How We Will Grow

CFO Message

Supporting Hitachi Group’s
Social Innovation Business throughthe appropriate capital allocation

investments, a 10% adjusted operating income ratio and 10%ROIC. Debt has increased considerably in accordance with themassive investment Hitachi made to acquire ABB’s power grids
business, resulting in a temporary elevation in the Debt/Equity (D/E)
ratio above our target of 0.5 times, which was set relatively
conservatively. Hitachi plans to continue investing in growth while

Yoshihiko Kawamura

leveraging under the adequate financial discipline and controllingdebt so the D/E ratio falls back below 0.5 times going forward.

Senior Vice President and Executive Officer, CFO

When executing investment, it is necessary to create earnings
opportunities while managing risks. By understanding and analyzing

Mr. Kawamura joined Hitachi in 2015 after serving as an executive officer at Mitsubishi
Corporation. Leveraging the experience he gained at Harvard Business School and thethe constant changes in the business environment and considering

World Bank, he has played a key role as Chief Strategy Officer (CSO) since 2018 andsocietal issues, our competitive advantages and constraints on

has driven structural reforms and the design of the 2021 Mid-term Management Plan.

management resources, we seek to properly identify and manage aHe was appointed Chief Financial Officer (CFO) in April 2020.

variety of risks as a company. I believe one of my most importantduties is to judge and monitor these risks.

Q: Having been promoted from CSO toCFO, how are you approaching your roleas CFO?

Hitachi follows strategies that move it closer to its vision ofbecoming a global leader in the Social Innovation Business. It is
important for us to support business units, the front lines foradvancing its strategies, on the financial side. I believe the core
mission of the finance department is to maximize efficiency in theprocurement of financial resources and effectively deploy them tofacilitate their sales activities without restriction.
Hitachi promotes the Social Innovation Business by amplifying its
presence in social infrastructure and digital transformation. As
exemplified in the acquisition of ABB’s power grids business, It isnecessary to mobilize a large sum of funds for the Social Innovation

Q: Can you explain Hitachi’s approach tocapital allocation?

Business, and we need to come up with an optimal solution to theseHitachi is keenly aware of the importance of growing in tandem withcan be made in a timely manner. Hitachi has an adequate level ofIn the past, operating income and operating income ratio were ourcapital markets. We believe in the importance of having constructive

liquidity, as the pace of capital accumulation has accelerated

results, the actual work of legal financial accounting, and ensuring

key performance indicators. In addition to these KPIs, we introduced

conversations with participants on capital markets that watch

alongside constant increase in profits. Readying a foundation foraccounting compliance. In my previous role as the CSO, I oversaw

ROIC as a new indicator last fiscal year, for the purpose of clarifying

companies in various industries along different time lines. For thisprocuring funds is a crucial element of financial strategy, and thisgrowth and investment strategies, as well as the Mid-term

The primary duty of the CFO is to make management decisions,mainly about investments, in addition to budgeting and compiling42

Q: Last year, Hitachi added return on invested
capital (ROIC) as a key performanceindicator. What are your thoughts on ROIC
management over the past year?

Q: What is Hitachi’s policy on allocating
financial and nonfinancial resources inline with its aim of becoming a global
leader in the Social Innovation Business?

funding needs. In addition, it is important to prepare a financial
foundation on a regular basis so that these essential investments

our intention of pursuing profits commensurate with the cost ofreason, we make a concerted effort to prepare informationalfoundation entails building cordial and all-around relationships withManagement Plan. As the CFO starting in April this year, I support

capital, while remaining aware of the balance sheet. Hitachi is inenvironment for it. Accordingly, this fiscal year, we took a leap of

external financiers and investors, including financial institutions andtop management in making business decisions by allocating capital

position to accelerate company-wide growth by improving capitalraising our disclosure level of managerial information. I hope thatcapital markets around the world, international institutions andand funds across the entire company and comprehensively

efficiency and concentrating management resources in highly

these enhanced disclosures will shed more light on Hitachi’s

government entities.

monitoring returns as a result of it. Japanese companies divide up

profitable businesses. Foreign investors make up approximately

management conditions among capital market participants.

Furthermore, social expectations for corporations have changed

the roles and responsibilities of the CSO (a majority of which belong

50% of Hitachi’s shareholders. Part of the reason why we introduced

Hitachi mainly considers growth investments in the area wheredramatically. For a sustainable company, the nonfinancial side hasto the corporate planning department) and the CFO, but around theROIC as a KPI is because these foreign investors pay close attention

significant synergies with Lumada, our strategic core, can bebecome increasingly important, in terms of contribution to solutions

world, many companies combine the functions of the CSO andto the cost of capital. Over the past year, we have striven to instill

anticipated, namely digital and IT businesses. In an environment offor social and environmental problems, in addition to management

CFO. I believe the experiences I gained as the CSO will be useful in

ROIC management from business units (individual profit centers) to

rapid advances in technology (big tech era), being too much

indicators that focus on profitability. Hitachi is proactively tackling

fulfilling my responsibilities as the CFO.

the front lines by using an ROIC tree, which breaks down thecautious on investment strategies could translate into various

social and environmental issues, such as by reducing its carbon

In its 2021 Mid-term Management Plan, ending March 31, 2022,

individual elements of ROIC and suggests ways to improve each

opportunity losses in the future. Hitachi aims to maximize corporate

footprint, a cause of global warming, and augmenting its corporate

Hitachi plans to execute ¥2.0 trillion–¥2.5 trillion in growthone. To increase earnings, ROIC must exceed the weighted averagevalue though the pursuit of relatively short-term profits and medium-behavior as a good corporate citizen. Strategically investing in fieldsinvestments. The funds needed for these investments are, ofcost of capital (WACC), a measure of procuring cost of capital (i.e.,

to long-term growth investments, while considering the balance ofthat facilitate solutions for these social and environmental problems

course, based on our operating cash flows, but being procured

ROIC spread is a positive value). Since last year, we haveoverall resource allocations, including R&D spending.

should translate into medium- to long-term growth for Hitachi, in myfrom diverse sources, including debt financing (e.g., loans fromperiodically conducted reviews of ROIC in each business unit. IAs for shareholder returns, I believe improving corporate value isopinion. If we lose sight of the nonfinancial aspects of social andfinancial institutions, issuance of corporate bonds). Looking ahead,

believe the rollout of ROIC has had an impact, as discussions havefundamentally important, more than anything else. We aim toenvironmental values and mechanically make investment decisions

we are keen to maximize returns on investments by appropriately

come to center more on ROIC and consensus has formed aroundincrease earnings per share as a result of improved profitability ofbased on the adequacy of short-term profitability, our future

allocating capital while aligning investments with our strategies,

ROIC, based on whether the cost of capital aligns with the businessoverall businesses, which is achieved through investments based on

corporate values could be eroded. To pursue economic, social andprocuring capital through an optimal combination of means with anbeing advanced. In addition, ROIC management is increasingly

appropriate strategies and the creation of an optimal businessenvironmental value in parallel (not sequentially), Hitachi will manage

eye on a rise of debt costs. If necessary, Hitachi will reshuffle its

understood in light of the reorganization and use of idle assets such

portfolio by shuffling assets from weak-performing businesses into

operations with an eye on medium- to long-term returns, whilebusiness portfolio. It is important to steer the portfolio toward

as land, and the concentration of capital that leads to greater

relatively profitable businesses. And we believe it is also important topaying due consideration to nonfinancial value and relationships,

assets that generate higher returns, while optimizing operations on

investment efficiency.

steadily and continually increase dividends. When the timing andwhich do not always factor into short-term profitability. The financethe capital procurement side. Business restructuring is done while

Despite the impact from COVID-19, which was not envisioned whenvarious conditions are right, Hitachi considers share buybacks.

department lends its support to the parallel pursuits of economic,

comprehensively considering strategic value and synergies withthe 2021 Mid-term Management Plan was drafted in early fiscal

Hitachi intends to comprehensively improve shareholder returnssocial and environmental value.

core businesses. On occasion, decisions are made to scale down

2019, our key management targets have not been changed as ofwhile striking a balance among increasing corporate value, dividends

or withdraw from businesses even if they are profitable.

today for capital allocations, including ¥2.5 trillion for growthand share buybacks (maximize total shareholders return).

Hitachi Integrated Report 202043