CEOMESSAGE
Toshiaki Higashihara
President & CEO

In fiscal 2017, Hitachi shifts into high gear. Our Social
Innovation Business will leverage our digital technology tocreate new value around the world.

“What kind of company will Hitachi be ten years from now?”
My thoughts on this topic are clear: “Hitachi must be the kind of company whose very
name is synonymous with innovation.”
Hitachi delivers innovations that answer society’s challenges. With our talented team andproven experience in global markets, we can inspire the world. This is our Vision, and it isup to us to make it a reality—to help establish a sustainable global society through ourbusiness operations.

8Hitachi, Ltd. Integrated Report 2017

Our Business ModelShifting into high gear

CEO Message

Hitachi is currently moving forward with its 2018 Mid-term Management Plan, targetingfiscal 2018. In the first year of the plan, fiscal 2016, we enacted a range of reforms to lay astrong foundation for future growth. Strong organic growth in individual businesses drove
revenues, adjusted operating income, EBIT, and net income attributable to Hitachi, Ltd.
stockholders to levels exceeding the forecasts we announced at the beginning of the fiscal
year. The company’s ROA* and free cash flow have improved, and all promises made to themarket have been fulfilled.

Fiscal 2016 Results and Fiscal 2017 Projections

FY 2016

FY 2017 (plan)

9,162.2

9,050.0

Adjusted operating income

587.3

630.0

Ratio to revenues

6.4%

7.0%

EBIT

475.1

580.0

Ratio to revenues

5.2%

6.4%

Net income attributable to231.2

300.0

Revenues

Strategic Focus

Billions of yen

Hitachi, Ltd. stockholders

Management & GovernanceValue Creation

Internal reforms included work on the selection and concentration of businesses. We
made decisive progress on deconsolidating our three listed subsidiaries (Hitachi TransportSystem, Ltd., Hitachi Capital Corporation, and Hitachi Koki Co., Ltd.) and enacting
structural reforms for less profitable businesses. We also continued our transition from a
product-out organizational structure to a market-driven one, and our launch of the Lumada
IoT platform will enable us to create enormous new value moving forward.
In fact, we are currently redesigning our entire business model around the axis ofLumada. Many businesses around the world provide consulting, products, or system
integration (SI) separately, but we believe that only Hitachi can deliver full, end-to-end
solutions, from exploring customer issues to constructing and maintaining actual systems.
Our shareholders tell us that they agree with this assessment of our strengths and ourapproach to reform. They are voicing their approval of our strategic direction and urging us
to move swiftly toward realizing its potential. We are determined to live up to theseexpectations. In fiscal 2017, we will shift into high gear, accelerating our activities in arange of fields globally in order to leap ahead.

Hitachi, Ltd. Integrated Report 2017

9Performance* ROA (Return on assets) = Net income ÷ Total assets (Average between the end of the current fiscal year and the end of the previous fiscal year) x 100

Optimizing our business portfolio with a redesigned balance sheet
In Hitachi’s last Integrated Report, I wrote of the clear distinction we saw between businesses tobe reinforced and those to move away from, and promised that we would focus on leveraging
our digital technology in our Social Innovation Business. To keep that promise, in fiscal 2016 weassessed which businesses we would need to move away from, including through divestituresof our listed subsidiaries. As we shift into high gear for fiscal 2017, we will remain focused on
the synergies within the Hitachi Group and maintain a medium- to long-term perspective as ourambitious M&A initiatives add to our corporate value.
Our 2018 Mid-term Management Plan includes investment expenses of 1 trillion yen, nearly
double the equivalent figure in the previous plan. We are proud of the superior human capitaland technology that we already command, but one of our pressing challenges is to further
strengthen our resources and develop maintenance businesses as opportunities expand anddigitalization progresses in regions where we have not yet established a significant presence.
This will be one of the issues informing our strategic M&A activity going forward.
Our acquisition of the US air compressor manufacturer Sullair in July 2017 is an excellent
example of intra-Group synergy of this sort. Sullair has a customer base of around 4,000
companies, and we are now well positioned to offer these companies not only existing Hitachi
products but also new digital solutions incorporating Lumada. To take another example,
Hitachi’s purchase of the UK elevator sales, installation, maintenance, and servicing company
Temple Lifts Ltd. will allow us to strongly expand our elevator business, previously centeredaround China and Japan, into the United Kingdom and the rest of Europe—another step
toward global growth.
Of course, if each business unit and company within the Group pursues its own profit andengages in its own M&A activity in isolation, this will not necessarily improve the efficiency of thebalance sheet of the Group as a whole. Recognizing this, in April 2017 Hitachi established anInvestment Strategy Division directly under the CEO to coordinate and optimize asset allocationand efficiency for all Hitachi businesses. This division will examine investment opportunities andset priorities in accordance with companywide strategies.
In this uncertain age, Hitachi will also strive to implement rigorous risk management responsive
to global trends—for example, establishing an energy mix sensitive to geopolitical risks andenvironmental problems. Another high priority will be redesigning our balance sheet alongsidecontinuous review of our portfolio to ensure they continue to meet current requirements.
10Hitachi, Ltd. Integrated Report 2017

Our Business ModelUniting the Hitachi Group for stronger cash-generating capability

Strategic Focus

CEO Message

Alongside these Group-wide efforts to optimize our business portfolio and redesign our balance
sheet, I believe that the mindset of our employees regarding costs and cash is also vital to ourongoing development.
Hitachi has historically been steeped in a mindset oriented toward monozukuri, meaningawareness of issues such as the need to reduce manufacturing costs at the factory level.
As a global company, however, we must earn and generate cash if we are to surpass ourcompetitors. It did not seem to me that sufficient attention was paid to this within the company.
To convey my focus in this area, I have been holding town hall meetings for employees at
locations around the world. Three years have now passed since I became president, and I feelthat my ideas have taken firm root throughout the company. As Hitachi prepares to shift toward
its Social Innovation Business leveraging digital technology, it is gratifying to see a significant
improvement in employee awareness of costs and cash—not to mention a new determination to
pursue improvements in these areas.
Currently, with the Hitachi Smart Transformation Project, we are benchmarking our global
competitors’ cost structure targets for each business in order to plan ways to maximize ourgross margin and optimize selling, general, and administrative (SG&A) expenses, and to improve
our cash conversion cycle (CCC) across manufacturing, services, and other areas of ourbusiness. Moving forward, by leveraging digital technology through Lumada, we will advanceour visualization and optimization of work processes across the entire Group, with the goal offurther transforming cost structures and enhancing our cash-generation capabilities.

Hitachi Smart Transformation Project

70 days

Reduced lead time by sharing order
receipt information between Frontand manufacturing divisions.

FY 2016

26.0%

FY 2018

Over28%Reduced costs of purchased items
through cost design from the designand development stage.

C/FImprovement

FY 2016

19.6%

FY 2018

20%

Value Creation

72.2 days

FY 2018

SG&A Expenses to Revenues

Standardized operations to control
increase in SG&A resulting fromstrengthening Front.

Management & Governance

FY 2016Gross Margin

P/LImprovement

Hitachi, Ltd. Integrated Report 201711

Performance

CCCPursuing shareholder returns with stronger corporate governanceThis increased awareness of cash generation among Hitachi’s employees can partly be
attributed to the stronger structure of the Board of Directors. Our shareholders have come totake an increasing interest in governance in recent years, from the monitoring and auditingfunctions of the Board of Directors to its members’ effectiveness and management transparency.
We are proud of our proactive approach to corporate governance. In 2012, we established ourguidelines three years before Japan’s national Corporate Governance Code was released, andwe continue to pursue meaningful improvement to our governance. For example, dismissal ofthe CEO and selection of a successor were added to the duties of the directors in 2016. Our
independent outside directors come from many different countries and boast front-line
experience in a range of fields. Naturally, they also hold Hitachi to global standards in areas
such as profitability and strategy execution. Their observations during Board discussions arealways stimulating, and they offer clear prescriptions to help Hitachi win globally—for example,
executing certain initiatives more rapidly to address conditions at low-performing businesses. It
is palpably clear that a positive cycle is being established, in which the Board’s objectives areeffectively communicated to the executive officers, including myself, who put those objectives
into effect in business operations.
Regarding shareholder return, our 2018 Mid-term Management Plan pursues this alongside
investment for future growth. The plan sets a hard goal of reaching 400 billion yen in annual net
income in fiscal 2018. In addition to that steady expansion, we are pursuing cash-flow reform toachieve stable growth in the dividend per share as the core of our approach to generateshareholder return. In fiscal 2016, we introduced stock options as a part of compensation
packages, allowing management to share the benefits and risks of stock-price movements evenmore closely with shareholders. Taking a medium- to long-term perspective, we aim to realize
further sustainable improvements in corporate and shareholder value.

Hitachi’s sustainability management
The task of a business has traditionally been to increase profits and give back to shareholders
and society. On the other hand, businesses today are also expected to achieve symbiosis withsociety—to manage sustainability. In 2015, the United Nations identified 17 Sustainable
Development Goals (SDGs)* targeting the most pressing issues that face the global community.
The following year, the groundbreaking Paris Agreement entered into force, aiming to enhance
global efforts to mitigate climate change and its effects. Clearly, companies are being asked toplay an ever-greater role in resolving global-scale issues through their business activities.
Hitachi’s Social Innovation Business is exactly this—sustainability management throughbusiness activities, considering the human experience and the global environment from along-term perspective and aiming to realize a sustainable society and improved quality of life.
We will continue to lead in responding to the issues facing society through our Social Innovation
Business as we actively contribute to achieving the SDGs and other global targets.

* Adopted by the United Nations in September 2015, the SDGs consist of 17 goals and 169 targets.

12Hitachi, Ltd. Integrated Report 2017

Our Business Model

THE FUTURE IS OPEN TO SUGGESTIONSManagement & GovernanceValue Creation

Strategic Focus

CEO Message“What is a ‘Social Innovation Business’?”
After we declared that we would focus on our Social Innovation Business, which combines
our strengths in OT (operational technology), IT, and products, this became another question I
was frequently asked by customers and shareholders. In the seven years since that announcement, our Social Innovation Business has chalked up a sustained and undeniable record ofsuccess. As we enter the IoT era, with digital technology and innovation already combining totransform the structure of business and manufacturing, our Social Innovation Business is
attracting more attention than ever. OT has been one of Hitachi’s strengths since its founding.
Our IT experience, too, has been cultivated for more than 50 years. Our Social Innovation
Business fuses these with digital technologies like big data analysis and AI, arousing highexpectations in the market. We see this as our past achievements and current initiatives bear
fruit globally.
In April 2017, as part of building a medium- to long-term foundation for our Social Innovation
Business, we established a Future Investment Division. Questions around how to improve ourcorporate value or how to develop the human capital to give us the leadership we will need in thefuture are vital, but they cannot be answered without an understanding of the tides ofnext-generation technology and social change, or an exploration of which fields Hitachi shouldstrengthen its presence in over the longer term in response to these trends. The Future
Investment Division was created to meet this challenge by considering such matters in a unified
approach across multiple projects. Within the division, leaders from multiple projects including
cutting-edge robotics and AI work alongside project members, creating the innovations andbusinesses needed to drive the company’s next generation while still upholding the “pioneerspirit” that has been part of Hitachi since the company’s founding.
Hitachi is a gathering of professionals with diverse experience, knowledge, skills, and ideas.
It is also a company with numerous businesses and productlines that make the world better. As CEO of Hitachi, byleveraging those strengths into One Hitachi, I will develop
the company into one which always goes one step beyond
when creating value.
The slogan of Hitachi’s current global brand campaign isTHE FUTURE IS OPEN TO SUGGESTIONS. This represents
our determination to contribute to building the future throughopen innovation arising from collaborative creation with ourcustomers and partners.
I invite you to keep watching Hitachi as we shift intohigh gear to leap ahead.
August 2017

Hitachi, Ltd. Integrated Report 201713

Performance

Toshiaki Higashihara
President & CEO
Hitachi, Ltd.