Annual Report>2005>Outline of the JFE Group>Kawasaki Microelectronics, Inc.

Outline of the JFE Group

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Kawasaki Microelectronics, Inc.

Yukio Yamauchi President & CEO Kawasaki Microelectronics (Kawasaki Micro) is a supplier of ASICs (application-specific integrated circuits) encompassing a wide range of activities from design to wafer manufacture, assembly, testing, and quality assurance. Delivery of these services is based on a core of state-of-the-art technical capabilities, together with strong and reliable partner companies. As the leading supplier of ASICs, we strive constantly to provide the finest products worldwide.
Yukio Yamauchi
President & CEO

Business Overview: Sales and profit declines caused by inventory adjustments in IT-related products

In the fiscal year ended March 2005, sales were brisk until the summer, particularly driven by digital consumer electronics products, whose sales were temporarily buoyed by the 2004 Olympic Games. Sales declined again from the autumn, however, impacted by inventory adjustments in the information technology sector. Among individual products, the shipment volume of products for digital cameras declined due to customers' production adjustments. Moreover, the profit ratio on products for LCD panels declined owing to fierce price competition despite an increased sales volume.

As a consequence of the foregoing, we experienced declines in sales and profits. Net sales fell 10.9% to 36.0 billion on a consolidated basis, operating income was down 59.9% at 1.9 billion, and ordinary income fell 59.6% to 1.8 billion.

Fundamental Strategy: Strengthening product development in growing fields, and use of outsourcing


Diversification and Expansion
of Product Fields
Diversification and Expansion
of Product Fields

State-of-the-art technical capabilities constitute the core of our strategy. With strong and reliable partner companies, we function as an ASICs vendor offering a comprehensive range of services from designing to wafer manufacturing, assembly, testing, and quality assurance. We continuously strive to offer the finest quality worldwide.

We devote most of our attention to the traditional core product fields of ASICs for digital cameras, LCDs, and office equipment. Additionally, two new fields are now regarded as pivotal to our business, and we aim to strengthen them. These products involve flat-screen televisions and telecommunications equipment, in which strong market growth is projected. Expanding from three to five core fields, we are now able to target a well-balanced product mix and secure sustained growth.

Our production structure involves outsourcing to manufacturers in Taiwan, which enables us to reduce capital investment and give priority to creation of intellectual property* and new technologies, thus maximizing earnings. We were the first in our industry to outsource the manufacture of ASICs, something that had long been regarded as difficult. As a result, we have accumulated a high level of expertise in this area, including control of quality assurance from our outsourcing suppliers. This has become another strength of our outsourcing business model.

* Intellectual Property: Large-scale integration (LSI) design assets, namely the functional circuits that make up the LSI and the built-in software. For system LSIs, the process from initial design start to final prototype takes considerable time. However, the design time can be shortened by the use of commercially available, high-quality IP and development support tools.

Our Fields of Particular Strength: LCD panel timing controllers hold 40% global market share

LCD panel timing controllers In addition to our ASICs for digital cameras, which have gained a long-standing high reputation, we maintain a 40% global market share in chips that control the timing of data transfer in LCD panels. Recently, in the field of ASICs for flat-screen televisions, we successfully concluded extensive negotiations with a major customer in Japan. These steps illustrate how we are steadily building up a market in these fields. In addition, we have a strong reputation both in Japan and overseas for ASICs for office equipment, optical fiber access networks, and other communications networks.

Progress under Medium-Term Business Plan: Amid a harsh business environment, earnings growth based on prowess in cutting-edge technologies

In the fiscal year ended March 2004, the first year of the first Medium-Term Business Plan, we exceeded our final target for ordinary income of 3 billion, but fell short of the target in the fiscal year ended March 2005. Our current focus is on ensuring that we meet our targets in the fiscal year ending March 2006, the final year of the plan.

CONSOLIDATED OPERATING RESULTS
Billions of yen
  (Years ended/ending March 31) 2003
Actual (approximate)
2004
Actual
2005
Actual
2006*
Forecast
2006
Plan's original target
 
  Ordinary income 1.0 4.5 1.8 1.0 3.0  
  Return on sales (ROS) 2.9% 11.1% 5.0% 2.2% 5.8%  
  *Estimated figures for the year ending March 2006 are those declared as of May 12, 2005.

Issues to Address: Strengthen price competitiveness and increase design and development resources

Markets in the field of digital consumer electronics equipment are expanding, but we expect prices to continue declining rapidly. To secure stable profits in such an environment, we must improve our price competitiveness. In addition, as business expands there is a pressing need to secure more designs and development resources. To address this issue, the company opened a technology development center in Sapporo in January 2005. We will maintain our focus on raising productivity and investment returns, and on enhancing our technical capabilities.

Head office in Makuhari   Design and development division
Head office in Makuhari   Design and development division