Hitachi Smart Transformation Project

March 27, 2012

Makoto Ebata
Senior Vice President and Executive Officer
Chief Transformation Officer (CTrO)
Hitachi, Ltd.

Hitachi Smart Transformation ProjectContents
１. Background to Start of Project
２. Project Outline
３. Examples of Activities

Hitachi Smart Transformation Project

１. Background to Start of Project
２. Project Outline
３. Examples of Activities

1-1 Project Background
Contribute to the development of sustainable social infrastructure
Accelerate Social Innovation Business
GlobalFusion

Environment

Leverage Hitachi's strengths to promote a global growth strategy
Focus business resources on the Social Innovation Business
Strengthen the business structure to stabilize profitability

Shift from competition focused on
the Japanese market to emphasis on true global competition
Establish an earnings platform for competing effectively withleading global corporations
Shift to a cost structure that allows Hitachi to compete effectively
with companies from emerging markets© Hitachi, Ltd. 2012. All rights reserved.

4

1-2 Benchmarking Global Competitors
FY 2010

Unit: %; Figures in parentheses represent indexed figures with Hitachi equal to 100.

HitachiＡＢＣＤＥＦＧ(Japanese)(Japanese)(non-Japanese)(non-Japanese)(non-Japanese)(non-Japanese)(non-Japanese)

Cost of sales（100）
74.8（102）76.5（96）72.0（87）65.2（94）70.0（93）69.8（72）
53.9

（89）
66.4

Selling,
general andadministrative
expenses（100）
16.2（91）14.7（108）17.5（96）15.6（86）14.0（90）
14.6（135）
21.9（105）
17.0

R&D
expenditures（100）
4.2（119）5.0（100）
4.2（112）4.7（126）
5.3（81）3.4（143）
6.0（140）
5.9

Operatingincome（100）
4.8（79）3.8（133）
6.4（302）14.5（263）
12.6（246）
11.8（410）
19.7

（233）
11.2

Reform the cost structure across the entire Hitachi Group© Hitachi, Ltd. 2012. All rights reserved.

5

1-3 Issues Related to Cost Structure Reforms
Developing a global growth strategy for theSocial Innovation BusinessHigh cost structure dependent on domestic resources
Inefficiencies and redundancies of resources due to multiple
businesses, large organizations, and optimization at the individualcompany level
Excessive focus on doing things internallyHitachi Smart Transformation Project launched© Hitachi, Ltd. 2012. All rights reserved.

6

Hitachi Smart Transformation Project

１. Background to Start of Project
２. Project Outline
３. Examples of Activities

2-1 Scope of Project

All costs

Allorganizations

Three cost areasJapanProduction cost
Direct materials cost

5 business groups
40 business entities

Indirect cost
Operating expenses
Administrative operations

All areas

Approx. 900
companies

China

Asia
India
Americas
Europe Global business strategy IT strategy  Human capital strategy© Hitachi, Ltd. 2012. All rights reserved.

8

2-2 Project Structure and External Coordination
In-house companies,Hitachi Group companies

Hitachi Group Corporate
Project owner: President
Leader: CTrO*
Steering Committee(Corporate officers: 9 individuals)

Smart Transformation Office(Cross-Functional Organization: 11 individuals)

Theme-based Projects

Regional supervising companies(China, Asia, India, U.S., Europe)
Coordinate external
resources that will
provide insight andsupport

President
Communication
at each level

Officer incharge of project
Cross-functionalteam

Overseas
groupcompanies

Domestic
group
companies

Implement
benchmarking

Global competitors, innovative companies in different
business sectors

Independentconsulting

All administrative operations, finance andaccounting processes, procurement processes, etc.

*CTrO: Chief Transformation Officer© Hitachi, Ltd. 2012. All rights reserved.

92-3 Three Cost Areas and Initiatives
Globalization of the total value
chain
Production
Centralization of common
processes globally

Production
cost

Total cost
approx.
¥9 trillion
Indirectcost

Directmaterials

Enhance global procurement
capabilities andexpand global procurement sites
Strengthen engineered sourcing

IndirectCentralize the Group's commonoperating expenses
in specialized departments
Centralize and standardize
administrative operations
Promote shared services globally

Directmaterials
cost© Hitachi, Ltd. 2012. All rights reserved.

10

Functions and Roles of In-House
2-4 Corporate
Companies and Hitachi Group Companies
In-house companies,
Hitachi Group companies

Hitachi Group CorporateEstablish KPIs for entire GroupEstablish global benchmarks

Strategy Formulate and promote global
growth strategy
 Benchmarking by individualcompany

 Centralize common processes
 Support global productivity
reforms

Productioncosts Globalization of total value chain
 Expand production at optimal sites
globally Review internal and external
production

Directmaterials
costs Strengthen engineered sourcing
 Refine cost planning for eachmachinery model Expand global procurement ofspecialized purchased items

Indirectcosts

 Instill corporate policies
at in-house companies andHitachi Group companies
 Review Group company structure Develop global procurement
infrastructure Cultivate common suppliers
overseas Promote pool purchasing
 Centralize the Group's common
operating expenses throughspecialized departments
 Centralize and standardize commonoperations
 Promote shared services globally© Hitachi, Ltd. 2012. All rights reserved.

11

2-5 Project Period and Targeted Cost Savings
2012 Mid-termManagement Plan
(Steadily reap the benefits ofshort-term initiatives)

To the next mid-term management plan(Implement full-scale transformation)

Production costs•Formulate
concept•Preparation•Benchmarks

Direct materials costs
Indirect costs

20112012

2013

2014

2015~Achieve a total cost reduction of 5%© Hitachi, Ltd. 2012. All rights reserved.

12

Hitachi Smart Transformation Project

１. Background to Start of Project
２. Project Outline
３. Examples of Activities

of Value
3-1 Production Cost Reforms (1) Globalization
ChainsTotal value chain
Sales

Production

Procurement

Approval

Productdevelopment

Exportmodel

Product
planning

OverseasbusinessmodelsSteps for Future Reform(Using initiatives at in-housecompanies and Hitachi Group
companies as examples)

Cost planning with respect to"optimal cost" through global
benchmarking

Japan-led
Globalization of design

Local
production
model"Locallyproduced, locallyconsumed" model;"Optimalsite-selection"
model

Japan-ledLocally-led
Expand locally-led leadership of
operations going forward

Establish global procurement
engineering center

Develop low-cost
production lines targeting
emerging markets

Globalization of total value chain© Hitachi, Ltd. 2012. All rights reserved.

14

of Common
3-2 Production Cost Reforms (2) Centralization
Processes GloballyIntegrate assembly and procurement of parts and materials for small
and medium-lot printed circuit boards used by individual businesses
Example of assembled circuit boardJapan
China and Asia
Currentlyapprox. 100 sites

Currentlyapprox. 40 sites

Eastern
China sites
Southern
China sites

Asian sites

Maximum pricedifference:
10 times higher(Unit assembly price)

Centralize value chain,maintain technologies(Production equipment/production technology/assembly design/procurement)

Establish EMS for small and medium-lot production© Hitachi, Ltd. 2012. All rights reserved.

15Enhance
3-3 Direct Materials Cost Reforms (1) Fundamentally
Procurement Capabilities

Expansion in scope and scaleUpgrade and expand
procurement sites
Transfer functions toChina and Asia
Cultivate and strengthenties with local suppliers
overseasIncrease overseas
procurement personnel

Globalprocurement

Engineered
sourcing

Continuous cost
reduction activities
Traditional procurement capabilities

Benefits ofthis projectEstablish a cross-functional
project through participation by
R&D departments andMONOZIKURI strategy
departments
Establish an engineering
procurement center

Enhance procurement
functions by incorporating
insights of global
corporations
Enhancement of functions

Past costsavings :approx.
¥200 billion

Targetedbenefits© Hitachi, Ltd. 2012. All rights reserved.

16

Global Procurement
3-4 Direct Materials Costs (2) Enhance
Capabilities

Hitachi Group Corporate
Created new post of Chief Executive Officer for Asia
Pacific (April 2012)
Transfer China/Asian region procurement functions tolocal operations

Hold supplier meetings in 12 cities worldwide
Meetings completed in 5 cities since October 2011
(Shanghai, Seoul, Taipei, Bucharest, Warsaw)
Attended by approximately 20 Hitachi Group companies
and 100 suppliers

In-house companies, Hitachi Group companies
Transfer head-office procurement functions to Asia
Singapore, Hong Kong, Dalian© Hitachi, Ltd. 2012. All rights reserved.

17and Expand Global
3-5 Direct Materials Costs (3) Upgrade
Procurement Sites

Upgraded and expanded corporate procurement sites:from 15 cities to 25 cities (end of the first half of FY 2012)

Increase allocation of engineering personnel
EuropeExistingprocurement sites
New procurement
sites

Total 200 individuals

China

Americas
Asia

Establish new procurement sites in emerging markets- Poland (Warsaw)- Rumania (Bucharest)- Turkey (Istanbul)- Russia (Moscow)- Brazil (Sao Paulo)- Mexico (Mexico City)- Philippines (Manila)- Indonesia (Jakarta)- South Africa (Johannesburg)- China (Hefei)© Hitachi, Ltd. 2012. All rights reserved.

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3-6 Direct Materials Costs (4) Enhance Engineered Sourcing
Hitachi Group Corporate“Less engineering" to mitigate the risk of high resource prices
Launch cross-Group, cross-functional project
Allocate engineering resources from the Research &Development Group, MONOZUKURI Strategy Division
and VEC Promotion Department- Develop rare earth-free motors- Standardize component specifications
among different business sectors(Cast metal, die casting, pressed items,molds, sintered items)

In-house companies, Hitachi Group companies
Upgrade and expand the engineering buyer system© Hitachi, Ltd. 2012. All rights reserved.

19

In-direct Costs by Demonstrating the3-7 Indirect Costs (1) Reform
Group's Collective Capabilities

Target areas

Operatingexpenses

Details

Main Projects- Centralize the Group's common operating
expenses in specialized departments- Cost reduction projects
by cost item

Make
100%
visibleCentralize
contracts

Centralize
specialized
departments- Launch of specialized
departments by costitem- Centralize and standardizecommon operations- Reform of individual
operations

Fullycentralize- Promote global sharedservicesStandardize

Operation in
low-cost regions

Administrative
operations- Review Group corporate functions- Review the structure of approx.
900 Group companies- Establish infrastructurein emerging markets inadvance- Reform of intra-Grouptransactions© Hitachi, Ltd. 2012. All rights reserved.

20

centralization target areas of
3-8 Indirect Costs (2) Expand
Group's common operating expenses

Step 1

Step 2

Step 3

2003-2009

From December
2009

Smart Transformation
Project
From April 2011

Targetregions

JapanJapan andcertainoverseassites

Entire Group,
includingoverseas

Newly established“Integrated Logistics Center”(October, 2011)
Machinery andbuilding repair
costs

Others
Logistics costs

Energy costs

Targetamount¥200 billion¥600 billion¥1,000 billion

Promoted
activities

Business travel
expenses・Commencepoolpurchasing

・Make allcost items
visible・Fully centralize
through
specialized
departments

Leasing costs

Softwareoutsourcing
expenses

Generaloutsourcing
Sundry andexpenses
supplies

Central management at“Group Asset Center”© Hitachi, Ltd. 2012. All rights reserved.

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Logistics Cost,
3-9 Indirect Costs (3) Reform
Asset and Leasing Cost

Logistics Costs
Establish Integrated Logistics Center
Integrate activities with and utilize the expertise of Hitachi Transport
System, Ltd.
Integrate management of separate logistics for each company

Maximize the use of the Group's scale(International tendering, centralized packaging materials, etc.)

Asset and leasing costs
Centralize and centrally manage at Group Asset Center
Co-locate Group companies’ offices,
optimize the floor space used per person
Integrated management of dormitories and housing,
reduce vacancies through shared Group-wide use© Hitachi, Ltd. 2012. All rights reserved.

22and standardize
3-10 Indirect Costs (4) Centralize
common operations

Operationalreform

Group centralization and establishmentof global shared services(Includes shifting operations offshore)Establish at an early stage based on examples(Began in fiscal 2012, successive expansion projecting completion in 2015)
 Finance & accounting, human capital, general affairs, procurement, IT,
trade-related operations, sales administration

Review and standardize over-emphasison operations quality
Review ofoperationquality

 Internal costs resulting from such factors as continuation of past
traditions, excessive service, and optimization at the individualcompany level

Review business structure and business units
Additional costs arising from the structure of Hitachi Group companies

Two efficiency-raising measures for administrative operations© Hitachi, Ltd. 2012. All rights reserved.

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3-11 Develop Global IT Platform
Opened Global IT Center in the U.S. to provide
IT support to 560 companies globally (April, 2011)
Current global IT services

Planned Model
Standardize the services provided
by the six regional headquarters
Establish an IT platform swiftly andefficiently

Independentservices provided bysix regionalheadquarters

Cannot address
global needs due toweak inter-regional
coordination

Hitachi Private Cloud
Standard global IT service
EuropeNetwork, e-mail, service desk, etc.
PublicCloudChina

India

Americas
Asia

Emergingmarkets

Japan

Improve efficiency and reduce administrative costs across entire Group© Hitachi, Ltd. 2012. All rights reserved.

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3-12 Conclusion

Transform to a cost structurethat can prevail globally

Shift the focus of technologies tocreating high-quality products at low cost

© Hitachi, Ltd. 2012. All rights reserved.

25

END
Hitachi Smart Transformation Project

March 27, 2012

Makoto Ebata
Senior Vice President and Executive Officer
Chief Transformation Officer (CTrO)
Hitachi, Ltd.