NKK CORPORATION: Annual Report 2001
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REVIEW OF OPERATIONS

     
   
Engineering Division

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Executive Vice President
Shigeharu Dote

NKK's Engineering Division is the leading steel-related engineering group in Japan. The division brings a steady stream of newly developed products to market, and a large number of its existing products have captured top shares in their respective domains. To retain and further enhance our capacity, we are building a production and marketing system that meets the challenges and opportunities specific to each segment on a Groupwide basis and fully demonstrates the power of the Group.

        In fiscal 2001, the operating climate for the Engineering Division was extremely harsh, characterized by continued sluggishness in the domestic economy and a slowing trend in the economies of the United States and other parts of Asia. Despite the apparent difficulties, we anticipated significant demand for environmental engineering systems and services and directed considerable efforts toward this area of pursuit. As a result, we won the largest number of orders for waste-processing facilities in Japan, including five high-temperature gasifying and direct melting furnaces.

      In the area of shipbuilding and offshore structures, we secured three years' worth of orders in a 12-month period. We benefited from rising demand for tankers and acquired six orders for very large crude carriers. We also received three new orders for cape-size bulk carriers--a category in which we lead the market. 

      Orders in fiscal 2001 surpassed previous records, climbing 30.5%, to ¥509.1 billion. Total sales rose 3.1%, to ¥449.0 billion. Operating income reached ¥17.9 billion, up 59.8%, as a result of concerted Groupwide cost-cutting efforts.

      The operating environment is likely to remain challenging in fiscal 2002, ending March 31, 2002, but we are nonetheless endeavoring to post excellent consolidated results. To this end, we will strive to accurately identify emerging social needs and respond swiftly with appropriate solutions while continuing to rationalize costs.

Percentage of Net Sales for Fiscal 2001
   
     



Energy Industries Engineering

In Japan, the energy industries engineering segment was engaged in a fierce battle for orders as deregulation and subsequent restructuring in the gas, electric power and petroleum industries forced major clients in these sectors to cut costs and reduce capital spending in an effort to enhance their own competitiveness and financial positions. Overseas, we encountered a downward trend in big projects, paralleling a move toward realignment and mergers among multinational petrochemical companies.

      Despite these difficult conditions, NKK maintained top share in city gas pipeline systems--a mainstay business--with a marketing focus on Japan's three largest gas companies and a competitive edge sharpened by thorough cost-cutting efforts. Segment sales increased 3.3%, to ¥67.6 billion.

      In November 2000, NKK formed an agreement with Chiyoda Corp. to jointly strengthen and expand activities in the energy-related plant engineering business, especially gas utilization. Through this agreement, we aim to capitalize on an upswing in demand for clean-burning natural gas, including liquefied natural gas (LNG), expected in the near future. We will also combine our high-tech expertise in plant engineering, which focuses on LNG storage tanks and terminal facilities, with Chiyoda's many achievements in system design and construction of LNG liquefaction plants overseas and receiving terminals in Japan.

 

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Natural gas pipeline branch and metering station



Environmental Industries Engineering

This segment, which handles projects related to the environment, water and wastewater and conceptual engineering, registered a 42.5% increase in orders, to ¥168.9 billion, and a 24.9% rise in sales, to ¥143.9 billion.

      In environmental engineering operations, year-on-year order growth jumped nearly 170%. This tremendous achievement is underscored by surging demand from local authorities in Japan for household waste incineration facilities ahead of policy measures to curb dioxin emissions, scheduled for implementation in December 2002.

 

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      Gasifying and direct melting furnaces have drawn particular attention as next-generation waste-processing facilities, spurring intense competition on both sales and development fronts. In fiscal 2001, NKK won orders for five gasifying and direct melting furnaces. This, plus orders for three stoker-type incinerators, cemented NKK's position as the No. 1 maker of waste-processing facilities in Japan.

      We also launched a project to develop a next-generation, low-cost, low-emission stoker-type incinerator. We expect this system to dramatically curtail production of dioxins and other toxic substances.

 
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Waste gasifying and direct melting furnace test plant, and image of a furnace currently under construction in Kakamigahara, Gifu Prefecture

      In water and wastewater engineering, NKK enjoys the highest share of the domestic market for waterworks systems. Over the past few years, we have noted a trend toward upgrading, repairing and quakeproofing existing systems and have, in response, introduced innovative technologies, such as the pipe-in-pipe (PIP) method, that have little negative impact on the surrounding environment.

      We anticipate rapid expansion in demand for advanced processing technologies that meet stricter water quality regulations for upstream plants as well as sewage and sludge-treatment systems, and are working to enrich our lineup of related products, including new ozone scrubbers.

      With various water-related technologies available and a vast expanse of know-how, NKK boasts a wide range of leading-edge systems, from those that ensure the supply of safe and delicious drinking water to those that process sewage, treat and recycle sludge and purify lake and river water.

 
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U-tube ozone reactor

      In concept engineering, one of our mainstay products is the wind turbine power generator, an alternative to petroleum-based energy that is gaining attention because it poses minimal threat to the environment. In fiscal 2001, we won orders for 65 generators, bringing the aggregate total to 92 and putting us within grasp of the top share in the domestic market.

      Soil contamination has become a social concern in Japan, resulting in increased public demand for investigations and cleanup operations. NKK aims to turn these activities into pillars of its environment-oriented business. The Corporation will utilize a high-performance soil-washing process from U.S.-based BioGenesis Enterprises Inc., for which it has exclusive application rights in Japan. This process has achieved excellent results and earned top marks in a state-or-the-art evaluation conducted by Superfund, a U.S. federal government program to clean up the nation's uncontrolled hazardous waste sites. We are also augmenting cleanup operations through our September 2000 agreement with major trading house Mitsubishi Corp.

 
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Wind turbine power generator in Hirado, Nagasaki Prefecture



Plant Engineering

The plant engineering segment builds and upgrades steel plants and offers assistance in the operation of such facilities. In fiscal 2001, we focused our marketing activities on ECOARC, an environmentally friendly electric arc furnace, and the Endless Bar Rolling System (EBROS).

      Electric furnace steelmakers, a principal client group for NKK in this segment, continued to curb large-scale capital spending because of the lackluster domestic economy, underlining the trend toward contraction of this market. Conditions were sluggish overseas as well, compounded by intense competition from major European steel plant engineering companies. Consequently, orders tumbled 29.5%, to ¥11.3 billion. Sales dropped 42.9%, to ¥18.7 billion.

      In view of the persistently difficult operating climate, NKK joined forces with Sumitomo Heavy Industries and Hitachi Zosen in establishing a joint venture, JP Steel Plantech Co., in April 2001. The new company consolidates the marketing divisions for steel plant engineering at each participating company, positioning it to respond to diverse customer needs with strong marketing, an extensive product lineup, advanced technologies and outstanding cost competitiveness. All three companies possess high-level construction technologies and solid sales results in the areas of ironmaking, steelmaking, plate and steel sheet processing and bar and section rolling mills. We are now planning to integrate the steel plant operations of the three companies by April 2003.

 

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NKK supplied EBROS to Tokyo Steel Manufacturing Co., Ltd.'s Takamatsu Works



Steel Structures and Machinery Systems

The primary efforts of NKK's steel structures segment, which grew from the bridge-building business, include the production and installation of such infrastructures as bridges, floodgates, buildings and hybrid caissons. NKK is one of the five major steel bridge builders in Japan, having participated in the construction of many major projects and earned high praise for inherent technological capabilities. We are especially known for high quality in the area of steel structures for buildings. Many celebrated architectural achievements in Japan stand tall with NKK's steel.

      Our accomplishments extend beyond Japan, substantiated by a long list of successful overseas bridge-building and construction projects. We have endeavored to improve our position against competitors to secure a large role in public infrastructure projects around the world.

      Our machinery systems segment undertakes the design and construction of physical distribution centers and also offers simulation services that pinpoint optimum efficiency and cost-cutting values. We have enhanced our cost-competitiveness in a number of areas, including parking systems, shield tunneling machines, transportation equipment and ship engines.

      Segment orders in fiscal 2001 reached ¥89.3 billion, up 27.9%. Sales, however, retreated 13.6%, to ¥81.7 billion.

 

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A bird's-eye view of Toyoda Junction Bridge, under construction over the existing Tomei Highway



Shipbuilding and Offshore Structures

NKK boasts many world-caliber, cost-competitive products in this segment. Results reflect the development of ships with price tags lower than those of rivals, exhaustive marketing activities and cogent cost-cutting facilitated through standardization of products.

      In fiscal 2001, demand for ships, especially tankers, expanded against a backdrop of skyrocketing oil prices, rising marine freight charges and tougher oil spill countermeasures. Seeking to capitalize on strong demand, NKK tirelessly reduced costs and enhanced certain products, such as the Malacca Max and Suezmax tankers, which enjoy stellar reputations in the market. As a result, orders in the shipbuilding and offshore structures segment skyrocketed 82.1%, to ¥112.0 billion, while sales fell 38.4%, to ¥50.8 billion.

      We anticipate that the shipbuilding business will grow more difficult over the medium to long term as international rivalry intensifies. The key to survival is multifaceted and highlights cost savings through economies of scale; accelerated product development capabilities; stronger product and technology strategies to broaden our variety of ships; and a streamlined administrative structure. To achieve these goals, management decided to integrate NKK's shipbuilding operations with those of Hitachi Zosen by October 2002, and has formed a committee to work out the details of the integration process.

      By utilizing the expanded scale afforded through integration, and by deriving greater efficiency in materials procurement and R&D, which together consume 65% of shipbuilding costs, we are aiming for a positive income effect of ¥5.0 billion annually .

 

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Cosmic, a 150,000 DWT oil tanker

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