Financial Information: Annual Report 2003

 As part of the 2nd phase of our Business Restructuring Program, we have reorganized our production bases in Japan and Europe. The purpose of the reorganization is to create an improved production system that better balances the twin concepts of “Production at market-oriented manufacturing bases” and “Production at optimum manufacturing bases.”

Purpose of Reorganizing the Production System

 Beginning with local production in Brazil in 1972, we have steadily expanded our global production bases at various locations close to our customers’ production sites, consistent with our “Production at market-oriented manufacturing base” concept. This will remain the case for high value-added components for the automotive industry, where it is necessary to respond locally to the customer’s specific needs and requirements. On the other hand, for products like miniature and small-sized ball bearings, where price competition has intensified, and standard ball bearings, which have become commodity items, we will shift to the “Production at optimum manufacturing base” concept, which stresses cost competitiveness when deciding on manufacturing locations.

Shifting Production of Commodities to Asia and Continental Europe

 Cost competition has become increasingly intense in recent years as customers shift their production to low-cost regions. At the same time, the trend among our competitors is to export components produced in low-cost regions to Europe and the U.S. In order to cope with this market trend, we are shifting production of commodities and products requiring stronger cost competitiveness to Poland and Asia, particularly China.
 As a result of transferring production out of Japan, the proportion of ball bearings produced in Asia, excluding Japan, rose from 35% at the end of 2001 to 45% at the end of 2002 on a production quantity basis. We plan for production in Asia to eventually account for more than 50% of global ball bearing production.
 In Europe, we are shifting production, mainly of standard ball bearings, from the U.K. to Poland to achieve lower costs and also minimize the impact of fluctuations in the Sterling Pound exchange rate. As a result, ball bearing production volume in the U.K. in 2002 was 30% lower than in 2001. In contrast, production volume in Poland rose 40% over the same one-year period.

Global Production Bases

 By reorganizing production in Japan and Europe, we have clarified the roles of each plant and established a more efficient organization that allows each facility to focus on its core products and markets.

Nearly 100% of bearings, automotive components, and precision machinery and parts for the Japanese market are produced locally.	Bearings: 65.9% are made locally, with the remainder imported from Japan, Europe, and Asia. Automotive Components, Precision Machinery and Parts: Local production accounts for 78.7% and 39.6%, respectively. All other products are imported from Japan.	Bearings: 71.3% produced locally, with 24.3% imported from Japan and 4.1% from Asia. Automotive Components: Local production has grown to 75.2%, with the remainder imported from Japan. Precision Machinery and Parts: Local production 11.1%, with the remainder imported from Japan.	Bearings: 26.7% produced locally, with almost all of the remaining bearings imported from Japan. Automotive Components: Local production has increased to 24.3%, with the remainder of components imported from Japan. Precision Machinery and Parts: All imported from Japan.

Improving Production through APS Activities We are working to improve production efficiency with our APS (Advanced Production Systems) activities. These activities are designed to create production systems that can respond flexibly to changing demand. Some of the activities include: 1. Better management of inventories Reduce work in-process and shorten product lead-times by expanding the “just-in-time” production system to our suppliers. In doing so, we aim to create a more efficient production-flow system. Improve the accuracy of factory production planning by improving communication between marketing, procurement, and other relevant divisions, as a means of establishing a production system where we produce only what we can sell. 2. Improving productivity Improve productivity by simultaneously reducing waste and implementing new production technology. For example, our “new concept production line” for bearings shortens the time required to retool, takes up less space, and reduces the percentage of product defects. 3. Expanding APS activities overseas Provide additional support to reinforce regional APS activities started in fiscal 2001 and 2002, including advice from outside consultants and follow-up meetings. 4. Employee education and training Conduct regular APS training sessions in order to ensure that APS activities are understood and implemented by employees from every level.

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