Hitachi Integrated Report 2022

CEO Message

Introduction

Whatʼs Hitachi

The Story of Collaborative Value Creation with Stakeholders

Materiality

Value CreationBusiness Strategies

The Value Creation Process

Sustainability

Mid-term Management Plan 2024

Data49Financial Strategies

CFO Message

Corporate Governance
Human Resources Strategies

CFO Message

Growth is one of the most important management objectives
in the Mid-term Management Plan 2024.
We will optimally allocate cash brought from organic businessgrowth, and generate further growth towards the future inconjunction with strengthening shareholder returns.
I was appointed CFO in April 2020, in the second year of the Mid-term Management Plan 2021.
Through various measures implemented during the Mid-term Management Plan 2021, suchas reorganizing the business portfolio, revising low-profit businesses and establishing ROIC
management to raise capital efficiency, we have transformed our business structure into one thatis able to increase profit in a stable fashion.
Hitachi aims to constantly achieve business growth and generate profits and cash by using its
10 trillion yen in assets as a base, but the contents of the assets that contribute to earnings
change considerably over time. How we think assets structure to maximize profit and cash in a
rapidly changing management environment now truly requires “an awareness of the times andresource allocation” on the part of management. We will continue working to build a financialbase to support that.

Results of the Mid-term Management Plan 2021

Yoshihiko Kawamura
Executive Vice President and Executive Officer, CFO, CRMO
Joined Hitachi in 2015 after serving as an executive officer at Mitsubishi
Corporation and as an economist at the World Bank. Leveraging theexperience he gained at Harvard Business School, he has driven structuralreforms as CSO (Chief Strategy Officer) since 2018 and as CFO (ChiefFinancial Officer) since April 2020. Current position from April 2022.

During the Mid-term Management Plan 2021, we were forced to revise our numerical targets
in a severe management environment that continues to this day, with the COVID-19 pandemic,
unstable international environment, semiconductor shortages, sharply rising material prices,etc. Under these difficult conditions, we have recognized the need to go back to the basics ofmanagement and have given greater priority to increasing our resilience to exogenous impacts,
such as by thickening liquidity on hand.
Meanwhile, we have been steadily working on existing management issues for some time andhave proceeded with considerable boldness to deconsolidate listed subsidiaries, and shift
to a business portfolio centered on digital and environmental businesses. The acquisition of
GlobalLogic and the ABB power grids business (now Hitachi Energy) is indicative of this. In
parallel with these initiatives, in order to achieve an operating income ratio at the 10% levelacross the board, we checked all businesses with using operating income ratio of 5% as abasis (half of the target operating income ratio), and pursued integration and optimization as

Hitachi Integrated Report 2022

CEO Message

Introduction

Whatʼs Hitachi

The Story of Collaborative Value Creation with Stakeholders

part of a review of low-profit businesses. We also responded
by utilizing our relatively healthy balance sheet to undertake
large-scale growth investments.
As a result of these activities, in fiscal 2021 adjusted operating
income ratio stood at 7.2%, with net income attributable toHitachi, Ltd. stockholders reaching a record high of 583.4
billion yen. In addition, I believe that our efforts to continue
with our transformation even under this harsh environment
have led to results, such as the cumulating 2.1 trillion yen inoperating cash flow generated over three years.

The Challenge of the Mid-term Management
Plan 2024
To become a leading global company, we will strive to (1)further improve profitability; (2) enhance the ability to generate
cash; and (3) address the ongoing issue from the Mid-termManagement Plan 2021 of boosting capital efficiency.
Growth through Lumada is a pillar of improved profitability.
Working from a base of the assets shifted with a focus
on digital and environmental businesses, we will improve
profitability by raising the proportion of our businesses thatare service-oriented, such as maintenance, upkeep andrecurring services in each sector. I believe we can also improve
profitability by continuing to implement reviews of low-profit
businesses.
Enhancing the ability to generate cash is a major challenge
now that we have completed a round of major M&A activities
and asset sales. Moving forward, we need to focus onmeasures to ensure that organic profits will lead to cash
generation. Corporate and Hitachi’s business divisions
are jointly operating a cash flow reform project. By further
improving efficiency when profit recognized in profit and loss
statements is converted into cash, we will achieve our Midterm Management Plan 2024 target of core FCF totaling 1.4
trillion yen (cumulative total over three years). Key measuresthat make up the project include management that isMateriality

Value Creation

Business Strategies

The Value Creation Process

Sustainability

Mid-term Management Plan 2024

cognizant of the marginal efficiency of funds, the introductionof best practices beyond business, improved cash conversion
management, cash flow visualization, and a shift in the internal
mindset away from profits on P/L statements towards anemphasis on cash flow.
We will also continue to work on ROIC as a KPI to improve
capital efficiency. We are already using the ROIC tree to spread
understanding internally, and this is leading to grassroots
action at each workplace. This has also strengthened theunderstanding that businesses unable to cover their capitalcosts are damaging corporate value.

Strengthening Risk Management
Amid an increasingly uncertain global climate typified by thecrisis in Ukraine, starting this fiscal year Hitachi developed astructure to comprehensively monitor both financial and nonfinancial risks. This means that as CFO, I have taken on theconcurrent role of Chief Risk Management Officer (CRMO).
We have been working to quantify investment and the otherfinancial risks by using a statistical method known as avalue-at-risk model, and are currently revising consolidated
management risks from having more than 800 companies
under the group umbrella and geographic risks from overseas
expansion from the perspective of overall management. We
will also consider a well-balanced approach to non-financial
risks, from quality assurance and compliance to safety andBCP measures in the event of natural disasters.

Enhancing Corporate Value through Dialogue
with the Capital Markets
I personally place an importance on dialogue with the capitalmarkets. We should be accountable to the shareholders
who have invested in Hitachi in terms of how we manage
the business, and we must also demonstrate appropriate

Corporate Governance
Human Resources Strategies

Data50Financial Strategies

CFO Message

shareholder returns. Through dialogue with the capital markets,
we often get comparisons with other companies, perspectives
and insight from the capital markets, and advice of all kinds,
making bilateral dialogue immensely productive. I believethat explaining the initiatives we will implement to achieve theperformance targets outlined in the Mid-term Management
Plan 2024 and steadily delivering on shareholder returns
including share buybacks are an important part of building a
relationship of trust with the capital markets.
Going forward, I think we will need to further consider how
intangible assets such as human capital and intellectual
property help improve corporate value, and link non-financial
KPIs to financial value. I hope to lead efforts to shape acommon language with the capital markets by exploring
what factors of production affect the value (added value) offinal goods and services, and considering the application of
the concept of “factor endowment” in economics (a model
to show the level of contribution that input resources such as
capital and labor make in the creation of added value).