The Hitachi Group
Value Creation Story
CEO Message

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Independent Director Dialogue

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Value Creation Process22

Capital Utilization and Value Creation

24

Value Creation Story

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Energy solutions
We manage 25% of the world’s substations andsupply stable energy to 1.8 billion people

CEO Message

Becoming a Global Leader in theSocial Innovation Business
Hitachi will transform rapidly to achieve the innovations required by the times.
Reaching a record high for the second consecutive year, fiscal 2018 adjusted operating income* at Hitachi came in at ¥754.9
billion, with the adjusted operating income ratio for the year meeting the Mid-term Management Plan target of 8%. Total Hitachi,Ltd. stockholders’ equity on the balance sheet during the period covered by the plan was up approximately ¥500 billion, backed
by the Company improving its ability to generate cash. Having achieved a V-shaped recovery after recording losses of ¥787.3
billion in fiscal 2008, Hitachi is now moving into a new stage of development.
* Adjusted operating income is defined as total revenues less cost of sales and selling,
general, and administrative (SG&A) expenses.

Toshiaki Higashihara
President & CEO

Returning to Our Roots

Reaffirming Our Strengths Based on the Lessons of the Past
In 2020, Hitachi will celebrate the 110th anniversary of its founding

loss ever for a Japanese manufacturer, with stockholders’ equity of

as a manufacturer of electrical machinery.

about ¥2–¥3 trillion being adversely impacted to fall at about ¥1

In all that time, one of the biggest turning points was thetrillion. Hitachi had been called an “unsinkable giant” in the past, somanagement crisis. The Company at the time posted the largest

how did things become so bad that it found itself being ridiculed as

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The Hitachi Group Value Creation Story“a sinking giant”? I believe this situation came about due to there

So the question is how best to create a growth strategy. Facedbeing no real sense of crisis at the Company. That said, afterwith truly dire conditions, we decided to “return to our roots.” Since

posting this huge loss, management did move to rebuild itself andits founding, Hitachi has focused on contributing to the improvement

spur an earnings recovery through a major reshuffling of theof people's lives by following a corporate philosophy based on the

Company’s businesses and reforms to Hitachi’s corporate

desire to “contribute to society through the development of superior,

governance structure.

original technology and products.” Established as a manufacturer ofHaving witnessed the Company’s struggles, I learned thefive-horsepower induction motors, Hitachi has not only developed its

importance of simultaneously implementing “peacetime structuralability to create products, but has honed its abilities in control andreforms” and a “sustainable growth strategy.” Crafting bold andoperational technologies (OT) in the more than 100 years it has

decisive strategies when an emergency arises is one thing, but if, inoperated as a manufacturer, as well as its knowledge in information

periods of relative calm, a company is not looking likely to become atechnologies (IT) over the past 50 years. Hitachi's strengths lie in its

world-class competitor, its leadership needs to take steps, including

ability to combine OT, IT, and its products to create new value andshrinking or withdrawing from struggling businesses. I have taken toprovide solutions that meet the needs of its customers and society.

heart the lesson that if a business fails to act boldly and with speed,

I believe the creation of an organization that makes full use of this

there is a very real risk of it not being able to survive, especially instrength allows us to contribute to the resolution of various social

these uncertain times.

issues, which in turn contributes to sustainable growth at Hitachi.

Completing the V-Shaped Recovery

Initiatives to Improve Profitability and Achieve Our Mid-term Management Plan Targets
I became Hitachi’s president and COO in 2014 and president andto see issues that were previously difficult to see, and with the ability to

CEO in fiscal 2016, when we launched the 2018 Mid-term

make quick management decisions, I soon began to see results.

Management Plan. Hitachi was unable to achieve the income ratio

In terms of our growth strategy, we launched Lumada, whichtargets in its 2015 Mid-term Management Plan, and we wereincorporates the sum of our technological knowhow, in May 2016,

determined not to let that happen again during the period covered byand established a system providing digital solutions throughout thethe new plan. So what was the best way to achieve our minimumgroup. Lumada is Hitachi's advanced digital solutions, services, andadjusted operating income ratio target of 8% and the creation of atechnologies for turning customers' data into insights to drive digitalstructure supporting margins in the double digits?

innovation. Lumada-based revenues have already expanded to

Our first move, launched in April 2016, was to overhaul our

12exceed ¥1 trillion.

organizational structure. This involved dividing up our large in-house

While promoting the reshuffling of our businesses, including the salecompany system into small business units, allowing us to clearlyof listed subsidiaries, we are also actively working to incorporate

identify the challenges and issues in each business. While enacting

businesses within the group that could be expected to generatemeasures aimed at spurring improvements in low-profit businesses,

synergies with Lumada. As examples of this, in 2017 we acquired air-

we also shrunk or withdrew from businesses where these measurescompressor firm Sullair, which has a global footprint especially inappeared unlikely to work. Our efforts to tighten project management

North America, and we aim to complete the acquisition of ABB’s

and review fixed costs on a companywide basis contributed to a

power grid business in the first half of 2020. The intent of the ABB

reduction in unnecessary costs, and we lifted on-site awareness of

power grid business acquisition is the greater provision of innovative

cash flow by making the cash conversion cycle (CCC) a key

energy solutions through an expansion in global sales channels. And

management indicator. I believe the organizational overhaul allowed us

to take it one step further, we also aim to incorporate the philosophy

Hitachi Integrated Report 2019

CEO Message

and know-how of this globally successful company into Hitachi increating greater value on a global scale as it moves into its nextorder to spur further positive changes. I believe acquisitions of thisgrowth stage.

type can provide Hitachi with a stepping-stone toward its goal of

The View after Rebirth

Exploring the Purpose of Our Business
If I were to summarize the 2018 Mid-term Management Plan, I would

A look around the world shows an unending series of changes

say its biggest achievements included instilling a shared sense of

impacting people’s lives. These include resource shortages andcrisis in employees throughout the Company and fostering a growing

climate change, demographic changes brought on by the aging of

focus on income and cash. These changes resulted in Hitachisociety, and the issues accompanying urbanization. Amid such an

achieving its Mid-term Management Plan target for an adjusted

environment, there are growing efforts around the world, including

operating income ratio of 8%, as well as a growing perception that

the Society 5.0*1 initiative in Japan, to resolve through innovation the

Hitachi as a global company should naturally produce incomesocial issues outlined in the United Nations Sustainable Development

margins in the double digits, and that the Company should be a

Goals (SDGs). Hitachi’s corporate philosophy for the past 109 years

global leader in the Social Innovation Business.

has been to “contribute to society through the development of

After having achieved a V-shaped recovery, is it really necessary

superior, original technology and products” and if each of its 300,000

for the Company to push income ratios to 10% or higher? I have for

employees around the world can find satisfaction in resolving social

some time been saying, “Show me the cash!” to our employees, inand environmental issues through advancing the Social Innovation

part as I feel it is necessary to focus on what comes before profit.

Business and broadening the field of related activities, I believe it

In this sense, I will never forget the first factory manager at Omika

would surely contribute to continued growth for Hitachi. Of course, it

Works with whom I worked after joining the Company quoting fromis important to improve economic value, but I also believe it is

Yuzo Yamamoto’s novel, A stone by the Roadside. A line in theimportant at the same time to improve social and environmental

novel essentially says, “There is only one you and you have only one

value. We aim to pursue this goal based not only on leadership fromlife, so if you don’t really use it, are you really human? Have yourthe top, but also through bottom-up participation from employees

really lived?” To apply that to today, if you spend more than half yourwho find real purpose in their work. If we can accomplish this, I

life at work, then it is through that work that you have the opportunity

believe Hitachi will be all the stronger for it.

to feel the happiness of people and society. It is through the job infront of you that you can help people and society. In other words, I
think contributing to building social and environmental value is amajor driver behind our personal growth and our job satisfaction.

*1 Society 5.0 expresses a new idea of society and related efforts to achieve this, as advocated by the Japanese
government. The aim is to develop the economy while addressing societal issues by deploying AI, IoT, robots
and other forms of advanced science and technology to make use of various data creating an affluent,human-centered society. The name refers to the evolution of a fifth form of society, continuing from the huntergatherer, agrarian, industrial, and information societies.

A Vision for a New Leap Forward

Aiming to be a Global Leader in the Social Innovation Business
The modern age has been called the era of VUCA (Volatility,

we value, and on the standards we use when making decisions. With

Uncertainty, Complexity, Ambiguity), where it is increasingly difficult to

Hitachi, these are grounded in our corporate mission and our values,

predict the future. This is why it is important to maintain focus on what

which are based on the concepts of “harmony, sincerity, and a

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The Hitachi Group Value Creation Story

pioneering spirit.” For historical perspective, Namihei Odaira, who

I also believe employees should do more than just fulfill the goals offounded Hitachi at age 36, noted that the motors and generators heleadership and that they should also focus on how their work can

repaired at the copper mines in what is now Hitachi City, Ibaraki

contribute to improving social and environmental value. Whenever I

Prefecture were all imported from abroad, and that Japanese industry

engage in direct communication, I am continually pushing for this

could never develop if people in the country didn’t learn to make thesekind of shift in the mind-set of our employees. The approach is notdevices on their own. With that idea, he founded Hitachi alongside a

based on instilling a sense of crisis, but rather on raisingnumber of fellow engineers. I believe the founding of the Company

awareness of the importance of social and environmental

was largely the result of Mr. Odaira’s desire to change Japan andcontribution.

contribute to the development of society and the country as a whole.

Expressing sentiments such as “today we were able to supply

That kind of drive still exists in Hitachi today. Our focus is not only on

safe water to people in the area” and “we contributed to theeconomic value, revenues and income, but also on using innovation totreatment of cancer patients,” our 300,000 employees worldwide

resolve the many challenges facing society. We believe that Hitachi

are well aware of their contributions to the environment andshould be synonymous with Social Innovation Business, and withsociety, as well as their connection to society in their daily work. I

that kind of presence, we hope to widely contribute to society as

believe that this builds motivation in our employees, and througha global leader. Even though times have changed, I believe thethe combined efforts of all, it contributes to the creation of higher

founder’s spirit continues to guide our management as part ofsocial and environmental value, and ultimately economic value for

Hitachi’s unchanging values.

the Company.

I believe global leaders must have a clear vision of what theyshould be and that they should take the lead in creating history.

Charting a Path to Growth: Launching the 2021 Mid-term Management Plan

Realizing Our Three Values and Establishing Goals for the Future
Our 2021 Mid-term Management Plan, launched in April 2019,

blocks coming together to form a unique structure, we can provide

focuses on simultaneously improving social value, environmental

a variety of solutions, such as energy management, human flow

value, and economic value, and establishes five business sectors

simulations, and autonomous driving solutions, in a unique(IT, energy, industry, mobility and smart life) for the creation of social

customized package to meet the specific needs each customer.

innovation. To put it differently, these are areas in which Hitachi can

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An example of this is the Copenhagen Metro project, for whichmake use of the technological know-how it has built up through its

Hitachi is supplying 24-hour driverless trains and related systems.

many years of developing social infrastructure. Moreover, in each of

The Dynamic Headway solution used in testing these systems

these business sectors, Lumada can be used as a common

focuses on train station congestion, using data from mounted

platform to achieve the goals of improving people’s quality of life

sensors to measure fluctuations in the number of passengers(QoL) as well as corporate value at our client companies.

arriving. Based on this information, the system then optimizes theStrengthening Lumada, which can accelerate innovation, is key tonumber of trains in operation. Hitachi’s efforts are focused on

growth moving forward. Indeed, the creation of multiple reusable

solving customer issues by combining solutions such as humansolutions in each of the key business fields can lead to theflow simulations, automated timetable generation, and operational

resolution of issues that cross industry and geographic boundaries.

management optimization as customizable blocks. Amid the trend

The image of toy blocks provides a good analogy for better

toward growing urbanization, better public transportation isunderstanding. As with the variety of colors and shapes of a child’s

increasingly required to prevent traffic congestion and create

Hitachi Integrated Report 2019

CEO Message

comfortable public spaces, and given that the Copenhagen Metro

it is contributing to improvements in social, environmental andproject also optimizes operational efficiency and conserves energy,

economic value.

Accelerating Innovation to Spur Growth

Building an Innovation Ecosystem with Lumada at Its Core
So the question now is how to strengthen and evolve Lumada. I

all over the world to create new ideas alongside Hitachi

believe this requires the building of an “innovation ecosystem” that

researchers and designers.

accelerates collaboration with business partners, universities,
research institutes, and customers around the world.

We are also actively working on initiatives designed to contributeto the acceleration of innovation around the world. These efforts

The Company is already working with research institutions andinclude acting as a supporting partner to start-ups as they create

domestic universities such as the University of Tokyo to create

new innovations, and establishing a corporate venture capital fund.

solutions to social issues. As example is the “Hitachi The University

We will continue to work toward improving the social,of Tokyo Laboratory.” We are also focused on expanding theseenvironmental, and economic value of our customers by creating

kinds of collaborative relationships to include overseas universities,

an ecosystem for co-creation and establishing Lumada as theresearch institutions, and customers. In April 2019, Hitachi

driving force behind the accelerated development of the Social

launched the collaborative creation project Kyoso-no-Mori at its

Innovation Business.

Central Research Laboratory, inviting customers and partners from

Building a Global “Delivery” System

Front-Line Personnel with the Hitachi DNA Hold the Key to Success
After focusing on solutions to customer issues and assessing“sincere” efforts for our customers and partners, and even should

feasibility and profitability, the framework for building on

they fail, they will never give up on their “pioneering spirit.” I believe

Lumada’s foundation is now complete. There are already about

securing and fostering frontline personnel exhibiting these650 Lumada customer cases, and we believe this shared basequalities is a key to our success.

will assist us in providing solutions that truly satisfy our

By combining the common solutions accumulated throughcustomers. However, for the sake of our customers, I believe it

Lumada, we can customize solutions for customers in different

is vital to develop front-line personnel who can provide evenparts of the world. Moreover, to strengthen our front-line humanhigher-added-value solutions. Hitachi’s collaborative efforts with its

resources so that we can realize this kind of “innovation

customers are not based on a vertical relationship, with one party

ecosystem,” we are not only training in-house employees, but

acting above the other, but instead are based on side-by-side

also actively recruiting personnel from outside the Company.

cooperation with the aim of improving social value. It’s

Given that cultures and business practices vary according toimportant for those involved to always think with a sense ofregion and country, we are working to cultivate humanownership and be at the forefront of discussions. If the direction of

resources in each of those areas. As an example, we havethe organization or team is different, our employees will work together

been able to secure human resources in areas such as

in line with the final decision in the spirit of “harmony”, leaving aside

California’s Silicon Valley who are not only talented andtheir previous opinions. Moreover, they will put forth their mostexperienced, but share a deep commitment to harmony,

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The Hitachi Group Value Creation Story

sincerity, and the pioneering spirit that make up the Hitachi

more background diversity there is, the better. I believe humanfounding spirit.

resources recruited from around the world will be instrumental in

I worked at the Omika Works in Ibaraki Prefecture for aboutsharing Hitachi’s values and resolving the social issues impacting our

29 years after joining the Company in 1977. The plant wascustomers. I have high expectations as well as great confidence

created in 1969 to house the combined control departmentsin this effort.

that were split off from the Hitachi and Kokubu plants, and forsome time after I was assigned to the facility, there was still alot of talk about from which of the original plants you came.
That said, my time there allowed me to experience the creationof a shared culture, as gradual integration brought with it thespirit of building a “Greater Omika” plant. In my opinion, theTotal Growth Investment of ¥2.5 Trillion

Aggressively Pursuing Growth Opportunities While Maintaining an Eye on
Capital Costs
Hitachi will invest more aggressively in growth, including M&A, overI believe an acceleration in the Social Innovation Businessthe next three years from fiscal 2019 to fiscal 2021 as part of its

requires Hitachi to further improve the level of trust it enjoys from

effort to become a true global leader. More specifically, we target asociety. With this in mind, we will promote compliance, quality

total investment of ¥2.5 trillion during the period, including about

assurance, and safety by utilizing digitalization and Lumada to¥1 trillion for the already announced acquisition of ABB’s power

reduce manual tasks.

grid business. Growth investment will be focused on the IT and

Based on these efforts, our fiscal 2021 earnings targets include

industry sectors, where we will enact unprecedented investment inaverage annual revenues rising organically by more than 3%, an

both human resources and R&D. To carry out large-scale

adjusted operating income ratio above 10%, and cumulative

investment, we will use financial leverage to reduce capital costs

operating cash flow for the three years greater than ¥2.5 trillion.

(WACC) and improve ROE, while at the same time fostering

Moreover, we target ROIC of above 10%, with the overseas

management awareness of capital efficiency by establishing return

revenue ratio climbing from 51% at present to better than 60%.

on invested capital (ROIC) as a new KPI.
Hitachi will also strengthen its business foundation to accelerate
development of the Social Innovation Business. In addition tooperational reforms based on data accumulated thanks toadvancements in production systems and business processes, aswell as the promotion of digital transformation by expanding thescope of Lumada’s in-house use, we are working to reduce fixed
costs and improve efficiency in sales and indirect operations.
Maintaining an awareness of what is appropriate for a global
company, we will continue to work toward improving profitability,with a gross profit margin*2 target of 30% or higher and an SG&A
ratio*3 target of under 20%.

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Hitachi Integrated Report 2019

*2 Gross profit margin: The percentage of gross profit to revenues.
		[(revenue – cost of sales)/ revenues] x 100*3 The SG&A ratio:
The ratio of the sum of all direct and indirect selling expenses and all general andadministrative expenses to revenues. SG&A expenses/revenues

CEO Message

Keywords for Survival in the Age of Data Capitalism:

Speed, Trust, Transparency and Customer Perspective
There is a paradigm shift taking place as we move from the age ofvalue and resolve social issues.

products to the age of digitalization and the importance of speedy

Of course, an opportunity is only an opportunity if we are properly

management continues to grow. Conversation at both the World

prepared to take advantage of it. With a venturing spirit backed byEconomic Forum in Davos at the beginning of the year and the G20

the Company’s “contribute to society” mission and its corporate

Summit in June centered on Data Free Flow with Trust (DFFT), withphilosophy grounded in “Harmony, Sincerity, and a Pioneering Spirit,”

the expectation of improvements in private information banks andeach of our employees is committed to building a relationship of trust

national databases. While the free trade of cross-border datawith our customers and the wider society. Moreover, with the higher

requires trust, I believe there can be no trust without transparency.

goal of contributing to a better world, Hitachi and its employees willIn this age of data, Hitachi, with its sensors and analysis

continue to work tirelessly to quickly provide solutions tailored to thetechnologies essential for data collection, will likely find morecustomer’s needs. I believe these efforts will lead to more

opportunities to promptly provide customers with solutions, andopportunities for Hitachi to become a global leader in the Social

should encounter more opportunities to both improve economic

Innovation Business.

Pursuing Dialogue with Stakeholders to Further Their Understanding of
Hitachi’s True Value
Communication is essential in building relationships of trust withIn regard to shareholder returns, Hitachi targeted a low

external parties. It has been said by some that Hitachi’s share price andconsolidated payout ratio of 20%–30% during the period covered bymarket capitalization are rather low, and when looking back, it certainly

the 2018 Mid-term Management Plan, and it paid dividends at thisappears that shareholder returns have for a long time not been at alevel except in fiscal 2018, when after-tax net income waslevel of which we could be proud. Given these circumstances, I

particularly low due to transitory factors. Our goal moving forward isstrongly believe it necessary to bolster communication with those in

to increase dividends paid to our shareholders to a higher level.

the capital markets to deepen trust. There are likely a substantial

Based on the “Hitachi Social Innovation is Powering Good”

number of stakeholders who still have the impression of Hitachi as a

campaign tagline that launched this year, we will strive to provide

manufacturer of heavy electrical machinery, something carried oversocial, environmental, and economic value in line with our efforts tofrom many years ago. However, the Company is undergoing rapid

contribute to enhanced value for our corporate customers and anchange, and that change is likely to accelerate moving forward. With

improved quality of life for people in general. We thank you and look

the goal of improving stakeholder understanding of Hitachi as it

forward to your continued support as we move forward.

stands now, as well as its future course, we will continue to work toincrease opportunities for communication while simultaneously

September 2019improving transparency, including in the disclosure of ROIC,
adjusted operating income, and revenues by sector.

Toshiaki Higashihara
President & CEO
Hitachi, Ltd.

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The Hitachi Group Value Creation Story

Independent Director* Dialogue

Harufumi Mochizuki
Chairman of the Board
Chair of the Nominating Committee
Chair of the Compensation Committee

Hiroaki Yoshihara
Chair of the Audit Committee

Board of Directors' Activities that Make Us a

Global Leader
Board of Directors
In what ways is the Board of Directors at Hitachi, a company with nominating committee, etc., conducting
managerial oversight?
Director Mochizuki: Hitachi’s directors may have richly diverse backgrounds,

key elements of the mid-term management plan, which include global

but they all are united in their focus on world-class governance. Based on myleadership; social, environmental and economic value; capital allocation; andpersonal perception, if the executive officers were swords, the directors would

capital cost. All related parties, including the Executive Vice Presidents,

function like a whetstone. We hold extensive discussions as if we wereattended the meeting of the Board of Directors held on the day we announced

grinding swords against this whetstone until it wore down, thereby creating

the mid-term management plan, during which we discussed how we should

shimmering swords. I think it is an important vision for us as directors.

inform individuals both inside and outside of the Company regarding the plan.

The Board of Directors narrows topics of discussions down to matters of key
importance, including budgets, financial results, the Mid-term Management

Director Yoshihara: Additionally, in fiscal 2018, we made business

Plan, M&A and high-risk investments. Our discussions are focused, but

judgements on important matters impacting the entire Company after holding

almost every member of the Board has something to say about each matter

active discussions within the Board of Directors and Audit Committee andon the agenda, which frequently results in discussion regarding a single topic

hearing additional explanations from individual executive officers on an

lasting more than an hour. This may be unique to Hitachi, but we sometimes

as-needed basis. These important matters included decisions regarding thehear explanations regarding important matters in advance at Audit Committee

acquisition of ABB’s Power Grids business and the suspension of the Horizon

meetings, where we proactively make inquiries concerning matters we hold in

Project, a nuclear power plant construction project in the U.K. Every time itquestion. Depending on the situation, we sometimes also ask for executive

faces decisions like these, the Board of Directors conducts analyses andofficers to make preparations at Board of Director meetings.

discussions concerning issues such as market trends, business strategies,

We also considered proposals from executive officers when forming theacquisition prices, post-merger integration (PMI) processes and potential risk

three-year 2021 Mid-term Management Plan that we announced in this May.

from a variety of perspectives. In the past, we have encouraged

We discussed these proposals on five occasions spanning an entire year, firstreconsideration of the projects that are inconsistent with our overall strategy or

focusing on their aims and then moving on to their main points before working

lack accountability in terms of economic rationality.

on formulating drafts. This process gave depth to discussions regarding the18

Hitachi Integrated Report 2019

* The “Independent Directors” are the directors who fulfill the qualification requirements to be outside directors
as provided for the Companies Act of Japan and also meet the independence criteria defined by the Company
and those provided by Japanese stock exchanges where the Company is listed.

How was the Board of Directors involved in profitability
improvement and business portfolio revision, two major
themes of the 2018 Mid-term Management Plan?
Director Yoshihara: In fiscal 2018, the final year of the 2018 Mid-termManagement Plan, we achieved both an adjusted operating income ratio of 8%
and record-high profit. When excluding impact from the suspension of the
Horizon Project, we also exceeded the plan’s targets for net income attributable
to Hitachi, Ltd. stockholders and ROA. Looking back on the three years coveredby the plan, I realize that we achieved the targets we set for each year of the plan(“Prepare for growth” in fiscal 2016, “Change gears toward growth” in fiscal 2017means that analyzing Hitachi takes time, which reduces the amount ofopportunity for people to become interested. It would be a waste for us toreduce our own level of opportunity to be positively evaluated by capital
markets and would also be undesirable from a governance point of view. We
have repeatedly discussed and asked executive officers what kind of company
we would like to become and why we engage in the businesses we do. As aresult, revisions to our portfolio have picked up speed over the past few years.

What is the background or the system that allows forfrank and effective discussions?

and “Achieve mid-term management plan to be a globally integrated enterprise”

Director Yoshihara: One reason cited for our ability to conduct frank and effective

in fiscal 2018) and sense a very strong momentum.

discussions is the management team’s wonderful Tone at the Top approach. In

However, these are just results. The Board of Directors holds discussions

particular, I feel that Executive Chairman Nakanishi and CEO Higashihara’s Tone atconcerning topics such as whether the direction the Company is taking is in

the Top approaches are providing us with an environment that encourages frankline with its vision of becoming a global leader or what is necessary to achieveand sincere discussions and enable quick access to information and people within

this vision. When investment, including R&D expenditure, decreases, we

Hitachi. Our top management’s attitude of sincerely working together to create a

conduct intense reviews to make sure that appropriate mid- to long-termbright future based on our fundamental principles regularly appears in their words

growth strategies, including R&D strategies, are not being neglected, even forand conduct. This attitude is what forms the cornerstone of good governance at

departments that are meeting their short-term targets. We also demand that

Hitachi and encourages our independent directors to adopt attitudes that will spareeven departments with particularly high results, such as adjusted operating

no opportunity to support Hitachi’s proper success.

income ratios of 8% or 10%, raise and meet their goals when they are being
outperformed by global competitors. As for less profitable businesses, weDirector Mochizuki: Hitachi’s system of holding annual Board of Director

routinely confirm their progress in terms of improving profitability. Whenmeetings overseas in line with its goal of becoming a global leader may also bebusinesses are continued despite not meeting targets for improved

unique. The goals of these overseas meetings are for all directors to visit locations

profitability, we conduct ongoing follow-ups concerning the reasons for theirimportant to our global businesses together, provide local residents with a deeper

continuation, as well as future countermeasures.

understanding concerning our businesses and raise the awareness of local
employees. During the previous fiscal year, we held this meeting in San Francisco,

Director Mochizuki: Even if we establish plans and implement them perfectly,

where we met with senior management from Hitachi Vantara and other Group

external environments never conform to our expectations exactly. When faced

companies to discuss overseas business strategies related to IT. We also invitedwith changes in business environment, how quickly we can react and how

experts on local circumstances and lecturers from organizations such as thehard we work to meet our initial targets are important factors. Evaluations

World Economic Forum Center for the Fourth Industrial Revolution Japan (C4IR),

concerning this speed, time frames and results are primarily conducted by ourwho provided us with the opportunity to understand front-line trends.

independent directors, who have experience in managing global companies.

Furthermore, we ensure that annual evaluations of the effectiveness of the

Our Board of Directors is characterized by strictness that is unprecedented

Board’s activities are done to completion by holding meetings in which

when it comes to Japanese companies, and I believe that this toughness had

independent directors discuss their results with the goal of improving them.

a significant impact on the improvement of our results.

Although the opinions of individual directors may vary, we feel a strong sense of

Hitachi manages multiple large-scale businesses, so it can be extremely
difficult from the outside to figure out what what kind of company it is. This

unity in that we all share the desire to contribute to the success of Hitachi. I believethat this sense of unity is an essential component of the Board of Directors.

Three Committees
Next, please tell us about the activities of eachcommittee. First, how does the Nominating
Committee select director candidates?

regarding this list. After narrowing down the number of potential candidates, 4members of the Nominating Committee then hold interviews individually witheach of them. The committee then discusses these results before finallyDirector Mochizuki: After thoroughly discussing the ideal composition for thedrafting a list of final candidates, which is submitted at the General Meeting ofBoard of Directors based on considerations of management issues, we try to

Shareholders. Each member of the committee takes pride in Hitachi’s Board

compose images of the individual candidates we believe to be necessary.

of Directors and participates in the establishment of its ideal vision. For theseWe then request that external consulting companies compile a list of
potential candidates based on these images and then hold discussions

reasons, committee members sometimes have different opinions, regarding
which they hold active and frank discussions.

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The Hitachi Group Value Creation Story

Independent Director Dialogue
What about the selection and training of CEO candidates?
Director Mochizuki: The selection of the next CEO is the Board of Directors’
largest mission. The Nominating Committee deliberates concerning the
succession plan after hearing reports from executive officers. First, while
maintaining a common awareness regarding the qualifications that Hitachirequires from a CEO, the Nominating Committee first discusses what kind of
human resources will be needed and at what time. Through discussions andWe are continuously conducting reviews aimed at optimizing our systems as
our management team becomes more diverse, with a growing number offoreign members, and faces changing management issues.

Please tell us about Hitachi’s tripartite audit approach, which
involves close collaboration among the Audit Committee, theinternal audit section and external third-party auditing firm.

individual coaching, the committee narrows down candidates for leadership

Director Yoshihara: The establishment and maintenance of appropriate audit

positions, including CEO, from an unfixed pool of human resources that it

systems are extremely important matters for companies like Hitachi that areattempts to revise at the conclusion of each fiscal year for a period of several

expanding businesses globally. The Audit Committee primarily identifies, assesses

years. This process enables members of the Nominating Committee toand deals with the various risks that face the entire Hitachi Group, which includes

understand the candidates while providing candidates with the opportunity toabout 800 consolidated subsidiaries worldwide. To perform these activities, thelearn a lot from the Nominating Committee. We do not limit our consideration to

Audit Committee, the internal audit section and external third-party auditing firm

the next CEO but also consider subsequent CEOs in the near and more distantcooperate closely to perform their tripartite audit function. This cooperation isfuture. Accordingly, we work to train management from a mid- to long-termbased on mutual trust, transparency and a shared sense of vigilance.

perspective as well, which we do through a variety of efforts, including

Moving forward, Hitachi will aim for further growth overseas. An increase inawareness-raising activities. These activities include lectures conducted by

global growth opportunities also means a simultaneous related increase in

independent directors targeting young employees referred to as the “Future 50.”

potential risk. For this reason, we must be more prepared than ever to verify
and cautiously consider this varied range of risks. Accordingly, it will become

Director Yoshihara: For sure, members of the Nominating Committee areimportant for us to further intensify our tripartite audit approach on a global

deeply involved in Hitachi’s leader development program. Committee

scale. To enable all members of the Audit Committee to more accurately

members hold discussions with candidates for leadership positions regarding

understand global risks, we will provide instructions concerning matters ofactual management issues and contribute to concrete training plans thatpriority to the internal audit section while gathering information from related

involve the creation of opportunities for candidates to acquire actual workbusiness departments and proactively visiting important sites both in Japan

experience through overseas assignments and involvement with various

and overseas, including those of acquired companies, to conduct inspections.

business units. Hitachi promotes diversity as a driver of growth, and thediversification of all levels of its management, in terms of nationality, genderand age, has picked up speed, particularly since Director Cynthia Carroll
joined the Nominating Committee, bringing proactive initiatives along with her.

How does the Compensation Committee makedecisions regarding remuneration?
Director Mochizuki: Our executive compensation comprises basic
remuneration, short-term incentive compensation and medium- and long-term
incentive compensation. We decide payment levels based on considerationsof economic environment, market trends and levels at other companies.
When deciding upon executive compensation that will objectively satisfy the
corporate officers who receive it, we make every possible effort to avoid being
arbitrary, as we believe that it is important for this compensation to lead to thedesire to work toward maximizing Hitachi’s corporate value. Based on thispoint of view, we have been promoting reforms for several years. In fiscal 2019,
we increased the ratio of variable compensation to overall compensation. A
distinguishing feature of this change is the reflection of personal target
evaluations in short-term incentive compensation. Additionally, we adopted a

Director Yoshihara: Members of the committee also request that executive
officers provide explanations regarding other projects that are deemed to carrya high degree of risk. In fiscal 2018, the committee requested explanations
concerning scandals and information security, confirming the validity of
response measures as well as progress on improvement efforts. Whenconsidering projects that have resulted in comparatively large-scale monetarylosses, the committee receives explanations regarding the cause of theselosses and recurrence prevention measures.
As original measures, Audit Committee members hold audit reporting sessions
targeting all corporate divisions and verify the status of initiatives aimed at raising
the corporate value of back-office sections. At least once per year, responsible
parties from about 20 divisions, including human resources, procurement, IT andbrands, provide explanations concerning the execution of these initiatives to thecommittee, which, having gained an understanding of the issues these divisions
face, provides operational advice as well as other support.

growth in corporate value from a medium- to long-term point of view while

How does Hitachi’s tripartite audit approach differ fromsimilar approaches employed at other companies withnominating committees, etc.?

sharing a common perspective with our shareholders. Eligibility for mid-term

Director Yoshihara: I cannot speak for what other companies are doing but,stock-based compensation incentives may be partially reduced depending on

generally, I can say that no matter how magnificent the organizations andhow total shareholder return measures up compared to the TOPIX growth rate.

structures you build happen to be, when it comes to practical implementation, theirrestricted stock compensation system for executive officers with the goal ofproviding an incentive for our management team to work toward continuous

20

Other than through on-site inspections, how do you identify risks?

Hitachi Integrated Report 2019abilities to perform tasks and the amount of enthusiasm they put into them often
determine their actual efficacy. The three parties that help Hitachi implement its
tripartite audit approach continuously work earnestly to achieve ideal auditing that ismore effective and efficient. All members of the tripartite audit team work to planand implement audits in a manner that is respectful and disciplined while remaining
keenly aware of each other’s roles. Before, we mentioned our top management’s
Tone at the Top approach; our management team, our finance department andother organizations that receive audits have high levels of understanding andawareness regarding governance, which creates a very cooperative environment.
Each year, the Audit Committee receives feedback from the internal audit section,
the finance department and external auditing firm. It then holds discussions
regarding this feedback and earnestly engages in initiatives aimed at further
strengthening and improving Hitachi’s tripartite audit system and framework.

Could you explain your thoughts regarding future
improvements to the Audit Committee?
Director Yoshihara: We are conducting a variety of ongoing initiatives
aimed at enhancing the effectiveness and efficiency of the committee’s
oversight function. For example, starting from the current fiscal year, we areappointing sector auditors who provide support by constructing tripartite
audit frameworks for their individual sectors of responsibility. This support
contributes to the further enhancement of our governance. We are also
discussing the use of digital technology to raise the efficiency of ourauditing operations, which require a great deal of time. Furthermore, weare continuously aiming to enhance our auditing function by working to
uncover human resources with audit capabilities within the Hitachi Group.
At the same time, we hold training and brainstorming sessions targeting
personnel throughout the Group who are involved with audits.

Looking Ahead
Finally, could you explain the key points of Hitachi’s governance? Also, please tell us about the challenges
you will tackle and the points on which you will focus to meet targets in the 2021 Mid-term Management Plan.
Director Mochizuki: The executive officers and directors that make up our

directors provide is essential toward making sure Hitachi is on track toward

management share common targets and work together to refine their abilities

success.

and maximize their performance as managers. I believe that this sharing ofgoals and teamwork define governance at Hitachi.

In our 2021 Mid-term Management Plan, we have identified three key
challenges we must face to achieve our goal of becoming a true global leader.

To become a global leader, we must always think about what is necessaryFirst, we must further strengthen our hiring and development processes to secureand continue to develop our governance sustainably. In terms of meeting

diverse human resources capable of performing globally. Second, we must build atargets in the 2021 Mid-term Management Plan, the most important task

global ecosystem that will support our digital solutions business, which is primarily

facing the Board of Directors is to reliably follow-up on and support thebased in Lumada. Third, the Hitachi Group must continuously revise andimplementation and progress of the plan.

accelerate the development of its business portfolio so that it will enable the

The Nominating Committee will aim to continuously adjust the composition of theGroup to maximize its synergies on a global scale and function as One Hitachi.

Board of Directors in accordance with our management issues. As for our CEO

We are currently experiencing an era of volatility, uncertainty, complexity andsuccession plan, all members of the committee are focusing their full efforts toward

ambiguity (VUCA) in which changes occur daily and quickly and many

selecting our next CEO. However, starting from this year, we have decided toopportunities and risks exist alongside each other. The Audit Committee isstrengthen the involvement of the entire Board of Directors by including directors

prioritizing further enhancement of our global risk management. For example,

who are not Nominating Committee members in the process. As the Compensation

it is extremely important for us to work to reduce risk by strengthening our

Committee has just implemented new compensations structures, we will continue

monitoring of overseas acquisitions. As an independent director, I will continue

to verify whether they have truly increased effectiveness and whether they

to support and supervise the management team in the execution of its duties

contribute to our goal of becoming a global leader.

in accordance with Hitachi’s founding corporate philosophy of contributing tosociety. These efforts will serve to assist Hitachi as it aims to raise the three

Director Yoshihara: Generally, when people talk about governance, we tend

values (social, environmental, economic) targeted in its 2021 Mid-term

to pay attention to the compliance aspect (e.g., legal compliance). However,Management Plan and become a global leader of social innovation.

the essential purpose of compliance is to fulfill the expectations of theshareholders who have placed their trust in us and to raise our corporate

Director Mochizuki: Both the management environment and the issues facing

value by practicing good management. Therefore, it goes without saying that

our management are continuously changing at a dizzying pace. Under these

Hitachi's governance strategy must involve compliance countermeasuresconditions, ideal governance for Hitachi is continuously changing, presenting a

aimed at preventing issues such as anomalous transactions and legal

perpetual challenge for its management. Moving forward, I will continue toviolations. However, from the perspective of true governance, our directors

support Hitachi in its goal of becoming a global leader by continuously

must hold timely discussions with our management team when they makeworking to improve the management of its Board of Directors and all of its

important decisions aimed at raising corporate value and participate in thecommittees, as well as the systems they decide upon, while maintaining aprocess of implementing these decisions. The support and supervision our

trial-and-error approach.

21

The Hitachi Group Value Creation Story

Value Creation Process
Comprehension of Issues and Trends
Global trends

Social issues
Climate change
Issues concerning energy, water andother natural resources
Population growth and urbanization
Aging infrastructure
Cybersecurity

Input

P.24

Customer issues

Accelerating digitalization
Appearance of geopolitical risks due to the globalization ofpolitics and the economy
Paradigm shifts (shifting from possession to sharing, fromobjects to things and from closed to open strategies)

Safety and security
Reduction of energy consumption
Response to diversifying consumer
needs
Improvement of productivity

Comprehend social issues and global trends while identifying
customer issues through collaboration with those same customers

Human capital• Strengthen front-line and digital talents• Promote diversity• Establish a globally unified evaluation standard
and training system for the development of
human resources• Consolidated number of employees (numberof overseas employees):
295,000 (133,000)

Intellectual capital• An IoT platform (Lumada) with morethan 100 years’ worth of operational
technology (OT) and more than 50 years’
worth of information technology (IT), andaccumulated know-how• Open innovation industry-academia-government
cooperation• R&D investment: ¥323.1 billion

Manufacturing capital• Lead time reduction by enhancement of
supply chain management

Diverse partners(open innovation)

Extract widely applicable industrial andAccumulation of Lumada
OT

IT

Operational technology with a trackrecord of more than 100 years

Information technology withmore than 50 years of history

Source of value (competitive ad
Social capital• Establishment of NEXPERIENCE, acollaborative creation process• Enhance disclosure of information to investors• CSR audits of suppliers• Improve dialogue between management andemployees

Natural capital

Lumada platform (system for converting data into value)

Capital Allocation Strategy

Financial and Capital
Strategy

P.34

Accelerate Innovation

P.36• Total energy input (crude oil equivalent): 2.27 GL• Raw material input: 4,403 kt• Total water input: 37.02 million m3

P.38

Sustainable growth strate

Financial capitalAt the start of the 2018 Mid-term Management
Plan (April 1, 2016)• Total Hitachi, Ltd., stockholders’ equity:¥2,735.0 billion• Total Hitachi, Ltd. stockholders’ equity ratio:
21.8%• Free cash flows: ¥81.4 billion

22

Hitachi Integrated Report 2019

Risk and Opportunity Management

P.65

Information Security

P.68

Standards on
Occupational Safety

P.70

Foundations supporting sustainableVision: Improving the Quality of People’s Lives,
Raising Customers’ Corporate Value and Achieving a Sustainable Society
Social value

Environmental value
Healthy lives and a safe,
secure, comfortable andefficient society

Economic value
Redistribution of added
economic value tostakeholders

High-quality andenvironmentallyconscious manufacturing
Reduction ofenvironmental burden
through the value chain

Simultaneously improve three types of customer value through five solutions

Output/ OutcomesP.24(as of end-FY2018)

Human capital• Ratio of female executive and corporate
officers: 5%• Ratio of non-Japanese executive andcorporate officers: 8.8%
• Number of female managers: 635(Hitachi, Ltd.)Intellectual capital• Number of Lumada customer cases:
over 650

Platform expansion

Manufacturing capitalbusiness expertise• Lead time reduction 20% from order
receiving to shipment for large industrial
products. (Compared with FY2016)

customer cases
Products

Social capital

We have developed andmanufactured products with ourown technology since our founding

vantage)

Value Creation Story• Number of meetings with institutional
investors and analysts: 550• Number of town hall meetings: 20• Number of suppliers who received CSR
audits: 24

P.26

Innovation ecosystems that constantly
create groundbreaking new value

Accumulation ofdiverse industrial andbusiness expertise
Environmental Vision and the
Decarbonization Business

P.46

Strengthen Lumada

P.48

gies

Natural capital• Reduction in CO2 emissions through improved
environmental performance of products andservices: 34% compared with FY2010• Reduction in energy use per unit: 14%compared with FY2005• Reduction in water use per unit: 34%
compared with FY2005• Reduction in waste and valuables generation
per unit: 16% compared with FY2005

Goals to which we contribute through our business strategies

Financial capital
Engaging in Responsible
Procurement

P.71

Compliance

P.73

Corporate
Governance

P.18 P.78

growthGoals to which we contribute through all of our corporate activities• Total Hitachi, Ltd. stockholders’ equity:¥3,262.6 billion• Total Hitachi, Ltd. stockholders’ equity ratio:
33.9%• Free cash flows: ¥447.1 billion• TSR* over past 10 years: 209.6%* Total Shareholder Return: Return obtained from stock investments over a certain period oftime; calculated as dividends+capital gains÷share price

23

The Hitachi Group Value Creation Story

Capital Utilization and Value Creation
Human capitalIntellectual capital

Manufacturing
capitalContribution to
Value Creation

Working as a team, a diverse andglobal workforce contributes toglobal growth of the Social Innovation
Business.

Creating new innovations byfusing ecosystems that stimulate
open innovation with cutting-edge
technologies.

In addition to the manufacturing
capabilities gained so far, manufacturing
capital contributes to improved
customer productivity and operational
efficiency by making full use ofadvanced technologies such as IoT, bigdata, and AI.

Targets

Creating a Workplace That Supports theActive Participation of a Diverse Workforce

Building New Technologies and Business
Models through Collaborative Creation

A Global Leader in Production
Efficiency and Quality(1) Attract, retain, and develop diverse talent
to lead business growth(1) Accelerating innovation<Manufacturing>(For fiscal 2021, in
principle)• Strengthening the front-line and digital talents• Developing mindset and skills to become global
leaders• Promoting diversity: Targeting 10% for both female
and non-Japanese in executive and corporate
officer positions, and 800 female managers by fiscal
2020 (Hitachi, Ltd.)(2) Transforming organizational culture
and employee mindset to encourage
proactivity and individual growth• Building Hitachi culture globally• Fostering a culture of career ownership(3) Reform organization and transform
employment policies to adapt toenvironmental changes; take action onorganizational reshuffling• Strengthening collaborative creation on a global basis• Creating new values through open initiatives suchas "Kyōsō-no-Mori" and corporate venturing• Creating innovations by strengthening solution
inventions(2) Creating the world’s No. 1 technologies

Improving the efficiency of global manufacturing
operations 30% through enhancement of the ECM*1 andSCM*2 systems.
*1 Engineering chain management*2 Supply chain management<Quality Assurance>• Focusing investment in the five key sectors andLumada• Further strengthening the framework for quality
assurance• Creating intellectual properties that support theworld’s No. 1 technologies• Strengthening global quality assurance operations(3) Promoting R&D and intellectual property
activities to resolve social issues• Explore new business opportunities and disruptive
technologies through open innovation• Promoting digitization of product certificates• Strengthening quality assurance in services, software,and security• Training quality assurance personnel• Drive activities to achieve “IP for Society,” an IP
strategy for the new era

P.38 Accelerate Innovation• Ensuring safety, health, and compliance• Shifting to job and role-based human resourcesmanagement

Major Initiatives
in Fiscal 2018

• Improved visibility of human resources-related
information by introducing “HR Management Integrated
Platform”
https://www.hitachi.com/New/cnews/
month/2017/11/171128.html• Started Hitachi Academy in April 2019 to foster humanresources that drives digital transformation• Promoted diversity among executives (diversifying thedecision-making level)• Held events such as the Global Women’s Summit tomotivate female workers
http://www.hitachi.com/New/cnews/
month/2018/10/181003.html• Globalizing our management training programs• Established Safety Management Division in April 2019

Fiscal 2018
Results• Investment in R&D: ¥323.1 billion<Manufacturing>• Promoted collaborative creation activities withcustomers and open co-evolution activities (openforums, Ideathons, Hackathons, etc.)

Lead time reduction for Large Industrial products byenhancing SCM• Expanded the field for open innovation globally• Build our global patent portfolio• Implement appropriate IP strategies according tobusiness domains - competitive strategy (productbusiness) and collaborative strategy (digital solution
businesses)• Promoted industry and academia collaboration (Hitachi
Cambridge Lab., Hitachi Kobe Lab.,Hitachi The
University of Tokyo Lab., Hitachi Kyoto University Lab.,
Hitachi Hokkaido University Lab.)• Participating in the setting on international standards
and rules.

• Trained IE*3 engineers• Trained Skilled workers
Placed three participants in the 45th WorldSkills
Competition, with one silver medal, one bronze medal,
and one medallion for excellence.
*3 Industrial Engineering<Quality Assurance>• Revised the framework for quality assurance• Strengthened quality assurance in embedded software• Strengthened global quality assurance• Training quality assurance personnel• Number of female managers (Hitachi, Ltd.): 635• Lumada customer cases: more than 650<Manufacturing>• Ratio for female executive and corporate officers (Hitachi,Ltd.) : 5.0%

• Patent application ratio outside Japan: 58%• Lead Time Reduction 20% for Large Industrial products
at Japan sites (vs. FY2016)• Ratio for non-Japanese executive and corporate officers(Hitachi, Ltd.): 8.8%
• Number of participants in global management training
programs: 3,844• Average educational investment per employee:¥127,800
Number of fatal accidents: 0 *1
Global occurrence rate: 4.20% *1, *2*1 Calendar year 2018
*2 Occurrence rate is the rate of workplace accidents per 1,000
directly contracted employees resulting in fatality or worktime loss of one day or more.

• Recognized as the Clarivate Analytics Top 100 Global
Innovators Award for eight consecutive years• Awarded the National Commendation for Invention"Japan Patent Attorneys Association President's Prize"by the Japan Institute of Invention and Innovation for the
Hitachi X-ray fluoroscopy system.
* Hitachi in fiscal 2019 was awarded the National Commendation
for Invention "Imperial Invention Prize" for the design of theClass 800 high-speed train for the UK.

• Lead Time Reduction 20% for Large Industrial products
at China sites (vs. FY2016)• Started the qualification program of IE engineers<Quality Assurance>• Strengthened governance by revising framework for
quality assurance• Enhanced system development methods within the
Hitachi Group by strengthening the software quality
assurance system• Developed Quality Assurance Standards within the
Hitachi Group• Implemented quality and reliability training

24

Hitachi Integrated Report 2019

Social capital

Natural capital

Financial capital

Building strong relationships with stakeholders,
including tie-ups between industry, academia
and government, as well as collaborative
creation with customers, maximizes business
opportunities on a global scale and reduces risk.

Guided by our Environmental Vision, we strive
to create value while also contributing to theresolution of environmental issues to realize a
low-carbon society, a resource efficient society
and a harmonized society with nature.

Hitachi can realize growth, centered on theSocial Innovation Business, through flexibility
in its operations thanks to a solid financialbase and appropriate financial strategies.

Earning the Trust of Stakeholders

Achieve the targets set forth in theEnvironmental Action Plan for 2021 looking
toward the Hitachi Environmental Innovation
2050 long-term environmental targets.

Building the Financial Base Necessary to
Achieve Value Creation(1) Enhance feedback to management based on
dialog with stakeholders (government, investors,
shareholders, customers, employees, local
communities)(2) Strengthen human rights due diligence (HRDD) and
CSR, green procurement• Promote HRDD
• Strengthen supplier compliance(3) Promote social contribution activities• Training, including STEM (see p. 9) training for those in theyounger global generation likely to be the future leaders(4) Proactive engagement and disclosure of information(1) Reduce CO2 emissions from the use of our products
and services, expand Hitachi’s decarbonization
business• Reduction rate of CO2 emissions compared to FY 2010:
more than 20%(2) Reduce CO emissions of factories and offices byintroducing renewable energy and high-efficiency
equipment
2(1) Enhanced profitability and generation of cash
• Promotion of business restructuring(2) Improving capital efficiency• Restructuring or selling off unprofitable assets• Acquiring highly profitable assets• Promoting financial strategies with an eye toward capitalcosts• Reduction rate of CO2 emissions per unit compared to
FY2010: 9%(3) Enhance efficiency in the use of water• Reduction rate in water use per unit compared to FY 2010: 9%(4) Enhance efficiency in the use of resources, reduceand recycle waste materials• Reduction rate in waste and valuables generation per unit
compared to FY 2010: 12%<Customer Competition Events>• Held the Hitachi Social Innovation Forum, an event creating
opportunities for collaborative creation with customers that
includes lectures and exhibitions on the results of social innovation
businesses around the world as well as future prospects• Held the Hitachi IR Day, which included business briefings forshareholders, investors, and analysts• Held town hall meetings for executives and employees to interact
and exchange views

Implemented environmental activities aimed at achieving a lowcarbon society, a resource efficient society, and a harmonized society
with nature outlined in our Environmental Vision and the Hitachi
Environmental Innovation 2050

Fiscal 2018 Targets• Reduced CO2 emissions from the use of our products and services,
expanded Hitachi’s decarbonization business• Operating cash flow margin: above 9%• ROA: above 5%• D/E ratio: under 0.5 times• CCC (Cash Conversion Cycle): 70.0 days

• Reduced CO2 emissions of factories and offices by introducing
renewable energy and high-efficiency equipment• Promoted HRDD

• Clarified climate-related risks and opportunities based on the TCFD
recommendations• Conducted audits during visits to suppliers• Enhanced efficiency in the use of water in factories and offices• Hosted 6 participants in the Hitachi-DST Scholarship Program forSouth African Engineers• Enhanced efficiency in the use of resources, reduced and recycled
waste materials in factories and offices• Hitachi Social Innovation Forum 2018 TOKYO, etc.

• Improve environmental performance of products and services
Reduction rate in CO2 emissions compared to FY 2010: 34%

Total Hitachi, Ltd. stockholders’ equity: ¥3.262.6 billion• Reduce energy use of factories and offices
Reduction rate in energy use per unit compared to FY 2005: 14%• ROA: 3.3% (6.2%)

https://hsiftokyo.hitachi/en/• Institutional investor and analyst meetings: 550• Executive town hall meetings: 20• Human rights for employees at each BU and group company
division were assessed and prioritized, with consideration given to
the formulation of medium-term action plans• Conducted CSR audits at 24 suppliers (130 suppliers in the fiscal
2012–2018 period)• Spending on social contribution activities: ¥1,888 million• Reduced waste generation
Reduction rate in waste and valuables generation per unit
compared to FY 2005: 16%• Enhance efficiency of water usage
Reduction rate in water use per unit compared to FY 2005: 34 %Total Hitachi, Ltd. stockholders’ equity ratio: 33.9% (35.9%)• D/E ratio: 0.23x (0.21x)
Free cash flow: ¥447.1 billion• Operating cash flow margin: 6.4%
• CCC: 69.3 days
• ROIC: 8.5% (10.1%)* Figures in parentheses exclude the effects from the Horizon Project
consolidation

25

The Hitachi Group Value Creation Story

Value Creation Story
Hitachi offers a host of solutions to the problems society faces. To develop these solutions, we maximize our strengths, OT,
IT, products we have accumulated over the years, along with the technological capabilities, knowledge and know-how wehave amassed through projects. Here, we introduce a global co-creation project in which Hitachi reduces CO2 emissions andhelps resolve the issues customers face.

“AI Captain” to Curtail Fuel Costs andOptimize Travel Routes
Co-Creation with Stena Line, One of Europe's Leading Shipping Lines,
to Optimize Fuel Efficiency and Voyage Planning
Here, we introduce a flagship project that demonstrates how Hitachi is cultivating social innovation. For this project,
Hitachi has partnered with ferry operator Stena Line to reduce ships' fuel consumption costs and minimize
environmental impact by introducing artificial intelligence (AI) technology.

Integrating Digital Technologies and Hitachi’s Products

planning are two of the highest priorities. While shepherding

Hitachi has created value by capitalizing on its three core

ships from a voyage’s start to finish, crews are tasked withcompetencies: operating technologies (OT), which the Company

minimizing fuel consumption and respecting the expected time

has built up over more than a century of manufacturing; cutting-of arrival (ETA).

edge information technologies (IT), which have a solid track

Fuel represents a major cost for shipping companies, sorecord dating back more than half a century; and products,

controlling consumption is a vital concern. Also, less fuel usedwhich the Company has developed and manufactured since themeans lower emissions. Stena Line is at the forefront of thetime of establishment based on its own technologies.

shipping industry’s efforts to reduce its environmental footprint.

On top of these value sources, Hitachi has developed theAccordingly, pursuing fuel efficiency and optimized shipping

Lumada IoT platform as a system for deriving value from data.

serves the dual purpose of improving financial performance andMaking use of its cutting-edge AI technology, the Company isenvironmental impact. This is well in line with Stena Line's vision

providing various solutions even in new fields and industriesof “Connecting Europe for a Sustainable Future”.

where it does not play a direct role.

In 2017, Hitachi and Stena Line started discussing ways to

In June 2018, Hitachi partnered with Stena Line, one of

improve operational performance through advances in artificial

Europe’s largest ferry operators, to introduce AI and machine-

intelligence and machine learning. This collaborative project

learning in shipping.

involved three Hitachi entities. The Social Innovation BusinessIn this project, although Hitachi does not manufacture theUnit, which has data scientists experienced in marine analytics,

vessels themselves, it is developing an effective solution for

initiated discussion with the customer. Hitachi Consulting acted

Stena Line based on its solid understanding of IT requirements

as a project management partner, providing data scientists with(such as edge-processing capabilities), its AI and machine-

experience in data analytics and visualization. The Center forlearning capabilities, and operating technologies developed andSocial Innovation Europe’s Automotive and Industry Lab

accumulated through the manufacture of other Hitachi

developed the core AI model for the project based on its vast

products.

experience in AI, deep/machine learning and general data
analytics.

Delivering Global Solutions through Collaboration

26

To develop a practical, feasible solution, Hitachi’s team haswith Customers

conducted multiple rounds of workshops to better understand

Stena Line, which transports 7.6 million passengers, 1.7 million

the customer, potential problem areas and the operatingcars and 2 million cargo units each year, has taken on the hugeenvironment. The team accessed historical shipping data,

challenge of becoming the world’s leading cognitive shipping

applying machine learning algorithms to generate insights oncompany by 2021. To this end, optimizing fuel and voyage

how to reduce fuel consumption. In these ways, the teamHitachi Integrated Report 2019sought to identify common characteristics of fuel-efficient

Values Hitachi Delivers

operations and extrapolate these findings across the fleet.

Moder n-day society faces major changes and a host of

The team discovered that weather conditions and the action ofchallenges, from energy and environmental issues to water

captains were major contributors to fuel consumption.

scarcity, rapid urbanization, an aging society, insufficient

Collaborating closely with Stena Line, Hitachi inspired Stenainfrastructure and security needs. Amid these circumstances,

Line to create an AI-based technology that learns captains’

Hitachi is committed to providing value to stakeholders bypractices, such as operating parameters corresponding to low

improving quality of life (QoL) and realizing a sustainable

fuel consumption, and then recommends fuel-efficient operating

environment.

parameters for upcoming trips.

With the Stena Line Project, Hitachi has inspired Stena Line toWith the help of AI, Stena Line’s captains can simultaneously

create a cross-functional team that combines seamanship,consider several variables, such as currents, weather conditions,mathematics and technology and to deliver social, environmental

shallow water, and speed through water, all of which would be

and economic value through AI and machine-learning.

impossible to do manually. Once installed in a vessel, the crew
monitors the ship and AI system, intervening only when necessary—

Optimizing shipping reduces fuel consumption, loweringsuch as reducing vessel speed due to traffic. The technology, dubbed

emissions of CO 2, NOx, and SOx. Rather than replacing the

AI Captain recommends fuel-efficient voyage plans in terms of

captain and crew, the AI technologies aimed at extending their

propulsion power and speed for given weather and environmental

expertise to allow for better decision-making and execution.

conditions (such as winds, sea current, waves and sea depth), as well

In addition to social and environmental value, considering theas vessel characteristics (such as loading conditions and hull

success of AI Captain, Hitachi is developing a core solution thatroughness). Initial trials of the AI-based model have been very

can be scaled across the industry, which could drive revenues

successful and Stena Line’s current goal is to roll out AI across theand profit for Hitachi. The solution could also help Hitachi gain

entire fleet by 2021.

market recognition in a new business segment and to develop
cutting-edge AI technology.
Going forward, Hitachi will keep providing innovative solutions
and creating social, environmental and economic value.

27

The Hitachi Group Value Creation Story

Value Creation Story

Ride a Train or a Bus,
Using Only Your Smartphone
Hitachi Rail STA Starts Proof of Concept of a Digital Ticketing Solution
for a Public Transportation Operator in Italy

In May 2019, Hitachi Rail STS S.p.A, a Hitachi subsidiary

The solution allows passengers to ride multiple types of publico p e r a t i n g i n t h e r a i l w a y s y s t e m s b u s i n e s s , e n t e re d a ntransportation without the need for paper tickets or IC cards,

agreement with Trentino Trasporti S.p.A to carry out proof of

making movement seamless and more convenient. For

concept (PoC) of a new digital ticketing solution for the public

operators of public transportation systems, the system reducestransportation operated by Trentino Trasporti, including Trento-

the need for ticket machines, ticket wickets and other

Malé-Mezzana Railway and buses in the vicinity of Trento, Italy.

equipment, lowering equipment investment and maintenanceThe digital ticketing, which uses smartphones as tickets,

costs. With this proof of concept, we are making travel moreleverages the Hitachi Group’s experience in ticketing and digitalconvenient for passengers by allowing them to seamlessly taketechnology.

multiple modes of public transportation in comfort.

W ith this solution, passengers install an app on theirOnce the digital ticketing solution is approved by Trentino

smartphones that allows position information to be read by

Trasporti and the service launches officially, Hitachi Rail STS will

vehicles (such as train cars and buses) and at waypoints (train

start selling tickets for the public transportation system,

stations and buses). The ticketing solution then determines

receiving a share of the revenues from ticket sales.

when a person is using public transportation, automaticallycalculates the fare, and charges that fare to the passenger in a
cashless transaction.

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Hitachi Integrated Report 2019