Annual Report>2005>Interview with the President

Interview with the President

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In the fiscal year ended March 2005, ordinary income more than doubled year-on-year to set a new record. To what factors do you attribute this achievement?
  The factors behind sales and profit growth were the establishment of an optimal production structure and tireless product-development efforts

Net sales in the fiscal year ended March 2005 were up 13.3% year-on-year at 2,803.6 billion, and ordinary income jumped 110.0% to 460.6 billion.

  I believe this was because the efforts we made in three areas bore fruit. The first was raising productivity. Business consolidation enabled us to further enhance efficiency in the way we use our corporate resources, namely employees, assets and funds. The concentration of our plant and equipment enabled us to slim down our workforce, and the ingenuity of our technical staff enabled us to increase the capacity utilization of individual items of plant and equipment, thus boosting output.

  The second area was the development, production and sale of Only One and Number One products based on technology that is unique (Only One) or simply the best (Number One) in the industry. We never cut back on research staff even at the consolidation, rather, we invested more corporate resources to accelerate the speed and widen the scope of our research. We have one of the industry's top research systems, with more than 500 staff.

  The third plus for us was our adoption of a strategy focused on the global market. We do not foresee any expansion of volume within Japan, given the country's declining population, whereas overseas markets offer possibilities for strong growth. We consider the whole Asian region as our "home market," and have moved quickly to cultivate customers with whom we can build stable relationships, particularly overseas facilities of Japanese manufacturers, and downstream steelmakers. Although there has been some concern about our high export ratio, we view this as a strength rather than a weakness.

  The combination of these steps we have taken and the improvement in steel prices resulting from the growth in global steel demand led to a substantial improvement in earnings in the fiscal year ended March 2005.

Ordinary income & ROS

All major financial targets set in the first Medium-Term Business Plan have already been met. How would you evaluate this achievement?
  Our management reforms have only just begun

We have completed the first two years of our first Medium-Term Business Plan, and already, all major financial targets on a consolidated basis -- including ordinary income, return on sales (ROS), return on assets (ROA), outstanding debt and shareholders' equity -- have been met a year ahead of schedule. To compete with overseas steelmakers, we set a 10% target for ROS, and in fact, achieved an ROS of 16.4% in the fiscal year ended March 2005. This was perhaps our most outstanding achievement.

  That is not to say I am satisfied with the status quo. The ROS of some leading overseas steelmakers is higher than 20%, so JFE does not yet lead the world's steel industry in terms of profitability. In addition, we have not met the targets in our other businesses -- engineering, urban development, and LSIs. We have only just embarked upon our management reforms, and are working hard to further improve our financial position and build a robust business structure.


  *1 Ordinary income + interest expense + depreciation and amortization
*2 Announced on May 12, 2005
What are your views on the present state of the steel industry globally, and on current moves towards reorganization and consolidation?
  Bipolarization of the steel market between high-end and commodity products, amid a rapid increase in steel demand and more advanced production techniques

  Reorganization and consolidation in the steel industry, shifting management emphasis from volume increase towards profitability
  World crude steel output

World crude steel output was in the 700 million ton band from the late 1970s up until 1999, but has increased sharply since 2000, topping the 1 billion ton mark in 2004 for the first time ever. Growth in China and the other BRICs** is causing shortages not only of steel, but also of other basic commodities such as crude oil, pulp, and rubber. As living standards improve, demand for steel, once it has risen, is unlikely to fall back again to the past level.

  In addition, there is global orientation towards higher quality, and that is driving sales of high-quality products such as Japanese cars. In the field of steel, too, we are seeing growth in demand for high-quality products that require advanced technical capabilities to manufacture. In the past, it was difficult to set our high-quality products at prices which correspond with the performance, but in recent years customers have come to place greater emphasis on high standards of performance and product quality, and are willing to pay higher prices for them.

  There is a trend towards consolidation and reorganization among steelmakers worldwide, giving them greater strength when negotiating with raw-material suppliers and steel users. This is being accompanied by a major change in the attitude of managements in the steel industry. That is to say, whereas for a long time even companies ranking among the top ten in the world were content with a low ROS, today their managements require a minimum ROS of 10%. In the past, the steel industry was the first to be hit by fluctuations in the economy, but since the year 2000, the steel industry has undergone a complete transformation in term of the business environment, earnings structure, scale of business, bargaining power, and the managerial mindset.

* BRICs stands for Brazil, Russia, India and China, four newly industrializing countries with huge land areas and massive populations that have been sustaining remarkable growth in recent years, and are seen as having tremendous business potential.
In light of how it has been affected by abrupt changes in the world steel industry, how will the JFE Group shape its strategy? Could you comment on issues facing the group during and after the period of your second Medium-Term Business Plan from April 2006 to March 2009, starting next term, and your vision for the future?
  Improvement of our financial condition, stable procurement of raw materials, increase in production capacity both in Japan and overseas, and priority on investment in human resources development

  Becoming a corporate group that customers choose for its technical capabilities and high product quality

"The main point of our second medium-term business plan is where to focus our investments once we have built a solid financial base by reducing interest-bearing debt."
CEO's Photo

The JFE Group's fundamental strategy is to be the group of choice by virtue of its technical capabilities and high product quality. Because of their originality and superiority, our high-quality products are virtually immune to price competition, enabling us to maintain high profit margins on a stable basis. By increasing the ratio of high-quality products in our production and sales, we will be able to generate higher earnings without increasing output. And to achieve that, we must make a sustained investment in product research and development and refine our manufacturing technology. It is also essential that, by such means as international alliances based on relationships of trust, we secure stable sources of supply of raw materials, and also generate stable sales, so that our performance is not left to the mercy of market fluctuations.

  Our major challenge in pursuing our strategy is the excessive amount of our interest-bearing debt. It was for that reason that one of the targets of our first Medium-Term Business Plan was to build a solid business structure and sound financial base by establishing a stable earnings capacity and reducing interest-bearing debt. I am glad to say that so far, we have made good progress in decreasing debt, reducing the ratio of interest-bearing debt to shareholders' equity to 149% by the end of the fiscal year ended March 2005. Nevertheless, at the current level it is still too early to say that we have established a solid financial base. Therefore, partly to ensure that we have the financial flexibility to cope with large-scale capital expenditures or strategic investments, we intend to lower that ratio to 50% by around the second year of our second Medium-Term Business Plan.

Debt outstanding and D/E Ratio

4 Priority Investment Fields   After laying the foundations for undertaking active strategic investment in this way, the major focus of the second Medium-Term Business Plan will be pinpointing the sort of targets for active investment that will enable us to raise profits further.

  To be more specific about our investment, I envisage four categories.

  First, in investment to secure stable supplies of iron ore, coal, and ferroalloys, we will form ties with partners in countries that produce those raw materials, such as Brazil, Australia, China and Russia, and will invest there.

MSG mine in Brazil   The Fukuyama No. 5 blast furnace
MSG mine in Brazil The Fukuyama No. 5 blast furnace, whose revamp was completed in March 2005

  Second, we will invest in steel plants for the production of goods ranging from crude steel to finished goods. Promising countries for this kind of investment include China, whose market is growing rapidly, and Brazil, which has abundant deposits of raw materials.

  Something that I feel very deeply when we form tie-ups with overseas entities -- whether raw-material suppliers or steelmakers -- is that we must share a common philosophy with our business partners. Since the steel industry requires heavy investments in its production facilities, we must take a long-term view of our business. A shared philosophy will strengthen long-lasting trust, on which the parties can build business mechanisms that will benefit both sides.

  The third category of investment is capital investment in steelworks in Japan. We aim to combine our various technologies -- for example in maintenance, production operations, and in overhauling and extending the working life of plant and equipment -- to enhance the ability of our plant and equipment to respond efficiently and flexibly to fluctuations in demand.

  And finally, but most importantly, we will invest in the development of our human resources. A company's fate is determined by its ability to nurture capable employees, and this is not only an issue for the steel business, but also a common issue for the whole group, including our engineering, urban development, and LSI businesses. We intend to invest more in the development of personnel capabilities, ranging from recruitment and education, through hands-on operations, to research and development.

  It is impossible to overstate the importance of research and development. Steel is a material, but it is much more complex than that. Items such as surface-treated steel sheet that are used, for example, for beverage cans, are really a product category rather than simply a material. The steel sheet that forms the body of a car incorporates a variety of proprietary technologies, and is not a material in the same way. Technical value of this kind has to be enhanced on a regular basis, and companies that fail to do so will not survive.

Please comment on compliance and social responsibility.
  We frankly admit having fallen short of our goals, and will devote ourselves to making improvements

"A company's top management needs to take firm decisions and expend energy in communicating the vital importance of CSR to all staff. I take every opportunity to remind our employees that CSR is the toppriority management issue."
CEO's Photo
Around three years have elapsed since the consolidation that brought about the birth of the JFE Group, and to date we have been relatively successful in some aspects, but have fallen short of some of our goals. It is regrettable that we are not yet at an adequate level in the area of compliance, and this is something we must address head-on. We frankly admit that our understanding of the concept of compliance, or, more broadly speaking, of corporate social responsibility (CSR), was still in an immature state. We recognize this as being the most important issue for the second Medium-Term Business Plan, and are currently considering specific ways of addressing it. We are absolutely determined to ensure that the spirit of CSR is understood completely and put into practice diligently by all our staff -- from workers on the factory floor to managers.
Do you have a message for your shareholders?
  A first-class company in technology and human resources, passing on its fruits to its shareholders

Based on its core businesses of steelmaking and engineering, JFE has become one of the world's outstanding performers in respect of earnings, gross market capitalization, and crude steel output. We intend to raise our status even further in the future. Since compliance- related problems came to light, we have moved rapidly to remedy them, and will continue to focus our energies on becoming one of the world's best companies in terms of CSR.

  To assure satisfaction for our shareholders, we will endeavor -- based on our core strengths of technology and human resources -- to be a first-class company over the long term, and will reward our shareholders with the fruits of those efforts. I ask our shareholders for their continuing understanding and support.