Interview with the President & COO

We take on
the challenge of creating
future innovation.
Toshiaki Higashihara
President & COO

What is your opinion about the progress of the 2015 Mid-term Management Plan?
The Hitachi Group is recording steady gains in earning power, andAnother urgent issue is the bolstering of our ability to generate

we have achieved record-high operating income for two consecutive

cash. Since October 2014, we have been working to further deepenyears. We are currently targeting an overseas revenue ratio of moreand enhance the Hitachi Smart Transformation Project and implement

than 50%, and this is within our reach. Also, regarding the Hitachi

initiatives focused on cash generation. Accordingly, we are reevaluat-

Smart Transformation Project, a cost structure reform project, theing business processes from demand forecasting to service provision

cumulative cost reduction benefits from this project for five years arefrom an end-to-end perspective. We are also promoting reforms in

expected to exceed our target of ¥400.0 billion.

supply chain management to increase overall operational efficiency.

As a result, I have had a profound sense that the Hitachi Group has

flow and to optimize collection and payment periods for accounts

the issues we face in recording additional growth have also become

receivable and accounts payable as well as inventory levels. In theseclear. First, we must achieve further improvement in our earningways, we will improve the cash conversion cycle. By further raising ourpower. Single-digit profit margins will not be sufficient for the Hitachi

earning power and strengthening our ability to generate cash that isGroup to succeed in competition, record growth, and thereby increase

the source of growth, we will accelerate Hitachi’s growth trajectory.

its corporate value. The 2015 Mid-term Management Plan is amilestone on the path to future growth. We will enhance the earning
power of the Hitachi Group by implementing aggressive initiatives on
a global basis and by steadily advancing reforms during ordinary
times, such as rigorous structural reforms for certain businesses forwhich growth is not expected.

12At the same time, we are taking steps to visualize our overall cash

started to see results from its reform initiatives. On the other hand,Hitachi, Ltd. | Annual Report 2015

Hitachi is focusing on the Social Innovation Business. Specifically, could you describe what typesof businesses are involved in this field?
Even on a worldwide basis, Hitachi is a unique company because we

reductions in operating costs are realized. In 2009, we supplied thehave both IT and social infrastructure businesses. The Social Innovation

U.K. with Class 395 high-speed trains, which have sustained stable

Business resolves issues faced by society and customers throughoperations since that time. This rolling stock significantly reduces theinnovation that combines both IT and social infrastructure, thereby

amount of time passengers spend on trains. As a result, we havecontributing to improvements in people’s quality of life.

received favorable feedback from many customers. One gratefulFor example, we are providing packages that combine rolling stock

commuter said, “I am now able to spend more time enjoying breakfast

and maintenance services for a railway project in the U.K., which is awith my family thanks to substantial reduction in commuting time.”good example of the integration of the IT and social infrastructure

In these ways, the Social Innovation Business simultaneouslybusinesses. Through the collection and analysis of big data from therealizes both economic value and social value by resolving problems

hundreds of sensors that are installed on each train set, we can offer

faced by society and customers. In addition, it is a business that canadvanced maintenance services, such as predictive diagnostics that

ultimately contribute to improving the quality of life for individuals

can help prevent breakdowns. In this way, stable operations andwho are the customers of our customers.

To enhance and expand the Social Innovation Business, the Company will strengthen three functional
layers: front-line function; analytics and control function, which form a common platform; and product,
software, and service function (hereafter, product function). Would you describe the background to thisapproach and the specific initiatives that will be implemented in the future?
Strengthening front-line capabilities

business activities. The Chief Executives are implementing projects

Previously, Hitachi was a “product-out” type of company that madewith the authority to make investments and the responsibility forhigh-quality products and then, subsequently, sold them to customers.

profit and loss. In regard to R&D, project finance, procurement, andHowever, to resolve the issues faced by customers and society, it isother areas, we will maximize utilization of the Hitachi Group’s sharedessential that we take a “market-in” approach, where we first identify

resources on a global basis.

what customers need and which direction we should take, and thenWe have also reorganized the R&D structure to reflect a “market-in”

create solutions through a process of collaborative creation. Front-line

approach. The Global Center for Social Innovation, which has beenfunctions play the lead role in these initiatives and, accordingly, we areestablished in Tokyo, North America, China, and Europe, is not a placestrengthening these functions in each industry and region.

for technical development but rather a place to work together with

Applying this approach to business sectors, we have integrated ourcustomers on the front-line in order to identify issues and find solutions.

various front-line functions and established new in-house companies

We will promote collaborative creation with customers by utilizing a

in the fields of healthcare and energy. Also, for IT services in fields suchvariety of means and tools. These include “Kizashi,” by which we canas finance, public & government and social infrastructure, we haveforecast future social trends and search for new business areas, based

consolidated the front-line functions including sales, engineering, andon political, economic, social, and technological factors in a region,

consulting units, which had previously been distributed throughoutand “Cyber PoC*,” a simulation tool for verifying total return on

the Hitachi Group. Through these initiatives, we have reinforced ourinvestment, such as the capital expenditures and operating costs

ability to address challenges.

necessary for solutions.

We are also using this approach with regard to global management.

* POC: Proof of Concept

On April 1, 2015, I appointed Chief Executives to serve as representatives of the Hitachi Group in four regions: the Americas, China,

Strengthening analytics and control capabilities

Asia-Pacific, and EMEA-CIS. We are accelerating the establishment ofWe are moving ahead with establishing and strengthening commona system for Autonomous Decentralized Global Management, underplatforms, such as those for big data analytics and control, which arewhich each regional Chief Executive autonomously takes the lead in

the source of competitiveness for the solutions we provide on thefront-line.

13

Regarding the analytics function, in May 2015, we acquired

Strengthening product capabilities

Pentaho Corporation, a big data analytics software company in theIf a business has products that can succeed on a global basis, then theU.S. Moving forward, we will increase the value of our solutions bycompetitiveness of solutions that utilize those strong products will all

applying Pentaho’s common platform for big data utilization tobe enhanced.

a variety of industries, such as healthcare and energy.
In the control function, Hitachi has the technologies and know-how

With this in mind, in May 2015, we established the Industrial
Products Company, which incorporates the medium-scale and large-to create autonomous decentralized systems. These systems canscale industrial equipment businesses that had previously been spread

continue to operate even if a portion of a system breaks down, andthroughout the Hitachi Group. Products include motors, inverters,

they can also be expanded in a phased manner. Hitachi has alreadysubstation control devices, compressors, and pumps, which are theachieved strong results with these systems in a variety of fields. These

core components of infrastructure systems.

include East Japan Railway Company’s Autonomous Decentralized

In addition to promoting product businesses that have a compara-Transport Operation Control System (ATOS), in which I was previously

tively short cash conversion cycle, we will create optimal combinations

involved, as well as systems for the steel industry. In the future, weof these businesses and social infrastructure businesses, which have awill work to generate more sustained, efficient solutions throughlong cash conversion cycle. This approach will contribute to the stable“symbiotic autonomous decentralized” systems, where systems ingeneration of cash over the medium-to-long term.

different fields, such as railways, energy, and water, are connectedin stages and work together on an overall basis.

What is the Hitachi Group’s approach to the optimal business portfolio?
Business portfolio reevaluation is a never-ending process. Can wetake steps to increase the competitiveness of our product businesses

increase value through combinations with IT? And by doing so, canwhile working aggressively to incorporate external resources, such thewe resolve the issues faced by society and customers and contributeacquisition of Italian companies that manufacture rolling stock andto improvements in people’s quality of life? We are continually

signaling systems.

reevaluating our business portfolio to further strengthen our front-line

On the other hand, in regard to businesses where a certain scale isfunction, analytics and control function, and product function, allneeded on a global basis, we will aggressively advance partnerships withwith these questions in mind.

companies that are global leaders. For example, we have established aIn product businesses, in addition to taking steps to enhance ourjoint venture with Mitsubishi Heavy Industries, Ltd., in the thermal

own competitiveness, we have the option of collaborating withpower generation systems business and will establish another joint

partners or utilizing joint ventures. For example, in the railway business,

venture with Johnson Controls, Inc. of the U.S. in the air-conditioning

the Hitachi Group provides a comprehensive range of services, including

systems business. In addition to raising the competitiveness of therolling stock, signals, operational management, maintenance, IC tickets,

products themselves, we will increase the value of the total solutions

and seat reservation systems. In these types of businesses, we willthat utilize those products.
In this way, with an ongoing focus on businesses that we need tostrengthen on our own and businesses for which we will increase
competitiveness through partnerships, we will move forward withbusiness portfolio reforms that are more transparent to external
stakeholders.

14Hitachi, Ltd. | Annual Report 2015

Acquire necessary resources (customer base, sales channel, technologies) for growth,
optimize business portfolios and increase revenue

Strengthen Front-line Function• Prizm Payment Services:
Finance (India)• Stone Apple Solutions:
Finance / Industry customer (Asia)

Strengthen Analytics Function• Pentaho: Data analytics

Strengthen Product Function• AnsaldoBreda / Ansaldo STS:
Railway business (Europe, Australia, etc.)• Waupaca Foundry:
Casting (Automotive, etc.)

Strengthen Product Function(JV, Alliance)• ABB (JV):
High-voltage DC powertransmission, etc.
• Mitsubishi Heavy Industries (JV):
Thermal power generation
systems business• Johnson Controls (JV):
Air-conditioning systems business

Finally, what is Hitachi’s approach to strengthening corporate governance, andwhat is its shareholder return policy?
Hitachi adopted a committee system in 2003 and, since that time,

open manner, and the opinions of the outside directors are actively

we have worked continuously to strengthen corporate governance.

reflected in management, without being restricted to the status quo.

Outside directors have been a majority of the Board of Directors since

In regard to shareholder return, in fiscal 2014, against a backdrop

June 2012 and, currently, 8 of the 12 directors are outside directors.

of steady gains in earning power, we raised the annual dividend ¥1.5

Moreover, four of the outside directors are non-Japanese. The outside

per share, to ¥12.0. Moving forward, we will strive to improve ourdirectors have extensive knowledge, including management experience

profitability and strengthen our financial position. Our policy will be toat global companies. They offer frank opinions, ranging from corporate

target sustained growth through continued investment and to provide

strategy to issues of each business and product such as growthstable returns to shareholders. We will respond appropriately to thescenarios for the Hitachi Group, cash flow, and market positioning.

Corporate Governance Code that was applied in Japan in June 2015,

As a result, other Company executives and I have become aware ofand we will implement management with a greater awareness of ROE

a wide range of issues, and we have been able to utilize these find-and other indicators of capital efficiency. In these ways, we will strive

ings in management initiatives. The executive officers, who fulfill theto strengthen corporate governance in an ongoing manner and tobusiness execution function, and the outside directors, who fulfill theincrease shareholder value.

management oversight function, conduct deliberations together in an15