and assembly Resources Management Check Strengthen startup flow Increase operating and space efficiency Optimize regional production and supply capacity Supply Transport Catch up (year) As part of the long-term plan, we will focus foremost on continuous efforts to bolster and promote technology development for processing and assembly equipment and apply this technology to production lines. Supply and transport equipment will also be targeted with stronger measures, with attention given to reducing equipment costs by simplifying the flow of goods and components right from the process design stage. Specific initiatives will be: (1) Clarify which points to emphasize regarding the method of flow, and thoroughly eliminate hidden inefficiencies related to the packaging of component parts supplied to production lines, transport methods and transport trajectory within the production line. (2) Bring a variety of approaches to bear in creating production lines that either minimize or avoid the need for transport and supply work altogether. One approach will be to eliminate work-piece direction change and dramatically condense the length of workpiece travel within the production line by investigating which product shape provides the best line flow. Another approach will be to reduce the amount of transport equipment used and develop simple component parts supply devices, transport robots and other low-cost transport and supply equipment. DENSO Corporation Annual Report