The Hitachi Group’s Growth Strategy

Capital Allocation Strategy
2018 Mid-term Management Plan
Achievements and Issues 2018
Profitability Improves, Leading Toward Further
Growth in Corporate Value

Promoting ROIC Management with a Higher
Awareness of Capital Costs

Under the 2018 Mid-term Management Plan, Hitachi promoted

Under the 2021 Mid-term Management Plan, Hitachi Group will

structural reforms in unprofitable businesses, enhanced project

introduce Return on Invested Capital (ROIC) as a management

management and engaged in other efforts aimed at improving

indicator and promote the improvement of capital efficiency and theprofitability. The Company also disposed of assets with earnings not

growth of highly profitable businesses through our management. ROIC

expected to generate a return on equity or invested capital andis an indicator that evaluates returns generated by invested capital

implemented measures aimed at improving the Cash Conversion

calculated by dividing business profit after taxes by invested capital. To

Cycle (CCC). These efforts resulted in ROA, a financial indicator,

increase returns, ROIC needs to exceed the weighted average cost ofreaching 6.2% (excluding the temporary impact of a nuclear power

capital (WACC), which is the cost of raising invested capital.

station project in UK), which exceeded the 5.0% target set for fiscal

Going forward, aiming for ROIC above 10%, we will strive to increase

2018. In addition, the D/E ratio, a measure of financial discipline, wasthe difference between ROIC and WACC (ROIC spread) and increase

maintained at a level well below 0.5 times. However, we recognize

shareholder value by strengthening profitability and reducing WACC

that there are further challenges to maximize corporate value.

through the use of financial leverage. To achieve this, we will improve

Retained earnings increased, while the dividend payout ratio andadjusted operating income, while at the same time continuing tolabor’s share of income remained at the same level. To achieve

promote the disposition and sales of owning shares as well as real

further growth going forward, we must strategically allocate capital inestate and other idle assets aimed at improving business asset

investment areas.

efficiency with the aim of appropriately structural reforms of

To increase capital efficiency, we will further reduce assets notexpected to meet investment capital, promote utilization of external
capital markets using financial leverage, make an effort tounprofitable businesses and countermeasures to businesses withchallenges.

understand risks according to changes in the business environment

Proactive Investment in Growth Areasand attempt to strike a balance between efficiency and risk

While promoting management with an awareness of capital costs, wemanagement.

will make large-scale growth investments of approximately ¥2.0 toFurthermore, we will promote management that is more aware¥2.5 trillion over the next three years using financial leverage thatthan ever of capital costs, engage in a financial strategy aimed attargets an optimal capital structure. Of this amount, we have alreadyfurther reductions in capital costs and monitor stock risk and return

announced the investment of ¥1 trillion in the ABB power gridindicators represented by the β-value and manage them with thebusiness, and positioning IT and industry as priority investment areas,

goal of optimizing them.

we will attempt to expand our digital solutions business focused on

Corporate Governance Code revisions have been in effect since

Lumada, while at the same time targeting growth by strengthening

June 2018 and the way of dialogues with capital markets has

services and products required for the provision of solutions. In terms

changed, thus we recognize the necessity of innovation inof regional strategies, we will make the necessary investments

conventional management methods. In addition to our basic

focusing on the North American and Asia-Pacific regions, making

approach to earnings plans and capital policies, we will indicate

bigger investments than ever before in an attempt to strengthen R&D

targets related to profitability and capital efficiency and explain howand human resource development.

much shareholder returns in excess of capital costs we will generateover the medium to long term in light of business portfolio
reorganization and the strategic allocation of management resources
based on precise ascertainment of capital cost.

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Measures Under the 2021 Mid-termManagement Plan

Hitachi Integrated Report 2019

Improve profitability(Increased NOPAT + equity in earnings of affiliated companies)
ROIC increase drivers

Examples of major action items (to be further broken down and assigned to each division)
Expand orders, determine appropriate orders received
Optimize customer portfolio

Expand profitablerevenues

Expand overseas revenues
Expand Lumada revenues

Increase adjusted operating
income ratio

Reduce materials cost, outsourcing expenses
Improve production efficiency
Improve business efficiency

2021 Mid-termManagement PlanTargets
Adjusted operating
income ratio
more thanReduce costs(3 reforms PJ, etc.)

Implement structural reforms
Strengthen project management

Increase NOPATReduce loss costs
Withdraw/replace unprofitable business

10%

Reduce tax expenses

Implement Appropriate tax management

Increase equity in earnings ofaffiliated companies

Realize joint venture/alliance synergies

Improve asset efficiency(Improved invested capital ≒ business asset efficiency)

Increase ROIC

ROIC increase drivers

Examples of major action items (to be further broken down and assigned to each division)
Early collection of trade receivables
Reduce inventories

Increase working capital turnover

CCC improvement
Trade payables: Set appropriate payment dates
Acquire advance payments
Implement pre-investment checks and post-investment monitoring

Improve business asset efficiency(Increase asset turnover ratio)

Review held real estate, sell idle real estate assets

Increase fixed asset
turnover ratio

Manage goodwill
Review cross-shareholdings and equity-method investments

Reduce cash on hand andinterest-bearing debt

2018 Mid-termManagement Plan

2021 Mid-termManagement Plan

¥4.0～4.5 trillion
Strategic investments area
• Sector- IT (including Lumada)- Energy- Industry• Region- North America- APAC

Investment forfurther growth¥2～2.5 trillion*¥0.5 trillion

OperatingCash FlowsCAPEX/
Shareholder
return, etc.

CAPEX/
Shareholder
return, etc.

R&D ¥1.0 trillion

More than¥2.5 trillion¥1.8 trillion¥1.6 trillion

ExpandInvestment

Expand pooling

Basic investment policy
M&A• Expand the digital solutions businesswhile strengthening products andservices and securing human resource
development, which are efforts essential
to providing solutions
R&D*Including theacquisition ofABB's power grids
business, etc.

Investment
for growth

Investment

Debt/
Asset sale, etc.

Improve accuracy of cash flow forecasts

ResourcesR&D ¥1.2 trillion scale• Strengthen development focused on AI(image analysis, voice recognition,
machine lear ning, etc.), robotics,
electrification and security to establish a
Cyber Physical System (CPS)
Human resources• Produce and strengthen human resources
who can create new innovation using
digital technology and provide optimal
digital solutions to customers throughexternal recruitment and internal humanresource development

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