CEO Message

A truly global company helping torealize a sustainable society

In my CEO Message in last year’s Integrated Report,
I made a commitment that Hitachi would accelerate future
growth and I invited all stakeholders to “keep watching
Hitachi as we shift into high gear to leap ahead” as “anInnovation Partner for the IoT era.” Over the past year, wehave made progress toward realizing our goals. We havedownsized or exited unprofitable businesses while revising
our business portfolio. At the same time, we have focusedon globally developing the Social Innovation Business,based on digital technologies that utilize Lumada in waysthat harness the strengths of Hitachi. We have also taken
steps to accelerate the pace of collaborative creation in
partnership with customers.
Our performance in fiscal 2017 set new records in profit
terms, with adjusted operating income, EBIT, and net

income attributable to Hitachi, Ltd. stockholders all posting
new highs. We made further progress in globalizing thebusiness, with the ratio of revenues from overseas operations
increasing to 50%. In addition, we achieved several of the2018 Mid-term Management Plan targets for KPIs such as
return on assets and cash conversion cycle (CCC) a fullyear ahead of target. These achievements demonstrate
our efforts to satisfy market expectations.
However, we cannot be satisfied with these figures if wewant Hitachi to be globally competitive. Having positioned
fiscal 2018 as a year of evolution towards becoming a truly
global enterprise, we are working to improve profitability
and strengthen our business foundation so that we canestablish a strong presence as an innovation partner for
the IoT era.

Results (FY2016, FY2017)
Revenues

9.2 trillion yen(8.8 trillion yen*1)

Adjusted operating
income ratio (amount)

9.4 trillion yen

6.4%

EBIT Ratio (amount)

7.6%

6.9%

(714.6 billion yen)(644.2 billion yen)

ROA

CCC

5.0%

72.2 days*2

FY2017FY201669.7 days

5.2%(587.3 billion yen)(475.1 billion yen)

3.3%*2FY2016FY2017106%

FY2016FY2017FY2016FY2017

+1.2%

+1.7%

(122%)(136%)FY2016

+1.7%

2.5

-day
improvement*1 Figures including YoY growth are adjusted to reflect continuing operations (for FY2016, revenues exclude Hitachi Transport System, Hitachi Capital, andHitachi Koki (now Koki Holdings)).
*2 Manufacturing, Services and Others

8

FY2017

Many people are aware of the changes that are currently
transforming our world. For example, while accelerated
digitalization brings greater convenience and affluence to
our lives, threats relating to cyberattacks and information
security are gradually increasing. Progressive globalizationin fields such as economics and politics is causing the
emergence of geopolitical risk and greater uncertainty inboth these areas. In addition, we face multiple social
challenges due to issues ranging from global environmental
destruction and climate change to demographic aging in
advanced economies and the rapid urbanization ofdeveloping countries. The global community faces asignificant new challenge as these issues become
increasingly complex and more deeply ingrained.
Against this backdrop of global transformation, theUnited Nations developed the Sustainable Development

Goals (SDGs) and the Japanese government has
advocated the Society 5.0 concept. Acknowledging thefuture development of humanity will entail major change
on a global scale. Hitachi views these trends as anopportunity to take the next leap forward through sincere
efforts to achieve such goals. The reason we want to be apart of creating the affluent and sustainable society as
envisioned in the SDGs and Society 5.0 concept, is that italigns with the mission Hitachi has pursued since its
foundation to “contribute to society through thedevelopment of superior, original technology and products.”
At a time of growing uncertainty, we believe Hitachi’s origins
in terms of contributing to society are imbued with greater
significance, and this reaffirms our commitment to work
closely with customers and other partners in utilizing
technology to address societal issues.

Harnessing Hitachi’s strengths in the Social Innovation Business
True to Hitachi’s origins and taking advantage of our best
strengths and characteristics, the Social Innovation
Business can expand our operations while helping torealize a sustainable society. One of Hitachi’s mainstrengths is the MONOZUKURI (manufacturing expertise)
we have cultivated in a wide variety of fields through morethan a century spent on continually developing suchcapabilities. Besides the breadth of our product range, thisis seen in Hitachi’s abundant Operational Technology (OT)knowledge regarding the operation and maintenance ofvarious products in different operational settings. The
demands of today’s customers are becoming more
complex and advanced: beyond simply purchasing a
product, they are interested in, for example, globallydeveloping the know-how their skilled engineers in Japanpossess or boosting productivity at manufacturing sites
engaged in high-mix, low-volume production. To develop
the high value-added solutions for addressing suchmanagement issues, we need a deep understanding—as a partner—of what happens across a range of sites
and the related issues. It is in such situations where I
believe Hitachi’s OT capabilities can play an extremely
valuable role.
With more than 50 years’ involvement in the field,
Hitachi also has extensive IT and front line knowledge.
Applying the IT-related knowledge we have developed overthis period we are creating optimized solutions using AI
and other digital technologies to analyze all kinds of data.
This is what we call “Lumada.” As new possibilities
emerge with digital technology, our presence in OT, IT, andproducts, puts Hitachi in a superior position to utilize these
digital capabilities to address a variety of real-world issues.
In this way, Hitachi can be an innovation partner for the
IoT era for customers. By utilizing the strengths of Hitachi,
our aim is to avoid the threat of product commoditization by
expanding into both solution- and service-based businesses
to generate higher margins and steady earnings.

Advancing sustainability management
In April 2017, in a move to ensure our business reflects
global trends, we created the Executive Sustainability
Committee to debate and make decisions on sustainability
management for the Hitachi Group. I chair this committee,
and its members include senior executives and Business
Unit heads. By addressing the issues affecting global
society as summarized in the SDGs, the Social Innovation

Business that Hitachi is promoting aims to realize asustainable society and improve people’s quality of life.
In line with this rationale, the Committee has lively
discussions on creating and expanding opportunities for
the Social Innovation Business within global markets,and on identifying related operational risks andmitigation measures.

9

Strategy for Value Creation

Addressing emerging trends head on

Sustainability Strategy Promotion Structure
Chair: President & CEO

Executive Sustainability Committee

Members: Senior Executive Committee members, business unit CEOs,
Hitachi, Ltd. department heads
Objective: Discuss and define sustainability strategy at management/
business unit/department levels

Secretariat: Sustainability
Promotion Division
Overseas CSR/environment officers

Sustainability Promotion Meetings

In April 2018, as core sustainability themes, thecommittee identified five goals from the 17 SDGs where
Hitachi could make a major contribution through businessactivities, along with a further six goals where we could
contribute based on all our activities as an enterprise.
Hitachi’s involvement in a wide range of business fields
means we can make a substantial contribution to achieving
the SDGs, and we are accelerating specific initiatives toachieve targets in the 11 areas we have identified.
For example, one of the goals where we plan to contribute
through our business activities as an enterprise relates toclimate change. With the Paris Agreement now in force,
many countries and regions are working to realize a

Eco-Management Meetings

low-carbon society. In Hitachi Environmental Innovation
2050, adopted in 2016, we have set quantitative goals
for medium-term CO2 emissions-reduction as part oflong-term environmental targets. The Executive
Sustainability Committee is examining deeply the issue of
how to achieve these targets from the perspective of theCO2 emissions caused by our own business activities, aswell as those due to the products that we deliver.
In this way, through SDG-focused sustainability
management practices across Hitachi, we hope to contributeon a global scale to realizing a more affluent society andimproving quality of life for all.

Corporate Commitment

Business Strategy

Hitachi contributes tothe achievement of all SDGs both
directly and indirectly throughits business activities.

Long-term Environmental Targets
Hitachi’s resolution looking toward 2050 and 2030

Hitachi Environmental Innovation 2050
For a low-carbon society

For a resource efficient society

For a harmonized society with nature

Through the value chain CO2 emissions

Build a society that uses water andother resources efficiently
with customers and society

Impact on natural capital

FY 2050

80% reduction
FY 2030

50% reduction(compared to FY 2010)10

Efficiency in use ofwater/resources FY 2050

50% improvement(compared to FY 2010 in the Hitachi Group)

Minimized

Strategy for Value Creation

An example of Hitachi’s technology for the future, this communication robot helps to improve quality of life.

Developing stronger competitivenessSince it was established, Hitachi has focused on developing
human capital based on a recognition that people are amajor source of competitiveness. This has included setting
up internal educational institutions to help employees
acquire skills. Today, as Hitachi seeks to evolve into a
truly global enterprise, we are focusing through our HR
management on promoting diversity. People with detailed
knowledge of the industrial structures and commercial
customs used in different countries and markets are
essential to the global development of our operations.
To foster innovation, we also see the need to have adiverse range of talented people with differing values
and perspectives working toward common goals.
Personally, I am determined that Hitachi makes tangible
progress promoting diversity. In line with this, in November
2017 we set and publicly disclosed numerical targets forthe ratios for both female and non-Japanese Executive
Officers and Corporate Officers and the number of female
managers in Hitachi, Ltd. One of the initiatives to achievethese targets with which I am personally involved is the
Global Women’s Summit, a series of events that bring
together around 100 female employees from around the
Hitachi Group worldwide for each event. These events aim
to deepen awareness of leadership and career planning
among female employees, while boosting motivation via
Sustainability Strategy Promotion Structure
End-FY2017 (actual)

FY2020 (target)

Executive and Corporate Officers
Female2.5%

10%Non-Japanese

6.4%

10%

577

800

Number of female managers

global networking opportunities. Since 2016, we have held
events of this kind in various regions around the world.
My discussions with female employees from countries
around the world through these events spur my efforts topromote the globalization of Hitachi’s business andcultivate greater diversity within our workforce.
We are also undertaking leadership development programs aimed at identifying and cultivating a diverse teamof next-generation business leaders for the Hitachi Group.
Besides senior executives, our independent outside
directors are also actively involved in this HR development
process aimed at building layers of leadership potential
throughout the company.
R&D is another important source of competitivenessfor Hitachi.
The mission to develop “superior, original technology”
has made research and development a major focus of
our activities from Hitachi’s earliest days. In 2018, wecelebrated the centenary of the establishment of the R&D
Division. As we work to develop the Social Innovation
Business globally, our R&D activities are focused on creatingworld-class technologies to support the business and on
fostering innovation based on a collaborative creation
approach with customers worldwide. We are looking toaccelerate our collaborative creation efforts with customers
by establishing Global Center for Social Innovation (CSI)
facilities in North America, Europe, China, and the AsiaPacific region. Our R&D operations are also actively involvedin the development of new and upgraded Lumada-based
digital solutions to drive the future growth of Hitachi.
Developing better products is another aspect of creatingworld-class technologies. In 2017, the ultra-high-speed
elevators that we installed in a high-rise building in
Guangzhou, China achieved the fastest speed ever11

recorded for an elevator. This product makes use of fluid
analysis technology that we originally developed for rollingstock used on high-speed railways, the common aim
being to transport passengers in comfort at world-beating
speeds by minimizing noise and vibration. This example
also illustrates how intra-Group synergies can help ushone a technical edge as part of developing and supplying
products with an outstanding global reputation.
Elsewhere, we are actively partnering with universities,
research institutions, and start-ups from around the world.
Guided by our vision to address social issues as part of
supporting the realization of the Society 5.0 concept, weare accelerating open innovation activities with institutions
such as the University of Tokyo, Kyoto University, andHokkaido University.
At the same time, as part of our global approach tosustainability management, we must revisit a range ofcorporate activities from the perspective of trying to realize
a sustainable society. To this end, in April 2018 we revised

the Hitachi Group Codes of Conduct to make it clear that
all officers and employees of Hitachi Group companies
bear the responsibility as global citizens to conductbusiness with higher aspirations. Guided by this principle,
we are formulating and implementing rules and undertaking
internal education programs across a range of corporate
activities, including product safety and quality assurance
programs; the construction of responsible supply chainsthat pay attention to human rights and environmental
concerns; and our comprehensive compliance programs.
In fiscal 2018, we welcomed two new independent
outside directors to the Board of Directors. Mr. Katsumi
Ihara recorded various achievements in his former careerat Sony. Mr. Joe Harlan has previously worked at seniorlevels for Dow Chemical, and has experience working inJapan as well. Utilizing the diverse wealth of experienceand knowledge of our directors, we will look to entrench
the growth of Hitachi by reflecting their helpful advice into
our management.

Achieving global growth through a focus on digital solutions
Through recent discussions with customers andgovernment representatives, I have sensed a positive
response toward realizing our 2018 Mid-term Management
Plan goal of being an innovation partner for the IoT era.
To instill confidence in this notion, we are focusing in thefirst instance on training more front-line personnel and data
scientists to help strengthen the Social Innovation Businessglobally. To expand our digital solutions business, we aretraining people to work in expert roles relating to interaction
and negotiation with customers such as consulting,front-end or systems engineering, contract negotiation,and project finance. At the same time, we are investing
to train and develop a global pool of data scientists.
Specifically, we have set up training programs and establishedthe Professional Community for researchers and practitioners
from various fields. Our target is to increase the number ofdata scientists working in the Hitachi Group to 3,000 by
fiscal 2021.
In April 2018, we also set up a new internal structure tofacilitate the global supply of solutions developed fornational markets. Executive Vice President and Executive
Officer Keiichi Shiotsuka, who leads the Systems & Services
Business, was appointed Head of the Social Innovation
Business that utilizes Hitachi’s digital technology. Hicham
Abdessamad was appointed the CEO of Hitachi Global
Digital Holdings Corporation, the holding company for
Hitachi Vantara Corporation and Hitachi Consulting
Corporation. Under this new structure, we will formulate
and implement a strategy to strengthen our Lumada
digital solutions by applying the cutting-edge technologies

12

being developed primarily for the Americas, along with ourexisting digital solutions-related expertise to drive theglobal expansion of the Social Innovation Business.
The adoption of this structure should also help to accelerate
Hitachi’s global expansion by entrenching the shift from a
product-centric business model to a new style ofoperations based on integrating digital technology solutions
with services.
Lumada is the foundation of our rapidly expanding
digital solutions business. Many customers have utilized it
since we first introduced Lumada-based services in 2016.
Revenues generated by Lumada operations exceeded 1
trillion yen for the first time in fiscal 2017 as it has grownsteadily to become a central pillar of Hitachi’s operations.
One example of this is the Maintenance & Repair Service
that we now offer industrial equipment manufacturers andother customers as a total support solution. This service
began life as a collaborative creation with an overseas
corporate customer, in which we developed a system toautomatically propose optimized repair schedules forequipment based on the analysis of varied data. Goingforward, we plan to develop this Lumada solution on a
global basis.
In September 2018, we established the Lumada Center
Southeast Asia in Thailand as part of strengthening ourglobal set-up. In line with the Thai government’s Thailand
4.0 vision that aims to establish the foundations for anadvanced economy while promoting further economic
growth, this center will be a base for the development ofdigital solutions based on collaborative creation with

Reflecting on the success of such initiatives, we are
steadily expanding Hitachi’s presence in digital solutions
through collaborative creation with customers. I am
confident this will be a major driver of the future growth of
Hitachi’s business.

Reinforcing our business foundation to become a truly global enterpriseThe 2018 Mid-term Management Plan contains clear
commitments to improving profitability and strengthening
cash flow generation. In fiscal 2017, we continued
downsizing or exiting unprofitable businesses with an
adjusted operating margin of less than 5%. Alongside this,we revised Hitachi’s business portfolio by selling part of ourequity stake in Hitachi Kokusai Electric Inc. and removing
remaining operations from the scope of consolidation. In
addition, we sold Hitachi’s interests in ALAXALA Networks
Corporation and the forged steel roll business.
In fiscal 2018, we are working to establish a more
efficient business foundation by continuing to restructure
operations, through reforms to indirect business processes,
and by reducing the number of companies within the
Hitachi Group. We are also promoting digital transformationfrom enhanced operational transparency, based on thecollation or integration of management information.

We are also maintaining a clear focus on future growthby prioritizing investment in growth areas to drive theexpansion of the business and targeting increased returns
from asset allocation. Specific policies included sales ofshares in publicly listed subsidiaries and measures toimprove CCC. These steps helped us make incrementalbalance-sheet improvements. Going forward, we will focus
on further strengthening cash generation, optimizing asset
management, and selectively focusing investments ingrowth sectors. We are analyzing all our businesses
closely based on their potential for expansion in global
markets and return on assets. While focusing ourinvestments on markets with growth potential andhigher-margin businesses, we will seek to reallocate assets
generating poor returns or reduce Hitachi’s exposure tosuch businesses. Our aim is to accelerate our investmentsin the Social Innovation Business, having secured a stronger
balance sheet and greater investment freedom.

Hitachi Group forms 300,000-strong united team
It is no simple matter for Hitachi to become a truly global
enterprise or to achieve a double-digit adjusted operating
margin. However, we are making steady progress towards
these goals and trying to speed up the actions needed torealize these ambitions.
More than anything, what gives me hope for the futureis the changes being made by employees of Hitachi tosupport growth. My conviction is employee awarenesswithin Hitachi and the attitude towards business processes
have both changed significantly over the past few years.
Since my appointment as CEO, we have undertaken avariety of policies. For example, introducing the Business
Unit system has made employees more aware of theperformance of their division and its cash-generation
capabilities, which in turn has translated into improved
divisional performance and greater individual pride in theseachievements. We also have recruited many new
employees, especially overseas, who are attracted to
Hitachi by virtue both of our philosophy of contributing tosociety and by the prospects of our Social Innovation
Business, which combines growth with efforts to create asustainable society. These many new colleagues point toour success in communicating Hitachi’s corporate

philosophy and culture to the world. I continue to holdtown hall meetings so that I can communicate mythoughts about Hitachi’s direction and goals directly to ouremployees around the world. I believe we can become
even more powerful as a unified team working towards
common goals if we can harness the diversity of over
300,000 individuals.
Looking ahead, I am confident we will continue to growsteadily and help realize a sustainable society based on
multiple partnerships. Please keep watching Hitachi as wemove in this direction.
September 2018

Toshiaki Higashihara
President & CEO
Hitachi, Ltd.

13

Strategy for Value Creation

customers across the Asia Pacific region. Going forward,
Hitachi will accelerate the development of digital solutions
using Lumada within ASEAN, with this center supporting
our collaborative creation projects with customers andother partners.