Establishing a stronger management to work with further changes within the business environment
Mid-Term Business Plan 2012-2014
A turning point in world affairs and the business environment
The company was able to meet its performance targets thanks to the continued strong demand in automotive-related products concentrated in Europe, despite the on-going downturn in the consumer electronics market. We envisage this trend continuing throughout the second half of the year. In February of this year, we announced the framework of our mid-term business plan 2012-2014 for the period beginning FY2012. Although we have already begun implementation of this plan, I would like to take another look at the outline and some concrete statistical targets.
At present, trends in the global economy and the business environment surrounding the Sumida Group are approaching a critical turning point and we need mid- to- long-term business vision that can accurately respond to the following types of changes in our environment:
● Decline of developed economies
Starting with the slow-down in Europe, due to the debt crisis, the relative status of the developed economies of Europe, America and Japan has begun to decline.
● BRICs gradual slowdown
Although there is still underlying growth in the economic activity of the developing BRICs (Brazil, Russia, India, China), this has tended towards a gradual slowdown.
● Quality and productivity improvements by manufacturers in developing countries
Manufacturers in developed countries are under threat from quality and productivity improvements seen in the manufacturing industries of developing countries.
● Developing countries become target markets
As we have seen in China, developing countries are experiencing economic growth. Consequently there is an increasing need to treat such countries, which have historically been seen as production locations, as target markets.
Business vision and statistical targets for FY2014
Given the business environment above, in our new mid-to-long term business plan that started FY2012, the Sumida Group has devised a master plan looking 10 years ahead. There are three stages to the master plan: “Stage I” is FY2012 –2014; “Stage II” spans FY2015-2017; and “Stage III” looks at FY2018 and beyond. By setting business proposals and statistical targets for each stage, we are aiming for net sales in excess of 100 billion yen.
Within this, the first three years or “Stage I” is an extremely important phase, as it lays the foundation for the mid-to-long term business plan. Consequently, by setting more specific statistical targets, we hope to push firmly forward in aiming to achieve them.
Firstly are improvements to profitability. In FY2014, our targets are net sales of 60 billion yen; operating income of 5 billion yen; and EBITDA of 8 billion yen. EBITDA represents “Earnings Before Interest, Taxes, Depreciation and Amortization” and indicates how much cash flow is produced against capital. By including specific statistical targets for EBITDA this time, we are creating a dynamic business structure, with the emphasis on profitability.
At the same time we are focusing on improvements to the balance sheet, with targets of 50 days for the cash conversion cycle and a D/E ratio of 1.4. The cash conversion cycle is the number of days it takes to realize cash. The longer the number of days, the longer it takes to obtain the cash from your business activities. Hence, the Sumida Group is striving to shorten the cash conversion cycle from the current 106 days to 50 days in order to realize cash within a shorter timeframe. Furthermore, the D/E ratio indicates the amount of interest-bearing debt in proportion to shareholders’ equity, with an optimal ratio thought to be 1 to 1.5. Over the next three years we hope to improve our ratio from the current 4.4 to 1.4.
The future of our three business segments
To achieve these statistical targets, we will need to increase our sales and expand into new fields simultaneously within our three main segments, “Automotive”; “Consumer Electronics”; and “Industrial.” “Automotive” will continue to maintain steady growth based on technologies developed to date. “Consumer Electronics” will focus on growth areas such as smart phones and ultrabooks and “Industrial” will play a leading role in the future, with a substantial increase in sales.
Further enhancements in markets, manufacturing and development
Yet further cost reductions are an important element in our mid-to-long-term business plan. Therefore we will implement the following measures:
● Further automation of production lines
We will accelerate the automation of traditional production lines, in particular promoting the complete automation of automotive-related products that have long product life cycles and relatively low fluctuations in production volumes.
● Strengthening our purchasing power via the “Global One” procurement system
We will unify our procurement office which is currently divided into different systems and suppliers, and promote global optimization of our suppliers. This will lead to rapid improvements in the purchasing power of Sumida as a whole.
● On-going relocation of production to low cost sites
Under our Silk Road strategy, we encourage the transfer of production to low cost sites, mainly satellite factories, and significantly reduce direct labor costs.
● New product development to suit market needs
We specify R&D objectives by region. New product and technology R&D is carried out in Japan, Germany and America, while in China, R&D concentrates on rapid response times to design changes, sample requests and alternative materials.
A stronger financial position to increase our ability to cope with the environment
Increasing profitability, via such cost reductions and productivity improvement, is of vital importance and is fundamental to our mid-to-long-term business plan. In order to make further use of this improved profitability in subsequent operations, in future we will pursue management goals that emphasize cash creation. To do so, we will implement the following two points and strive to achieve the statistical targets set out in the table below.
● Global cash management
By regularly forecasting global cash flow, and knowing how much cash is on hand for use in debt repayment, we can consolidate our capital using cash pooling* and settle our debts.
● Cash conversion cycle
We will improve capital efficiency through inventory reductions and shorter cash conversion cycle.
The Sumida Group will strive to build the foundations for renewed growth via steady achievement of such initiatives, as contained in the mid -term business plan.
*Cash pooling: This refers to the practice of centralizing the finances of individual companies within the Group through a master bank account opened at the Group’s main trading bank, to allow flexible funding between the individual companies.
Shigeyuki Yawata, CEO of Sumida Group