2019_4q_omron_e

36/39 Questioner(3)

(Questioner 3) I am Komiya of Mitsubishi UFJ Morgan Stanley. Given that we have CEO Yamada with us today, I would like to ask for your views. I, too, was somewhat taken aback by the decision to create a separate risk factor for earnings fluctuation at the corporate level. You have indicated that management considered a number of downside scenarios. Should we view your stated earnings forecast as a level that you are definitely committed to achieving even if the environment is worse than you have assumed? I would also like to understand what it was about the uncertainty you felt which led you to adopt this format. The market has been through inventory adjustment phases before. What is different this time? Equally, if it wasn’t the uncertainty, I would be interested in knowing if this reflects initiatives to enhance how you manage the business. (Yamada) First, the ￥65 bn OP target is a level that we are determined to achieve. As I have already noted a number of times today, the bottom-up aggregation of the forecasts of each segment adds up to ￥70bn; each of the businesses will be working toward achieving this level, but the ￥65 bn target is a base-line level that we are determined to achieve. This is the first time we have taken this approach. It reflects the high level of uncertainty that we see. The uncertainty is not specific to OMRON but reflects the uncertainty we see in the behavior of our IAB customers and their investment plans. There are investment projects that are still being funded for capacity expansion or upgrades to facilities but many of these are now on hold with no clarity on timing. Once there is clarity on the market outlook, we would expect these projects to proceed but frankly, at this time, we have no idea when that might be. This is what led us to take this approach to our full-year forecasts. Obviously, the market outlook could change; we will be closely monitoring trends. We would hope to be able to achieve and perhaps overshoot this plan if possible. (Q) Thank you. In FY2018, there was a sharp deterioration in market conditions in December. When I look at the Y/Y declines for IAB in 2H, profits are off sharply and the margin is down substantially. With regard to this, there was a similar pattern of profit declines immediately after you became CEO. If you compare the two downturns, how would you assess IAB’s resilience to changes in the external environment? How has the business changed? This time around, the downturn coincided with an investment phase. Looking in from the outside, it is difficult to separate out the advance investments from other costs. If you exclude the advance investments, how do you think IAB’s ability to respond to changes in the external environment has changed? (Yamada) Just to confirm that we are talking about IAB, yes? I can confidently say that the IAB business has clearly improved. Today, I talked about AXI, but there are many other solution packages that are strongly supported by our customers. Optically, the profitability of IAB appears to have fallen because we have been prioritizing investments in R&D and marketing. The GP margin has actually continued to rise. Obviously, there are factors for variability from time to time, but compared to 2011, 2012 or even 2015, the business is stronger. To give you one example, OMRON has ATCs which act as a forum for engagement when our application engineers start to work with a customer to develop a new solution. In Japan, there is one at Kusatsu and another in Kariya. We are currently in the process of increasing the number of ATCs to 35 on a global basis. Two years ago, we had seven. We are proactively investing in contact points for our customers, where we can jointly create value, and hiring system engineers. I believe this is the source of IAB’s strength. (Q) I apologize, but I may not have asked my question properly. I was interested in knowing whether you feel that this time around, you were able to respond more quickly to the change in the environment, or you were able to detect the change earlier, relative to the previous downturn. (Yamada) I see. I think that we were able to respond faster than before. Although we operate through distributors, for the kinds of solutions packages we discussed earlier, we are interacting directly with the customers during the sales process. The ATCs are one example of how we have made this happen. By interacting with customers at the ATCs, we have visibility into the status of customers’ investment projects, so we have an immediate sense for whether the customer is likely to go ahead or whether it may be suspended. We have direct relationships with the leading customers in each industry, which I believe has significantly improved our access to information on customers’ investment plans. (Itagaki) Could you pass the mic to the person in the front, please?