Interview with the President & CEO

Toshiaki Higashihara
President & CEO

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Hitachi, Ltd. | Integrated Report 2016

Hitachi aims to further advancethe Social Innovation Business and become“An Innovation Partner for the IoT Era.”13

Interview with the President & CEO

How do you evaluate the 2015 Mid-term Management Plan?
Under the 2015 Mid-term Management Plan, we were able toDespite slowing growth in China and in natural resource and oil-achieve a certain degree of results. For example, we reached ourproducing countries, it is likely we would have been able totarget for revenues of ¥10,000 billion and significantly strength-achieve our targets if we had rigorously implemented project

ened our cash-generating capability. Over the past three years,management and structural reforms. Moving forward, it will be

we recorded a stable adjusted operating income ratio at a 6%

my duty as CEO to carry out thorough measures to address theselevel and steadily improved our earnings. However, as with theissues and place Hitachi on a stable growth track in the advanced

EBIT ratio, we did not reach our target for a stable adjusted oper-Social Innovation Business, which will leverage the use of digitalating income ratio of more than 7%. This was primarily attribut-technologies.

able to unprofitable projects in the overseas plant business,
centered on the Middle East, and to our slow response to market
changes in the telecommunications and storage businesses.

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Hitachi, Ltd. | Integrated Report 2016

Hitachi is aiming to be “An Innovation Partner for the IoT Era.”
Would you describe the background and how to achieve this?
By leveraging IT and operational technology (OT), such as control

The key to these initiatives will be Lumada, the IoT platform

and operation technology, Hitachi is rolling out the Socialthat we launched in May 2016. We will collect larger amounts of

Innovation Business globally, where the Company provides

data through the IoT, and Lumada offers a common platform foradvanced social infrastructure systems.

more rapidly converting this data into high-value digital solutions

With IoT and digitalization making ongoing progress, people’s

while promoting collaborative creation with a larger number ofpreferences and values are changing from products to outcomes,

customers and partners. Distinctive features of Lumada include

from owning to sharing, and from closed to open environments.

its ability to provide multiple solutions on a single platform andAgainst the background of these changes, there are new devel-

its open architecture, which means that Lumada can be con-opments in the business world. Companies need to transit from anected to customer systems easily and extended in stages.

“product-out” approach, where they supply the products that

Furthermore, Lumada utilizes secure, high-reliability technologies

they have developed, to a “market-in” approach, where theythat have a proven track record in the Social Innovation Business.

work together with their customers to understand these customers’ issues in order to create solutions and new value.

In April 2016, we launched a new business structure that ismore market-driven. Under this new structure, the front, which

Hitachi accurately anticipated this trend through the Social

consists primarily of 12 business units, works to resolve customer

Innovation Business. Moving forward, we will maximize the lever-issues and provides solutions in four focused business domains.

aging of IT and OT as our strengths and lead the IoT Era throughThe front will utilize Lumada to create a wide range of digital

our advanced Social Innovation Business, which will draw on thesolutions, and by sharing use cases through Lumada, we willlatest digital technologies such as artificial intelligence (AI) andsteadily develop our advanced Social Innovation Business on abig data analytics. In this way, we will strive to contribute toglobal basis.

improvements in people’s quality of life.

What is Hitachi’s approach to the optimal business portfolio?
In fiscal 2016, we will examine our low-profitability businesses

added value. On the other hand, in businesses that require a cer-and clarify which businesses we will reinforce and which we willtain operational scale in global markets, we will move forward

dissolve. In addition, under the 2018 Mid-term Managementwith business restructuring initiatives, including partnerships withPlan, we will focus on the Social Innovation Business, which willother companies. Our transfers of portions of our shares inleverage the use of digital technologies toward the next growth

Hitachi Transport System and Hitachi Capital were examples ofstage. For example, through investments and M&A we will con-this approach. Going forward, we will continue to acceleratetinue to build up businesses that have synergies with digital tech-reform of the business portfolio as we work to strengthen thenologies such as AI and big data analytics that can generate

Social Innovation Business.

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Interview with the President & CEO

Please explain the positioning of the 2018 Mid-term Management Planand its targets.
The 2018 Mid-term Management Plan is positioned as a mile-

Over the next three years, we will increase the front workforce bystone for Hitachi’s move up to the next stage, and on that basis

20,000 people, and through special training programs we will

we will implement management strategies with a focus on cash

strive to develop human capital who can work together withand profits. The plan includes ROA and operating cash flow

customers to identify and resolve their issues. In this way, we will

margin as new target indicators. We will increase asset efficiency

aim to have the front contribute 40% of revenues in fiscal 2018.

by examining low-profitability businesses and accelerating busi-

With regard to our cost structure, our SG&A expense ratio will

ness portfolio reforms. In addition, through improvements inincrease slightly due to the strengthening of our front workforce

earnings and working capital, we will generate cash as the source

and increasing R&D expenses. Nonetheless, we will take steps toof investment and link these initiatives to future growth.

improve the gross margin by promoting cost reduction centered

Our starting point for fiscal 2016 revenues is ¥9,000 billion,

on products, carefully examining low-profitability businesses, andprimarily because Hitachi Transport System and Hitachi Capital

expanding service businesses by bolstering the front. In fiscal

have become equity-method affiliates. In fiscal 2018, we will aim

2018, we will aim for adjusted operating income and EBIT ratios

for revenues of ¥10,000 billion through accumulated orders, suchof more than 8% each and net income attributable to Hitachi,as the railway business in Europe and M&A initiatives. Moreover,Ltd. stockholders of more than ¥400.0 billion.

we will strengthen the front, which will be a driver of our growth.

Would you describe cash-generation initiatives andHitachi’s approach to investment?
Under the 2015 Mid-term Management Plan, we further

select growth businesses. In M&A, we will conduct more rigor-

enhanced and expanded the Hitachi Smart Transformationous evaluations of such factors as business synergies, investment

Project, a cost structure reform project, and worked to reinforce

returns, and risk, and after acquisitions we will implement thor-

our cash-generating capability. Consequently, our operating cash

ough monitoring of investment effectiveness. In these ways, weflow margin* improved from 5.7% in fiscal 2012, to 8.6% inwill boost investment returns. Over the next three years, we arefiscal 2015. We have also instituted improvement targets for theplanning a cumulative total of ¥1,000 billion in investment, ofcash conversion cycle (CCC)* at each in-house company, and we

which about 60% will be allocated to the front and platform,

had significant achievement. We largely reduced the CCC by 10.2

and about 40% to products. First, by investing in competitivedays from fiscal 2014 to fiscal 2015. Moving forward, we willproducts, where the CCC is relatively short, we will acceleratereevaluate cost structures and make further progress in optimiza-

our cash-generating capability over a shorter time period. Thetion of accounts receivable collection periods, accounts payable

cash obtained will subsequently be used to invest in the front

payment periods, and inventory levels. Through these initiatives,and platform areas, which will lead to increased earnings growth

we will strive to achieve an operating cash flow margin of more

over the medium-to-long term. We will implement cash manage-

than 9%* in fiscal 2018.

ment to achieve an optimal mix by carefully combining short-In addition to increasing the operating cash flow margin, wewill restructure the business portfolio and sell assets to secure
cash for investment. For capital expenditure, we will carefully

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term and medium-to-long-term revenue sources.
* Manufacturing, Services and Others

Hitachi, Ltd. | Integrated Report 2016

Finally, what is Hitachi’s approach to strengthening corporate governance, andwhat is the shareholder return policy?
Since we adopted the committee system in 2003, we have taken

Going forward, we will continue taking steps to strengthen

steps to continually strengthen the oversight function. In addi-

corporate governance, such as complying with all the principles

tion, we have worked to establish a framework for reflecting afor companies under the Corporate Governance Code that took

global, diverse viewpoint in management. Since June 2012, out-effect in Japan in June 2015.

side directors have been a majority of the Company’s Board ofRegarding the shareholder return policy, we are now in aDirectors, and in June 2016, the number of non-Japanese outsidephase of investing for future growth, and we need to continue todirectors was increased by one. Currently, 9 of the 13 directors

implement aggressive investments to succeed in global competi-

are outside directors. Moreover, 5 of the outside directors aretion. We will strive to achieve stable growth in dividends bynon-Japanese.

increasing net income attributable to Hitachi, Ltd. stockholders

Hitachi’s Board of Directors is composed of professionals who
are active in various fields with experience at the CEO level.

and cash flow.
In addition, we have introduced stock options as stock-based

Meetings of the Board of Directors include vigorous exchanges ofcompensation, thereby having management leaders share theopinions on such matters as the strategies that Hitachi should

benefits and risks of stock price fluctuations with shareholders. In

implement and points of differentiation from competitors, as welldoing so, we aim to advance management based on a medium-as advice based on the directors’ philosophies as management

to-long-term perspective and achieve sustainable improvements

leaders and on their past experience. In these ways, the meetingsin corporate value.

foster enhanced awareness and motivation. The courses ofaction that are shared at meetings of the Board of Directors areaggressively reflected in management’s subsequent actions.

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