VALUECREATION

CASE 01

OUR INSIGHT AND STRATEGY
Becoming an Innovation Partner for the IoT Era is a key part of Hitachi’s 2018 Mid-termManagement Plan. The Lumada IoT platform will help Hitachi pursue new value throughcollaborative creation with customers.

New Value Through Collaborative Creation
with Customers
Across the world, from North America to Europe andChina, the creation of innovation through digitaltechnology is accelerating. In Japan, too, as part of its“Society 5.0” program,*1 the government has taken thelead in driving a revolution in services and business andtransformation of industry structure through digitalization.
Amid these rapid changes, in May 2016 Hitachi launchedthe Lumada* 2 IoT platform. Based on the two key ideas ofcollaborative creation and connections, Lumada isdesigned to create value through the company’s Social
Innovation Business by connecting customer value chains
and resolving business issues.
Lumada is a distillation of Hitachi’s rich and extensive
experience in OT (operational technology) and IT solutions,and as such is Flexible, Intelligent, Composable, andSecure. Recognizing that customers usually prefer to makethe best possible use of systems that are already deployed
and operational, we have prioritized composability as aparticular strength: the ability to flexibly combine Lumada

with existing systems. Lumada is also easy to link withother IoT platforms and systems, allowing it to support a
broad range of industries and customer cases. That
Lumada is made up of proven, commercialized, and highly
trustworthy technology is another advantage. This
technology includes Pentaho, an integrated analysis
software package that can bring together diverse datastored in a variety of formats and apply analysis frommultiple perspectives, and Hitachi AI Technology/H, amultipurpose AI.
*1 Society 5.0: An umbrella term for several related initiatives designed to createa Super Smart Society that will respond to social needs efficiently andmeticulously by merging cyberspace and the physical realm at a high level.
The term implies a revolution driven by innovations in science and technology
creating a successor to the hunter-gatherer, pastoral-agrarian, industrial, andinformation-based models of society.
*2 Lumada: A name created by combining the words illuminate and data,
reflecting the fact that Lumada sheds light on large quantities of data to reveal
hidden connections and provide customers with valuable business insights.

The Lumada IoT Platform
FlexibleIntelligent

OT Assets
Machine Data

Edge

Stream Data
Processing
HSDP*3
Device Control

SecureIT Assets

IoT Platform Lumada

Data Collection

Human Data

Composable

Analytics

StudioPentaho
Artificial Intelligence
AT/H*4

Dashboard Builder
Workflow Designer
Core

Business Data

Asset Avatars (Assets’ Digital Twins) *5
Data Lake HCP *6
Foundry
HAF/EDC Execution Management Infrastructure*7*3 HSDP: Hitachi Streaming Data Platform. *4 AT/H: Hitachi AI Technology/H. *5 Digital Twin: The concept of using digital information about a product to build its
duplicate (twin) in a visual space. The concept has been proposed by NASA for its next-generation aircraft development. *6 HCP: Hitachi Content Platform.
*7 HAF/EDC: Hitachi Application Framework/Event-Driven Computing.

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Hitachi, Ltd. Integrated Report 2017

Our Business ModelI
LumadaSI Business
Build platform forcustomer datautilization

Apply Hitachi Group cases
to customers

Lumada business
FY 2016 (Result)

Increase the number ofcustomer cases

Utilize Lumada
within Hitachi Group

Expand toa global scale

Lumada Business Growth Model

Lumada Promotion Framework

Hitachi designed Lumada to be the ultimate tool forpursuing new value in collaborative creation withcustomers, and intends to grow the Lumada businessthrough a combination of three monetization models.
First, Hitachi will provide individual systems tocustomers through the Lumada SI (Systems Integration)
Business. As this business gains experience andknowledge, it will develop new customer cases that can beused to grow the Lumada Core Business, creating“solution cores,” blueprints allowing Hitachi to provide
leading-edge digital solutions—the second monetization
model. Adoption of these ideas internally will also drive
improvement in management indicators across the entire
Hitachi Group, allowing monetization in a third way.
In the Lumada SI Business, Hitachi develops anddelivers data infrastructure customized to meet individual
customer requirements. The Lumada Core Business,meanwhile, is a service business in which Hitachi
improves management indicators and resolves customer
issues by utilizing artificial intelligence to convert
customer data into value. Because the Lumada Core
Business allows the nimble, global deployment of solution
cores created in the Lumada SI business, customer cases
can be optimized for more general application in a variety
of industries. The Lumada Core Business is expected to
expand rapidly. Meanwhile, applying Lumada within the
Hitachi Group and its entire value chain will makeproduction sites smarter, reducing manufacturing costs
and optimizing inventory management.
Hitachi expects the combination of these three models
to help the Lumada business as a whole exceed 1 trillion
yen in revenue for fiscal 2018.

The Hitachi Insight Group, an elite team including OT and IT
specialists from Hitachi, Ltd., Hitachi Data Systems
Corporation, and other Hitachi Group IT businesses, isplaying a central role in promoting the Lumada business.
Since beginning operations in May 2016 at its headquarters
in Santa Clara, California, the Hitachi Insight Group has
welcomed hundreds of world-class new hires. Particularemphasis was placed on hiring people with experience in
key positions at leading Silicon Valley enterprises.
In April 2017, the research team Insights Laboratory
was established. Gathering together researchers,
designers, data scientists, and solutions architects from awide variety of fields, Hitachi is accelerating the pace ofinnovative collaborative creation by working with customers
to develop new ideas, design systems, and demonstrateconcepts and value.
Additionally, to promote front-led collaborative creation
with customers, in February 2017, Hitachi named a Chief
Lumada Officer (CLO), a newly created position, for eachbusiness unit. CLOs are responsible for promoting the useof Lumada in such reforms as increasing the efficiency ofwork processes. The CLOs also share information distilledfrom the on-site experience of the leading Lumada
businesses. Their role is to develop new business models
within the Hitachi Group. CLOs will deepen links to the
Hitachi Insight Group and promote the expansion of thesolutions business and the creation of customer cases
within the Hitachi Group.

Hitachi, Ltd. Integrated Report 2017

Strategic Focus

Bring smart
technologies to
production sites

II
LumadaCore Business

Value Creation

Improvement ofbusiness KPIs

FY 2018 (Target)

1,050 billion yen

Management & GovernanceIII

CEO Message

900 billion yen

19

Performance

Lumada Business Growth ModelLumada Development Case Studies
As of March 2017, Hitachi has collected and published 203
Lumada customer cases, mainly involving the industrial
sector, representing successful collaborative creation withcustomers. We divide the types of value customers
typically seek to create into four categories—boostingsales, cost optimization, risk mitigation, and costvisualization—and roughly half of the customer cases
published as of fiscal 2016 were for cost visualization (92of the 203 total cases). Cost visualization is a crucial
gateway to the use of Lumada: by letting customers
directly experience the value of the platform, it encourages
its application in other areas, allowing even greater results
to be achieved.
One client of Hitachi Consulting Corporation, a leading
beverage maker, had seen its costs mount considerably
due to residual odors on some of its products, dependingon the quality of water used. The Lumada platform was
employed to collect and manage all of the client’s waterrelated information, from intake to drainage, and to clarify
water quality maintenance and its costs, enabling Hitachi
to offer a proposal on a new filtration system andapproaches to managing its facilities.
Hitachi used the solutions gained from this customer
case in proposals made not only to beverage makers but
also to other businesses for which water quality
management was an issue. We were able to sign contracts
with customers in a variety of industries as a result,including water, food, and papermaking.
Through Front-led collaborative creation withcustomers, this project contributed to resolving issues thatthey faced; it also drove the development of new solutions.
Hitachi will continue to expand the Lumada Core Businessby leading collaborative creation with customers from the
Front and capturing new customer cases.
Proactively advancing the use of Lumada within the
Hitachi Group has also allowed us to improve ourmanagement indicators and therefore our enterprise value.
Lumada has proven useful in the realm of cost structurereform, which has long been a focus for Hitachi. Establishing20

Hitachi, Ltd. Integrated Report 2017a Lumada workplace dedicated to the Hitachi Group andmaking full use of analytics and artificial intelligence allows
work processes to be visualized and optimized and makes
supply chains more efficient from end to end.
As of the end of March 2017, there are 23 Group
companies participating in this program, including Hitachi,Ltd., Hitachi Chemical Company, Ltd., and Hitachi Metals,Ltd., demonstrating the value of using actual data fromproduction sites.
Customer Cases (As of the end of March 2017)
Risk mitigation
27 cases

Boosting sales
41 cases

Risk assessments
Quality improvement

Total
203 cases

Cost visualization
92 cases
Loss cost visualization
Real-time alerts

Behavioral analysis
Organizational
revitalization

Cost optimization
43 casesPlan optimization
Higher productivity
Maintenanceimprovements

Typical Customer Cases
Boosting
sales

Optimize promotions based on
customer attributes andbehavioral history

Number of customers
increased by morethan 10%Adopted by companies including a professional baseball team
Analyze employee work activities
and reflect in improvement
measures

Order rate improvedby 27%

Adopted by call centers and financial institutions
Cost
optimization

Predictive failure diagnostic
service for large-scale aircompressors

Operational efficiency
improved by 20%

Monitoring of 250 domestic and 20 overseas facilities
Predictive failure diagnostic
service for medical equipment(superconductive MRI)

Downtime reducedby 16%

Introduced by about 90% of customers purchasing superconductive MRI

Risk
mitigation

Analyze the operating
condition of manufacturing
equipment to detect signs of
product defects

Spoilage expenses
reduced by 75%

Adopted by electrical equipment manufacturers

Our Business Model

Executive Interview

Giving Birth to New Value
with Our Customers

CEO Message

Keiji Kojima

Since unveiling Lumada in May 2016 at the largest IoTevent in North America, Informa’s Internet of Things
World, we have received a great deal of valuable
feedback on Hitachi’s strategy in discussions withcustomers around the world.
My impression is that customers outside Japan inparticular admire our concept of collaborative creation
with customers, calling it “highly unique.” Because
Lumada is based on Hitachi’s long experience in the SI
industry, constant and careful attention to customer needs
is fundamental to the business. Our goal is not simply to
spread an IoT platform—we want to use Lumada
alongside customers to resolve their issues. In my view,
our customers’ understanding that this is our starting
position is the reason so many of them have highexpectations for Lumada.
In the IoT society, what customers seek is notproducts but the resolution of business issues. Hitachi isaiming to pivot to a results-based business model, andLumada is central to that.

Santa Clara, California, where the Hitachi Insight Group isbased, is now home to many accomplished Silicon Valleyveterans—people who play a leading role in the world of
IT. In the US, this sort of talent is known as “rock star”
human capital.
Most of these “rock stars,” it seems to me, share our
feeling that the IoT solutions offered by pure IT vendors arelimited by a lack of knowledge of products and equipment.
The Hitachi Insight Group is where they can fully exercise
their creativity to make new breakthroughs.
And their dynamism is astounding. As soon as theyjoin the company, they crisscross the world, visiting
production sites in Japan or holding in-person discussions
with key figures for their work. New ideas and proposals
come in a constant stream.
What we wanted from these new members of ourorganization was speed and the kind of culture andenvironment that makes speed possible. The work
environments they create and the way they do theirwork has a big impact on existing employees. The
power they have to change both organizations andmarkets is palpable.

Hitachi’s extensive product catalog and long experience
with IT solutions puts it in an advantageous position within
the IoT market. We are intimately familiar with a wide rangeof products and equipment, from production facilities andrailroads to construction machinery. Our Group is also richin knowledge and experience regarding the evolutionary
stages of OT, such as operational controls for trains. IT-only
vendors do not have these strengths.
As long as there are products and equipment in theworld, enterprises will grapple with issues like how tomanage their assets more efficiently and how to reduce thecosts of management. This means that Lumada will be able
to contribute to a rapidly expanding range of markets. It is
not restricted to the bounds of any particular industry. At
the same time, carefully selecting markets where bigger
results can be achieved more quickly will be crucial tohelping the Lumada business grow.

The Next Challenge: Worldwide Expansion

Management & Governance

Hitachi’s Position in the Rapidly Growing
IoT Market

Value Creation

World-Class Human Capital Reforming
Organizations and Markets

Going forward, I believe that Lumada’s challenge will be tostrengthen its service delivery globally. Within Japan, theGroup’s services division is well developed, and Hitachi’s
ability to provide complete, end-to-end solutions, including
ongoing maintenance, is highly valued by customers. We
aim to strengthen our delivery channels to allow us todeliver the same level of service elsewhere in the world.
Once this framework is in place for Lumada, we expect the
rapid expansion witnessed in Japan to be repeated on a
global scale.

Hitachi, Ltd. Integrated Report 201721

Performance

Collaborative Creation with Customers
Drives True Competitiveness Overseas

Strategic Focus

Senior Vice President and Executive Officer
CEO of Services & Platforms Business Unit
Hitachi, Ltd.

OUR ACHIEVEMENTS

cost structures since 2011, Omika Works has embraced thechallenge of revolutionizing design and manufacturing byusing IoT technology to the best possible effect. To
eliminate wasted effort and advance optimization of
production planning through visualization of the entire
production process, Omika Works not only transitioned to ahigh-efficiency production model linking four separate
systems—the Progress and Operation Monitoring System,
the Work Improvement Support System, the Modular
Design System, and the Factory Simulator—it also
implemented a “Sense, Think, Act” cycle for information
about the “three Ms”: man, machine, and material. Together,
these measures reduced production lead time forrepresentative products*1 by 50%.

Omika Works, Hitachi, Ltd.

The wide-ranging development of Hitachi’s Lumada
Core Business, in which accumulated customer
cases and internal deployment studies are offered
as solutions to customers facing similar issues, isvital for expansion of the Lumada business as awhole. The high-efficiency production model
established at Hitachi’s Omika Works is one
example of this cycle. Having dramatically reduced
production lead times through IoT technology, thismodel is now attracting significant attention among
Lumada’s solution cores.

*1 These representative products are control devices for power and social industry
sectors, accounting for roughly 20% of total production at Omika Works.

High-Efficiency Production Through IoTOmika Works has supplied systems for social infrastructure
like power generation, railways, and water supply for half acentury. High reliability is a must for social infrastructure,
and Omika Works is unique in addressing customer
requirements with exacting care at every stage of theprocess, from development of hardware and software to
maintenance and service. Omika Works is a high-mix,
low-volume manufacturer, meaning that its products arecustom-made for each individual client.
The common wisdom around mass-production
factories is that, with standardized product specifications
and manufacturing procedures, efficiency can be increased
relatively easily through automation. At a plant like Omika
Works, however, specifications differ by order,
specifications and delivery dates are subject to frequentchange, and production tends to rely on a greater
proportion of highly skilled workers. For factories like this,improving efficiency through optimization and automationof manufacturing processes is generally held to be difficult.
Nevertheless, as part of the Hitachi Smart
Transformation Project, which has been reforming Group

Progress andOperation
Monitoring System

Performs unified analysis and visualization of
production progress and equipment
operations to allocate production resources
optimally and promote timely improvements
when delivery delays are expected

Work Improvement
Support System

Facilitates work improvement and shortens
the work improvement cycle byautomatically extracting processes where
actual and expected work times differ anddisplaying work videos and instructions

Modular Design
SystemStandardizes shared portions of existing
individual product designs as modules,
reducing the number of parts that must be
designed individually and shortening design
lead time

Factory
Simulator

Responds to production plan updates suchas changes to order quantities or delivery
dates by automatically preparing a feasible
optimized production plan and adjusting
part procurement details

Omika Works High-Efficiency Production Model

Think
1

Progress and Operation
Monitoring System (RFID
Production Monitoring*2)

2

3Work Improvement
Support System

Dynamic monitoring of the “three Ms”

Bottleneck work analysis/countermeasures

Internal tags

Bottleneck
work

4

Modular Design (MD)System
Rapid design
Feedback system

Countermeasure proposals
On-site workflow forecasts

MD methods

On-site workflow
visualization

Database storage

Sense
Omika Works
production line

Factory Simulator

Act

RFID

RFID

Work video

RFID

Work video

Work video*2 RFID: Radio Frequency Identification. A noncontact, automatic detection technology that reads information via radio waves from media such as tags and cards
containing IC chips and small antennas.

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Hitachi, Ltd. Integrated Report 2017

Our Business Model
CEO Message
Strategic Focus

To bring the results achieved using IoT at Omika Works
within reach of a broad range of customers pursuing
improvements in their business, in July 2017, versions of
the Progress and Monitoring Operation System and Work
Improvement Support System were made available as
Lumada solution cores for the manufacturing field,
generalized to ensure applicability to a wider range of
production facilities. Many customers have already joined
our training program introducing the Omika Works IoT
implementation case study, and manufacturing reform
through collaborative creation with Hitachi is spreading,particularly among high-mix, low-volume manufacturers.

*1 Mass customization: Realizing mass-production levels of productivity even in
high-mix, low-volume manufacturing.
*2 Faster factory control cycle: Deploying a process control system that uses
identification tags to grasp the production process more accurately, enabling
both reliable identification of bottlenecks and swift remedies.

Value Creation

Hitachi’s IoT: From Omika to the WorldManagement & GovernanceIn order to enjoy the benefits of these IT systems to theutmost, hands-on manufacturing knowledge is vital.
Manufacturing involves a chain of connected systems,
from order acceptance through engineering (design),
procurement, production, quality assurance, andmaintenance. Instead of attempting to improve eachsystem individually, adopting the optimal approach for theentire process is crucial. Omika Works’ OT allows it toprecisely understand the interdependencies between
these systems and know how to appropriately address
challenges arising in the “three M” areas. Establishedusing OT accumulated over many years, this new
production model can now be developed for inclusion
among the solution cores Hitachi provides to the
manufacturing industry.

In May 2017, the machine tool manufacturer Okuma
Corporation embarked on a collaborative creation projectaiming to build on the results achieved at Omika Works andestablish an advanced production model that supports
mass customization.*1 An experimental model was set up
at Okuma’s new Dream Site 2 factory. Machine tools are aclassic example of a high-mix, low-volume manufactured
product, created by processing and assembling thousands
or even tens of thousands of components according todiverse customer specifications. Recognizing thisopportunity, Hitachi and Okuma will continue working on
new generations of factory technology through integrationof their manufacturing know-how and collaborative creationon the themes “visualization of production” and “a fasterfactory control cycle.”*2
In recent years, the manufacturing industry has seencustomer needs diversify due to the rapid development ofdigital technology. Increasingly, manufacturers are calling for
production systems that can respond to these diverse needs
quickly and increasing productivity by making the best use of
the “three M” resources on hand has become a challenge.
Through collaborative creation with customers, Hitachi willcontinue to identify management challenges and provide
customers with solutions that enable them to digitize thesupply chain and production activity from an end-to-end
perspective and to improve management indicators.

Hitachi, Ltd. Integrated Report 201723

Performance

Accumulated Operational Technology
Generates Results