03

HDS REPORT 2023

HDS Group’s
Values and Aspirations

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Sustainability
Management

Data and Company
Information■ Values and Aspirations

Unchanging goals that we want to achieve through corporate activities

Ma na g e me nt Phi l o so ph y

Respect for
the Individual

A MeaningfulCompany

Coexistence andCo-prosperity

Contribution
to Society

HDSI aspires to be a company
where the rights of every individual
employee are respected, and whereindividuals can pursue a meaningful,cultural, and worthwhile life.
We will make HDSI a company
that believes in each employee’s
aspirations, supports independent
activities, and creates an environment
where employees can maximize theirabilities through work, and whereabilities and performance are
rewarded.

HDSI wants to be recognized as ameaningful, superior company which
manifests creativity, has personalityand distinctive characteristics, andwhose management foundation isbased on ceaseless research anddevelopment activities and a constantemphasis on quality—a company
where the entire organization finds
meaning in making utmost efforts.

HDSI is supported by many different
parties including our employees,
customers, shareholders, materials
and parts suppliers, affiliatedcompanies, and trading partners.
We make our best efforts to create
attractive products, services,compensation, working environments,
and trading relations to satisfy allthese concerned parties.

HDSI broadly contributes to society
and industry through our corporate
activities as a good corporate citizen.
The products and services weprovide directly and indirectly
contribute to the betterment of society.
We aspire to be a company thathelps improve the environment andthe quality of the communities where
we are located.

HDS Group’s
Values and Aspirations

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Sustainability
Management

The world of Motion Control Transformed by a Single Invention
The innovative idea and the unique principle of HarmonicDrive®
are the brainchild of a brilliant
American inventor, C. W. Musser.
Making use of the deflection of metal,
Musser’s invention defied
the conventional wisdom and instantly
became the object of worldwide
interest at the time as a revolutionary
method of conveying motive power.
Two companies stepped forward
to take a chance at commercializing
this concept. One was
USM (United Shoe Machinery Corporation),an American company,
and Hasegawa Gear Works, Ltd.,the forerunner of Harmonic Drive Systems Inc.
Subsequently, HarmonicDrive® was successfullycommercialized for the first time in Japan. Currently, the technology
fulfills the needs of various domains that require positioning accuracy.
The management philosophy of Harmonic Drive Systems demonstrate
our values and reflect various aspirations behind the realizationof Total Motion Control.
Musser’s wave-motion gearing mechanism was originally called “Strain-wave gearing” and waspatented under that name.Subsequently in Japan, Harmonic Drive Systems Inc. succeeded incommercializing the technology.The technology today is generally referred to as a “wave-motion
gearing mechanism,” while the term HarmonicDrive® is a registered trademark that applies
exclusively to the products manufactured by Harmonic Drive Systems Inc.This trademark is
registered not only in Japan, but also Taiwan and South Korea.

visio
o
r
P

Data and Company
Informationn of total motion co

HDS REPORT 2023
Values and Aspirations

ntr
ol

Cloud/fog computing

Big data/AI
Speed reducers

loT/loE

MotorsSensors

Technology andtechnical skills

ICT/5G
Controllers

機 構
Mechanisms

素materials
材
Raw
Drivers

Electric power sources/
wireless power supply

Production/
process technologies
Other system elements

Pu

rs u

Softwareo
it o f s u p e rio r a c t u a t

rs

04

05

HDS Group’s
Values and Aspirations

HDS REPORT 2023

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Sustainability
Management

Data and Company
Information■ Message from the CEO

For the advancement of the Total Motion Control business, we need to break awayfrom our monoculture and develop outside-the-box thinking.
To create new standards that define the next 50 years, we will continue to drive
our effort to transform employees’ mindset so that they can take on new challenges
without hesitation.

President and CEO

President and CEO

Akira Nagai

HDS Group’s
Values and Aspirations

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Data and Company
Information

Data and Company
Information

HDS REPORT 2023
Message from the CEO

The connection between management philosophy, strength of our business model and our corporate culture
The management philosophy of Harmonic Drive Systems consists of four pillars: “Respect for the
Individual,” “A Meaningful Company,” “Coexistence and Co-prosperity,” and “Contribution toSociety.” Atsuo Tokoro, the first president, played a key role in establishing them. We don’t reallyknow what kind of aspirations our top management had when they developed these philosophies.
However, today’s growing awareness of SDGs (Sustainable Development Goals) shows thesephilosophies were truly outstanding and forward-looking.

HarmonicDrive®, a brand of strain wave gearing products,
symbolizes guaranteed performance and quality“Respect for the Individual,” the most important management philosophy of all, means that HDSI
aspires to be a company where the rights of every individual employee are respected and whereindividuals can pursue a meaningful, culturally rich, and purposeful life. We have a common
payroll system for white-collar and blue-collar workers, and the concept is also applied to otherinternal systems and our business model. We set the retirement age at 60 as early as in the
1970s. It was raised to 65 in 2015 and 70 in 2019. Thus, employees’ individuality is our top
priority. At the same time, we expect them to fulfill their responsibilities as individuals and it’s very
important for them to understand their own roles and responsibilities.
Today, many companies aspire to be “A Meaningful Company.” HarmonicDrive®, the productof the HDS Group, is capable of generating a high level of force with small motive power. It’s
also energy efficient and friendly to the global environment. Moreover, no industrial robots canfunction without it. We produce only these important components, and our corporate culture has
been built around that. That means we are accustomed to ignoring other things. To put it in anegative context, we are trapped in a monocultural environment. The HDS Group doesn’t makegeneral-purpose products. What we are good at is the customization of our original products tothe individual needs of our customers. As a result of focusing on this business model, we became
indispensable in society, or “A Meaningful Company.”
We collaborate with our suppliers for casting and forging that are required to make our
products because we are not capable of doing them internally. We know that these suppliers
and intermediate processing companies are also proud of the fact that their products are used
in industrial robots worldwide. Their work with this shared identity also leads to our pursuit of“Coexistence and Co-prosperity” and “Contribution to Society.” I believe the HarmonicDrive®
brand represents the guaranteed performance and quality of our products and the HDS Group’s
value and role. It is also a source our message emanates from.

We will continue to improve our business model to accomplish our
missionTo achieve our mission, “To contribute to technological innovation in society through motion
control technology,” we need to keep improving our business model based on the management
philosophy. In addition to high-precision speed reducers such as HarmonicDrive® andHarmonicPlanetary® which are our core products, we will continue to offer high-value-added
products with clear advantages over competing products, including actuators made of motors,
sensors, and other parts, as well as the drivers, controllers, and other system elements for drawing
out their top performance.

Business environment outlook, opportunities and risks
In the HDS Group’s investors’ guide, a long-term sales trend of our products is presented along withthose of machine tools, industrial robots, and semiconductor manufacturing equipment, the external
factors that have led our sales growth. When you look at the graph, it appears as though wehave achieved growth. However, it’s an afterthought, in a sense, because we don’t manufacturemachines and tools ourselves. Internally, I emphasize the position of the company to the employees;
we are not creating innovation, but we do contribute to the people who create innovation.

06

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HDS REPORT 2023
Message from the CEO

HDS Group’s
Values and Aspirations

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Opportunities and risks in the industrial robot market where
medium- to long-term growth is expected
We can’t just be passive, though. We need to foresee what kind of business domain will drive ourgrowth in the future. HarmonicDrive® is small, light, and highly precise and yet can generate highlevels of force. Because of this advantage, we see space industry and medical equipment as the
new promising markets. In space, product durability is essential because the vacuum environment isunfavorable to lubrication. Thanks to the performance record of our products, we can expect to see
the wider use and increased adoption of HarmonicDrive®. With respect to medical equipment, ourproducts have already been adopted for surgical robots by a North American medical equipment
company. This market is increasing with the recent participation of manufacturers from Japanand Europe. Our employees will keep focusing on fulfilling customers’ needs every day while themanagement team is concentrating on making business forecasts to decide the company’s future
directions.
About half of our sales come from products used for industrial robots. According to the latest
forecast from the IFR (The International Federation of Robotics), the number of industrial robots
installed worldwide is expected to grow 7% annually on average from 2023 to 2026. China
and small robots will continue to lead the growth, and demand for our HarmonicDrive® products
is expected to outgrow the market average.
Within the robot market, we see humanoid robots (robots resembling the human body inshape) as a new domain. It seems almost certain that the demand for industrial robots willcontinue to increase with the ongoing shrinkage of global labor markets. The problem is how
the speed and dexterous movements of humans can be exactly reproduced by robots. However,thanks to the evolution of AI-led autonomous driving technology, the solution is coming into sight.
To make the movements of humanoid robots closer to humans, functionality of the body and thebrain is the key. In terms of reproduction of human body movements, it is possible with today’s
robotic technologies. Seven-axis robots can reproduce the movements of human arms. However,to perform the dexterous movements of human hands, 15 ultra-small speed reducers are required
per hand (five fingers). We have already provided our HarmonicDrive® products to be used for
prototypes of humanoid robots. We see huge growth potential in this domain.
With regards to the Chinese market, how to compete with local robot manufacturers that are
steadily gaining strength is an issue. Currently, among the top ten industrial robot manufacturers in
China in terms of market share, six or seven are Japanese or European. Local manufacturers don’t
seem to have broken their dominance yet. However, we can’t deny the possibility it will become
like a machine tool market (there are only three or four Japanese manufacturers in the top ten
companies) in the near future. To deliver our HarmonicDrive® products to leading Chinese robot
manufacturers, preservation of high added value as well as reduction of the cost is required.

Sustainability
Management

Data and Company
Information

Sales of HDSI Products for Industrial Robots and Number of IFR Industrial Robots Installed
Sales of HDSI Products for Industrial Robots

Number of IFR Industrial Robots Installed (right scale )(Millions of yen)
30,000(Thousands of units)
1,200

26,26725,20425,0001,000

21,34821,241

20,00015,00012,525
9,942 9,980
400
10,000
304
6,057
254
221
5,000 178
0

2013

2014

2015

2016

2017

13,111

423

526

553

593

622

662

718

800
600

387 390

400

8,886
200

2018

Results

2019

2020

2021

2022

2023

2024

2025

2026

0

Forecasts
Source: Created by HDSI based on IFR World Robotics 2023

Our experience gained from many failures supports theperformance, quality standard, and future of our customers
The HDS Group has been doing business centered around HarmonicDrive® for more than 50
years. Our products have wider applications and our mass-production system is better than thoseof our competitors. We don’t believe apparatuses or machines equipped with HarmonicDrive®
can outperform the inherent capacity of HarmonicDrive®. Although we’ve been doing business inthis field for a long time and enjoying a commanding market share, we are always aware of thepotential danger posed by competitors that are capable of gathering strength in a short period oftime.
As the basic patent of HarmonicDrive® has already expired, our competitors can use thetechnology to guarantee the basic performance of their products. Moreover, by making additional
efforts such as aggressive pricing, they may get a chance to steal business from us. The difference
between us and the competitors is that HarmonicDrive® is the result of our learning from failures
over the past 50 years. And this experience is reflected in our efforts to make better products suchas making the product more compact and improving the design, materials, and production. That’s
why we are confident that the performance and quality of our products is guaranteed for many
years to come. It is supported by our customers’ words we hear from time to time that the lifespanof HarmonicDrive® is longer than that of their equipment.

HDS Group’s
Values and Aspirations

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Sustainability
Management

Data and Company
Information

HDS REPORT 2023
Message from the CEO

Break away from the monoculture and challenge change
The HDS Group is focusing on the business of manufacturing HarmonicDrive® products andcustomizing them for each customer. We have no intention to change this business model.
With HarmonicDrive® at the core, we will develop compatible motors and drivers to drive thediversification of our product lineup for the provision of Total Motion Control. This is the mission
given to the top management.

We have gained knowledge of electronic technology as well asmechanical technology to deal with new customer needs
It would be ideal if we can keep growing just by manufacturing HarmonicDrive®. However,the business environment surrounding us has been changing rapidly in the past few years.
Until recently, most orders could be handled with mechanical technology and we could simply
concentrate on making defect-free speed reducers for our customers. Today, we are required touse electronic technology in addition to mechanical technology to meet the needs of customers
who are using speed reducers consistently for their services and facilities. We don’t dismiss thepossibility of M&A as a way to deal with the new technology but we will stick to our core domain
and stay away from new technologies we don’t understand very well.

Transformation of mindset – taking on new challenges throughoutside-the-box thinking – is required to break away from themonoculture
We recognize the importance of sticking to our core domain, but at the same time, theprevalence of certain monocultural practices is a problem for the Group. I think, if we can takecare of only HarmonicDrive® properly, it may be enough for us to survive. The problem is the lackof strong will in the company to change the monoculture. The reality is, it is difficult to expect an
immediate transformation because our workers are so accustomed to making HarmonicDrive®

one that is able best to adapt and adjust to the changing environment in which it finds itself.”
The reason why we could have survived for 50 years with our monoculture is that we have been
responding seriously to the changing business environment and customers’ needs. While weare sticking to our peculiar monoculture, our development and product domains are expanding,with an increasing number of engineers who are well versed in both electric and electronic
technologies. This is something we can be proud of.

products faithfully to the specified sizes and selling them.
Our customers will drive our changes. When we were listed on the stock market in March
1998, we adopted the corporate slogan, “Seeking harmony with the future.” Our society and ourcustomers have been evolving by designing new innovations for the future; we, too, have been
evolving toward the future along with them. Just as Darwin said, “It is not the most intellectual of
the species that survives; it is not the strongest that survives; but the species that survives is the

To break away from what we might call a Harmonic syndrome, or excessive reliance on
HarmonicDrive®, we are searching for new technologies that can potentially replace our existing
technology in the future through partnership with SRI, a research institute in the U.S. Abacus®
speed reducer, a theoretically high-efficiency technology, is one of the breakthrough technologies
that may be incorporated to complement our product lineup.

08

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HDS REPORT 2023
Message from the CEO

HDS Group’s
Values and Aspirations

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Sustainability
Management

Data and Company
Information

Results and challenges of the Medium-term Management Plan, toward the next 50 years
The current medium-term management plan covers a period from April 1, 2021 to March 31, 2024.
On April 1, 2024, a new medium-term management plan will be in force. A review of the current
medium-term management plan reveals that the biggest achievement in these three years was
the expansion of production capacity, although we may have to face difficulties in the final year,
including a disappointing operating margin. From 2017 to 2018, monthly production capacity of thecompany (non-consolidated) was only around 50,000 to 60,000 units. Ultimately, it was increased
to 100,000 units per month, but we put many of our customers to much inconvenience due to delays
in delivery. Based on lessons learned, we incorporated forward-looking measures into the previous
medium-term management plan; we decided to construct the new Ariake Plant to increase our monthly
production capacity to 200,000 units, including the output from the Hotaka Plant.

Management policy on the production system; more speed isrequired to tackle the next issues
Management policy on our production system has also changed. Until recently, we focused on
profit and stable profitability. As a result, when order volume decreased and temporary workers’
workload was reduced, we tried to cut costs by not extending their contracts. However, this does
not allow us to respond to an increase in order volume because temporary workers cannot behire in such a case. So, we have changed the way we see things and set a different policy.
Since we train temporary workers as well as employees to make them valuable resources for us,
we will think twice before letting them go in a downturn. Due to this policy change, the decline in
our profitability looks relatively large. However, we are determined to continue the policy because
it is vital to the survival of the company. In parallel with keeping the necessary number of workers
in the production area, we are aggressively driving automation and labor-saving efforts.
The next issue to address in the new medium-term management plan that will be put into force
on April 1, 2024 is how to operate the enhanced production system in the Hotaka Plant and the
Ariake Plant in full capacity. To achieve this, we need to receive more orders. For this purpose,
we will expand our business domain to supply our products other than industrial robots, strengthen
the vertical integration of each product group, and introduce a full lineup of mechatronics
products, that is Total Motion Control.

Add mindset transformation of speed and change to customeroriented quality standards
As a manufacturer, we aim to improve on Quality (Q), Costs (C), Delivery (D), Service (S), andadditionally, Speed (S). The business of the HDSI Group is neither BtoC nor BtoB. We call it BtoE.
That is, our target customers who ultimately decide the specification for product customization are
engineers (E) in the customers’ organizations. For our product development, understanding whatkind of product they need and what kind of movement they want to reproduce is most important.
As a result, more than 99% of our products are customized products. On the other hand, we
knew we had a problem with the speed required to respond to the requests from the customers’
engineers in a timely fashion.
To address this, we introduced an emergency response (ER) approach as practiced in medical
services. That is, if we receive a request from a customer, the relevant department needs tosuspend any ongoing work and hold a team meeting to discuss the matter, even if it’s only 15
minutes. It’s similar to an emergency room where doctors make a prompt diagnosis when apatient is brought in. I believe our employees’ awareness of speed will increase, if gradually,
through this kind of effort.
As a clear effect of the ER approach, the company’s direction has always matched thecustomer-oriented approach. The definition of our quality standards is not simply to satisfy
the requirement for product sizes and functions in full, but also to satisfy all our customers’
expectations. Timing of delivery is one of them. Responding to the customer’s request if a customer
asks us to deliver products by tomorrow also leads to satisfying customer expectations.
Whether we can break away from our monoculture and how we transform ourselves will leadto “create new standards that define the next 50 years (2021 should be regarded as the groundzero, rather than the 51st anniversary) through outside-the-box thinking,” described as one of
the basic policies of the medium-term management plan, the key phrase of which is “Toward the
Next 50 Years: Moving to a Solid Growth Stage.”

HDS Group’s
Values and Aspirations

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Sustainability
Management

Data and Company
Information

HDS REPORT 2023
Message from the CEO

Sustainability activities and stakeholder engagement efforts
We established the Sustainable Committee in April 2023, but my personal view is that the degreeof our employees’ commitment to sustainability is still low. In fact, we introduced a management
program compliant with ISO 14001 in 1998. Based on this, we have set departmental goals
for not only business issues, regular operations, and challenges, but also compliance issues andhuman resource development, and created a system where specific measures to achieve the goals,
by whom, by when, etc., are determined. Thus, an internal system is almost ready but it is also
important to have external reviews of effectiveness. I think it offers a good opportunity to strengthen
our sustainability efforts.

Governance: Discussion in the Board of Directors on whether
effective measures are chosen to carry out the management plan is
also important
Related to sustainability, “Establishment of a management foundation that adapts to the times” is
one of the material issues. In this respect, governance is particularly important, because it is not
only about the supervision function of the Board of Directors but also about discussing whether
effective measures are chosen to carry out the management plan. For our way of thinking andexecution process, outside directors’ objectivity and the skills supported by their expertise play animportant role in providing awareness-raising advice to us. They also attend monthly Executive
Officer meetings and give appropriate advice on operational matters.

Responsibility of top management for engagement with stakeholders

Engagement with our stakeholders is important for the enhancement of corporate value on a
medium- to long-term basis. In this regard, my responsibility is to accurately explain the current
status and future outlook of the HDS Group for our stakeholders’ understanding. Therefore, mycommunication capability is very important.
Within our stakeholders, we regularly engage with the customers through daily operations
because most of our products need to be customized for them. With the employees, it is relatively

easy to engage because we share the common objective of making good products. However,I want to change, as my initiative, their culture of “the company rules and nothing more.” With
respect to our suppliers, a group has been formed by 38 Tier 1 companies, called the HDS
Kyoryokukai (HDS Cooperative Association) and we keep in close contact with them throughworkshops and get-together events to share management issues. A proper understanding of the
HDS Group by our shareholders and investors is essential. At the same time, we always strive
to be aware of external views of us. We don’t have a corporate culture that we deal with themarket simply for the sake of the share price, but we stay vigilant so that our market value doesn’t
go below their original investment. With regards to the recruitment candidates who may become
our stakeholders in the future, our employees provide an accurate pictures of the HDS Group,
including our business and products, to technical colleges and high schools as visiting lectures.
In conclusion, we will continue to take on various new challenges for the advancement of the Total
Motion Control business and manage our business to meet the expectation of our stakeholders.

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HDS Group’s
Values and Aspirations

HDS REPORT 2023

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Sustainability
Management

Data and Company
Information■ Materiality to Achieve Aspirations
Based on our management philosophy, we aim to bring a sustainable society into reality and growour business by achieving our mission of “To contribute to technological innovation in society throughmotion control technology.”
In modern society where things are changing rapidly and all kinds of social issues have beenbrought to the fore, it is becoming increasingly more critical to build a sustainable managementfoundation that can flexibly respond to short-, medium-, and long-term opportunities and risks inthe future and to contribute to the solution of social issues. To achieve this, we need to identify ourpriorities to be addressed for the sustainable growth of the HDS Group. As part of this effort, wehave identified material issues (materiality) for our business. It is important to incorporate them into

our business strategy and work on it with a medium- to long-term view.
In identifying materiality, we focused on ensuring consistency with SDGs as well as management
philosophy and business strategies. For evaluation, we look at it from the perspective of social
sustainability and sustainable growth of the HDS Group.
Furthermore, in preparation for the formulation of the new medium-term management plan thatwill be in force from FY2024, we are reviewing current materiality, developing specific measures todeal with materiality, and setting KPIs (key performance indicators) through repeated discussions in
the Sustainable Committee that was established in April 2023.

Process of extraction and identification of materiality

1

Step

Extracting sustainabilityrelated issues

2

Step

Identification ofmateriality

3

Step

4

Step

Approval by the Board of
Directors

Extracted issues are evaluated from the perspectivesof “impact on social sustainability” and “impact
on the sustainable growth of the HDS Group” andmapped on a materiality matrix. Based on the
HDS Group’s business strategies, issues that haveparticularly strong impacts are classified into fivematerial issues in the materiality matrix.
Consistency between the selected materiality andthe medium-term management plan is assessed. In
addition, whether the selected materiality properlyreflects stakeholder expectations is checked throughengagement with shareholders and institutional
investors.
Five material issues (materiality) are discussed ina meeting body consisting of the members of theboard, corporate auditor, and executive officers,
to confirm their validity. After the discussion andfinal approval by the Board of Directors, materiality
is published on our website.

Creation of a Rewarding Workplace

Reduction of Burden on the Global Environment

Provide a safe and secure work environment
Promote professional development
Develop an HR system and workstyle that promote diversity

Reduce GHG emissions
Use renewable energies
Manage wastes and hazardous material

Provision of Products and Services That Meet Customer Expectations
Strengthen the quality management system
Develop new products and markets
Provide products and services that address environmental changes and diversifying needs

Establishment of a Management Foundationthat Adapts to the Times

Creation of Stable Systems for Procurement and Supply

Promote sustainable management
Align organization and management structure to market expectations

Create systems resistant to fluctuations in production
Enhance supply chain management

Establish a financial base to support growth and strengthen financing

Build a global production system

Verystrong
Impact on social
sustainability

Confirming validity

In addition to issues concerning the HDS Group’sbusiness strategy, issues that are related tosustainability are extracted comprehensively by
going through case studies focusing on value chain
companies and looking at global frameworks onsustainability such as the SASB Standards.

Materiality Matrix

Impact on the sustainablegrowth of the HDS GroupVerystrongHDS Group’s
Values and Aspirations

Materiality to Achieve
Aspirations

Among the five material issues, “Reduction of burden on the global environment” has a big impact
on social sustainability. Similarly, “Creation of a rewarding workplace,” “Provision of products andservices that meet customer expectations,” “Creation of stable systems for procurement and supply,”and “Establishment of a management base that adapts to the times” have a strong impact on thesustainable growth of the HDS Group.
For “Reduction of burden on the global environment,” the HDS Group will make efforts to work
together with the purchasers of our products to reduce GHG emissions (through the use of renewableenergies and other ways). We will also address the issue by controlling water usage, reducing
wastes, and developing recyclable products. HarmonicDrive® is an environmentally friendly product.
Thanks to its strong point of “small and light,” devices equipped with it can be miniaturized. As
a result, energy efficiency is improved in their usage and the environmental burden they create
throughout their product life cycle from extraction of resource to disposal can be reduced. We will

Sustainability
Supporting Action
Strategies

Sustainability
Management

Data and Company
Information

HDS REPORT 2023
Materiality to Achieve Aspirations

continue to improve its performance and quality. “Creation of a rewarding workplace” is strongly
related to “Respect for the individual,” the most important of our management philosophy. We
will strengthen our human capital by providing a safe and secure work environment, encouraging
capacity development, and developing an HR system and workstyle that promote diversity. With
respect to “Provision of products and services that meet customer expectations” and “Creationof stable systems for procurement and supply,” we will strive to further improve our Total Motion
Control business to meet diversified customer needs for performance, quality, and other aspects ofour products. Concerning the enhancement of our supply chain, we need to build a strong system,
including improvement in the accuracy of our forecasts to deal with the large fluctuation of demandof the HDS Group’s business. In respect of “Establishment of a management base that adapts to thetimes,” we need to strengthen the sustainability of our management system in addition to financial
support to address the material issues.

Materiality of the HDS Group
Materiality

Creation of a
Rewarding Workplace
Provision of Products and Services
That Meet Customer Expectations
Creation of Stable Systems
for Procurement and Supply
Reduction of Burden on
the Global Environment
Establishment of a Management
Foundation that Adapts to theTimes

Key Measures●

Provide a safe and secure work environment●

Promote professional development●

Develop an HR system and workstyle that promote diversity

Strengthen the quality management system
Provide products and services that address environmental
changes and diversifying needs● Develop new products and markets●●●

Create systems resistant to fluctuations in production●

Enhance supply chain management●

Build a global production system●

Reduce GHG emissions●

Use renewable energies●

Manage wastes and hazardous material●

Promote sustainable management●

Align organization and management structure to market expectations●

Establish a financial base to support growth and strengthen financing

Relevant SDGs

Refer to:p.43, p.45

p.15, p.19, p.21
p.23, p.25, p.26
p.41

p.42, p.66

p.37, p.39

p.17, p.49, p.52

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HDS Group’s
Values and Aspirations

HDS REPORT 2023

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Sustainability
Management

Data and Company
Information■ Value Creation Process
MissionTo contribute to technological innovation in society through motion control technology

External environment/
Risks and opportunities

INPUT

BUSINESS ACTIVITIES
Robust supply chain
Manufacturing
Capitalp.23

Intellectual
Capitalp.19

HumanCapitalp.01 p.35
p.43 p.45

Social and
Relationship
Capitalp.41
p.42

Financial
Capitalp.17

NaturalCapitalp.37
p.39

Strengthening cooperation centered on the
HDS Cooperative Association
Unique components
exclusive to
HDS Group madewith advanced
technology

Procurement

OUTPUT

Stable supply of high-quality
products
Advancement ofProvision of total motion control

skills and production
technology
Manufacturing leadtime that meets
delivery schedule
requested
Manufacturing by customers

Maximizationof Group

Speed
reducers
OthersystemelementsHighdurability

Sales

Research and development of
products that help our customers reduce
their environmental impact

Developmentof markets
and application

Sensors

Reinforcement ofcapability to solve
customers’ issues

MotorsLightweight

Compactsynergies
ResearchandR&D
developmentof products
adapted to the times

OUTCOME

Highprecision

Drivers

Controllers

Strategy plan
Management Policy

In pursuit of excellent actuators
Materiality

Management Philosophy

Expand RD, AD, andMT businesses by developing
valuable products andenhancing services
Build a managementfoundation that meetsthe demands of the times

Strengthen coordinationand maximize synergies withoverseas Group companies
and institutions

Achieve QCDS
that meets
customer expectations

Create new standards
that define the next 50 years
through outside-the-box thinking

RD: HarmonicDrive® AD: AccuDrive®, HarmonicPlanetary® MT: Mechatronics

HDS Group’s
Values and Aspirations

Materiality to Achieve
Aspirations

Sustainability
Supporting Action
Strategies

Sustainability
Management

Data and Company
Information

HDS REPORT 2023
Value Creation Process

From Input to Outcome in Our Value Creation Process
In order for the HDS Group to achieve sustainable growth, it is important for us to accurately identify the surrounding social issues and business environment, recognize risks and opportunities, and produce outcomes that lead to increased
corporate value. These outcomes will be created from our inputs that are our strengths and through our unique business activities based on our management philosophy. This process will enable us to achieve our mission.

External environment/Risks and opportunities
Reduction of global environmental burden and realization of a decarbonized, recycling-oriented society

Decrease in workforce and skilled workers

Increased interest in sustainability

Establishment of supply chain

Global environmental issues such as decarbonization and resource recycling are global social issues, and our Group's suppliers are increasingly paying attention to these issues, including requests for information disclosure. Delays inaddressing these issues may lead to a decrease in business opportunities for the HDS Group. On the other hand, the decline in the working population and the number of skilled workers will lead to an increase in demand from robot
manufacturers and others, who are our customers, and the Group will also need to strengthen its production system and establish a sustainable supply chain.

INPUTManagement foundation to refine strong business activities and expected effects from inputs[Human Capital]

Number of employees (consolidated): 1,324 (including 574 overseas)
Appropriate evaluation of each individual and work environment based on the
management philosophy, “Respect for the Individual”

HDS Cooperative Association: 38 companies, 28 global sites in 12 countries[Social and
Relationship Capital] Supply chain structure that supports competitiveness and an enhanced global presence[Manufacturing Capital]

Ratio of property, plant and equipment to total assets: 31.7%,
capital investment: ¥9.2 billion
6 domestic and 3 overseas production bases, and a build-to-order system thatcreates competitiveness[Financial Capital][Intellectual Capital]

R&D expenditure: ¥3.2 billion, 137 R&D personnel
Quality standards that meet customer expectations and realization of
total motion control[Natural Capital]

Total assets: ¥154.3 billion, net assets: ¥103.9 billion
High financial stability, growth investments, including use of interest-bearing liabilities

Energy input: 47,595 MWh, water usage (withdrawals): 31 ML (megaliter)
Promotion of environmentally friendly business activities

OUTCOME Management capital and time-conscious initiatives that lead to outcomes and value creation
Expand RD, AD, and MT businesses by developing
valuable products and enhancing services

Build a management foundation that meetsthe demands of the times

Strengthen coordination and maximize synergies withoverseas Group companies and institutions

Achieve QCDS that meets customer
expectations

Create new standards that define the next
50 years through outside-the-box thinking

To expand business by strengthening competitiveness,
it is essential to develop products that cannot be
imitated in precision speed reducers. In mechatronics,
it is necessary to develop products that enable
customers to bring their vision to life and thatcompetitors would want to imitate. We believe thatthese two approaches will lead to the expansion offinancial, manufacturing, intellectual, and social andrelationship capital.

To promote sustainable management, it is necessary todevelop human resources capable of leading businessexpansion, establish personnel systems and work
styles that enhance diversity, and shift away from ahomogeneous corporate culture. In addition, we
believe that execution of IT enhancement strategy,
establishment of a financial base to support growth,and strengthening fundraising capabilities are vital as
they will lead to the enhancement of financial, human,and intellectual capital.

To pursue value by regional optimization and global
optimization, we need to utilize management
resources at each site, promote proactive coordination
with overseas research institutions, and establish a
global production system. We believe that fulfilling thiswill lead to the growth of manufacturing, human,
intellectual, and social and relationship capital.

QCDS stands for quality (Q), cost (C), delivery
schedule (D) and service (S). We aim to achieve
QCDS through zero non-conformances and zerocomplaints (Q), improved productivity (C), commitment
to delivery schedule requested by customers (D), andaccelerating the speed of activities (S). We believethat this approach will result in enhanced
manufacturing, human, and social and relationshipcapital.

In this approach, which will be conducted over along period of time, our business activities will directly
result in outcomes. Proactive challenges leveraging thestrengths of the Group's products—compactness,light-weight, and high precision—are important toboost the value of the Group. This requires fostering aculture that is sensitive to changes in society andaccepts variant perspectives. We believe that thisapproach will lead to the expansion of human,
intellectual, and natural capital.

MissionTo contribute to technological innovation in society through motion control technology

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