NKK CORPORATION: Annual Report 2001
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TO OUR SHAREHOLDERS

Yoichi
Shimogaichi
President and Chief Executive Officer

Background

Fiscal 2001, ended March 31, 2001, was characterized by challenges and opportunities in all areas of NKK's operations.

      The operating environment for the Steel Division was mixed. In the first half of fiscal 2001, demand for steel expanded as rising exports to other parts of Asia, for example, reinforced the favorable effects of domestic economic recovery, including higher private capital spending and improved business for the manufacturing sector. In the second half of the fiscal year, however, the domestic economy turned sluggish and demand for steel sagged, mainly owing to a reduction in the number of public works projects. In overseas markets, a slowing U.S. economy created a spillover effect that extended to Japan and the rest of Asia, further squeezing demand for steel and precipitating a noticeable rise in the level of inventories.

      The Engineering Division benefited from favorable demand in the environmental industries engineering segment, as well as in shipbuilding and steel structures. Results for other segments within the division, however, were severely affected by heightened competition, the continuing course of deregulation and fewer public works projects up for bidding.

Fiscal Performance

Despite the challenges of this operating environment, NKK increased net sales and net income on a consolidated basis. Net sales rose 6.0%, to ¥1,787.2 billion, thanks to strong first-half demand for steel as well as brisk order activity for waste incineration equipment. Operating income expanded 30.1%, to ¥80.6 billion, owing to concerted cost-reduction efforts. Net income reached ¥97.0 billion.

      A breakdown of net sales reveals that the Steel Division contributed ¥1,298.4 billion, up 5.1%; the Engineering Division, ¥449.0 billion, a 3.1% gain; and Other Fields, ¥121.8 billion, a 36.1% increase.

Stronger Corporate Group

Fiscal 2001 was the inaugural year of our medium-term group business plan and marked an extremely important beginning for us. Seeking to bring the three-year plan to a successful conclusion in March 2003, we acted swiftly to determine and then implement various measures designed to optimize our business structures, raise profitability and, thereby, solidify our consolidated financial position. Our commitment has already brought about significant improvements. These results attest to the appropriateness of quick decisions on radical restructuring of divisions, rationalization of costs and development of new business in fiscal 2001, and also embody such management reforms as the corporate officer system and the consolidated business division system.

Improved Consolidated Financial Position
Our plan targets a return on assets (ROA) ratio of at least 5.5% by March 31, 2003, as well as free cash flow totaling ¥400 billion over three years and a reduction of consolidated outstanding debt to ¥1.2 trillion. In fiscal 2001, we took major steps toward these goals. The most significant were the radical streamlining of assets, including the sale of our head office building in Tokyo; a rise in the personnel productivity rate through downsizing; and the integration of funding policies via a Groupwide cash management system to enable more efficient account settlements and minimization of cash deposits.

      Consequently, we made great headway in just the first year of the plan. Specifically, ROA reached 3.1%, up 0.9 percentage point. Free cash flow, including gains from the sale of fixed assets, expanded to ¥285.4 billion, or 71.4% of the three-year aggregate goal. The balance of outstanding debt fell to ¥1,319.1 billion, at March 31, 2001, and, if approximately ¥80 billion in cash equivalents set aside for redeeming corporate bonds in the first half of fiscal 2002 is considered, the balance dropped to ¥1,240 billion--nearly the level we are working toward by the March 31, 2003 target date.

Higher Productivity
Our cost-reduction efforts go beyond conventional rationalization of spending to encompass breakthroughs in production technology. Innovation at the Fukuyama Works is a prime example.

      With the world's first full-scale application of the zero-slag steelmaking process, the Fukuyama Works has successfully shortened the time needed for charging basic oxygen furnaces with hot metal, blowing oxygen and tapping molten steel, as well as the time required after tapping to prepare for the next charging. As a result, productivity has risen, output is higher, and tapping capacity for the steelworks' three operating furnaces exceeds 10 million tons per year. Casting capacity has also improved, reflecting the increase in tapping capacity, which has buoyed worker productivity approximately 20% over the fiscal 1995 level.

More Focused Global Strategies
Automakers, a major client group, have assumed a keen cross-border perspective in their operations. Realizing that a global supply structure is crucial in meeting the needs of such clients more responsively, NKK reinforced its cooperative arrangement with National Steel Corporation, a key production point in the United States, on research and development (R&D) and production fronts. In March 2001, a new chief executive officer was appointed at National Steel. The new management will implement various measures to improve National Steel's profitability and international competitiveness. These innovations will enable NKK to elevate client satisfaction levels and enhance consolidated income.

      In April 2001, NKK agreed to begin three-way negotiations with Kawasaki Steel Corporation and Thyssen Krupp Steel AG toward the goal of global strategic collaboration. We intend to mutually strengthen global supply structures geared to the needs of demand sectors. While the details are currently being worked out, we anticipate the eventual culmination of cooperation along these lines.

Win-Win Strategic Alliances
In recent years, international rivalry has intensified in several of the business areas NKK is pursuing. Against this backdrop, we recognize the importance of instituting such measures as additional cost rationalization to sharpen our competitive edge. Alliances with other companies offer considerable merit by facilitating operating structures more congruent with respective business sectors. We have thus adopted a more aggressive stance toward business integrations and tie-ups with other companies in such fields as shipbuilding, energy industries engineering, steel works plant engineering and information technology (IT).

      NKK already has an excellent reputation in the shipbuilding industry for its highly efficient shipyards and innovative products. We decided to integrate our shipbuilding operations with those of Hitachi Zosen Corporation by October 2002. The alliance will build on our strengths and allow reduced costs through expanded economies of scale, accelerate product development through shared and reciprocal access to business resources, and enable us to broaden our variety of ships.

      In the field of steel works plant engineering, we joined Hitachi Zosen again, along with Sumitomo Heavy Industries, Ltd., in establishing a sales company in April 2001. Through this joint venture, we expect to secure a degree of scale that permits us to surmount heightened worldwide competition in the 21st century. We are currently expediting preparations for business integration, scheduled for April 2003.

New Businesses
In April 2001, following the enactment of a recycling law for specified electric appliances, such as televisions, refrigerators, washing machines and air conditioners, NKK Trienekens Corporation, a joint venture by NKK, Mitsui & Co., Ltd., and Sanyo Electric Co., Ltd., commenced operations. NKK, which is managing overall operations, has built a recycling plant and is providing operational assistance and technologies for resource reapplication. This corporate alliance will be instrumental in our efforts to realize zero-emission operations.

      Another area of potential is the soil purification business, which stresses healthy soil and groundwater conditions. In this new business area, we have applied the high-performance soil-purification method of BioGenesis Enterprises, Inc., which offers a proven remedy for contaminated soil.

Business Consolidation with Kawasaki Steel

In April 2001, NKK and Kawasaki Steel agreed to consolidate all businesses undertaken by the two companies, on the basis of equal partnership and in mutual trust. The basic scheme calls for the joint establishment of a holding company through stock transfer by October 2002, under which both companies will become wholly owned subsidiaries. The two companies will be reorganized to form new entities by business segment by April 2003.

      A year earlier, in April 2000, we formed a cooperative alliance on logistics, maintenance and procurement with Kawasaki Steel in a bid to mutually cut costs and promote greater operating efficiency at four domestic steelworks. As we were working to expand the scope of the alliance, the operating environment was undergoing drastic changes, characterized by global realignment of client industries and raw materials suppliers. We concluded that consolidation was the best way to enhance our competitiveness and respond effectively to the trend among clients to streamline their list of suppliers.

      Based on current data, the business consolidation will create the largest steel company in Japan, and the second largest in the world, with annual crude steel production capacity of 33.6 million tons. Utilizing this scale, with steel and engineering as its core businesses the new company will be committed to establishing a strong earnings base and enhancing shareholder value.

Fiscal 2002 Outlook

The domestic economy is anticipated to remain sluggish, and overseas markets are likely to be lackluster as long as uncertainty over the U.S. economy persists.

      However, we will continue to focus on steel sheets--a mainstay product--while demonstrating our strengths in the promising field of environmental solutions to further enhance our fiscal performance.

      We will strive to realize the benefits of full-scale business consolidation with Kawasaki Steel ahead of the actual integration. We will also seek to attain the targets of the medium-term Group business plan as soon as possible to derive maximum benefit from a more efficient organization.

In Closing

NKK will build on its unique strengths with continued intensity to maintain and enhance a corporate value representative of the Group for the society of the 21st century. We will concurrently seek to meet shareholders' expectations and raise corporate value for investors.

      On behalf of the Board, I thank you for your ongoing encouragement and ask for your continued support.

July 2001
Yoichi Shimogaichi
Yoichi Shimogaichi
President and Chief Executive Officer

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