Financial Information: Annual Report 2004

	Review of Operations

Automotive Components

Michio Shinohara Head of Automotive Division - Headquarters

Sales of Automotive Components

1. Business Overview

Products
NSK’s automotive components business is composed of three core product groups: steering-related products, electric power steering (EPS) systems, and automatic transmission components. The products we consider to be of particular strategic significance are EPS systems, next-generation half toroidal continuously variable transmissions (CVTs), and electric linear actuators for automotives. By specializing in automotive components, which have both environmental and economic advantages over conventional products, and establishing a global production network, we are able to respond to the needs and requirements of automakers not only in Japan but also in Europe and the U.S.

Superior Ability to Differentiate
NSK’s comprehensive business domain gives us a competitive edge in the automotive business. The lubrication and motion technologies developed in our bearing business and the mechatronic control technology developed in our precision machinery business both contribute to the better performance of our automotive components. By independently developing EPS components such as controllers and motors, we also have a cost advantage. Furthermore, as both production as well as research and development in the automotive industry become increasingly borderless, our global operations network is becoming an ever more important factor in improving our competitiveness.

Global Position
NSK boasts a major share of the global EPS market. We are also reinforcing our position as a global supplier of steering systems, which include steering columns and steering joints. Half toroidal CVTs are another area where we maintain a strong lead over industry peers in terms of developing technology to expand the applications of this product. NSK introduced the world’s first commercial half toroidal CVT in 1999.

2. Business Environment and Strategy

Business Environment
Global automobile sales seem to have peaked out over the past few years. In order to expand our automotive-related business in this economic environment, NSK has been focusing on developing steering systems that are more energy efficient and environmentally friendly. While global automobile sales appear to be experiencing relatively flat growth, our sales of these products have actually increased. Our “technological expertise” and “superior ability to offer innovative solutions based on these technologies,” combined with our capability for “joint development” with automakers are factors that differentiate us from our competitors. The successful combination of these factors have become an additional profit driver. Fortunately, automobile sales have begun to show signs of moving out of their current slump, as China’s economy continues to grow and the global economy recovers. However, we are not content to rely on the upturn in the macro environment. Rather, we are aiming to grow by further strengthening our ability to develop new technologies and expanding our customer base.

Global Automobile Production (NSK’s estimate)

Sales by Region (Sales are recognized by customers’ location)

Business Strategy
In fiscal 2003, we focused on “development aimed at expanding sales of strategic products” and on “strengthening our global supply system.”

1) Development aimed at expanding sales of strategic products
We succeeded in developing a high-output brushless motor for our EPS systems capable of increasing output by 20-30% over previous models. This will enable the adoption of EPS systems in vehicles with engine displacement of 2,000cc and over.

In our half toroidal CVTs, we succeeded in reducing both the size and the weight of this product by 25% and managed to cut costs sharply, laying the groundwork for aggressive sales efforts to the world’s automakers.

Regarding our electric linear actuators for automotives, we are developing both an integral motor type system and an actuator system, whose performances have already earned a strong reputation among users.

2) Strengthening our global supply system
In December 2003, production started at our first steering component plant in China, enabling us to begin full-scale supply of steering columns to Japanese automakers producing in China. Going forward, we plan not only to expand supply to European and American automakers based in China but also to develop the plant as a supply base for Japan, Europe, and the U.S. We have also decided to construct a new EPS plant in Poland, with production scheduled to commence in 2005.

3. Review of Business Results for Fiscal 2003 and Overview, by Region

Review of Business Results
Fiscal 2003 sales in this division fell 14.2% year-on-year. The main factor behind this large decrease in revenue was our withdrawal from the seat belt business. In April 2003, we transferred complete ownership of the seat belt business to Autoliv Inc. (Sweden), as this product does not share NSK’s core technologies. Despite the sales decline, operating income remained flat year-on-year, resulting in an improvement in the operating income margin to 3.3%, compared with 2.8% in fiscal 2002.

Overview, by Region
By region, sales decreased 14.6% in Japan, 12.1% in the Americas, 6.7% in Europe, and 44.6% in Asia. In addition to the withdrawal from the seat belt business, mentioned above, the other main factor behind these declines was the decrease in steering column sales in Europe. However, sales to Japanese transplants in the Americas and sales of automatic transmission components in Japan were strong.
  Local production ratios are rising steadily. Primarily owing to expanded production of automotive components in Thailand and in India, the local production ratio for Asia rose from 24.3% in fiscal 2002 to 53.7% in fiscal 2003.

Sales by Production Region for FY2003

4. Outlook for Fiscal 2004

In line with the reorganization carried out in February 2004, changes in segment categorizations took effect beginning from the fiscal year ending March 31, 2005. As result of the organizational change, what had been designated formerly as Automotive Components is now the Automotive Products segment. This new segment includes automotive bearings, which previously had been included in the Bearings segment.
  In the automotive industry, there is a time lag of two to three years between the receipt of an order and the actual production and delivery of the product. Therefore, the fiscal 2004 sales estimate for this segment is fairly firm. Although we expect overall automobile production in fiscal 2004 to remain flat, we forecast a 4.3% increase year-on-year in sales of our automotive-related products to ¥298.0 billion, supported by higher hub unit bearing sales and growth in demand for automatic transmission components and EPS systems, mainly in Japan.