Investors’ Meeting for Business Strategyfor the Energy & Functional Materials Sector
Q&A Summary
Date and time:
Presenter:

Tuesday, September 26, 1:30 to 2:45 p.m.
Hiroshi Ueda, Representative Director &Senior Managing Executive Officer

Heat-Resistant Separators
Q. It seems you rely to an extremely high degree on just one major North
American automobile manufacturer in your separator business, so do you
plan to expand to new customers going forward? Also, your production
capacity for the base film is not that large, so I would like to ask about
your future investment plans.
A. As I said earlier, the reason for our strong reliance on one company is that
we are sharing in our customer’s business and strategy, with ourcompany adopting this strategy for handling business. Other companies
understand the advantages of aramid separators, and a number ofcompanies have decided to adopt them. As for investment in the base film,
we are considering deploying facilities with better productivity than ourcurrent facilities, and we are working to develop new production
equipment. In addition, we are currently in talks with customers about
when to engage in this investment.
Q. You just said that several companies had decided to adopt your separators,
but how much potential does this business actually have?
A. Currently, demand from the US automobile manufacturer is strong, so wehave no spare supply capacity. This is why the amount that we can supply
to other companies is only a small percentage of our total production
capacity.

Q. The US automobile manufacturer has decided to use your aramid
separators through its current models, but is there a high chance that youwill also supply the separators for the SUVs that are planned to beannounced next?
A. I cannot speak to details, but we are in talks about upcoming models. We
are still in the initial discussion phase, but Sumitomo Chemical has ten
years’ experience in supplying aramid separators, and we have earned
trust in not causing any quality problems in the time we have been
supplying them. For this reason, we are currently the first company
people talk to when developing new car models. Supply structure andcosts are yet to be decided, but they have a strategy for further expansion
going forward.
Q. You have said you will be expanding separator production capacity to 400
million square meters a year, but I would like to ask about your vision forfurther production capacity expansion beyond that.
A. An executive at the US automobile manufacturer has explained that they
have a multipronged vision of the future. We are told that the annual
production capacity for lithium-ion batteries at the Gigafactory is 35
gigawatt-hours (GWh), but that they will expand this to 50 GWh or even
100 GWh. In order for us to support 35 GWh/year in lithium-ion battery
production, we will expand separator production capacity to 400 million
square meters a year. If they are going to double their production
capacity for lithium-ion batteries, then a further 400 million square
meters a year will be necessary. An investment of tens of billions of yen
will be necessary to increase separator production capacity by another
400 million square meters a year. After sharing our business strategy
with our customers, we would like to make that investment if necessary.

Q. Ceramic separators beat aramid separators on cost, so how will you be
reducing costs going forward, and how do you plan to differentiate?
A. It is said that aramid coating is high cost, but we are researching a
number of possible rationalizations to bring that down. Because ceramic
separators require a certain level of thickness to ensure safety, thedifference in costs with aramid separators is not as great as you might
think. We are also currently researching production methods tosignificantly increase productivity for the base film, and we would like todeploy facilities using this method in our investments for the next period.
Q. How do you plan to improve the profitability of the separator coating?
A. Of course we are trying to rationalize the supply of raw materials, and weare working to improve the productivity of coating equipment. If we canreduce the amount of coating equipment required from ten machines tofive, our cost competitiveness will increase.
Q. I understand you are working to increase your number of suppliers for thebase film for the aramid separators, but what efforts are you making to
make sure that the quality of the separators remains consistent while
using base film from a variety of manufacturers?
A. Currently, we are procuring base film from a number of companies, but as
you pointed out, there are differences in manufacturing methods andquality between the various manufacturers. Sumitomo Chemical uses abase film with different characteristics, using certain technology toproduce separators of even quality.

Q. I understand that there are a growing number of companies in China
using a wet method to produce separators, but that there is still a quality
gap compared to Japanese companies. Is there a future possibility ofperhaps procuring base film from Chinese manufacturers while
producing aramid separators internally?
A. We view the stability of quality as essential in procuring base film. It is
not good enough for just a portion of the base film to be of good quality; we
require that all the film delivered be of good quality.
I believe there are only a handful of manufacturers around the world thatcan provide separators of that level of stable quality. We cannot predictwhether, or to what degree, the quality of base film from Chinese andother new manufacturers will stabilize in the future, but if it does, wewould like to consider using it.
Q. It seems that the profitability of your separator business is low comparedto other companies in the same industry, but is this due to the fact thatyour business is still at a relatively small scale? Or is it because the costof specific components is high? If after, say, five years, your business hasgrown to some degree, and you have achieved improvements inproductivity, what degree of profit do you think this business willproduce? I would like to ask about both the reasons for the current low
profit margin and your future prospects. Because this is a sector withhigh-performance businesses, I would like to ask what percentage profit
margin you envision as you invest in this area.
A. We have set prices for our separators strategically, with a view toward
creating a new era for our separator business. We decided to prioritize
increasing sales volume over maintaining high prices. For this reason,
our profit margin has gotten a bit low. Because we also have some room toimprove in our manufacturing process, we are currently pursuing
rationalizations. Our separators are products with extremely specializedfeatures, but they may not have widespread appeal. For this reason, thedegree to which the customers who have understood the benefits of ourproduct and adopted it expand their businesses will become a major pointin our own business. As for profit margin, there is some market
competition, but we would like to aim for double digits.

Cathode Materials
Q. On slide 11, you show the market for automotive lithium-ion batteries
reaching 6 trillion yen by 2025, but how are you taking the problem oflimited supplies of rare metals into consideration? In particular, there areworries about insufficient supplies of cobalt, but a higher proportion ofnickel will be used in cathode materials, so do you think this insufficient
supply of raw materials will not impact the production of lithium-ion
batteries?
A. In order for the lithium-ion battery market to reach 6 trillion yen by 2025,
growing by seven times over the ten years from 2015, the reuse ofresources will be necessary. Battery manufacturers may have to adopt a
strategy of not only building battery factories in places where batteries
will be used, but also of building recycling factories. As you pointed out, a
response to limited resources will be necessary, and part of that will haveto be the collection and reuse of cobalt.
Q. I understand that your next development goal in cathode materials is anickel-cobalt-manganese ratio of 8:1:1, but I would like to ask if you are
confident that this will be adopted for cathode materials in batteries forelectric vehicles beginning in 2020.
A. Currently, high-nickel cathode materials in mass production use a ratio of
more than 80% nickel, while some cathode materials in development use
over 90% nickel. In order for cathode materials to increase the energy
density of the battery, it is important to make cathode precursor
materials with precise crystal structures. The selection process forcathode materials for use in automotive batteries that will begin mass
production around 2020 is ongoing, and we aim to have our cathodematerials adopted for this generation of batteries.

Q. On slide 24, you explained the generational changeover in cathodematerials, but will you be able to make full use of the strength of Tanaka
Chemical’s cathode material precursor manufacturing due to thegenerational changeover? I would like to ask about your background to
your forecasted expansion in the adoption of cathode materials going
forward.
A. As generations advance, the methods for forming crystals in cathodematerials become more important. It is not only the size of the crystals,
but also factors such as their resistance to breaking that are essential,
and these are determined by the methods of making the precursor
materials. I would like you to understand that precursor materials are
not simply the raw materials of cathode materials; they are importantelements that determine the functionality of the cathode materials.
Tanaka Chemical has been producing precursors for a long time, since theera of nickel-metal-hydride batteries. Because they have built up a large
store of research into the production of nickel-based precursors, theycreate extremely precise particles. You may think this is just about thesize of the particles, but Tanaka Chemical has technology to manufacture
precursors with excellent properties, including a lack of impurities andconsistency in flow distribution.

Q. Your company has taken a stake in Tanaka Chemical, but was this inorder to create synergies that would give Tanaka Chemical the strength
to make a significant investment? Can we expect synergies from theproduct combination of cathode materials and separators?
A. As we expect rapid growth in the market for automotive lithium-ion
batteries, battery manufacturers and automobile manufacturers arelooking to tie up alliances along their supply chains. Supply chains are in
the midst of being decided, as automobile manufacturers look at where
they will buy batteries, and battery manufacturers look at where theywill buy cathodes and separators. There is demand for high quality inseparators, and if metals are mixed in during the manufacturing process,for example, the products will have extremely undesirable properties. We
work to prevent contamination with foreign metal particles in the
manufacturing process of separators by maintaining a perfectly clean
environment and strengthening an inspection system. The question ofhow to make batteries that have the high levels of energy required forautomotive applications, and of how to ensure quality, is a question thatencompasses all parts of the process, including separators and cathodematerials. In addition, by offering both separators and cathode materials,
our customers can approach us from a variety of different angles, so thereis the possibility of utilizing synergies on the side of taking orders as well.
Super Engineering Plastics (SEP)
Q. It seems that your SEP product lineup is a bit small compared to othercompanies in the same business, but what are your thoughts?
A. There are other companies in this business expanding their own lines ofSEPs and other engineering plastics. Our company would also like to findgood materials and add them to our lineup, but we are not looking to justincrease the number of products, but to narrow them down to those which
we can make good use of. Currently, our lineup consists of the three
categories of polyethersulfone (PES), liquid crystal polymer (LCP), andpolyether ether ketone (PEEK) products sold through alliances with othercompanies.

Q. With SEPs, what sort of market are you targeting?
A. In today’s presentation, we focused our explanation on automotiveapplications, but PES can also be used for applications, including
aerospace applications, food containers, and dialysis membranes. Prices
are varied because it is an extremely big market, but we are targeting
higher-priced applications, one of which is automotive applications.
Within the category of automotive applications, we would like to target
customers who understand the outstanding characteristics of PES, andwho are willing to buy it even at a higher price.
Q. I believe European companies such as BASF and Solvay may competewith you in PES, but why is your company’s market share not very large
yet in automotive applications, despite having a large market share inaerospace applications? Also, what efforts are you taking to increase yourmarket share going forward?
A. As you pointed out, we have put a great deal of effort into the aerospace
application market, while BASF and Solvay have been developing theirbusiness through broader applications. We would like to apply thetechnology developed in producing for aerospace applications, and expand
it into other applications as well.
OthersQ. What is your forecast for orders for the CO2 separation membranes going
forward? I would like to ask about the timing of this product’s
contribution to sales, including whether you expect further orders during
the current Corporate Business Plan.
A. The CO2 separation membranes that have already been delivered arecontributing to saving energy in the CO2 separation process at factories,
but due to the lower price of oil, the economic benefits are not what wehad initially hoped. However, it is said that the era of carbon taxes(carbon pricing) will be arriving soon, and when that happens, theprocessing of CO2 emissions will become an issue. In light of this, we areworking on research that is a bit more long-term. Beyond this, we areworking on a variety of joint development projects on uses for CO2
separation membranes outside factories.

Q. On slide 7 you show the Sector’s product lines and state your intention to
devote management resources and proactively expand your business inareas where the market growth rate is high, but outside of those areas,
would you consider entering into alliances as you have done with S-SBR?
A. For S-SBR, it has been six months since we established ZS Elastomers asa joint venture with Zeon Corporation, and we are beginning to generatesynergies, both in terms of sales and technology development. To give youa slightly detailed explanation of the technology, we are trying to bring
together Zeon Corporation’s coupling technology with our chain
modification technology. Because electric vehicles are heavy, there is aneed to increase the wear and abrasion resistance of tires. European tiremanufacturers, in particular, want to increase the wear and abrasion
resistance of tires, so we need to develop high molecular weight S-SBR.
By bringing together the technologies of the two companies, we are in theprocess of developing a polymer that has greater wear and abrasion
resistance.
For alumina, we have been working to rebuild our business since 2015,
but a competitor exited the business this year, and we are getting morecustomer enquiries. For alumina, as well, rather than commodity
products, we are targeting value-added applications. Our low-soda
alumina is used in semiconductor manufacturing equipment, receptacles,and conveyors, and demand is increasing. In addition to our efforts tostreamline our operations, new applications are expanding, and acompetitor is exiting, so the business is benefiting from positive trends.
For resorcinol, one large US manufacturer suddenly exited the business,so we are getting very strong enquiries, and we expect a significant
increase in sales this fiscal year. Because our supply capacity is limited,
we decided to increase our capacity by about 2,000 tons. To our currentcapacity of 20,000 tons at our Chiba Works and 10,000 tons at our Oita
Works, we will slightly expand by 2,000 tons.
For rubber chemicals, demand is increasing for our silane coupling agent,a rubber additive that increases the wear and abrasion resistance ofrubber.
For EPDM, currently there is an over-supply in world markets. Under theslogan “EPDM that is not EPDM,” we are working to createhigh-performance EPDM that can serve as a substitute for chloroprenerubber or silicone rubber. General-purpose EPDM will be produced atPetro Rabigh.
Q. Your goal for sales for fiscal 2018 is 300 billion yen, with operating incomeof 18.0 billion yen, but that level of profitability seems a bit low. As you
are the Functional Materials Sector, a profit margin in the double digits
should be imperative, so I would like to hear your thoughts on improving
profitability.
A. We expect that competition in the battery components business will begetting fiercer. At the same time, there are some businesses we have been
operating for some time that achieve profit margins in the double digits,
where we would also like to further improve profitability. There arebusinesses where competition will be getting more intense, andbusinesses where we can expect improvements in income, but overall wewould like to further improve our profitability.
(END)

Cautionary Statement
Statements made in this document with respect to Sumitomo Chemical’s
current plans, estimates, strategies, and beliefs that are not historical facts
are forward-looking statements about the future performance of Sumitomo
Chemical. These statements are based on management’s assumptions andbeliefs in light of the information currently available to it, and involve risks
and uncertainties. The important factors that could cause actual results todiffer materially from those discussed in the forward-looking statements
include, but are not limited to, general economic conditions in Sumitomo
Chemical’s markets; demand for, and competitive pricing pressure on,
Sumitomo Chemical’s products in the marketplace; Sumitomo Chemical’sability to continue to win acceptance for its products in these highly
competitive markets; and movements of currency exchange rates.