Profile

Founded in 1878, Kawasaki Heavy Industries, Ltd. (KHI) isa leading comprehensive manufacturer of transportationequipment and industrial goods in the world. With abroad technological base that encompasses land, sea
and air, KHI manufacturers ships, rolling stock, aircraft
and jet engines, refuse incinerators, industrial plants,
steel structures and various manufacturing equipment
and systems. KHI also produces such world-famous
consumer products as Kawasaki brand motorcycles and
Jet Ski® personal watercraft.

Contents
Financial Highlights
1
To Our Shareholders
2
Outline of Kawasaki Global Operations
5
Transportation Equipment
6
Ships
6
Rolling Stock8
Consumer Products
10
Aerospace12
Industrial Equipment
14
Machinery, Environment & Power Plants
14
Plant Engineering & Steel Structures
16
Composites of Consolidated Sales
18
Financial Review
20
Supplementary Information on Non-Consolidated Results 22
Consolidated Balance Sheets
24
Consolidated Statements of Income
26
Consolidated Statements of Shareholders' Equity
27
Consolidated Statements of Cash Flows28
Notes to the Consolidated Financial Statements
29
Report of Independent Public Accountants
40
Six-Year Summary
41
Board of Directors
42
Consolidated Subsidiaries
44
Network
47
Kawasaki Corporate Data
49

Cover:
XOH-1 No.2, a prototype of OH-1 lightobservation helicopter. A total of four XOH-1s
were delivered to the Japan Defense Agency
between May and August 1997.
Received the Howard Hughes Award.

Financial Highlights
Kawasaki Heavy Industries, Ltd. and consolidated subsidiaries
Years ended March 31, 1998, 1997 and 1996

Thousands of
U.S. dollars

Millions of yen

1998

1997

1996

1998

For the year:
Net sales
Net income
Capital expenditure
Depreciation and amortization¥1,297,212
18,55642,92832,416¥1,224,259
22,57235,13031,245¥1,086,244
16,46239,31930,823$9,819,924
140,469
324,966
245,390

At year-end:
Total assets
Total shareholders’ equity
Interest-bearing debt

1,222,906
209,040
437,387

1,303,168
197,161
447,210

1,252,371
162,984
441,437

9,257,426
1,582,437
3,311,029

¥13.3
6.0

¥16.4
7.0

¥12.2
5.5

$0.10
0.05

Per share amounts (yen and U.S. dollars):
Net income
Cash dividends

Note: The U.S. dollar amounts represent arithmetical results of translating Japanese yen to dollars on the basis of ¥132.10=$1, the rate prevailing as of March 31, 1998.
These translations are solely for the convenience of the readers.

NET SALESNET INCOME

TOTAL SHAREHOLDERS’
EQUITY(Billions of yen)(Billions of yen)(Billions of yen)

1,400

25

250

20

200

15

150

10

100

5

50

1,200
1,000
800
600
400
200
0

0
94 95 96 97 98

94 95 96 97 98

0

94 95 96 97 98

1

To Our Shareholders

We are pleased to report on the business results of

In keeping with the Company's policy of stable

Kawasaki Heavy Industries, Ltd. (the “Company”) anddividends, the total cash dividend for fiscal 1998 wasits consolidated subsidiaries (collectively, with the¥6.0 per share.

Company, “KHI”) for the fiscal year ended March 31,
1998 (“fiscal 1998”).

In line with the recent international movement toward
the standardization of accounting policies, KHI made amajor change in its accounting policy for recognition of

OPERATING RESULTS

revenue deriving from large-scale and long-term

During fiscal 1998, the stagnation of the Japaneseconstruction contracts by substituting the percentage-of-

economy became more pronounced. Public-sector

completion method for the completed-contract method.

investment declined, as did consumer spending, with

KHI believes that this change increases transparency andworries continuing over the Japanese financial system

more accurately represents operational performance.

and other aspects of the economy. Overseas, thepicture was mixed. While the U.S. economy continued

OUTLOOK

its expansion and the major European economies

In Japan, we anticipate a long-term slump in personalenjoyed modest growth, Asian countries such as

consumption and declines in both public and private

Thailand, Indonesia and South Korea suffered severe

investment. These factors will put further downward

downturns.

pressure on wholesale prices and raise the

In spite of the adverse management environment,

unemployment level. Adding in the problem of non-

KHI was successful in developing overall operations.

performing loans held by Japanese financial

An increase in net sales was accounted for primarily byinstitutions, we foresee a worsening of the present

higher sales in the Transportation Equipment andrecession. We are hopeful that the government will takeAerospace segments, which more than offset ameasures to improve the general economy, but it isdecrease in sales of the Industrial Equipment segment

difficult to make predictions in this area.

that resulted from a decline in public-sector
investment.
KHI's net sales for fiscal 1998 totaled ¥1,297.2 billion,
an increase of 6% over fiscal 1997.
Despite vigorous company-wide measures toOverseas, there are some fears that the U.S.
economy may be overheating, although it continues toperform well. The economies of Europe are in arecovery phase, and the imminent currency unification
may act as a further spur. In Asia, the confusion that

improve profitability, the profit for fiscal 1998 was lessarose from currency instability and the consequent

than that for fiscal 1997. A drop in operating income

economic stagnation will continue for some time.

was caused substantially by the lower profitability oflarge-scale contracts for rolling stock with U.S.
customers and the above-mentioned decrease in salesof Industrial Equipment. Operating income was ¥51.1
billion. Net income was ¥18.6 billion.

2

Toshio Kamei

Dr. Hiroshi Ohba

President

Chairman and CEO

ACTIVE RESPONSE

Creating and Expanding New Business Fields

With increased trade liberalization, the world economy

We are now creating and nurturing the operations thatis rapidly becoming borderless, a development thatwill form the nucleus of our business in the comingmeans intensified price competition on a global scale. In

century. Toward that end, we will proceed priority

the face of this extremely severe situation, KHI isinvestment of corporate resources in fields where weenergetically promoting its corporate policies with aanticipate significant growth. We will also planview to ensuring its prosperity as a global enterprise indevelopment strategies that harmonize precisely with

the next century.

market needs, while achieving a fusion of planning,
sales and technology. We are also promoting effective
technological development. In the fields of electric3

power generation, environmental recycling, andfurther reduction in overall production costs. Anothertransportation, where our objective is to create newgoal is an increase in the efficiency of the back office

operations, we want to combine technology and know-

and administrative functions.

how on a company-wide basis to achieve a quick andsteady expansion of our business activities.

Globalization of Operations
Another priority is further globalization in operational

Comprehensive Systems Engineering Enterprisedevelopment. In order to strengthen its international

We are determined to promote our development as acompetitiveness, KHI will adopt a multi-faceted

comprehensive systems engineering enterprise. Thereapproach to overseas markets, including businessis a growing trend on the part of our clients in Japan

expansion in new international markets, overseas

and overseas toward proposals for en-bloc systemproduction and procurement, and tie-ups with overseas

orders. In responding to these proposals, we must

companies.

incorporate related products within a systems

In fiscal 1997, in China, we entered into joint

engineering structure so that the whole is greater thanventures for the production of marine hydraulic

the sum of the parts.

machinery in Wunan and for the creation of aIn the environmental field, we are promoting total

shipbuilding operation in Nantong. We followed up

system operations comprising pulverization,these moves with the startup of a joint venture on

incineration, power generation, exhaust-gas processing,

Hainan Island for the production of engines forash melting, and recycling. In the transportation field,

motorcycles and a venture for steel structures in

we are pursuing total traffic control systems which

Shanghai. In Southeast Asia, KHI assumed control of the

include track, signals, maintenance depots and total

motorcycle manufacturing and sales operations of aoperational control systems as well as rolling stock.

company in Thailand, establishing a new company overwhich KHI has operational control.

Big Reduction in Costs

In the United States, we received an order for 400

We are making strong efforts to reduce costs at least in

next-generation subway cars from the New York City

line with the decline in market prices. In addition toTransit Authority. Production of the cars will be

conventional cost-reduction measures, we must

undertaken concurrently at the Hyogo Works in Japanreassess our design philosophy from the ground up,

and the Yonkers Plant in the United States. Delivery is

and that involves a change in conceptual thinking.

scheduled for the year 2000.

Based on a full analysis of what our customers truly
need, we will design products that eliminate waste andincrease efficiency at minimum cost. The result will be a4

Outline of Kawasaki
Global Operations

Move to International Standards

TRANSPORTATION EQUIPMENT

KHI is shifting its management focus in the direction ofa greater emphasis on consolidated results and efficient

Ships

use of shareholder capital. Given the rapid globalizationof the financial and capital markets, our operations

Rolling Stockmust be based on global standards. KHI will endeavor
to maximize consolidated return on capital throughConsumer Products

more efficient management of its assets and liabilities,
while strengthening the competitiveness andprofitability of the entire KHI Group, including

AEROSPACE

subsidiaries and affiliates. The change in accounting
policies described earlier represents a move in thisAerospacedirection, as it is aimed at increasing the transparencyof financial disclosures.
Through the measures outlined above and therealization of a corporate culture marked by creativity
and vitality, KHI is committed across the board topositively addressing and overcoming the challenges
posed by the adverse operating environment.
Meanwhile, we request the continued understanding
and support of our shareholders and associates.

INDUSTRIAL EQUIPMENT

Machinery,
Environment &Power Plants

June 1998

Plant Engineering &Steel StructuresOTHER

Dr. Hiroshi Ohba

Toshio Kamei

Chairman and CEO

President

5SHIPSWith shipbuilding experience dating back to its founding in 1878,
KHI is one of the leading players in the global market for marinetransportation equipment. The Company’s long tradition of
innovation for over a century continues full speed ahead at its
shipbuilding facilities in Sakaide and Kobe, where engineers are
hard at work developing the vessels of tomorrow.
Backed up by superb engineering know-how and advanced
shipping technologies, KHI has been focusing on building
sophisticated, high-value-added vessels. In particular, theCompany’s gas carriers such as LNG carriers and LPG carriers
enjoy a distinguished reputation worldwide. In fact, Japan’s first
LNG carrier was built at the Sakaide Works, KHI’s main
shipbuilding facility, in 1981. Advances in design concepts arealso being fully utilized for high-speed container ships anddouble-hull VLCCs (very large crude-oil carriers).
Smaller, special-purpose vessels are another importantfeature of KHI’s shipbuilding accomplishments. The Company isproud of its specialized technologies, as applied to theultrahigh-speed Kawasaki Jetfoil, a passenger craft impervious
to rough weather, and the aluminum-alloy Kawasaki Jet Piercer,a high-speed car ferry–both of which are produced at the Kobe
Works. High-tech submarines for the Japan Defense Agency arealso produced at this site.
In regards to overseas activities, KHI has established a joint
venture company in China to build new ships, which, in addition
to the Sakaide Works and Kobe Works, will serve as a third
facility for the further globalization of the Company’s
shipbuilding operations. As an internationally recognized leader
in the field, KHI seeks to provide quality ships with leading-edge
technologies in the 21st century.

MAIN PRODUCTS
LNG carriers
LPG carriersContainer ships
VLCCs and other types of tankers
Bulk carriers
High-speed vessels (Jetfoils, Jet Piercers)
Submarines
Maritime application equipment

6

Submarine OYASHIO
Features state-of-the-art submarine technology, including
advanced underwater search and stealth anti-detection
capabilities. Delivered to the Japan Defense Agency.

Transportation Equipment

IZU Large-scale Patrol Vessel
Delivered to the Maritime Safety Agency for use
as a command vessel in sea rescue operations.
Features include a helicopter platform, selfpropelled underwater monitor TV system and aunique system for supply loading.

LPG Carrier Fountain River
Delivered to Kawasaki Kisen Kaisha, Ltd., this
79,200m3 LPG carrier is highly energy-efficient,due to its economic diesel engine and lowpropulsion resistance design.

ROLLING STOCK
Since beginning production of rolling stock for domestic
railways in 1906, KHI has been the driving force behind Japan’smass transportation network.
KHI covers the full spectrum of rail-based transport–fromelectric locomotives and freight cars to the high-speed
Shinkansen and rapid transit systems. This breadth of expertisehas positioned us as the largest producer of rolling stock inJapan, with the top share of contracts for the Japan Railways(JR) Group. A manufacturing base in the United States insures
the ability to respond to overseas business demand in North
America, for example, as a main producer of subway cars for
New York City along with commuter trains for the surrounding
metropolitan areas.
The Shinkansen bullet train–legendary for its speed, safety
and comfort–remains a mainstay of our domestic business.
Research into aerodynamics accumulated by the Company’s
Aerospace operations has been successfully applied to
Shinkansen development to attain ever-higher speeds.
Supported by its technological superiority, KHI has been
involved in all recent JR projects to develop new types of
Shinkansen. Exemplifying its accomplishments are: Series 500,
the latest Nozomi bullet train built for JR West in 1996, whichruns at 300 kph, the fastest operating speed in Japan; Series E-2
the Asama bullet train produced for JR East, which made its
debut in time for the 1998 Winter Olympic Games; and, Series
700 and E4 as illustrated here.
In response to increasing environmental challenges, railways
are being reevaluated as an energy-saving mode of mass transit.
Recognizing the need to meet the diversified needs of customers
worldwide while contributing to environmental solutions, KHI isundertaking the systematic streamlining of operations toachieve greater speeds, safety, cost and energy efficiency inoverland transportation.

MAIN PRODUCTS
Electric cars (including Shinkansen)
Electric and diesel locomotives
Passenger coaches
Integrated transit systems
Monorail cars
Platform screen doors

8

Series 700 Shinkansen Bullet Train
Delivered to JR Central, this train has advanced features that
reduce the effect of changes in air pressure and minimize
cabin noise, thereby enhancing passenger comfort.

Transportation Equipment

Series 5000 Sapporo Municipal Subway Train
Developed specially for the Sapporo Municipal Subway
Nanboku Line, this subway train has a range of featuresthat enhance passenger comfort, including electronic
display panels, extra doors and an attractive appearance.

Series E4 Shinkansen Bullet Train
Delivered to JR East, this bi-level train operates
with 16 cars, the world’s largest transportation
capacity. Streamlined front design significantly
reduces wind noise.

CONSUMER PRODUCTS
Since starting overseas production in the U.S. in 1974–the firstJapanese manufacturer of motor vehicles to do so–KHI has
distinguished itself by producing such world-famous consumer
products as the Kawasaki brand motorcycle and Jet Ski®
personal watercraft.
Today, the Company has grown to encompass over 6,000
dealerships and 16 manufacturing sites around the world. These
include the Lincoln plant in Nebraska, KHI’s first overseas plant,
which manufactures motorcycles, Jet Ski® watercraft, and ATVs
(all-terrain vehicles) destined for Europe and the Americas.
KHI offers an impressive lineup of motorcycles, from 50cc to
1,500cc, with medium- and large-size premium bikes such as the
Ninja and Vulcan series. By remaining keenly attuned to theneeds and wants of customers around the world, the name
Kawasaki has become a trusted household word.
KHI was the first to commercialize the Jet Ski® some two
decades ago and has been fostering the demand for personal
watercraft ever since. Jet Ski ® has found a significant market
niche in the United States, where it created a whole newcategory of marine sports, and the machine is now gaining fanselsewhere in the world.
The Company’s diverse range of consumer products also
includes multipurpose ATVs, utility vehicles with fat tires,known as MULE, and a full line of portable generators ranging
from 1,000 watts to 5,000 watts.
In the future, KHI will expand its consumer products
business in Southeast Asia, adding this market to its "Big Three"comprising Japan, America and Europe.

MAIN PRODUCTS
Motorcycles
All-terrain vehicles (ATVs)
Jet Ski® personal watercraft
General-purpose gasoline engines
Brush cutters
Transmissions

Jet Ski® 1100STXThe superior control of the Jet Ski® 1100STX,
which can accommodate up to three people, offers
an exciting and comfortable ride while adding awhole new dimension to marine leisure craft.

10

Transportation Equipment

Kawasaki Motorcycle “NINJA ZX-9R”
This 900cc road sports model is supreme inits class, and has enhanced maneuverability
to provide driving comfort under a wide rangeof conditions.

Kawasaki Motorcycle “VULCAN NOMAD”
Based on the renowned “VULCAN 1500,” the “VULCAN NOMAD”
has a host of accessories that make it the last word in luxury
motorcycle tourers.

AEROSPACEAs a manufacturer of such exacting machines as airplanes, jetengines and avionics systems, KHI has been the main thrust
behind Japan’s aerospace industry. Further growth of thisindustry is widely anticipated given the expanding global market
for advanced aircraft and system technologies.
In the area of civil aviation, for more than two decades KHI has
participated in international projects in conjunction with majorindustry players. In particular, the Company supplies component
parts for the B777 and B767 passenger airplanes developed jointlywith The Boeing Company of the United States. KHI also develops
and manufactures helicopters, such as the twin-engine BK117,
Japan’s first domestically developed helicopter produced incooperation with MBB (currently Eurocopter Deutschland GmbH)in Germany. In order to make this helicopter more responsive tocustomer needs, the Company is working on a range of advanced
systems, including a global positioning system (GPS) and an
active vibration reduction (AVR) system, among others.
In the defense sector, KHI has played a prominent role as theprime contractor in the development and manufacture of the T-4
intermediate jet trainer as well as the manufacture of the P-3C
anti-submarine warfare patrol airplane and the CH-47J largetransport helicopter. Also, as the prime contractor, the Company
has recently developed the OH-1, a new light observation helicopter for the Japan Defense Agency. Last year, four prototype
models were delivered and currently KHI is manufacturing the
OH-1, with delivery expected to commence in 2000.
In the jet engine business, thanks to the recent increase indemand in the civil aircraft market, the number of international
orders is steadily growing. The current product line includes theV2500 turbo-fan engine for mid-sized passenger aircraft and theRB211/TRENT and PW4000 turbo-fan engines for larger-sized
passenger airplanes.
Looking forward, KHI will continue to strive to improve
production cost efficiencies while building upon its
technological expertise, with a view to competing in the growinginternational market for aerospace equipment.

MAIN PRODUCTS
P-3C anti-submarine warfare patrol airplanes
T-4 intermediate jet trainers
CH-47, OH-1 and BK117 helicopters
Component parts for B777 and B767 passenger airplanes
MissilesElectronic equipment
Space equipment
Jet engines
Gas turbines

12

Photo provided by The Boeing Company

B777-300 Passenger Airplane
KHI participated in the development and manufacture ofthis model. The plane has a maximum seating capacityof 550. Boeing commenced delivery to customers in
May 1998.

Aerospace

UP-3D Electronic Warfare Training Support Aircraft
The UP-3D, a derivative model of the P-3C, creates electronic
warfare environments such as radar-jamming.

V2500 Turbo-fan Engine
Manufactured under an international joint
development project, these engines offer low
emissions and excellent fuel economy as well as
high reliability and ease of maintenance.

MACHINERY,ENVIRONMENT& POWER PLANTS
Highly acclaimed for their performance and efficiency, KHI’s gas
turbines are employed in a wide range of power-generation
systems, from industrial facilities to emergency generators forcommercial customers.
Of particular note is a combined cycle power plant (CCPP),
manufactured in cooperation with Asea Brown Boveri AG of
Switzerland, which generates electricity by combining turbines
powered by both natural gas or fuel oil and the steam produced
by waste heat. Last year, KHI built an innovative CCPP in China
with blast furnace gas firing turbine. Strong sales of this CCPP
are foreseen, given the ever-increasing demand forenvironmental-friendly and energy-efficient power plants
worldwide.
The environment is unquestionably a top priority at KHI,
which has a variety of products for waste and sewage treatment.
As a principle manufacturer of more than 140 city refuse
incineration plants in Japan, in 1997, KHI delivered the largest
domestic plant in disposal capacity for Nagoya City. At present,
the Company is developing an incineration plant based on thenext-generation technology of gasification. With theimplementation of full-scale operations, this plant will
greatly reduce the volume of burnt ash and its accompanying
emissions, while yielding clean power. R&D activities in thisfield will continue to be upgraded, with engineering efforts
concentrating on the design of new, ecologically sound methods
for the treatment and recycling of city refuse and industrial
waste.
Industrial hydraulic equipment and construction machinery
are another focus for the Company. Already acknowledged as a
top global producer of hydraulic equipment, KHI is boosting its
overseas production in the United Kingdom. At the same time,
the Company is stepping up efforts at its U.S. manufacturingbase related to the production of wheel loaders.

MAIN PRODUCTS
Power plants
Aero-derived gas-turbine engines for naval vessels
Diesel engines
Medium-sized gas turbines for standby and cogeneration
systems
Municipal refuse incineration plants
Boilers
Crushing machinery
Various types of industrial hydraulic equipment
Wheel loaders

14

CCPP for Baoshan Iron & Steel Corporation, China
Delivered to the largest steel maker in China, this is thefirst of its kind to operate using only blast furnace gas
with low calorific value. Achieved 150,000kW output, arecord in power plants using blast furnace gas.

Industrial Equipment

Gasifying Melting Incineration System
KHI has reached the final stage in thedevelopment of a gasifying melting
incineration system for next-generation
refuse incinerators. In April 1998,
operations were initiated at a pilot plant in
Sodegaura, Chiba Prefecture.

M7A-02 Gas Turbine
KHI has developed and launched a M7A-02
7,000kW-class gas turbine engine, completing a
low-cost, compact, standardized cogeneration
package. The turbine’s advanced technology
delivers best-in-class electric efficiency and dry low
emissions of NOX and CO.

PLANT ENGINEERING& STEEL STRUCTURES
KHI is one of the world’s foremost engineering experts involving
a diversity of plant projects, including the construction of steel,cement, chemical and other industrial plants. The Company isalso engaged in the design and fabrication of steel
superstructures essential in bridges, tunnels and other largescale public-works projects.
In particular, its technical expertise in steel and cement
plant engineering is one of the highest in the world, and has
been adopted in plants everywhere. KHI’s shield machines andtunnel boring machines (TBMs) stand out in quality andreliability. The legendary high-performance of the TBMs usedduring the building of the Eurotunnel under the Straits of Doveris renowned throughout the industry.
KHI has participated in numerous domestic megaprojects,
including the Akashi Kaikyo Bridge, the world’s longest
suspension bridge; the Trans-Tokyo Bay Highway Bridge, builtwith superbox girders and world-class shield machines withdiameters of 14.14 meters; and, Kansai International Airport, astate-of-the-art facility featuring baggage handling and cargohandling systems. The Company is proud to be a major
contributor to the accomplishment of such technological feats.
In addition, KHI is working to provide products designed tofurther rationalize and automate every stage of production,
processing and distribution systems, encompassing a broadarray of industrial robots.
The Company will continue to develop new technologies andextend its know-how in the construction of various plants
worldwide. At the same time, KHI will promote the globalizationof its scope of operations while utilizing across-the-board
technologies in order to develop new products and areas ofbusiness.

MAIN PRODUCTS
Steelmaking, cement, chemical and other industrial plants
Shield machines and tunnel boring machines
Bridges
LNG and LPG tanks
Penstocks
Watergates
Airport facilities
Steel frames
Factory automation systems
Industrial robots

16

Akashi Kaikyo Bridge
With an effective length of 3,911 meters, this is
the longest suspension bridge in the world. KHI
constructed the main tower on the Awajishimaside and produced the stiffening girders.
Opened in April 1998.

Industrial Equipment

Flue Gas Desulfurization Unit for Shikoku ElectricPower Co., Inc.
This facility, constructed at the Anan Power Plant,
reduces sulfur oxide emissions and recovers gypsum
as a by-product. Economy and efficiency ofoperations have been achieved by means of anadvanced operation control system.

PC Based Controller for Industrial Robots
KHI has developed and launched a PC based
controller for industrial robots. Using Windows® NT
as a base operating system, this controller directs
and monitors the operation of robots and gathers
information on daily operations. System also
allows for enhanced maneuverability.