NKK CORPORATION: Annual Report 2002
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To Our Shareholders

 
YOICHI SHIMOGAICHI
CHAIRMAN OF THE BOARD
  MASAYUKI HAMMYO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Background

Domestic business conditions in fiscal 2002, ended March 31, 2002, were somber, characterized by sluggish consumer spending and a significant decline in capital investment by the private sector. Overseas markets fared no better, as the effects of a slowing U.S. economy impacted on commercial and financial activities in other parts of Asia.

      The operating environment for the Steel Division was particularly difficult. Gloomy business prospects at home and abroad, which caused a drop in the demand for steel, were compounded by the implementation of safeguards and antidumping measures by the United States on imported steel products. As a result, inventories expanded and prices remained low, despite steelmakers’ voluntary curtailment of production.

      In engineering, public- and private-sector projects were fiercely contested.
 

 
Fiscal Performance

In this grueling operating environment, NKK posted a 7.5% drop in consolidated net sales, to ¥1,653.5 billion. An unprecedented operating loss by consolidated subsidiary National Steel Corporation completely offset the benefits associated with achievement of our cost reduction goals, leading to a consolidated operating loss of ¥7.7 billion. Evaluation losses on investment securities, paralleling poor stock market conditions, were compounded by special losses accompanying National Steel’s March 6 filing for protection under Chapter 11 of the U.S. Federal Bankruptcy Code and subsequent execution of required restructuring procedures. NKK thus recorded a consolidated net loss of ¥67.6 billion.

      Total sales contributed by the Steel Division fell 8.8%, to ¥1,184.5 billion. The Engineering Division, however, provided a positive boost with a 0.4% increase in total sales, to ¥450.9 billion. Other Fields contributed total sales of ¥81.6 billion, down 33.1%.
 

 
Measures to Hone Competitiveness

NKK has steadily implemented various measures aimed at enhancing the Corporation’s ability to respond effectively to sudden changes in the operating environment. These measures included establishing a production structure for 13 million tons of raw steel, decentralizing activities, withdrawing from unprofitable pursuits and selling selected assets.

      In April 2001, NKK and Kawasaki Steel Corporation decided to consolidate all operations undertaken by the two companies in an effort to expand the sphere of operations, establish a firmer operating foundation, sharpen competitive edge worldwide and enhance the overall ability to meet the global needs of multinational customers. After the plan was publicly announced, each division energetically commenced preparations for consolidation, and in December 2001, NKK and Kawasaki Steel reached a final agreement on the basic aspects of a new group—the JFE Group. We are now engaged in activities geared to the establishment of a holding company—JFE Holdings, Inc.—in September 2002, to be followed by reorganization of individual business segments into independent companies in April 2003.

      The JFE Group plans to achieve synergy effects totaling ¥80 billion by the end of fiscal 2006. To realize these effects in the steel business segment earlier than originally scheduled, the two companies have studied such measures as promoting OEM and technology exchange. The JFE Group expects to achieve synergy effects of ¥20 billion by the end of fiscal 2003.

      The efficiency of R&D operations will be enhanced by avoiding project redundancies and focusing more on the development of new products.

      In the area of steelmaking facilities and equipment, we are considering ways to optimize blast furnace operations, discontinue or integrate the activities of other production facilities and make effective use of existing mills and production lines, based on the location and unique strengths of each.

      Upon consolidation, the JFE Group will be the second largest steelmaker in the world, with annual raw steel output of 28 million tons. The new group will utilize the benefits of its larger scale to forge the foundation of a more solid profit structure.

      The Steel Division has also embraced a global strategy that highlights responsiveness to customers’ needs. This strategy hinges on a comprehensive agreement signed by NKK, Kawasaki Steel and ThyssenKrupp Steel AG in April 2002 covering joint activities in the field of carbon flat steel, with a focus on automotive steel products and R&D. This agreement will enable the three participating companies to establish a global supply network, conduct joint R&D activities and provide new products and excellent services to customers on a worldwide basis.

      Rivalry in the field of engineering has also intensified on a global scale. Our goal is to implement strategies for each segment of the Engineering Division to fortify the overall profit structure and pursue new business opportunities through alliances with other companies that have proven records of competitive excellence in each field of endeavor.

      In shipbuilding, to realize higher product-development capabilities and cost competitiveness, we finalized an agreement with Hitachi Zosen Corporation to integrate our respective shipbuilding operations. Realignment will commence in October 2002 with the establishment of Universal Shipbuilding Corporation.

      In steelworks plant engineering, NKK, Hitachi Zosen and Sumitomo Heavy Industries, Ltd., merged their respective sales divisions to form JP Steel Plantech Co. in April 2001. The three companies extended operations to include engineering functions in April 2002, a year ahead of schedule, to boost sales, technology and cost-competitiveness in the face of shrinking demand and intense competition from major overseas plant construction companies.
 

 
New Developments in Environmental Businesses

Management has identified expansion of environment-oriented business as a key to corporate growth. In fact, the Corporation has been promoting “Environmental Solutions,” a proposal-style service that provides comprehensive solutions to environmental and eco-energy concerns, since 2000.

      NKK has accumulated considerable environment-related know-how and technologies, including resource-conservation methods and high-temperature combustion techniques applied to steelmaking as well as environment-related systems and equipment used in engineering operations.

      A prime example of our efforts to contribute to a cleaner environment worldwide is the development of recycling operations that we can integrate into our steelworks infrastructure. The most noteworthy recycling activity is the use of waste plastics for blast furnace feed, an application brought to practical fruition by NKK in 1996 as the industry’s first plastics recycling technology. This and other recycling operations, including those of NKK and its subsidiaries, have reached a value of approximately ¥12 billion, paralleling an increase in annual processing volume.

      The outlook for recycling operations is very positive. We anticipate the market for waste plastics alone to roughly double in three years.

      In eco-energy operations, we developed technology for the low-cost, mass-production of dimethyl ether (DME), which has drawn attention as a clean energy source for the 21st century. We are aggressively pursuing commercial applications of DME as a fuel for generating electricity and powering diesel vehicles and as an alternative to LPG.
 

 
National Steel

The adverse business climate in the United States, coupled with structural problems and a sharp drop in steel prices, has driven a succession of local steelmakers into filing for Chapter 11 protection. On March 6, 2002, National Steel filed for protection under Chapter 11 to secure the necessary liquidity for restructuring its operations. The company has acquired financial institution approval for debtor-in-possession financing, and will implement procedures in accordance with Chapter 11 provisions and restructure under the fair supervision of the Bankruptcy Court. Production, sales and other corporate activities will continue as before.

      Components of National Steel’s income statement have been reflected in NKK’s consolidated statement of operations for fiscal 2002, but the assets and liabilities of the subsidiary have been excluded from NKK’s consolidated balance sheet. NKK has no intention of injecting new cash or capital into National Steel.
 

 
In Closing

In February 2002, Masayuki Hammyo was promoted to the post of President and Chief Executive Officer, replacing Yoichi Shimogaichi, who assumed the role of Chairman of the Board. Under this new management, we will strive to accentuate the strengths of the NKK Group, reinforce profitability at all levels and utilize all possible means to ensure the JFE Group gets started on a very positive and dynamic note.

      The road ahead remains challenging. Although economic recovery in the United States promises better export conditions in fiscal 2003, a delayed rally in corporate profits will restrict capital investment patterns in Japan.

      The successful integration of two corporate cultures is also a vital part of business consolidation. To this end, NKK and Kawasaki Steel are promoting reciprocal personnel exchanges to provide opportunities for employees to develop new ways of working together effectively.

      On behalf of the Board, we extend our sincere thanks for your support and look forward to your continued encouragement of our efforts as we begin a new chapter in our corporate history.
 
July 2002
 
Yoichi Shimogaichi
Chairman of the Board
  Masayuki Hammyo
President and Chief Executive Officer

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