Moving Forward Corporate Communication Center Public and Investor Relations Group 2010

Transcription

1 Moving Forward Annual Report 2010 Year ended March 31, 2010

2 10 REVIEW OF OPERATIONS

3 FINANCIAL HIGHLIGHTS Hitachi Chemical Co., Ltd. and Consolidated Subsidiaries For the Years Ended March 31, 2010, 2009 and 2008 For the year: Thousands of (except per share data) 2010/2009 (except per share data) (Note) % change Net sales 455, , ,929 $4,895,559 (6.8)% Operating income 38,341 19,938 60, , Net income 23,509 2,740 31, , Capital expenditures 20,984 35,972 37, ,634 (41.7) Research and development expenses 25,402 27,617 28, ,140 (8.0) At year-end: Total assets 426, , ,741 $4,586, % Total net assets 282, , ,970 3,038, Per share data: Net income (basic) $ % Net income (diluted) Cash dividends Net assets 1, , , Value indicators: Return on sales (%) Return on equity (ROE) (%) Return on assets (ROA) (%) Debt/Equity ratio (DER) (times) Note: U.S. dollar amounts in this annual report are translated from yen, solely for the convenience of the reader, at the rate of 93=US$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market as of March 31, Net Sales Operating Income / Percentage of Net Sales Net Income Return on Equity (ROE) / Return on Assets (ROA) Cash Dividends per Share Billions of yen 800 Billions of yen % Billions of yen 80 % 20 Yen Years ended March 31 Years ended March 31 Years ended March 31 Years ended March 31 Years ended March 31 Operating income Percentage of net sales (right scale) ROE ROA * The Housing Equipment and Environmental Facilities segment was removed from the scope of consolidation in October 2007 due to the sale of its shares. For this reason, the earnings of the segment have not been included in the Company s consolidated financial results from October 1, Hitachi Chemical Co., Ltd. Annual Report

4 TO OUR SHAREHOLDERS Moving Forward Over many years, the Group has grown and prospered because it adhered to its management philosophy of contributing to society through the development of superior technologies and products. The Group is striving to improve its ability to create sustainable profits by investing management resources into growth fields and working to create new products and to develop new businesses. It is also actively expanding onto the global market, particularly focused on emerging countries, and instituting aggressive management through the reconstruction of operations geared toward optimizing them for the fluctuating operating environment. Kazuyuki Tanaka President and Chief Executive Officer 2

5 First of all, I would like to thank all of our stakeholders, from our shareholders and investors, to customers, suppliers, and members of the community, for their continued support and understanding of the Hitachi Chemical Group. The economic environment in fiscal 2009, the year ended March 31, 2010, showed a general trend toward recovery, which was driven mainly by China and other emerging countries, as economic stimulus measures implemented around the world helped to relieve the pressure put on the economy that has persisted since the financial crisis that occurred in fall The Group s business results have been improving due to such factors as the rapid recovery of sales centered on electronics related products, which occurred against the backdrop of increased demand for digital consumer electronics. However, we were still unable to recover results to the level seen before the financial crisis. In this environment, in order to turn this recovery in demand into solid business results, we took a defensive stance toward management by implementing such cost adjustment measures as bringing fixed costs commensurate with volume of sales. At the same time, for the purpose of constructing systems geared toward the next stage of growth and development, we worked to reorganize the Group s operations, invest in growth fields, and enhance our overseas operating bases. It has been one year since I assumed the position of President in April 2009, and I believe the fact that we were able to achieve increased income, regardless of the lack of a full recovery in demand, is a great accomplishment. While the operating environment in fiscal 2010, the year ending March 31, 2011, remains highly opaque and difficult to predict, I anticipate that demand will grow remarkably, particularly in emerging countries. We will engage in aggressive management, without missing this present opportunity, to get the Group back on the path to growth, and further increase our presence in the global market. With this in mind, Hitachi Chemical has established its medium-term management plan for the coming three-year period. After the financial crisis, emerging countries have been of increasing importance in the global economy. At the same time, the structure of the economy has been transforming. When I assumed the position of President, I stated that in order to respond to such transformation, it is necessary to implement changes in the three key areas of business, organization, and human resources. Under the new medium-term management plan, I intend to accelerate the speed of these changes, and expand our operations through the persistent implementation of aggressive management. In fiscal 2012, the year ending March 31, 2013, which marks the end of the medium-term management plan, we are aiming to achieve net sales of billion, operating income margin of over 10%, over 50% of net sales accounted for by overseas sales, ROE of over 12%, and ROA of over 8%. On the following pages, we will explain in detail how we intend to develop our operations in the future leveraging the strengths of the Group s various technologies. Hitachi Chemical Co., Ltd. Annual Report

6 MESSAGE FROM THE PRESIDENT SUMMARY OF FISCAL 2009, THE YEAR ENDED MARCH 31, 2010 Turned recovery in demand into solid business results through the early institution of cost adjustment measures, while selecting businesses and increasing efficiency to ensure future development In fi scal 2009, the global economy saw a general trend toward recovery. This recovery was driven by China and other Asian countries, which were quick to bottom-out due to the effects of economic stimulus measures that were implemented around the world in response to the recession resulted from the fi nancial crisis that occurred in fall Accordingly, the Group s operating environment also saw a change for the better as business results began to recover. However, we did not see a full recovery in demand, and the lingering sense of uncertainty for the future remained along with the belief that it will still take time to recover to the levels seen before the financial crisis. Under these conditions, we worked to turn Financial Results Billions of yen Years ended March 31 Net sales (left scale) Operating income (right scale) Net income (right scale) this recovery in demand into solid business results by implementing cost adjustment measures and thorough control in management, such as bringing fi xed costs commensurate with volume of sales, rapidly adjusting production based on drastic fl uctuations in demand, and implementing optimal inventory management. In particular, we implemented measures to thoroughly cut fixed costs, not only limited to cutting various management expenses, such as personnel expenses, but also through the careful selection of capital investments. Also, in order to select businesses and increase effi ciency to ensure future development, we engaged in the reorganization of operations. In order to develop an industrial energy business, the aluminum electrolytic capacitor operations that were part of Hitachi AIC Inc. s capacitor operations were transferred to Shin-Kobe Electric Machinery Co., Ltd., which makes electricity storage devices such as lead-acid batteries and industrial-use lithium ion batteries, in October Through these efforts, we are working to strengthen Shin-Kobe Electric s comprehensive electricity storage device operations. Additionally, we decided to remove tantalum capacitors from the Group s operations, and accordingly sold these operations on March 31, Also, the sales, business planning, and R&D divisions of Hitachi Powdered Metals Co., Ltd., which produces powdered metal products and carbon anode materials for lithium ion batteries, were integrated into Hitachi Chemical in April This new structure will enable us to create synergies and will contribute to the further strengthening of the automobiles business and the environment & energy business. Furthermore, we implemented a number of initiatives geared toward investing in future growth fi elds and enhancing overseas operating bases. In addition to increasing our production capacity of carbon anode materials for lithium ion batteries, through which we 4

7 hold the top market share among such consumer products as notebook PCs and mobile phones, we installed new production lines for carbon anode materials used in environmentally friendly automobiles, such as electric vehicles (EV) and hybrid electric vehicles (HEV), for which demand is expected to increase. Also, in disc brake pad operations, as a new step forward in our efforts to increase overseas sales, we established Hitachi Chemical Mexico S.A. de C.V. with the aim of increasing the demand for our products in the North American automobile market. As a result of these initiatives, net sales in the year under review fell 6.8% year on year, to billion, operating income rose 92.3%, to 38.3 billion, and net income increased 758.0%, to 23.5 billion. MANAGEMENT ISSUES AND MEDIUM-TERM MANAGEMENT PLAN Expanding operations through aggressive management in order to consistently achieve increased sales and income In order for the Group to realize sustainable growth, we must tackle the issues of creating a business structure less susceptible to fluctuations in market conditions, and consistently achieve increased sales and income. In fi scal 2009, we implemented thorough analysis and reduction of costs in order to get business results back on the track to recovery as soon as possible. At the same time, we focused on improving the operation system through such efforts as reorganizing the Group s operations for future growth before we move on to conduct business aggressively. Going forward, in order to maintain sustainable profi ts, it is necessary to reconstruct our business structures in response to changes in the market through the creation and nurturing of growth businesses. Accordingly, the Group established its new three-year medium-term management plan with the purpose of setting the direction for these efforts. The Group has developed business in four business fi elds telecommunications & displays, automobiles, environment & energy, and life sciences. The new medium-term management plan restates our devotion to these four business fi elds. In particular, the telecommunications & displays fi eld is important to the foundation of the Company. Therefore, going forward, we will work to maintain and expand the scale of our business in this fi eld as a core business. In the automobiles fi eld, we will focus not only on automotive parts, but also work to expand into the area of transportation systems. Furthermore, we will aggressively work to increase the scale of the environment & energy business and the life sciences business, which while currently relatively small, shows great potential for future growth. We will work to expand operations in these four business fi elds based on a two-pillar policy. These two pillars are expanding global operations, particularly focused on emerging countries, and creating new products and developing new businesses. First, I would like to discuss our plans for global expansion. We will work to accelerate the expansion of operations in Thailand and China, countries in which we are currently advancing. Additionally, we intend to develop new operations in emerging countries such as Mexico and India. Next, I will explain our efforts to create new products and develop new businesses. The Group possesses a diverse lineup of products. These products were developed with the support of our various technologies. Leveraging this strength, we are fusing our various technologies in order to create new products that meet the latent needs of customers. In fi scal 2012, which marks the end of the medium-term management plan, we are aiming to achieve net sales of billion, operating income margin of over 10%, over 50% of net sales accounted for by overseas sales, ROE of over 12%, and ROA of over 8%. We have defined the three-year period of the medium-term management plan to be three years for aggressive management, and will work to realize the goals defi ned in this plan through concrete implementation of the President s policies of changes in the three key areas of business, organization, and human resources, which were discussed in fi scal Outline of Medium-Term Management Plan Basic Directives 1 Expand onto the global market, centered on emerging countries 2 Create new products and develop new businesses Targets Net sales: billion Operating income margin: Over 10% of net sales Overseas sales: Over 50% of net sales ROE: Over 12% ROA: Over 8% SPECIFIC INITIATIVES FOR FISCAL 2010 While market conditions remain highly opaque, we expect to see signifi cant growth centered on emerging countries. In order to take advantage of the opportunities created for growth, it is vital that we actively advance aggressive management in fi scal 2010, which marks the fi rst year of our new medium-term management plan. We will strive to achieve increased sales and income by focusing our attention on markets and regions in which we anticipate growth now more than ever. Hitachi Chemical Co., Ltd. Annual Report

8 Aiming for over 50% of net sales accounted for by overseas sales, aggressively promoting global expansion One of the goals defined in our medium-term management plan is raising the ratio of overseas sales so that it accounts for over 50% of overall net sales by fiscal In order to meet this goal, we are working aggressively to expand our overseas operations. In China and Thailand, markets in which we are currently advancing, we believe the markets are entering the second stage of growth. Accordingly, I think it is important that we promote the localization of R&D functions and work to improve management efficiency. We completed construction of the Suzhou Development Center in China in May 2009, and are currently engaging in the proactive hiring of local workers. Going forward, by building a strong staff of local workers, we will work to increase sales from companies in China by offering development and technological services that are matched to the needs of these local companies. In particular, we will focus on increasing sales of photosensitive dry films and epoxy molding compounds. In Thailand, in addition to our currently operating automotive parts manufacturing bases, we are planning a new design center. By enhancing this added design function utilizing local workers, we are aiming to improve both production efficiency and sales. In our efforts to develop new overseas operating bases, markets in India, Mexico, and Brazil, which have high growth potential, will be particularly important. In Mexico, we completed construction of production facilities for disc brake pads, and finished preparations for mass production in fiscal We began mass production in spring Our first goal will be increasing sales for the North American automobile market. In India, we have already established sales branches for powdered metal products. Additionally, the Company is developing plans to expand automotive parts businesses in India, including the localization of manufacturing bases. Furthermore, we are conducting feasibility studies to determine what potential exists for the development of infrastructure materials products. Based on the results of these studies, we will develop plans to provide products that are matched to local needs and aim to further advance into the Indian market. Creating new products and developing new businesses In order to achieve sustainable growth, we will work to expand operations in the four business fields mentioned previously by creating new products and developing new businesses, and introducing high-valueadded products. First of all, we will work to create new products and expand operations in future growth markets by bolstering our research efforts related to the environment & energy fi eld. Up until now, by devoting a great deal of research resources to the telecommunications & displays market, we have developed products for this market as a core business. In fiscal 2009, we began shifting corporate R&D resources to the environment & energy field in order to expand businesses in new markets in the future. Going forward, we will devote even more resources to this fi eld. Additionally, by fusing Hitachi Chemical s various technologies, I believe that we can develop new products for this market. An example of areas we are focusing on would be LED and solar cells, which have seen increased demand due to such characteristics as their low energy consumption and long product-life. I believe that it is important that we quickly capture a signifi cant share of this market. We are currently developing products for this market including heat radiant materials, which are used in such devices as LED lighting due to their superior insulating and heat-conducting properties, and conduct materials, which contribute to increased effi ciency of power generation in solar cells. Samples of some of these products have been made available. In the automobile market, we have been striving to bolster sales of products such as materials used in power modules as well as materials used in lithium ion batteries for environmentally friendly automobiles, including EV and HEV. In October 2009, we installed our first production line for the manufacturing of carbon anode materials to be used in lithium ion batteries for automobiles. This line began mass production in spring Due to increased usage of this product, we have decided to install a second production line. Overseas Sales Reorganization of Corporate Research Priorities Billions of yen % % Years ended March 31 Overseas sales Percentage of overseas sales in net sales 10 0 FY08 FY09 FY10 (Plan) Telecommunications Environment & Energy Automobiles Foundation Technologies Life Sciences 6

9 Furthermore, reciprocal feedback from our materials operations, which include varnishes and films, and components operations, such as automotive parts and printed wiring boards, is contributing to the development of new businesses. In order to make a shift toward aggressive management in fi scal 2010, we have reorganized our internal structures. We have reorganized divisions based on production levels, and accordingly have integrated the operations of the Advanced Performance Materials Operational Headquarters, Printed Wiring Board Materials Business Sector, Electronic Components Business Sector, Automotive Products Business Headquarters, and the Medical Business Unit, in order to build synergies between material operations and components operations. Additionally, we have created Marketing and Sales Operations, Manufacturing Operations, the CSR Management Sector, and the New Business Development Headquarters, which oversee operations throughout the Company, and work to support the Company s operating foundation. As president, I will head the New Business Development Headquarters myself, and work to accelerate the development of new products. FORECAST FOR FISCAL 2010 We will assure increased sales and income by focusing on bolstering sales and reducing costs, and the acceleration of new product development In fi scal 2010, I believe that taking advantage of the increased demand from emerging countries, such as China, will result in steady sales, particularly electronics related products. While the recovery of demand for automotive parts has been sluggish and the premature demand resulted from the economic stimulus measures employed around the world is a matter of concern, we expect the market to see recovery, particularly in China and the United States. However, we are still faced with lingering worries related to terms of trade, such as falling sales prices and rising prices of raw materials. Under these circumstances, we will work to assure increased sales and income in fi scal 2010, which marks the fi rst year of our new medium-term management plan. To this end, the Group will strive to achieve increased sales and income by accelerating the creation of new products, while working to reduce costs continuously. Through these efforts, we forecast that net sales will increase 6.5% year on year, to billion, operating income will rise 9.5%, to 42.0 billion, and net income will increase 8.5%, to 25.5 billion. SHAREHOLDER RETURNS We will take a long-term view and work to provide stable shareholder returns The Group s basic policy is to fully consider a wide range of factors when allocating earnings to cash reserves and dividends. This process includes a comprehensive view of our operating environment, overall performance, future business projects, and our targets for dividend payments. Also, we use cash reserves in ways that strengthens our financial framework, while at the same time investing in the R&D of new high-value-added products that have signifi cant growth potential, and implementing investments geared toward improving the effi ciency of our current businesses. Based on these policies, for fi scal 2009, we maintained cash dividends per share at 32 the same level as the previous fi scal year. Going forward, we will strive to make Hitachi Chemical into a company that can continue to provide superior technologies and products that are state-of-the-art by consistently implementing R&D programs and making capital investments in areas that raise the Company s value. At the same time, we will take a long-term view toward dividends and work to issue stable dividends to shareholders. In conclusion, going forward I would like to ask our shareholders and investors for their continued support and understanding. July 2010 Kazuyuki Tanaka President and Chief Executive Offi cer Hitachi Chemical Co., Ltd. Annual Report

10 HITACHI CHEMICAL FEATURE Pillars Supporting Future Growth To ensure the sustainable achievement of increased sales and income, we have developed a growth strategy based on two pillars: global expansion, and creating new products and developing new businesses. In this section, we will explain in detail the initiatives we are implementing under this policy. Global Expansion As part of our plans for global expansion, we are accelerating the expansion of our operations in Thailand and China, which are both countries we are advancing our operations in. We intend to further develop operations in emerging countries with markets that show high growth potential including Mexico and India. Below, we will introduce the development center for photosensitive dry films we established in Suzhou city, in the Jiangsu province of China, and the automotive parts production bases we established in Mexico. Increasing sales of photosensitive dry films for printed wiring boards in China through the establishment of a new development center Hitachi Chemical (Suzhou) Co., Ltd. is one of the Group s Chinese production bases for photosensitive dry films for printed wiring boards (photosensitive dry films hereafter). In May 2009, we established a development center at this subsidiary using an investment of 520 million. In China, there are currently a large number of printed wiring board manufacturers, who serve as customers for our photosensitive dry films. We have been further equipping and expanding our manufacturing facilities in China, which is the largest market for photosensitive dry films. Previously, development of photosensitive dry films had been conducted at Japanese manufacturing facilities. However, we decided that to further expand these operations it was necessary that we construct R&D functions in China, and work to accelerate the development of products and strengthen technological services. Currently, we completed creation of the development workforce and recruited local staff. Going forward, we will work to increase sales from Chinese companies by developing products that are matched to the needs of local companies. Initiatives geared toward new markets including the establishment of production bases for automotive disc brake pads in Mexico The Group currently has production bases for its automotive parts operations in Japan, as well as in China and Thailand. To further expand sales of automotive disc brake pads, we completed construction of a new factory in Nuevo León, Mexico, our first factory in this country, which began mass production in spring First, we will increase sales for the large-scale North American automobile market, which has stable demand. Currently, we are progressively acquiring supply contracts with automobile makers in the United States. The establishment of a production base that is geographically close will enable us to provide finely tuned responses to customers needs in relation to delivery and quality control. Accordingly, we aim to increase sales in this area. Going forward, we will consider the possibility of increasing sales of other brake products, such as shoe assemblies for rear drum brakes, and so on. We believe that our production base in Mexico will be important to our expansion into the markets of emerging countries, such as Brazil, in which demand is anticipated to increase rapidly in the future. Automotive disc brake pads Photosensitive dry fi lms 8

11 Creating New Products and Developing New Businesses To achieve sustainable growth, it is vital that we create new products and develop new businesses, as well as introducing high-valueadded products. Currently, the Group has identified the environment & energy as a field that it must strengthen to ensure growth. We are aggressively diverting management resources to this field. By fusing the various technologies that we have accumulated we will create new products that meet the latent needs of customers. We will expand operations in new markets. Below, we will introduce the carbon anode materials for use in the lithium ion batteries for environmentally-friendly automobiles, which we began mass production of in spring Increasing production lines for carbon anode materials for use in the lithium ion batteries for environmentally-friendly automobiles In November 2009, the Group installed a new production line for carbon anode materials for use in the lithium ion batteries for environmentally-friendly automobiles (anode materials for environmentally-friendly automobiles hereafter) at Yamazaki Works manufacturing facility (Katsuta). Anode materials for environmentally-friendly automobiles are used in the batteries of such environmentally-friendly automobiles as hybrid electric vehicles (HEV), electric vehicles (EV), and plug-in electric vehicles (PEV). In April 2010, this production line went into operation and an investment of 2.0 billion was approved to install a second production line, which goes into operation in December 2010, to respond to demand from new customers. Recently, the introduction of alternative sources of energy has been promoted against due to such factors as the progression of global warming due to CO2 emissions and high gasoline prices that are a result of the soaring prices of crude oil. Interest in environmentallyfriendly automobiles is also on the rise. Small, lightweight, and highly functional lithium ion batteries have gone into usage in environmentally-friendly automobiles, and mass production of these batteries has begun. Anode materials are vital in lithium ion batteries. Features such as high energy density and output, long life, and safety are expected from anode materials. We currently possess the top share of the global market for carbon anode materials for the lithium ion batteries used in consumer electronics such as mobile phones and notebook PCs. Leveraging the development technologies that we have accumulated through our work with consumer electronics, we have developed graphite-based anode materials that enable high energy density, and amorphous carbon anode materials with excellent input characteristics, for use in automobiles. We also achieved both long life and a high level of safety for batteries by stabilizing the surface and internal structure of the anode materials even against an electrolyte and variations in temperature. Multiple customers in Japan and abroad are already using them. We plan to enhance our production capabilities of anode materials for environmentally-friendly automobiles in response to increased demand. A series of upgrades will be made over a period of years and will require an investment of approximately 10.0 billion. Through the continued implementation of aggressive enhancements, we will work to maintain our top share in the global market for anode materials. Carbon anode materials for lithium ion batteries (for environmentally-friendly automobiles) Hitachi Chemical Co., Ltd. Annual Report

12 REVIEW OF OPERATIONS ELECTRONICS RELATED PRODUCTS Materials ranging from semiconductor related and LCD related materials to printed wiring boards Percentage of Net Sales Net Sales Operating Income / Operating Income Margin % Billions of yen 400 Billions of yen % Years ended March Years ended March 31 Operating Income Operating Income Margin (right scale) 0 Products Semiconductor and Display Related Materials Slurry for Chemical Mechanical Planarization Heat-Resistant Fine Polymers Die Bonding Materials Epoxy Molding Compounds Anisotropic Conductive Films for Displays Light Guides for Liquid Crystal Displays Printed Wiring Boards and Related Products Multilayer Printed Wiring Boards Multiwire Boards Flexible Printed Wiring Boards Package Substrates Copper-Clad Laminates for Printed Wiring Boards Copper-Clad Laminated with Inner Layer Circuits Photosensitive Dry Films for Printed Wiring Boards Plating Chemicals for Printed Wiring Boards Others Carbon Anode Materials for Lithium Ion Batteries Capacitors 10

13 Review of Operations In the Electronics Related Products segment, sales fell 2.5% year on year, to billion, and operating income increased 77.1%, to 30.5 billion. This was due to steady sales of materials for semiconductors and displays, and photosensitive dry films that were a result of increased demand for digital consumer electronics in China. Semiconductor and Display Related Materials In semiconductor related materials, there has been increased demand in digital appliances and other applications in China and resulting sales of epoxy molding compounds increased compared with the previous fiscal year. However, sales of slurry for chemical mechanical planarization and die bonding materials decreased compared with the previous fiscal year due to falling selling prices and others. In display related materials, sales of anisotropic conductive films for displays increased compared with the previous fiscal year based on increased demand in China for LCD televisions and others. Printed Wiring Boards and Materials for Printed Wiring Boards In printed wiring boards (PWBs) market, sales of multilayer PWBs decreased compared with the previous fiscal year due to decreased demand from automobile and information and telecommunication equipment although sales expanded in semiconductor package substrates for mobile handset applications. With regard to materials for PWBs, sales of photosensitive dry films increased compared with the previous fiscal year due to China s booming demand. Meanwhile, the automobile market has still not reached a full-scale recovery, and resulting sales of copper-clad laminates for PWBs decreased compared with the previous fiscal year, although sales of semiconductor package substrate materials increased. Others Sales of carbon anode materials for lithium ion batteries increased compared with the previous fiscal year due to increased demand for mobile handsets and notebook computers. In capacitors market, sales of capacitors decreased compared with the previous fiscal year due to decreased sales of tantalum capacitors, although sales of aluminum electrolytic capacitors in photovoltaic and wind power generation applications remained firm. Hitachi Chemical Co., Ltd. Annual Report

14 ADVANCED PERFORMANCE PRODUCTS Widely used in various fields such as automobile and semiconductor manufacturing Percentage of Net Sales Net Sales Operating Income / Operating Income Margin % Billions of yen 400 Billions of yen % Years ended March Years ended March 31 Operating Income Operating Income Margin (right scale) 0 Products Industrial Materials Electrical Insulating Varnishes Solder Resists Conformal Coating Resins Alkyd Resins Acrylic Resins Amino Resins Alkyl Phenol Resins Furan Resins Epoxy Resin Hardeners Specialty Chemicals Shell Molding Resins Phenolic Resin Molding Components Molds for High-Voltage Insulation Adhesives Road Sign Materials FRP Molding Compounds Carbon and Ceramics Carbon Brushes Carbon Sliding Materials Glass-Like Carbon Products Silicon Carbide Ceramics Alumina Ceramics Single Crystals Automotive Parts Interior and Exterior Plastic Molded Products Molded Plastic Rear Door Modules Planar Antennas for Millimeter- Wave Radar Disc Brake Pads Drum Brake Units Brake Shoes, Brake Linings Flexible Graphite Gasket Materials Advanced Functional Films Adhesive Films Contactless IC Cards and Tags Cross-Linked Foamed Polyethylene Food Wrapping Films Others Diagnostics Decorative Laminates Batteries Power Supply Units Golf Carts Powdered Metal Products Materials for Foundries 12

15 Review of Operations In the Advanced Performance Products segment, sales fell 11.4% year on year, to billion, and operating income increased 165.6% year on year, to 7.7 billion. While automotive parts saw recovery in demand, this was not a full recovery, and as a result net sales fell below last year s levels. Industrial Materials Sales of electrical insulating varnishes increased compared with the previous fiscal year due to an increase in sales for surface protection for LCD circuits and an expansion in sales for hybrid electric vehicles. Sales of epoxy resin hardeners decreased compared with the previous fiscal year due to a decline in demand in automobiles and other applications. Advanced Functional Films Sales of adhesive films increased compared to the previous fiscal year due to demand recovery for the surface protection of optical sheets used for LCDs and other applications and sales expansion in semiconductor production process applications. Sales of contactless IC cards and tags also increased compared with the previous fiscal year due to increased sales in the amusement field. Carbon and Ceramics In carbon products, sales of carbon brushes decreased compared with the previous fiscal year due to decreased demand for automobiles and railway vehicles. Sales of ceramics related products also decreased compared with the previous fiscal year due to a fall in sales of semiconductor manufacturing equipment and automobile water pumps. Automotive Parts Sales of molded products for the interior and exterior of automobiles decreased compared with the previous fiscal year due to a decline in automobile production. In the meanwhile, more models adopted our friction materials in North America increasing sales of friction materials compared to the previous fiscal year. Others Sales of diagnostics increased in comparison with the previous fiscal year due to growing sales of gene analysis services and new diagnostics products. In powdered metal products, sales decreased compared with the previous fiscal year due to a decline in sales of automotive mechanical parts and other applications. With respect to rechargeable batteries, although sales of automotive batteries in the after market remained firm overall sales decreased compared with the previous fiscal year due to a decline in sales for new automobiles. Hitachi Chemical Co., Ltd. Annual Report

16 MAJOR RESULTS IN THE YEAR UNDER REVIEW 2009 NEWS RELEASE DATE June 23 Development of Heat-dissipating Sheets Achieving Both Metal-like High Thermal Conductivity and Flexibility Hitachi Chemical has developed two new types of sheet products Graphite/Resin High Thermal Conductive Sheet in which graphite filler is vertically oriented *1, and an insulating material named BN/Resin High Thermally Conductive Sheet in which boron nitride (BN) is vertically oriented. These sheets can effectively transfer the heat generated from various electronic devices to their cooling modules *2. Possible applications of the high thermal conductive sheets developed include the CPU used in personal computers, chipsets, main chips in game consoles, and the heat radiating parts of digital video cameras, etc. Specifically, insulating systems adopting BN sheets are expected to be used in the radiating portion of parts that requires electrical isolation around the perimeter of a circuit. We will promote marketing efforts and aim to attain 2 billion in annual sales by *1 Oriented means that particles are unidirectional aligned and not random. Vertical alignment of particles inside a fi lm can facilitate thermal conduction along the orientation direction of the particles. *2 Cooling modules are a system to allow heat to escape from electronic components effectively. Metal-made heat sinks (copper, aluminum, etc.) are installed on the upper part of electronic devices. Appearance of BN/Resin High Thermally Conductive Sheet (left), Graphite/Resin High Thermal Conductive Sheet (right) July 14 Development of Adhesive Sheets Satisfying the Requirements for Both Insulation and High Thermal Conductivity Hitachi Chemical has developed Hiset* adhesive sheets that are designed to demonstrate high thermal conductivity in all directions to be used as insulating and heatdissipating material for removal of the heat generated from various electronic components installed in the inverter for hybrid cars, home electric appliances, LED lighting fixtures, computer peripheral equipment, and other devices. Development of Hiset will help enrich our lineup of heat-dissipating products and we aim to achieve 5 billion in annual sales by * Hiset is a registered trademark of our company in Japan Appearance of Hiset July 21 Hitachi Chemical Commences Mass Production of Suspended Particle Device (SPD) Film whose Light Transmittance is Controlled by Adjusting AC Voltage Hitachi Chemical introduced the SPD technology from Research Frontiers Inc., and successfully commercialized a SPD film. Utilizing its proprietary technologies including resin synthesis technology, film coating technology, and size control technology for adjusting the size of light-control particles based on nanotechnology, Hitachi Chemical succeeded in commercializing a roll-coated, wide-width SPD film whose light transmittance can be freely controlled by simply adjusting AC voltage. Lightcontrol glass interrupts sunlight entering a room, and subsequently reduces temperature rises, which in turn helps limit the usage of air conditioning. This feature, as well as the enhanced privacy it offers, leads us to believe that the market for light-control glass will expand in the future. We began mass production of SPD film at Goshomiya Works in July Going forward, we developed samples and aim to achieve sales of 5 billion in annual sales by OFF ON Example of construction use* * Provided by Research Frontiers Inc. October 6 Brembo and Hitachi Chemical Jointly Develop Innovative Disc Brake Pads for High-Performance Cars Hitachi Chemical Co., Ltd. and Brembo S.p.A. have reached a Technical Agreement for the production of an innovative friction material for use in high-end cars. They have been jointly developing revolutionary high-performance disc brake pads with superior wear resistance and excellent control, as an alternative to the low steel material predominantly used in Europe to date. These brake pads are now close to application on several automobiles for markets world-wide. According to the agreement, Hitachi Chemical grants an exclusive license for production and sale of specific friction material to Brembo. Going forward, we will accelerate expansion of the Group s automotive parts business in the European market, using this partnership with Brembo as a stepping stone. Caliper (Brembo of Italy) 14

17 BOARD OF DIRECTORS AND EXECUTIVE OFFICERS As of June 23, 2010 Yasuji Nagase Kazuyuki Tanaka Keiichi Takeda Takashi Urano Yoshio Osawa Takemoto Ohto Nobuo Mochida Shigeru Azuhata DIRECTORS COMMITTEE MEMBERS EXECUTIVE OFFICERS Yasuji Nagase Chairman of the Board Kazuyuki Tanaka* Director Keiichi Takeda* Director Takashi Urano Director Yoshio Osawa Outside Director (Chairman, Konomi, Inc.) Takemoto Ohto Outside Director (Advisor, NICHIREI Corp.) Nobuo Mochida Outside Director (Director, Chairman of the Board, Hitachi Metals, Ltd. Representative Executive Offi cer, Executive Vice President and Executive Offi cer, Hitachi, Ltd.) Shigeru Azuhata Outside Director (Vice President and Executive Offi cer, Hitachi, Ltd.) * Serves concurrently as Executive Offi cer Nominating Committee: Yasuji Nagase Committee Chairman Kazuyuki Tanaka Committee Member Yoshio Osawa Committee Member Takemoto Ohto Committee Member Nobuo Mochida Committee Member Shigeru Azuhata Committee Member Audit Committee: Takashi Urano Committee Chairman Yohio Osawa Committee Member Takemoto Ohto Committee Member Shigeru Azuhata Committee Member Compensation Committee: Kazuyuki Tanaka Committee Chairman Kazuyuki Tanaka Representative Executive Offi cer, President and Chief Executive Offi cer Keiichi Takeda Representative Executive Offi cer, Executive Vice President and Executive Offi cer (Support of the President, Oversight of administration, Internal control, Finance, CSR activities) Kiyoshi Togawa Senior Vice President and Executive Offi cer (Management strategies, Oversight of group companies) Kazuyoshi Tsunoda Vice President and Executive Offi cer (Oversight of automotive parts, Diagnostics) Yoshihiro Nomura Vice President and Executive Offi cer (Advanced performance materials) Shigeru Hayashida Executive Offi cer (Innovative technologies, Life sciences) Hiroki Sashima Executive Offi cer (Printed wiring boards) Yushi Kusunose Executive Offi cer (Sales) Shunichiro Uchimura Executive Offi cer (Automotive parts) Akira Kaneko Executive Offi cer (Technology innovation management) Masayuki Kan Executive Offi cer (Administration) Itsuo Watanabe Executive Offi cer (Research and development, New business development) Shunichi Sato Executive Offi cer (Manufacturing, Quality assurance, Purchasing, Distribution, Oversight of technology innovation management) Misao Nakagawa Executive Offi cer (Materials for Printed Wiring Boards) Nobuo Mochida Committee Member Shigeru Azuhata Committee Member Shoichi Hanaeda Executive Offi cer (Management Strategies, Group companies) Hitachi Chemical Co., Ltd. Annual Report

18 CORPORATE GOVERNANCE Hitachi Chemical believes that one of its most important management tasks is establishing a management structure that is sound, highly transparent, and capable of responding swiftly to changes in the market. As part of these efforts, in June 2003 the Company adopted the Company with Committees system, which separates operational and supervisory functions to achieve highly objective, transparent management. Board of Directors The Board of Directors of Hitachi Chemical Co., Ltd., which is composed of eight Directors including four Outside Directors, holds regular monthly meetings and extraordinary meetings when necessary. Outside Directors are management executives, professionals, and others selected for their familiarity with the Company s management conditions and knowledge of relevant fields such as R&D, where the Company has important management tasks. In addition to approving the budgets and accounts, the Board of Directors uses the monthly and quarterly performance reports it receives from the Executive Officers to manage the budget and business results. In order to ensure the separation of operational and supervisory functions, the Company does not allow the Chairman of the Board to serve concurrently as an Executive Officer, and limits the number of Directors concurrently serving as Executive Officers to the required minimum of three. During fiscal 2009, the Board of Directors met 15 times, with a 98 percent participation rate among Directors. To strengthen the supervisory function of the Board of Directors, a Nominating Committee, Audit Committee, and Compensation Committee, each of which includes Outside Directors, have been established under the Board of Directors. During fiscal 2009, the Nominating Committee met 3 times, the Audit Committee met 13 times, and the Compensation Committee met 4 times. The Nominating Committee selected Director candidates for presentation to the Annual General Shareholders Meeting. The Audit Committee audited the execution of the duties of the Directors and Executive Officers. The Compensation Committee set the policies for deciding the compensation of the Directors and the Executive Officers, based on which it determined the content of compensation for each individual. To ensure its independence, the Audit Committee conducts audit activities with specialized staff who are employees independent from the Executive Officers. The Auditing Office performs internal audit work by order of the Chief Executive Officer, and cooperates in conducting audits if instructed to do so by the Audit Committee. Executive Officers Meeting Composed of all Executive Officers, the Executive Officers Meeting acts as an advisory body to the Chief Executive Officer to ensure prudent decisions through multifaceted study of important issues that may affect Hitachi Chemical Co., Ltd. or the Group. The Executive Officers Meeting, as a rule, holds regular meetings twice a month and extraordinary meetings when necessary to accelerate decision-making and business operations. It participates in managing the budget and business results by executing the decisions of the Board of Directors when the budget is determined or revised, and by presenting monthly and quarterly performance reports to the Board of Directors. Executive Officers and employees promptly report matters required by law to the Audit Committee, as well as decisions by Executive Officers in connection with important matters that affect the Company as a whole, the results of internal audits conducted by the divisions in charge, and the status of reports made by the internal reporting system maintained by the Executive Officers. Matters Related to Decisions of the Compensation of Directors and Executive Officers The Compensation Committee yearly discusses and decides the policies to decide the compensation of Directors and Executive Officers. As a basic policy, the compensation of Directors and Executive Officers is decided based on the position and responsibilities of each individual. This compensation is also adjusted based on such factors as the performance of the Company, the business environment, and the trends of other companies. Business Execution and Management Supervision Framework Annual General Shareholders Meeting Supervision Board of Directors (8 Directors* including 4 Outside Directors) (* 2 Directors serve concurrently as Executive Officers) Nominating Committee 6 Directors including 4 Outside Directors Compensation Committee 3 Directors including 2 Outside Directors Audit Committee 4 Directors including 3 Outside Directors Main task Decisions on proposals for election and dismissal of Directors Main task Decisions on compensation of Directors and Executive Officers Main task Audit of Directors and Executive Officers business operations and preparation of audit report Decisions on candidates for Independent Auditor Independent Auditor (Ernst & Young ShinNihon LLC) Execution President and Chief Executive Officer Executive Vice President and Executive Officer, Senior Vice President and Executive Officer, Vice President and Executive Officer, Executive Officer Executive Officers Meeting (An advisory body to the Chief Executive Officer) Considers issues of importance which may affect Hitachi Chemical Co., Ltd. and the Group CSR Management Sector Auditing Office 16

19 Compensation of Directors is composed of the monthly-based compensation and the year-end distribution. The monthly-based compensation is a fixed amount that is decided for each individual, based on such factors as their position and area of responsibility. Likewise, the year-end distribution is also decided for each individual taking such factors as their position and responsibilities into consideration. However, the effects of short-term fluctuations in the Company s performance will be considered on a limited basis. Compensation of Executive Officers and Executive Officers that serve concurrently as Directors is composed of monthly-based compensation and performance-based compensation. The monthly-based compensation is, by principal, a fixed amount that is decided for each individual based on such factors as the specific position and responsibilities of such Executive Officers. Whereas, the performance-based compensation is set in proportion to the Company s results for the fiscal year, the results of the departments for which each Executive Officer is responsible, and individual performance and degree of performance improvement. Compensation of Directors and Executive Offi cers for Fiscal 2009 Classifi cations Number Amount of compensation () Directors (Outside Directors) 9 (4) 163 (30) Executive Offi cers Total Notes: 1. Compensation amounts presented are rounded off to the nearest one million yen. 2. The compensation amount for Directors who served concurrently as Executive Offi cers is shown separately as the Director compensation amount and the Executive Offi cer compensation amount, and such amount is included in the total compensation amount of each classifi cation. 3. Included in amount of compensation is unpaid bonuses related to year-end distribution (Directors) and performance-based compensation (Executive Offi cers) to be paid as of June 2010 amounting to 119 million. However, the actual amount of compensation paid is decided by the Compensation Committee based on the policies outlined in the Matters Related to Decisions Regarding the Compensation of Directors and Executive Offi cers section above. 4. As included in the number of Outside Directors is one Outside Director that retired as of June 19, 2009, the monthly-based compensation paid to this Outside Director from April to June 2009 is included in the amount of compensation. Compensation of Independent Auditor Compensation of Independent Auditor for Fiscal 2009 Amount of compensation Classifi cations () Total amount of monetary and other fi nancial 122 benefi ts payable by the Company and its subsidiaries The amount of compensation payable to the 55 Independent Auditor by the Company (*) Notes: 1. The Company pays compensation to the Independent Auditor, and other such person, for duties other than those described in the Certifi ed Public Accountants Act Article 2 (1), such as consultation regarding the transition to IFRS standards and verifi cation of earning reports of overseas personnel. 2. In the audit contract between the Company and the Independent Auditor, the compensation paid for audits under the Corporation Law and audits under the Securities Exchange Law are not broken down and cannot be practically separated, and therefore both are included in the amount in (*). 3. The Company s audit of overseas subsidiaries is carried out by a Certifi ed Public Accountant or an audit fi rm (including persons or organizations with equivalent qualifi cations in the foreign country in which the subsidiary operates) other than the Company s Independent Auditor. Incorporation, and to ensure that other business operations are appropriate. As the part of the fundamental operation of this system, the effectiveness of the internal control systems of the Company and the Group is evaluated by the Internal Control Committee, which is chaired by the Executive Vice President and Executive Officer and primarily consists of responsible parties from such areas as the CSR Management Sector, Marketing & Sales Operations, Manufacturing Operations, and the Auditing Office. The results of these evaluations are decided while taking into consideration audits conducted by the Auditing Office and the Independent Auditor, and are reported to the Executive Officers Meeting and the Audit Committee. If, through the process of evaluation, inadequacies are detected in the internal control systems, then the Company will work expediently to improve the system. Specifically, the Company s standards of corporate conduct serve as a basic code of conduct throughout Hitachi Chemical, and the key parts of other important rules and basic systems are also shared across the Group. While protecting the independence of each Group company, this promotes smooth coordination, raises the efficiency of internal audits, and makes the internal control system effective. Effective from the year ended March 31, 2009, J-SOX requires the inclusion of a management report on the Company s internal control over financial reporting in the Yuho business report. Management has conducted its yearly evaluation of the Company s internal control in accordance with the standards on management assessment of internal controls published by the Business Accounting Council of the Financial Services Agency (FSA) (Standards for Management Assessment and Audit Concerning Internal Control over Financial Reporting). Management has concluded that the Company has maintained effective internal control over financial reporting as of March 31, The Independent Auditor has expressed its opinion that the management report fairly represents actual conditions. Risk Management System The Company has created the Guidelines for Implementing Measures to Counter Risk at Hitachi Chemical. This document prepares for target risk scenarios for the entire Company by specifying the responsibilities of all executives and employees in preventing risks, the composition and role of the Emergency Response Task Force to be put in place during emergencies, and the communication standards to be observed. Additionally, the CSR Management Sector conducts regular audits of each Company division internally and the Group companies to check the status of the risk management systems and carries out comprehensive auditing in preventing risks from occurring and dealing with them if they occur. It also requires each division to undertake self-audits. Risk Management System Board of Directors Audit Committee President and Chief Executive Officer Internal Control System The Company has built and operates a system to ensure that execution of business operations conforms to laws and the Company s Articles of CSR Management Sector Corporate Export Regulation Group Administration Department Environment & Safety Management Department Chemical Risk Management Group Company Divisions Group Companies Hitachi Chemical Co., Ltd. Annual Report