Hitachi Corporate Strategy

Establishment of Stable,
High Profit Structure
November 16, 2006

Kazuo Furukawa
Hitachi, Ltd.
© Hitachi, Ltd. 2006. All rights reserved.

Establishment of Stable, High Profit Structure

Contents
1. Basic Management Policy
2. Establishment of High Profit Structure,and Growth Strategies
3. Globalization & Capturing Synergies
4. Summary© Hitachi, Ltd. 2006. All rights reserved.

(fiscal 2003-2005)

1-1. Review of the “i.e. HITACHI Plan II”“i.e. HITACHI Plan II” Goals

Evaluation

Positive FIV

Insufficient FIV management

Accelerate globalization

Overseas sales up /Not enough improvementin profitability

Strengthen groupmanagement

Building of Group management
infrastructure
FIV (Future Inspiration Value): FIV is Hitachi's economic value-added evaluation index inwhich the cost of capital is deducted from after-tax operating profit. After-tax operating
profit must exceed the cost of capital to achieve positive FIV.

© Hitachi, Ltd. 2006. All rights reserved.

31-2. Basic Policy
Basic Management Policy
Rigorous focus on market-oriented approach and profit creation

Goal
Establishment of stable, high profit structure

Key Initiatives
1. High profitability through rigorously FIV-based management
2. Building of stable, high profit structure
3. Evolution to group management for high profitability
4. Innovation by collaboration creation© Hitachi, Ltd. 2006. All rights reserved.

41-3. Key Initiatives (1)High Profitability through Rigorous FIV-based Management
2 years of negative FIV: Cautionary notice
If restructuring plan not
approved, or if there is no positive FIV within two years of approval:
Withdrawal advisory
Withdrawal plan and implementation (in principle)

Rigorous use of FIV rules

1. Rigorously FIV-based business management• Move・実質的独立会社制の進化
to substantially independent company system
・事業モニタリング、リスク管理の強化• Stronger
business monitoring and risk management

2. Restructuring and reappraisal, with no area sacrosanct© Hitachi, Ltd. 2006. All rights reserved.

51-4. Key Initiatives (2)Priority Areas
Social Innovation BusinessSocial Infrastructure
Business

Industrial Infrastructure
Business

Life Infrastructure
Business

Power Systems
Railway Systems
Government Systems

Automotive Equipment
Systems
Industrial Systems
Financial Systems

Urban Systems
Home ICT Systems
Medical Systems

Information Infrastructure Business
IT Platforms

System Solutions

Infrastructure Technology/Products
Semiconductors
Materials
Motors / Inverters© Hitachi, Ltd. 2006. All rights reserved.

PanelsHard Disk Drives

61-5. Key Initiatives (2)Building of Stable, High Profit Structure
A shift to business areas in which Hitachi can utilize its
strengths, accelerated by timely management decisions
based on the rigorous application of the FIV rule

1. Strengthen social innovation business• Expand overseas business• Expand service and maintenance business• Allocate resources with priority on strong businesses(Investment emphasis on M&A, globalization, R&D, etc.)

2. Maximizing synergies with infrastructuretechnology/products business• Contribute to social innovation business through distinctive
technology such as high functional materials© Hitachi, Ltd. 2006. All rights reserved.

71-6. Key Initiatives (3)Evolution of Group Management for High Profitability
1. Group governance system emphasizing collaborative creation• Hitachi 7 business groups• Major 40 subsidiaries

Promote rigorous consolidated
management

2. Efficient management of consolidated subsidiaries(Decrease number of consolidated subsidiaries to around 700)

3. Flexible reappraisal of equity relationships
to improve profitability© Hitachi, Ltd. 2006. All rights reserved.

81-7. Key Initiatives (4)Innovation by Collaborative Creation

1. Diverse partnerships• Nuclear power (GE), car information systems (Clarion),magnets (NEOMAX)

2. Profitability-focused innovations• Grow businesses that are No. 1 or No. 2 in market share
30% of total sales (fiscal 2005) 40% (fiscal 2009)• Direct linkage between R&D and generating profits- Assign 15% of corporate researchers to business divisions- Shorten R&D period by 30%• Double value of intellectual property© Hitachi, Ltd. 2006. All rights reserved.

91-8. Numerical Targets

Fiscal 2009: Consolidated Operating Margin of 5%

D/E Ratio: 0.8 or below(including minority interests)© Hitachi, Ltd. 2006. All rights reserved.

10Establishment of Stable, High Profit Structure

Contents
1. Basic Management Policy
2. Establishment of High Profit Structure,and Growth Strategies
3. Globalization & Capturing Synergies
4. Summary© Hitachi, Ltd. 2006. All rights reserved.

2-1. Establishment of High Profit Structure (1)Initiatives to improve negative FIV businesses

1Power Systems

2

Flat-Panel TVs

3

Hard Disk Drives© Hitachi, Ltd. 2006. All rights reserved.

122-2. Establishment of High Profit Structure (2)Power Systems

Operating income in fiscal 2007
Positive FIV in fiscal 2008

1. Upgrade MONOZUKURI (manufacturing)• Strengthen business using the Supervisory Office for Power Systems• Rigorously upgrade reliability and technological capabilities• Invest in leading-edge verification systems

2. Strengthen overseas thermal power business• Manage projects rooted in each region of the world• Strengthen risk management by collaboration between groupcompanies and partners© Hitachi, Ltd. 2006. All rights reserved.

132-3. Establishment of High Profit Structure (3)Flat-Panel TVs

Operating income in fiscal 2007
Positive FIV in fiscal 2008

1. Strategy• Increase share in growth market of large-screen plasma TVs• Expand product lineup, including LCD TVs

2. Build global operation system• Establish production system in Japan, North America,Europe, China• Build total supply chain management system

3. Collaborative creation with partners• Matsushita Electric Industrial• IPS Alpha Technology© Hitachi, Ltd. 2006. All rights reserved.

142-4. Establishment of High Profit Structure (4-1)

Hard Disk Drives (1)Operating income in fiscal 2007
Positive FIV in fiscal 2008

1. Management strengthened
2. Strengthen competitiveness by new technology and products• Expand application of perpendicular magnetic recording technology
and differentiate based on quality• New product ratio of 75% in fiscal 2007

3. Enhance production capacity and cost competitiveness• Achieve mass-production effect by ramping up capacity
in China & Thailand• Improve yields by increased use of new head materials© Hitachi, Ltd. 2006. All rights reserved.

15

2-5. Establishment of High Profit Structure (4-2)

Hard Disk Drives (2)4. Strengthen developmental capabilities• Design and development groups integrated, standardize designs• Promote “TOKKEN,” special R&D projects

5. Emphasize Japanese MONOZUKURI ethic• Hitachi quality is receiving high grades from major customers

6. Expand strategic tie-ups with partners￭ Quality Evaluation Ranking ofHitachi by major customers

2004

2005
1.7

2006*

2007

Jan. to Mar. Apr. to Jun. Jul. to Sep.

Jan. to Dec.

2006

Apr. to Jun.

3.1

￭ Share by Number of Units

1.4

14%

15%

17%

20% (Target)* Estimates by Hitachi© Hitachi, Ltd. 2006. All rights reserved.

16

2-6. Growth Strategies (1)Priority Areas
Social Innovation BusinessSocial Infrastructure
Business

Industrial InfrastructureBusinessLife Infrastructure
Business

Power Systems
Railway Systems
Government Systems

Automotive Equipment
Systems
Industrial Systems
Financial Systems

Urban Systems
Home ICT Systems
Medical Systems

Information Infrastructure Business
IT Platforms

System Solutions

Infrastructure Technology/Products
Semiconductors
Materials
Motors / Inverters© Hitachi, Ltd. 2006. All rights reserved.

PanelsHard Disk Drives

17

2-7. Growth Strategies (2)Social Infrastructure Business
Overseas utilization of domestically-honed "Japanese quality",and localization of each basePower Systems[Nuclear Power]￭ Global alliance with GE￭ Leading-edge maintenance and service technology, highreliability monitoring control systems￭ Development of next-generation nuclear power technology[Thermal Power]￭ Strengthening of business infrastructure by establishing local
subsidiaries in the U.S. and Europe￭ Differentiate using high-efficiency power generation systems,
environmental protection equipment, etc.

[Target Operating Margin]

Fiscal 2009 3%

Fiscal 2005 -5%Railway Systems￭ U.K. orders for lightweight aluminum cars having No. 1 market share in Japan￭ Entry into railway vehicle maintenance business in U.K.
￭ Expand the operations control system in overseas market© Hitachi, Ltd. 2006. All rights reserved.

18

2-8. Growth Strategies (3)Industrial Infrastructure Business
Further strengthen advanced technology to create andmaintain products having leading market share
Automotive Equipment Systems￭ Development of hybrid car systems￭ Development of outside recognition technology
to increase safety￭ Use tie-up with Clarion to strengthen car information systems
business[Target Operating Margin]

Fiscal 2009 5%

Fiscal 2005 4%

Industrial Systems / Semiconductor & LCD manufacturing equipment￭ Early launch of equipment for next-generation semiconductorand LCD manufacturing applications￭ Equip bases to handle needs of overseas customers

Industrial Systems / Construction Machinery￭ Strengthen global development and expand services by new plant construction￭ Focus on upgrading the development of battery-powered excavator,
energy-saving, environmental-burden reduction technologies© Hitachi, Ltd. 2006. All rights reserved.

192-9. Growth Strategies (4)Life Infrastructure Business
Utilize collective strengths of the Hitachi Group to provide
secure, pleasant solutions
Urban Systems￭ Expand market share of new elevator/escalator
installations in Asia
￭ Expand solutions business based on elevator/escalator
maintenance service networks(security, energy, redevelopment projects, building management)[Target Operating Margin]

Fiscal 2009 5%

Fiscal 2005 4%

Home ICT (Information Communication Technology) Systems￭ Provide services that fuse broadcasting and communications￭ Provide infrastructures for Next Generation Networks able tohandle high-speed, reliable distribution of video and voicedata© Hitachi, Ltd. 2006. All rights reserved.

202-10. Growth Strategies (5)Information Infrastructure Business
Use storage and consulting to bolster profitability
IT Platforms[Storage]￭ Use market superiority in enterprise systems centering on
virtualization technology, and the expansion of sales
channels for mid-range systems, to grow sales[Server]￭ Provide competitive offerings anchored by BladeSymphony[Target Operating Margin]

Fiscal 2009 7%

Fiscal 2005 5%

System Solutions￭ Use established consulting expertise combined with SI
capabilities to provide one-stop solution services￭ Global marketing of finger vein authentication systems
and Hibiki μ-chip RFID

[Consultants]

Fiscal 2008 (Target)
3,000
Fiscal 2005
1,200

© Hitachi, Ltd. 2006. All rights reserved.

21

2-11. Growth Strategies (6)Materials Business
Expand top share products and promote development of new materials
Utilizing group synergies with social innovation business[Strengthen competitiveness]￭ Focus on automotive systems, electronics and industrial area
￭ Enhance development of top share products￭ Strengthen magnet business[Deepen Hitachi Group Tie-ups]￭ Use group synergies to promote development andcommercialization￭ Promote development of new materials (motor materials, panelmaterials, etc.)© Hitachi, Ltd. 2006. All rights reserved.

[Target Operating Margin]

Fiscal 2009 8%

Fiscal 2005 7%

22

Establishment of Stable, High Profit Structure

Contents
1. Basic Management Policy
2. Establishment of High Profit Structure,and Growth Strategies
3. Globalization & Capturing Synergies
4. Summary© Hitachi, Ltd. 2006. All rights reserved.

3-1. Globalization & Capturing Synergies
Globalization“Full emphasis on market-oriented approach in the world's growing infrastructure markets”

1

Accelerate move into BRIC markets (especially China and India)

2

Promote localization through tie-ups with prominent partners

3Bolster global proposal capabilities and brand power4

Training of global personnel

5

Upgrade functions of Chief Executives for North America, Europe,
China and Asia

Capturing Synergies
1Use synergies between businesses to create value2

Use operational synergies to improve earnings© Hitachi, Ltd. 2006. All rights reserved.

24

3-2. Development of high profitability global business
FY2005

Accelerate globalization ofsocial innovation businessStable, high profits by promoting
localization of development,
production, marketing,and services

FY2009Ratio of overseas sales

45%38%
Ratio of operating income

48%
35%

5.0%

2.7%

65%

Japan

Overseas

52%

Operating income margin

RegionInitiatives to globalize social innovation businessNorth
AmericaStrengthen sales operation (power, consulting, storage, etc.)

EuropeEmphasis on main growth sectors (railways, storage, power, etc.)

China
Asia

Strengthen growth businesses(promote tie-ups with prominent partners and localization, etc.)

Tackle growth markets (India: construction machinery, software, etc.)© Hitachi, Ltd. 2006. All rights reserved.

25

3-3. Synergies between businesses(Automotive Equipment Systems examples)* Merger of Tokico and Hitachi Unisia(October 2004)

Using the collective strengthsof the Hitachi Group to realize
the car society of the future

Drive control systems

Engine management systems* Motor Power Systems Division(established April 2006)

Electric powertrain systems

Motors,inverters,
Li batteries,etc.

Car information systems
Navigation andnext-generation
telematics* TOB of Clarion (October 2006)

Materials andfunctionalparts© Hitachi, Ltd. 2006. All rights reserved.

* TOB of NEOMAX by Hitachi Metals (November 2006)

26

3-4. Using operational synergies to improve earnings

12

34

5

Cost reductions achieved by strengthening groupmanagement infrastructure
Increased concentration and centralization of purchasing
Reductions in cost of materials:
300 billion yen/year (fiscal 2006)

Additional cost reduction 30 billion yen (fiscal 2008)
Utilize IT and reinforce group cooperation

Reduction of indirect costs
15 billion yen/year (average up to fiscal 2008)

Pooling of group funds
Annual saving of 5 billion yen/year in interest

Effective use of assets
Cash flow improvement of 5 billion yen/year (fiscal 2010)

Centralization of IT infrastructure
Savings of 7 billion yen/year (average up to fiscal 2008)© Hitachi, Ltd. 2006. All rights reserved.

27

Establishment of Stable, High Profit Structure

Contents
1. Basic Management Policy
2. Establishment of High Profit Structure,and Growth Strategies
3. Globalization & Capturing Synergies
4. Summary© Hitachi, Ltd. 2006. All rights reserved.

4-1. Strengthening of management infrastructure

1

MONOZUKURI and technological capabilities

2

Human-resource capabilities

3

CSR Management© Hitachi, Ltd. 2006. All rights reserved.

29

4-2. Earnings structure in fiscal 2009
(yen)
FY2005SocialInfrastructure
BusinessFY2009500 billion

Life Infrastructure
Business
Information
Infrastructure
Business

SocialInfrastructure
BusinessOperatingincome

Life Infrastructure
Business
Information
Infrastructure
Business

256 billion

Industrial
Infrastructure
Business

Infrastructure
Technology/Products
Business

Infrastructure
Technology/Products
Business00Sales

Industrial
Infrastructure
Business

10 trillion(yen)

Information on the progress of structural reforms will be provided on a regular basis© Hitachi, Ltd. 2006. All rights reserved.

30

4-3. Summary
Establishment of Stable, High Profit Structure

Fiscal 2009: Consolidated Operating Margin of 5%

D/E Ratio: 0.8 or below(including minority interests)© Hitachi, Ltd. 2006. All rights reserved.

31

Cautionary Statement
Certain statements found in this document may constitute “forward-looking statements” as defined in the U.S. Private Securities Litigation Reform Act of 1995. Such“forward-looking statements” reflect management’s current views with respect to certain future events and financial performance and include any statement that does
not directly relate to any historical or current fact. Words such as “anticipate,” “believe,” “expect,” “estimate,” “forecast,” “intend,” “plan,” “project” and similar
expressions which indicate future events and trends may identify “forward-looking statements.” Such statements are based on currently available information andare subject to various risks and uncertainties that could cause actual results to differ materially from those projected or implied in the “forward-looking statements”
and from historical trends. Certain “forward-looking statements” are based upon current assumptions of future events which may not prove to be accurate. Undue
reliance should not be placed on “forward-looking statements,” as such statements speak only as of the date of this document.
Factors that could cause actual results to differ materially from those projected or implied in any “forward-looking statement” and from historical trends include,
but are not limited to:- fluctuations in product demand and industry capacity, particularly in the Information & Telecommunication Systems segment, Electronic Devices segment andDigital Media & Consumer Products segment;- uncertainty as to Hitachi’s ability to continue to develop and market products that incorporate new technology on a timely and cost-effective basis and to achievemarket acceptance for such products;- rapid technological change, particularly in the Information & Telecommunication Systems segment, Electronic Devices segment and Digital Media & Consumer
Products segment;- increasing commoditization of information technology products, and intensifying price competition in the market for such products, particularly in the Information& Telecommunication Systems segment, Electronic Devices segment and Digital Media & Consumer Products segment;- fluctuations in rates of exchange for the yen and other currencies in which Hitachi makes significant sales or in which Hitachi’s assets and liabilities aredenominated, particularly between the yen and the U.S. dollar;- uncertainty as to Hitachi’s ability to implement measures to reduce the potential negative impact of fluctuations in product demand and/or exchange rates;- general socio-economic and political conditions and the regulatory and trade environment of Hitachi’s major markets, particularly, the United States, Japan andelsewhere in Asia, including, without limitation, a return to stagnation or deterioration of the Japanese economy, or direct or indirect restriction by other nations
on imports;- uncertainty as to Hitachi’s access to, or ability to protect, certain intellectual property rights, particularly those related to electronics and data processing
technologies;- uncertainty as to the results of litigation and legal proceedings of which the Company, its subsidiaries or its equity method affiliates have become or may become
parties;- possibility of incurring expenses resulting from any defects in products or services of Hitachi;- uncertainty as to the success of restructuring efforts to improve management efficiency and to strengthen competitiveness;- uncertainty as to the success of alliances upon which Hitachi depends, some of which Hitachi may not control, with other corporations in the design anddevelopment of certain key products;- uncertainty as to Hitachi’s ability to access, or access on favorable terms, liquidity or long-term financing; and- uncertainty as to general market price levels for equity securities in Japan, declines in which may require Hitachi to write down equity securities it holds.
The factors listed above are not all-inclusive and are in addition to other factors contained in Hitachi’s periodic filings with the U.S. Securities and Exchange
Commission and in other materials published by Hitachi.

© Hitachi, Ltd. 2006. All rights reserved.

32