|Yoichi Shimogaichi (left) and Shunkichi Miyoshi|
Fiscal 1998 had the unfortunate distinction of being the first year in postwar history in which the Japanese economy suffered a second consecutive year of negative growth. Instability in the financial system, deflation of asset values, and disappointing corporate results across the board all contributed not only to a drop in consumer spending but also to declines in capital investment and other areas of private-sector demand.
The government unveiled two large stimulus programs, but their effect has yet to be realized. The Japanese economy remains in serious straits, with a recovery seemingly far off.
NKK responded to the unprecedented challenges of this difficult business environment by embarking on an even more comprehensive restructuring program during fiscal 1998. This program is built on a firm commitment to re-establishing a solid base of profitability and to achieving target profit levels during fiscal 1999.
In line with these policies, during fiscal 1998 we made strenuous efforts to minimize anticipated declines in profits. However, the business environment continued to deteriorate toward the end of the fiscal year, resulting in a final sales figure of ¥1,013.6 billion for the period, a decline of 8.8% from the result achieved in the previous year. Consequently, the company posted its first operating loss in twelve years. NKK took a net loss of ¥ 50.3 billion because of special charges incurred in the process of reorganizing its business. Under these conditions, the company had no choice but to suspend payment of a dividend for the fiscal 1998 period.
Looking ahead to fiscal 1999, we anticipate a significant turnaround in operating profits as we expect to see results from the business restructuring measures we launched in fiscal 1998, along with further reductions in fixed and other costs.
Domestic demand for steel was generally weak. Exports were also adversely affected by the struggling economies in Southeast Asia and by declines in sales to the United States during the latter half. These conditions resulted in a 5% decline in the volume of shipments for the year which, coupled with a sharp drop in prices, reduced sales by 10% from the level recorded last year.
NKK responded to this rapid and serious deterioration in the business environment by embarking on the following programs:
(1) Withdrawals: NKK withdrew from the stainless steel sheet business, which had been rendered unprofitable by excessive stainless steel production capacity in the industry.
(2) Reorganization: Following the dissolution of Toa Steel Co., Ltd.,NKK reorganized its bars and shapes business within the group, establishing NKK Bars & Shapes Co., Ltd.
(3) Spin-offs: Some businesses have been spun-off as independent subsidiaries in the interest of creating more streamlined and dynamic organizations.
 Redefining roles for the two steelworks
(1) Pursuing lower operating costs at the Keihin Works: Production at the Keihin Works will be set at an optimum level (approximately 250,000 tons/month) (i) to reduce payroll costs through a rigorously streamlined organizational structure, and (ii) to utilize the benefits of a wider choice of raw materials.
(2) Increasing competitiveness at the Fukuyama Works: The blowing-in of the No. 2 blast furnace and the introduction of an innovative zero-slag smelting process provide the works with upward elasticity in its production volumes, as well as advantages in production cost and quality.
 Overseas operations
NKK took steps to reinforce operations at its steel sheet projects in Thailand, which had been hit by economic turmoil in Southeast Asia, with a capital increase in August 1998.
 Environmental measures
NKK has introduced the following new processes and products in order to address mounting concerns about the global environment:
(1) Increased use of waste plastics as blast furnace feed
(2) Development of ecofriendly products like chrome-free chemically treated steel sheets and gradient high-silicon magnetic steel sheets
The volume of new overseas contracts was down significantly, particularly in the fields of steel plants and energy engineering. The company did, however, achieve strong growth in the volume of orders for environmental plants, including nine orders for anti-dioxin process engineering. Growth in this area, combined with that in new areas such as wind power generation, a market in which NKK ranks second domestically, enabled the company to post overall growth for new orders compared to the level achieved last fiscal year. Total orders booked amounted to ¥353.7 billion.
Sales, however, declined from last year due to reductions in the number of large domestic public-works projects and sluggish international markets, especially in Southeast Asia. Sales for the division totaled ¥355.4 billion.
Although the Engineering Division was able to post a consolidated profit for the year, profitability declined mainly because of reduced work volumes from overseas projects.
The division has responded to this difficult situation by implementing the following programs designed to improve its profitability:
(1) Review of the scale of operations and a reduction in the number of its employees
(2) Withdrawal of unprofitable products
(3) Spin-off of the steel frame fabricating function of the Shimizu Works into an independent subsidiary, NKK Shimizu Co., Ltd., founded in July 1999.
The division had an order backlog of ¥ 425.1 billion at the end of the fiscal period.
NKK withdrew from unprofitable static random access memory (SRAM) products in March 1999 in order to concentrate on the more promising area of logic design services. The company intends to provide these services without maintaining fabrication facilities.
Outlook and Challenges
NKK is determined to reposition itself to achieve its goals despite difficult business conditions. With aggressive restructuring, management and employees are dedicated to building a solid profit base even though the business environment remains volatile. NKK and all its affiliated companies are united in their efforts to improve competitiveness and regain profitability. Some of NKK's policies to this end are summarized as follows:
 Significant reductions in fixed costs
(1) By the end of fiscal 1999, NKK will decrease its October 1998 payroll by 3,900 positions, effectively reducing staffing levels to 11,400 people.
(2) NKK will exercise greater selectivity in capital investment and reduce its capital investment budget to the range of ¥40-50 billion.
(3) The company will reduce its outstanding borrowings to ¥1 trillion by the end of fiscal 1999, thereby reducing debt servicing charges.
 Steel Division
Programs implemented since last year have led to reductions in payroll, outsourcing, and raw materials costs. As cost rationalization continues, significant improvements in profitability can be expected.
In order to capitalize on the Fukuyama Works' competitiveness in upstream processes and to pass on these advantages to other domestic and international group activities, Fukuyama began supplying billets to NKK Bars & Shapes, hot- and coldrolled sheets to the Thai sheet projects, and slabs to NKK's subsidiary, National Steel Corporation, in the United States.
 Engineering Division
The Engineering Division has reduced the number of its employees, withdrawn unprofitable products from its lineup, and undertaken a range of other measures to enable it to achieve stable profit levels even under the current adverse conditions. The division forecasts an upturn in profits for fiscal 1999.
The Engineering Division plans to enhance its competitiveness in the environmental plant and other core businesses as it seeks greater profitability.
The company intends to have its Year 2000 compliance program for all in-house systems completed by September 1999. NKK has established a "Y2K Response Committee" in readiness for any problems that may arise in systems either inside or outside the company. This committee is responsible for company-wide efforts to manage and prepare for Y2K risks.
The challenges that we face are unprecedented, but NKK is a company that has pulled together to face and overcome adversity in the past. Our organization surmounted the economic turmoil caused by the oil crises and the dramatic appreciation of the yen in addition to a number of other setbacks. We are committed to seeking out and putting in place reforms that we believe will be required not only to survive in these uncertain times but to excel as well. NKK has marshalled the resources of the entire group in its efforts to rebuild its base of operations. We trust that we will have the continued support of our shareholders and friends as we move boldly forward to secure a bright and prosperous future.
Chairman of the Board