Annual Report 2011 For the year ended March 31, 2011
Profile DENSO Corporation, headquartered in Kariya, Aichi Prefecture, Japan, is a leading global supplier of advanced automotive technologies, systems and components. Since its foundation in 1949, the Company has spurred industry growth through pioneering research and development and superior quality products. As one of the world s top suppliers of automotive components, DENSO works hand-in-hand with all major automakers worldwide in the fields of climate control, engine management, body electronics, driving control and safety, hybrid vehicle components, and information and communications. DENSO also utilizes its proprietary technologies and expertise in the fields of industrial systems and non-automotive thermal systems. The company currently employs approximately 120,000 people in 35 countries and regions including Japan. Contents n Financial Highlights 1 n A Message From the President 2 n Feature: Fuel-saving Technology Development and Targeting Emerging Markets 5 n Global Management 10 n Review of Operations by Business Segment 12 n Working to Enhance Corporate Value 14 n Executive Management 20 n Financial Section 21 n Corporate Data 75 n Investor Information 78 Forward-looking Statements This annual report contains forward-looking statements about DENSO s future plans, strategies, benefits and performance that are not historical facts. They are based on current expectations, estimates, forecasts and projections about the industries in which it operates and benefits and assumptions made by management. As the expectations, estimates, forecasts, and projections are subject to a number of risks, uncertainties and assumptions, they may cause actual results to differ materially from those projected. DENSO, therefore, wishes to caution readers not to place undue reliance on forward-looking statements. Furthermore, the company undertakes no obligation to update any forward-looking statements as a result of new information, future events or other developments, risks, uncertainties and assumptions mentioned.
Financial Highlights DENSO CORPORATION and Subsidiaries Years ended March 31, 2011, 2010 and 2009 Percent change Thousands of U.S. dollars 2011 2010 2009 2011/2010 2011 Net Sales: 3,131,460 2,976,709 3,142,665 5.2% $37,660,373 Sales in Japan 1,506,681 1,518,105 1,615,771 (0.8%) 18,120,036 Sales outside Japan 1,624,779 1,458,604 1,526,894 11.4% 19,540,337 Net Income (Loss) 143,033 73,427 (84,085) 94.8% 1,720,180 Total Assets 3,380,433 3,364,070 3,018,438 0.5% 40,654,636 Equity 2,072,443 2,032,264 1,900,719 2.0% 24,924,149 Capital Expenditures 145,087 114,422 314,425 26.8% 1,744,883 Depreciation 193,082 237,944 276,624 (18.9%) 2,322,093 R&D Expenses 290,069 270,077 297,148 7.4% 3,488,503 Financial Highlights Yen Percent change U.S. dollars Per Share: Basic net income (loss) 177.49 91.11 (104.13) 94.8% $ 2.13 Cash dividends 46.00 27.00 40.00 70.4% 0.55 Equity 2,435.14 2,378.18 2,220.89 2.4% 29.29 Billions of yen Percent change Foreign Exchange: Foreign exchange loss (34.0) (43.8) (56.6) (22.4%) U.S. dollar (18.8) (21.7) (22.5) (13.4%) Euro (12.6) (9.7) (8.0) 29.9% Impact of 1/U.S.$ change 3.0 2.3 1.9 30.4% Impact of 1/Euro change 0.7 0.6 0.4 16.7% Yen Percent change Average Exchange Rate: Yen/U.S. dollar 84.68 91.31 100.90 (7.3%) Yen/Euro 111.62 129.24 146.14 (13.6%) Number of Employees 123,165 120,812 119,919 Note: U.S. dollar amounts have been translated, for convenience only, at the rate of 83.15=US$1, the approximate exchange rate prevailing on March 31, 2011, the last trading day of the fiscal year. Net Sales (Billions of yen) Net Income (Loss) (Billions of yen) Dividends (With Treasury Stock Repurchases) (Billions of yen) 5,000 250 80 4,000 3,000 2,000 1,000 200 150 100 50 0 50 60 40 20 0 07 08 09 10 11 100 07 08 09 10 11 0 07 08 09 10 11 Cash dividends Treasury stock repurchases Treasury stock repurchases figures show the amounts that have been purchased between the general shareholders meeting of one year to the next. DENSO Corporation Annual Report 2011 1
A Message From the President A Message From the President Nobuaki Katoh President and CEO First, I would like to express my deepest sympathy to the families of those who perished in the Great East Japan Earthquake of March 2011. We were fortunate DENSO Group employees and their families did not suffer major damage or injury. Having witnessed the disastrous aftermath of the earthquake, we united in giving the highest priority to supporting the restoration of the affected areas. On the manufacturing side, we are gradually increasing production volume. We will work to restore production to preearthquake levels as quickly as possible while working hard to contribute to the recovery of our suppliers and the group companies of DENSO in the affected areas. Review of Fiscal 2011 In the automotive industry, the world market achieved overall expansion, buoyed by growth in emerging markets and a turnaround in the United States. In Japan, automobile sales fell below previous-year levels due to the negative effect of the termination of the government s vehicle incentive program for vehicle replacement, as well as the impact of the Great East Japan Earthquake. However, domestic auto production surpassed the previous year, thanks to healthy exports of completed vehicles. Under these circumstances, the consolidated net sales of the DENSO Group totaled 3,131.5 billion, up 154.8 billion from the previous year. Operating income of 188.3 billion was recorded, 51.7 billion, mainly due to capacity utilization gains accompanying increased sales, despite foreign exchange losses due to yen appreciation. Consolidated net income totaled 143.0 billion, an increase of 69.6 billion. By segment, all regions except the South American region ( other areas ) reported year-onyear increases in sales and income. Compared with our original forecast, we estimate that the Great East Japan Earthquake had a negative impact of around 60.0 billion on net sales, due to production adjustments and suspension of operations at some plants. 2 DENSO Corporation Annual Report 2011
Efforts to Improve Mid-Term Profit Recovery Policy In the year under review, the Group worked to reduce fixed costs and strengthen efforts to build a streamlined and lean business structure. We concentrated on activities aimed at achieving growth, while developing technologies to improve fuel efficiency and reduce carbon dioxide emissions, and addressing emerging markets. At the same time, we endeavored to enhance global development systems that will enable effective and timely response to local needs. With respect to technological development aimed at improving fuel efficiency and cutting carbon dioxide emissions, we are committed to efficient energy utilization and maximizing the benefits of fuel savings across all powertrain fields. To do that, we are enhancing our products for gasoline and diesel vehicles and developing technologies for hybrid and electric vehicles. In gasoline engines, we are on track to achieve our goal, which is to develop technologies that reduce fuel consumption by 20 percent. We are also focusing on cost-reduction technologies for emerging countries, where market growth is anticipated. Here, we are working to establish a framework enabling complete localization of functions from product development to production and sales in order to address local needs in a timely manner. Specifically, we are pursuing a cost-reduction campaign, called Cost Half, with the aim of cutting costs by 50 percent. In the year under review, we considered various relevant matters, such as functional, performance and structural optimization, as well as local procurement of materials and tailoring specifications to regional requirements. As a result, we succeeded in lowering costs by 40 percent. Going forward, we will expedite efforts to reach the 50 percent target A Message From the President Outlook for Fiscal 2012 : Recovering From the Great East Japan Earthquake We expect the world automobile market to expand moderately, driven by continued healthy conditions in newly emerging markets, as well as a turnaround in the U.S. economy and a return to normal following the termination of sales promotion measures in Europe. In the near term, however, there are concerns that recovery of the global economy and automobile market, which has progressed well to date, may be stalled due to various factors. These include accelerating inflation and growing bubble risk, which may have a harmful impact on newly emerging economies, as well as rising crude oil prices amid political instability in North Africa and the Middle East. In Japan, we note that such world conditions are causing the yen to remain high. Due also to the Great East Japan Earthquake, the economic outlook is difficult to predict, and the operating environment for the Company will become even more challenging than in the year under review. Although domestic automobile production is getting close to pre-earthquake levels, our top priority for the time being is to help restore people s lives in the aftermath of the disaster. We will place particular emphasis on production, so that we can help suppliers and Group companies in affected regions return to normal, and thus address customer needs as quickly as possible. DENSO Corporation Annual Report 2011 3
A Message From the President Returning Profits to Shareholders For fiscal 2012, we forecast consolidated net sales of 3,170.0 billion, operating income of 135.0 billion and net income of 98.0 billion. The current fiscal period is the final year of our structural reform program, a core policy of the Group. In the year ahead, we will complete our structural reforms by building a streamlined and lean business structure and establishing a framework for renewed growth. At the same time, we will make steady efforts to address changing business conditions and issues, such as foreign exchange fluctuations and risks. In addition, we will further expand in new businesses outside of the automobile field, such as refrigeration and air conditioning systems, factory automation systems and automatic recognition devices. And, we will consider expanding business in fields beyond the automobile sector to include energy management aimed at the more efficient use of energy in homes, vehicles and society at large. In consideration of our recent performance and the operating environment, we declared an annual dividend of 46.00 per share for fiscal 2011, up 19.00 from the previous year. This represented a dividend payout ratio of 25.9 percent, which is within our 25 30 percent target range. Our fundamental policy is to consistently increase cash dividends, giving due consideration to a comprehensive range of factors, including consolidated business performance and the dividend payout ratio. Although this policy remains unchanged, we will look at shareholder returns after ensuring we retain sufficient earnings to allow the minimum necessary business investment and development. At the same time, we will curtail various outlays, in light of ongoing difficult business conditions. In our quest to improve shareholder value, we must grow our business and generate steady income. To that end, we will use retained earnings to make investments in R&D and capital equipment aimed at developing fuel-saving technologies and low-cost products for emerging markets. Due to the Great East Japan Earthquake, we are now reassessing our R&D expenditures. Adopting a select and focus approach, however, we will steadily invest in fields necessary for future growth. Finally, we have initiated discussions on how DENSO should evolve over the next 10 years and what issues will arise during that time. In fiscal 2012, we will take those discussions to a deeper level along business-specific lines, and in fiscal 2013 we hope to unveil a long-term strategy for 2020. Going forward, we will step up efforts to enhance returns for all shareholders. July 2011 Nobuaki Katoh President and CEO 4 DENSO Corporation Annual Report 2011
Feature: Fuel-saving Technology Development and Targeting Emerging Markets Feature One of the pillars of DENSO s structural reforms, a mid-term profit recovery policy, is Developing systems for future growth. In line with this, the Group is pushing ahead with developing technologies for improving fuel consumption and reducing carbon dioxide, as well as addressing the needs of the markets of emerging nations. In this feature section, we look at the current state of initiatives toward these ends, as well as future initiatives. 1 Technology Development Structure: Reforms to Ensure Sustainable Growth Based on its structural reform drive, DENSO is undertaking research activities from three distinct standpoints: promoting development across business groups; strengthening the development structure from a long-term perspective; and enhancing the global development system. (1) Promoting Development across Business Groups Developing competitive products requires more than just strengthening the competitiveness of existing product areas. At DENSO, we believe it is important to combine technologies and expertise in order to enhance development from the standpoint of the entire vehicle. As an example, we developed engine-related products and air conditioning systems separately. We came to realize, however, that collaboration between engineers in these separate areas leads to the development of more competitive vehicle system products. One way we do this is through the DENSO Projects (DP) organizational method. With DPs, we gather together each business group specialist related to a certain development theme. In the fuel efficiency area, we have DP DECO2 (Decreasing Co2 and DENSO Eco Project), DP-ISS (Idle Stop & Start System), and DP-Advanced Motors Systems, whose members discuss topics beyond their immediate responsibility to generate innovative ideas. The DP approach has also been effective at accelerating the development process. In the hybrid vehicle (HV) and electric vehicle (EV) areas, we previously developed individual parts in each business unit. However, we have established the HV system division to strengthen development from a systems standpoint in order to better meet customer needs. One of the many strengths of DENSO is its ability to marshal the development abilities of the entire company. We will sharpen this competitive edge going forward. DENSO Corporation Annual Report 2011 5
DENSO S Technical Centers around the World Europe Asia & Oceania North America Feature The technical center in Europe is focusing on four areas: diesel, hybrid and electric, thermal management and active safety. Furthermore, with electronic engineering team s intensive participation from this year, Europe, as part of the global development structure, will lead the development of emerging technologies in these areas and contribute to DENSO globally. In Asia, where Japanese vehicles account for nearly 80 percent of the auto market, vehicle production is expected to reach 4 million units by 2015. This is one of the most important regions for DENSO. We will put effort in developing products that meet the unique needs of this region, such as our continuous summer, a market with a mixture of affordable and high class, and as an advanced region for alternative fuels. The market for vehicle connectivity and infotainment technology is changing rapidly, and we are strengthening our resources to lead DENSO in this area. We re also acting as a design center to support DENSO efforts in Japan, to offer instrument clusters with multi-information displays and superior graphics. Additionally, we are working with government and automotive bodies to develop Dedicated Short Range Communication (DSRC) technology. DENSO believes our unique customer approach for safety and connectivity technology will lead to new global business opportunities. South America The auto market in South America is India To expand DENSO s business in the burgeoning Indian market, DENSO is improving the competitiveness of our products, and specifying the regional specifications and developing products that meet specific local needs. China In addition to offering technical services for customers locally developed vehicles, we are expanding sales in cooperation with DENSO Headquarters and other overseas technical centers. This year, DENSO has started a enhance our operational system and develop lower cost products in China. We are also planning to expand the technical center to provide better services to Chinese customers and develop technologies locally. growing rapidly, with production expected to reach 5 million units by 2015, mainly unique vehicle models*. This region will likely become a base for developing global cars for emerging countries. DENSO will establish its South American technical center on the site of our new plant in 2012 to assist customers to develop products. * Unique vehicle models: These are assembled using former platforms imported from automakers countries and components originally designed in Brazil, including engines and bodies. 6 DENSO Corporation Annual Report 2011
(2) Strengthening the Development Structure From a Long-term Perspective In order to continually develop products that meet the needs of society and customers, we must anticipate future demands and technological trends to determine exactly what kinds of systems, products, and technologies are required. DENSO is bolstering its technology roadmap activities to do just this. We choose priority research themes based on this roadmap and society and customer needs. In the past 3 years, we have reassigned about 30 percent of our development staff to priority and new business areas, as a way to both enhance operational efficiency and augment new development. In addition to focusing on fuel efficiency, we have started concentrating on the areas of information and communications, and safety. (3) Enhancing the Global Development Organization Responding to the diverse needs of markets across the globe is critical for the future of DENSO. We are meeting this challenge by moving away from Japan-centered development and building a global structure that can create appealing products for the specific needs of each region. This geographic, marketbased development structure is being reinforced through core technical centers in seven countries: Japan, North America, Europe, Australia, China, India, and Brazil. In addition, the core technical centers take the lead in developing cutting-edge technologies for which their areas have a competitive edge, with North America responsible for information communications and human-machine interfaces (HMI), and Europe responsible for diesel and safety technologies, for example. Feature 2 Policy and Achievements in Fuel-saving Technology Development The Group is developing technology that improves fuel consumption based on the concept of energy management. DENSO s Energy Management is a technological approach that comprehensively controls the efficient energy usage of the entire vehicle from the three viewpoints of raising efficiency, reducing the environmental burden and using energy regeneration; and links to all automobile fields including powertrain, thermal, electric, electronic, and information safety. In the powertrain field, we are pursuing efficiency improvements in the conventional internal combustion engine, which will remain in the mainstream for some time. At the same time, we have strengthened technological development for ISS and HVs, both of which are expected to increase market share going forward. Furthermore, by combining and integrating various fuel-efficiency technologies, we are finding that we can contribute to improve fuel efficiency by approximately 20 percent for gasoline engines. Our aim is to achieve greater efficiency gains going forward. Energy management Alternative energy 50% 20% Operate alternator, A/C 10% Others 20% Driving Heat loss and others Efficiency improvement Load reduction Energy regeneration Heat DENSO Corporation Annual Report 2011 7
Feature Technology Development for HVs/EVs Though the widespread diffusion of HVs will depend on lower vehicle cost and even better fuel economy, by 2020 approximately 20 percent of all passenger cars sold in Japan, the United States, and Europe should be HVs. In addition, since HV technology is relatively easy to apply to EVs, we are putting priority on strengthening our development structure in this field. In terms of development, DENSO is working on cutting costs and further improving performance of key products such as inverters, DC-DC converters, battery monitoring units and electric compressors. In addition, we are developing many new products, including battery packs that integrate motor generators, batteries, battery monitoring units, cooling fans and other elements. The Company is also strengthening development from both system and vehicle perspectives. One example is establishment of the HV system division. Adoption of the Energy Management is another. To illustrate, technology that preserves heat to maintain air conditioning performance and for engine warm-up has become important because less heat is generated from engines as electrification advances. We are developing a heat pump for HV systems that uses efficient heat regeneration and generates heat. Gasoline engine components ECU&EDU EGR System Ignition Coil & Spark Plug High Pressure Pump Fuel Pressure Sensor Intake & Exhaust VCT Exhaust System High Pressure Injector We are focusing on developing technologies for direct-injection engines for which demand is expected to be high. In direct injection engines, fuel is injected directly into the combustion chambers at high pressure, which is more fuel-efficient compared to conventional injection systems that spray fuel into the intake pipe. DENSO recently developed a new injector and high pressure pump for direct injection engines, which improved fuel atomization and pressure performance. Idle Stop & Start System Hybrid system Speed of vehicle Deceleration Stop Conventional Starter New starter Engine stops when vehicle stops Engine stops when vehicle decelerates stops Engine stops Engine stops Almost doubles the fuel efficiency Electric compressor Battery monitoring unit We have developed a new starter for ldle Stop & start System (ISS), which stops the engine during deceleration. This starter almost doubles the fuel saving effect compared to previous starters, which stop the engine only when the vehicle stops. Also, we are developing a variety of ISS that differs in cost and capabilities. Hybrid vehicle ECU Power control unit DC-DC converter 8 DENSO Corporation Annual Report 2011
3 Approach to Emerging Markets Global growth in the auto market is being driven by emerging markets like China, India, and Brazil. DENSO is bolstering its development of low-cost components and its manufacturing development structure to ensure business growth in emerging markets. Four Low-cost Heat Exchangers DENSO has developed four heat exchangers for the Indian market. They are manufactured on a single production line, which helps to significantly reduce cost. (1) Developing Competitive, Low-cost Parts The most basic approach to development involves understanding local customer needs and market characteristics, and then deciding on optimal functionality, price, and performance and designing products based on these parameters. Establishing Radiator Heater core Feature the superiority of each individual product in the market is important for the success of this strategy. In addition, local raw materials and parts procurement and local product design and manufacturing using local facilities are also crucial to product competitiveness. In emerging markets, we aimed at halving Condenser Evaporator costs compared with existing products. This will help in our efforts to develop low-cost products with optimal functionality, performance, and quality which match local needs. We were able to reduce costs by 40 percent. Going forward, we will step up activities to achieve our goal of halving costs. (2) Manufacturing Development Structure DENSO is strengthening its local product development structure in order to respond to local customers in a timely manner and develop products dovetailing with their needs. We are enhancing the capabilities of our Shanghai technical center and have established a joint venture in India with the local company Subros Limited to design air conditioning systems. We will also establish new centers in India by the end of 2011 and in Brazil in early 2012. By the end of fiscal 2013, we aim to have a fully global development and design structure. Regarding production, we have established a plant to produce car air conditioners in Changchun, China. In Brazil, we built a new plant to ramp up production, augmenting our existing plants that manufacture car air conditioners and radiators. Production has already commenced at the new plant. Products for emerging markets High Cost Japan Local procurement and Local production Optimal function Emerging Markets Target of 50 percent cost reduction for 23 products Achieved 40 percent cost reduction so far Accelerate efforts in finding local suppliers and promote local procurement DENSO Corporation Annual Report 2011 9
Global Management As enshrined in our mid-term profit recovery policy, DENSO Group companies are organized into four geographical segments other than Japan: North America, Europe, Asia & Oceania, and Others. Each region has its own independent business structure centered on a regional headquarters. Autonomous development, procurement, and production activities by each regional organization provide a framework that enables faster local decision-making and encourages further sales expansion. Consolidated subsidiaries Affiliates under the equity method Employees 187 (Japan 68, North America 28, Europe 35, Asia-Oceania 50, Others 6) 31 (Japan 13, North America 4, Europe 2, Asia-Oceania 10, Others 2) consolidated basis 123,165 non-consolidated basis 38,318 Global Management Sales by Segment 17.3% 1.7% <as of March 31, 2011> Japan North America Europe Asia & Oceania Others 10.7% 14.2% 56.1% DENSO Headquarters North America In response to expansion of local production activities by Japanese automakers, we sought to increase overall sales, centering on thermal systems and powertrain control systems. In the year ended March 31, 2011, sales in North America increased 13.0% year on year, owing to growth in vehicle production on the back of market recovery. Regional operating income surged 309.8% year on year, thanks to capacity utilization gains, which contrasted with a substantial currency exchange loss. The three Detroit-based U.S. automakers, General Motors, Ford, and Chrysler, provided a powerful boost to regional sales. Going forward, we will aggressively expand sales in North America focusing on these automakers. DENSO INTERNATIONAL AMERICA, INC., the registered headquarters, wins various awards from automakers every year. In the year under review, it was selected as a GM Supplier of the Year honoree. The award was based on DENSO s efforts to consistently perform above expectations in the areas of quality and warranty for its products. The Technical Center in Michigan engages mainly in the design of local applications. In addition to reinforcing these design capabilities, we will target further sales expansion by focusing on the development of unique North American products, with the aim of creating new businesses in human machine interface (HMI), powertrain systems, and hybrid and electric vehicles. On the production side, DENSO also recognizes the need to establish a supply system in the expanding Mexican market. DENSO INTERNATIONAL AMERICA, INC. 10 DENSO Corporation Annual Report 2011
Europe One of our important sales strategy, DENSO is focusing on expanding sales to European automakers. In addition to increasing sales of thermal systems and powertrain control systems, we aim to establish a strong presence in markets with high growth potential, such as information and safety systems and hybrid and electric vehicles. To this end, we must reinforce our cost competitiveness by procuring components locally. In the year ended March 31, 2011, in Europe, despite an increase in sales mainly due to European automakers, a substantial currency exchange loss led to decrease in sales of 2.4 percent year on year while operating income increased by 2.3 percent. In the aftermarket business segment, DENSO acquired CTR Srl, an Italian aftermarket distribution company, in June 2010. Our aim is Asia & Oceania Singapore-based DENSO INTERNATIONAL ASIA PTE. LTD. (DIAS) serves as the headquarters of DENSO s operations in Asia and Oceania. DIAS has a wholly owned subsidiary in Thailand, DENSO INTERNA- TIONAL ASIA CO., LTD. (DIAT), which operates a technical center. Amid expansion of markets in Thailand and Indonesia, DENSO is enjoying healthy regional sales growth, driven mainly by Japanese automakers. We are currently reinforcing sales to both local and European and U.S. manufacturers as a result of recent free trade agreements (FTAs) in the region. Expansion of the compact car market has led to intensive competition and lower prices. In response, we must reinforce cost competitiveness and make low-cost products while stepping up local procurement of components, equipment, and molds. For this, we will seek to create products optimized to local requirements based on user and market surveys. Going forward, DIAS will focus on attracting orders for compact car parts, manufacturing low-cost products, and boosting sales to motorcycle manufacturers, especially in Indonesia and Vietnam. In China, we are bolstering sales activities targeting local manufacturers through the development of low-cost products. We will to expand the European aftermarket business by broadening our product lineup and sales channels. In November 2010, we strengthened our presence in the Middle East and North Africa with the establishment of DENSO SALES MIDDLE EAST & NORTH AFRICA FZE. DENSO views the Russian automotive market as a promising growth market for the future. For this reason, in August 2009 we established DENSO SALES RUS L.L.C. (DSRU) in Moscow. This company promotes marketing activities in that country and is also considering e s t a b l i s h i n g a supply system in Russia. DENSO INTERNATIONAL EUROPE B.V. reinforce the activities of our technical center in Shanghai to meet anticipated demand for energy-efficient vehicles and vehicles powered by new energy sources stemming from environmental regulations. In India, we are seeking to increase sales to both local and global manufacturers while maintaining sales to Japanese car manufacturers, including Maruti Suzuki, which holds the largest market share. As a result of these initiatives, in the year ended March 31, 2011 sales in Asia & Oceania grew 22.2 percent year on year. Operating income rose 10.2 percent owing to gains in capacity utilization and other factors. DENSO INTERNATIONAL ASIA PTE. LTD. (Singapore) (Thailand) Global Management Others The Other segment comprises 6 operations, mainly in the South American countries of Brazil and Argentina. DENSO regards this region as the next-largest growth market behind China and India. Accordingly, we are working to stay in step with the business expansion of our customers there. Automobile production is expanding in South America. In Brazil, car production grew from 3.22 million units in the year ended March 31, 2010 to 3.42 million in the year ended March 31, 2011, a 6 percent increase. In Argentina, meanwhile, vehicle production rose 33 percent over the same period, from 570,000 units to 750,000. Although our sales in these countries have mainly targeted Japanese automakers, we intend to increase sales to European and U.S. manufacturers. In line with this strategy, DENSO DO BRASIL LTDA. (DNBR) commenced operations at a new plant in early 2011, and will begin construction of a technical center in early 2012. DENSO Corporation Annual Report 2011 11
Review of Operations by Business Segment Business Segment Percentage of Net Sales Major Topics of Fiscal 2011* Review of Operations by Segment Automotive Business New Thermal Systems Sales 955.2 billion (+3.9%) Powertrain Control Systems Sales 772.0 billion (+13.7%) Information and Safety Systems Sales 524.3 billion (+0.6%) Electric Systems Sales 273.6 billion (+3.7%) Electronic Systems Sales 288.5 billion ( 2.0%) Small Motors Sales 230.6 billion (+4.4%) Industrial Systems and Consumer Products 30.5% 24.7% 16.8% 8.7% 9.2% 7.4% 1.3% Acquires Italian aftermarket distribution company for automotive climate control components. Developed an electric air-conditioning system for hybrid buses. Established joint venture to design car air conditioning systems in India with Subros. Construct a new plant to produce car air conditioners in Changchun, China. Toyota Industries and DENSO to establish an automotive air-conditioning compressor manufacturing company in Indonesia. Developed four low-cost heat exchangers for the Indian automotive market. Constructed a new plant for production base in Brazil. Developed a new gasoline direct-injection injector and high-pressure pump with improved fuel spraying and boosting functions, and started mass production. Developed a 3,000-bar common rail system that achieved the world s highest injection pressure; expanding sales in emerging nations markets, and markets for agricultural and construction machinery, and trucks. DSI Consortium announces version 1.0 Technical Specifications for the DSI3 standard. Established the DP-SmartHMI Office as a project organization, to strengthen development work on car cockpits that combine meters, car navigation and other operating devices. Established the DP-iSafety Office to strengthen development work on vehicle safety and driving support technologies. Developed one of the world s lightest starters for compact vehicles. Established the European Technology Division for Europe, where there is state-ofthe-art vehicle control technology. Received new orders for ECU from Hyundai, and entered the strong markets for agricultural and construction machinery. In China, ASMO Co., Ltd. established a new company for small motors and other related products. DENSO WAVE Inc. developed VS-Series 6-axis compact robots world s fastest, slimmest robots of their class, and with the world s first all-internally wired design. Received World-renowned if Design Award for New VS Series 6-axis Compact Robots. Sales 42.1 billion (+5.3%) Note: In addition to the above, the other business segment recorded net sales of 9.4 billion. *For more information, please visit our website news release http://www.globaldenso.com/en/newsreleases/index.html 12 DENSO Corporation Annual Report 2011
Main Products [Thermal Systems Products] Air conditioning systems for cars Radiators, Cooling fans, Inter coolers, Oil coolers, Engine cooling modules, Reserve tanks [Climate, Cooling and Heating Products] Air conditioning systems for buses and construction equipment, Truck refrigeration units, Air purifiers Air conditioning unit Engine cooling module [Engine Control Components] Ignition coils, Magnetos, Spark plugs, Glow plugs, Exhaust gas sensors, Ceramic substrates, Diesel Particulate Filters (DPFs), Engine ECUs for motorcycles [System Control Components] Valves (Exhaust gas recirculation (EGR) valves, Automatic transmission (AT) control valves, AT solenoid valves, Oil flow Control Valve (OCV), and others), Canisters, Knock sensors, Accelerator sensors, Variable cam timing (VCT) components, Throttle bodies, Air flow meters, Oil filters, Air cleaners, Integrated air fuel modules, Shift-by-wire actuators, Horns, Acceleter Pedal Module (APM) [Diesel Injection Products] Common rail systems, In-line fuel injection pumps, Rotary fuel injection pumps, Nozzles, Fuel filters [Gasoline Injection Products] Fuel pumps, Fuel pump modules, Fuel injectors, Direct Injection Components (Injector, Pump) [Body Electronics Components] Instrument clusters, Integrated climate control panels, Smart keys, Remote keyless entry controllers, Rear and corner sonars, Car security systems, Body ECUs [ITS Products] Car navigation systems, Electronic Toll Collection (ETC) on-board equipment, Data communication modules [Driving Assist and Safety Products] Airbag sensors and ECUs, ABS/ESC actuators and ECUs, Millimeter-wave radars and ECUs for pre-crash safety systems and adaptive cruise control systems, Laser radars and ECUs for adaptive cruise control systems, Cameras and ECUs for Lane Keeping Assist, HID ballast, ECUs for adaptive front lighting systems Fuel pump module Car navigation system Common rail systems Millimeter-wave radar Review of Operations by Segment [Engine Electrical Systems] Starters, Alternators [EHV Components] Inverters, DC-DC converters, Battery monitoring units [Electric Control Components] Sensors and ECUs for electric power steering systems Alternator Battery monitoring unit [Electronics Products] Engine ECUs, Transmission ECUs, Power management ECUs [Electronics Devices] Semiconductor sensors, ICs, Power modules [Relays] Engine ECU Semiconductor sensor (Inertia sensor) Windshield wiper systems, Windshield washer systems, Power window motors, Power seat motors, Power sliding door motors, Power steering motors, Motors for Engine control systems, and other automotive motors Windshield wiper system Power window motor [Automatic ID Data Capture Devices] Bar code handy scanners and handy terminals, QR code scanners and handy terminals, IC card readers/writers, Radio Frequency-Identification (RF-ID) systems [Factory Automation (FA) Products] Industrial robots, Programmable controllers [Refrigeration and Air-conditioning Systems] Cooling units for electronic devices (Mobile phone base stations, Computers, and others), Kerosene heat pumps, Spot coolers and heaters [Consumer Products] CO2 refrigerant heat-pump water heaters, Automatic faucets Industrial robot CO2 refrigerant heat-pump water heater DENSO Corporation Annual Report 2011 13
Working to Enhance Corporate Value Corporate Social Responsibility In our corporate philosophy, we describe our mission as contributing to a better world by creating value together with a vision for the future. We adopted DENSO Vision 2015, a longterm management vision, in 2004 to guide our efforts in putting this philosophy into practice. This vision meshes perfectly with the building of a sustainable society. Cooperating, collaborating and sharing values with our many stakeholders are indispensable to achieving this vision based on corporate behavior that earns the trust and support of society. To ensure that all Group companies conducting business worldwide put this philosophy into practice, we adopted the DENSO Group Declaration of Corporate Behavior in April 2006, making clear our responsibility to stakeholders. We have placed corporate social responsibility (CSR) at the core of our management and are working to contribute to building a sustainable society through our business activities. Promotion Structure In 2006, we established the CSR Promotion Meeting which is chaired by the president and in which the basic policies behind CSR activities are discussed and examined. The meeting is held twice yearly to set direction for and make decisions on CSR management and to confirm the progress of CSR-related activities. In 2009, we shifted from a traditional emphasis on priority areas and fundamental areas to a new framework emphasizing Promotion Structure Working to Enhance Corporate Value Environmental conservation Top Management Meeting CSR Promotion Meeting (chairperson: president) Occupational safety, mental health Top Management MeetingProcurement, information disclosure, respecting associates, customer relations,other Environment Committee Safety and Health Committee Subject-specific review meetings CSR Framework DENSO Group Declaration of Corporate Behavior Policy Stakeholder satisfaction Risk management Stakeholder satisfaction Customers : For customers trust and satisfaction, we will create new value. Employees : Respect our employees and provide a work environment that encourages each individual s dynamic work. Shareholders and investors Strive to enhance corporate value and encourage dialogue with shareholders. Suppliers Maintain open, fair and transparent dealings. International and local communities Engage in environmental conservation, philanthropic activities, and sound and fair business operations. Risk management Compliance, information security, etc. Promotion structure CSR Promotion Committee CSR Promotion Center CSR Leaders 14 DENSO Corporation Annual Report 2011
stakeholder satisfaction and risk management. This means we are focusing more intently on a stakeholder perspective in policies. Evaluation by Outside Institutions DENSO is highly regarded by outside institutions when judged by the socially responsible investment (SRI* 1 ) standard for evaluating social, environmental, ethical and other CSR initiatives along with financial performance, a fact that is indicated by its inclusion in the Dow Jones Sustainability Indexes* 2 consecutively for the last 11years and in the Ethibel Sustainability Index* 3, an important European indicator. DENSO s bond ratings from one Japanese and two U.S. rating companies reflect its sound financial condition, as indicated below. * 1 SRI: Socially Responsible Investing * 2 Dow Jones Sustainability Indexes (DJSI): Indexes selected by Dow Jones & Company, Inc. and SAM Group, a Swiss research company. Of approximately 2,500 major companies in 34 countries, the top 300 companies are selected. * 3 Ethibel Sustainability Index (ESI): A Belgian NPO, Forum ETHIBEL, evaluates the S&P Global 1,500 companies in terms of sustainability. As of November 13, 2007, 338 companies, including DENSO Corporation, were selected for inclusion in the ESI Excellence Global indice. Bonds Rating of DENSO Long-term Short-term Rating&Investment Information AAA a-1+ Standard&Poor s AA- A-1+ For more Information, please see our CSR Report. http://www.globaldenso.com/en/csr/report/2010/index Supporting Recovery and Restoration Efforts After the Great East Japan Earthquake The DENSO Group is united in its commitment to supporting recovery and restoration efforts in the aftermath of the Great East Japan Earthquake. We see these efforts as of the utmost importance. Support for Recovery and Restoration in Disaster-Stricken Areas We are providing humanitarian support, as well as essential supplies, to affected suppliers and Group companies. In addition, we are conducting fundraising activities. Volunteers in action Working to Enhance Corporate Value Bicycles being repaired Support From Overseas Bases Overseas bases in 15 countries and regions made financial donations and provided much-needed supplies. DENSO SALES SWEDEN AB donated blankets and jackets. Donation of Old Bicycles Acting on a request from the city of Kariya in Aichi Prefecture, where DENSO s headquarters is located, we fixed up approximately 340 unwanted or abandoned bicycles brought to waste dumps by citizens and donated them. DENSO Corporation Annual Report 2011 15
Working to Enhance Corporate Value Corporate Governance DENSO regards the establishment of sound corporate governance as a key management task and is working to further improve its provisions in this regard. The Company sees this as vital to raise group competitiveness, in order to maintain and improve long-term business performance in today s rapidly changing global markets. DENSO has adopted the corporate auditor system. In addition to statutory bodies such as the General Meeting of Shareholders, the Board of Directors and the Board of Corporate Auditors, as well as the Accounting Auditor, DENSO has put in place a number of internal control systems. Furthermore, through the ongoing provision of management information to shareholders and other investors, the Company practices sound, highly efficient and transparent management. To expedite accurate decision-making by the Board of Directors and execute rapid business operations, the Company has put in place a management system that enables appropriate oversight and monitoring by corporate auditors, and a system that heightens the effectiveness of implementing full corporate governance. For example, in order to speed up decision-making and operational execution, we have reduced the number of directors, members of the board or director board membors and adopted a managing officer system whereby we appointed managing officers. Under this system, directors oversee activities in all business divisions and play a bridging role between management and day-to-day operations, while managing officers focus exclusively on business execution in each business division. In addition, the term of office for directors is set at one year to create a management structure capable of adapting flexibly to changes in the business environment and to further clarify management responsibility for each business term. Roles and Results of Principal Executive Bodies DENSO has also established an executive meeting system whereby two bodies are involved in making decisions regarding business operations. The Board of Directors makes final decisions on statutory and important matters as the decisionmaking body, while the Top Management Meeting acts as a deliberative body that debates matters from a Group-wide perspective and submits proposals to the Board of Directors. Board of Directors (met 16 times in fiscal 2011, with attendance rates of 94% and 81% for directors and corporate auditors, respectively) Top Management Meeting (met 45 times in fiscal 2011) Management Auditing Function The Company s two standing corporate auditors and three outside corporate auditors are responsible for monitoring the execution of duties by directors and auditing the operations and financial condition of DENSO Corporation and its domestic and overseas subsidiaries. In line with corporate governance, the Company believes it is important to have objective and independent monitoring of management from outside the Company, and so appoints outside corporate auditors who reflect their varied experience and extensive insight outside the Company in their audits of DENSO. In addition to the statutory appointment of corporate auditors, the Company s audit system also comprises dedicated internal audit departments* at the parent company and key domestic and overseas subsidiaries. In terms of audit methods, DENSO s business divisions and domestic and overseas subsidiaries have voluntary inspection systems by which they inspect the status of their own internal controls, while the internal audit departments continuously conduct audits to ensure compliance with laws and the appropriateness of the Company s own management and business procedures. DENSO s corporate auditors attend important meetings, including Board of Directors meetings and the Top Management Meeting, and exchange information and opinions with the Internal Audit Department and departments related to internal controls, and the Accounting Auditor, in order to audit the directors execution of their duties and to fulfill their management oversight function. * 47 members as of March 31, 2011 Mr. Fujio Cho, an outside corporate auditor of DENSO, has been appointed chairman of Toyota Motor Corporation, with 16 DENSO Corporation Annual Report 2011
whom DENSO has a business relationship. DENSO s basic internal control policy is decided by the Company s Board of Directors, and the corporate governance system is as illustrated below. Determination of Remuneration for Directors As regards to the basic monthly remuneration, the upper limit of the total remuneration amount ( 80 million per month for directors, 7 million for corporate auditors) is set within a total monetary amount decided by resolution of the General Meeting of Shareholders. The monthly remuneration for directors authorized by the Board of Directors is determined based on the Company s standards, and the remuneration of corporate auditors is determined in collaboration with the auditors. Stock options are granted to directors in units of a certain number of shares, linked to the position of each director. However, although stock options that were granted before 2009 can still be exercised up to the end of the exercise period, DENSO has not granted stock options since 2010 because they have ceased to function as an effective incentive due to turmoil in the financial markets. Bonuses are decided by resolution of the Regular Meeting of Shareholders. After the total amounts to be paid to the directors and corporate auditors have been approved, the bonus for each director is authorized by the Board of Directors based on the extent of the individual director s contribution, and the bonuses for corporate auditors are determined in collaboration with the auditors. Category of director Total remuneration (Millions of yen) Total remuneration by type () Stock option Bonus Basic remuneration Retirement benefit Number of eligible directors Directors 931 552 155 224 15 Corporate auditors 90 53 20 17 2 Outside corporate auditors 32 22 5 5 3 Note: excluding outside corporate auditors As regards to retirement benefits for corporate auditors, the Company used to apply a certain increase factor to the monthly remuneration of each corporate auditor corresponding to the years of service. With the aim of increasing the transparency of the remuneration system for corporate auditors, the Company abolished the system of retirement benefits for corporate auditors at the conclusion of the Regular Meeting of Shareholders on June 25, 2010. Internal Controls In order to ensure the reliability of financial reporting, since fiscal 2009 the Financial Instruments and Exchange Law was required an audit of the internal control reporting system (where companies assess the effectiveness of their internal controls pertaining to financial reporting and have those controls audited by an auditing firm). Viewing this as an ideal time to upgrade and strengthen controls to ensure healthy, continuous growth, DENSO Corporation has been working to develop and strengthen the Group s overall internal controls with the goal of ensuring the reliability of our financial reporting, as well as the effectiveness and efficiency of our operations. These actions Working to Enhance Corporate Value Corporate Governance System Basic internal control policy is decided by the Company s Board of Directors, and the corporate governance system is as illustrated below. General Meeting of Shareholders Appoint, Supervise Board of Directors Chairman/President/ Executive Vice President Senior Managing Directors (Business Division Leaders) Managing Officers (Frontline Operational Execution) Audit Top Management Meeting CSR Promotion Meeting Risk Management Meeting Information Strategy Committee Customer Satisfaction Improvement Committee Environment Committee Export & Import Administration Controls Committee Safety and Health Committee Internal Information Committee Others Internal Audit Department Audit Accounting Audit Board of Corporate Auditors (Majority of External Corporate Auditors) Accounting Auditor DENSO Corporation Annual Report 2011 17
Working to Enhance Corporate Value have been based on a policy of implementing sound and thorough compliance with the laws regarding internal control, promoting autonomous and independent activities related to internal control, and continuously improving and streamlining internal controls. Compliance DENSO considers legal compliance as fundamental to appropriate corporate conduct, and is focusing efforts on instilling an awareness of compliance in each employee. The Company sees compliance as not only the observance of laws but also a responsibility to meet the expectations of stakeholders. In this sense, the Company considers it to be the cornerstone of all conduct. In an effort to ensure thorough compliance, the Company formulated the Code of Conduct for DENSO Group Associates, which is shared by domestic Group companies. Overseas Group companies use a regional version of the Code of Conduct for DENSO Group Associates formulated or planned to be formulated by their regional headquarters in accordance with national and regional laws and customs. In 2010, DENSO amended the Code mainly by adding a section about the necessity of complying with laws concerning business competition. System to Promote Measures In 1997 DENSO created a Business Ethics and Compliance Committee (now integrated into the CSR Promotion Committee) chaired by a director. The committee works to develop frameworks in each country and region. In 2003 in Japan, the Company has established a Business Ethics Hotline which is administered by outside legal counsel and the Company s Legal Department. In fiscal 2011, the hotline received some 169 inquiries and requests for advice, all of which were addressed after staff investigated the situation and confirmed the facts. In addition, DENSO is proactive in promoting awareness of ethical matters, offering regular compliance education by employee level and publishing a compliance-related newsletter. Domestic Group companies use promotion structures based on DENSO Corporation s system. For overseas Group companies, regional headquarters develop organizational systems, introduce and operate reporting systems, and pursue enlightenment activities that take into consideration the characteristics of their country and region. In North America, Group companies are working to prevent unlawful conduct by assigning compliance officers to each operating base and administering a 24-hour helpline (reporting system) and audit system. The status of these activities is regularly reported to base managers and used in efforts to prevent recurrences and improve activities. In Europe and China, Group companies are operating a compliance program that includes a helpline that is appropriate to the circumstances in each country. In addition, regional headquarters employees responsible for legal affairs in Japan, North America, Europe, China and Southeast Asia meet regularly to work to ensure and maintain compliance by sharing information and issues. Also, DENSO was investigated on July 20, 2011 by the Japan Fair Trade Commission in relation to the Japanese Antimonopoly Act regarding sales of certain automotive components. Locations investigated include the company s headquarters in Kariya, Aichi and some other sales branches in Japan. DENSO is fully cooperating with the investigations. Risk Management Basic Approach and Promotion System for Risk Management DENSO works to minimize the diverse risks associated with its global business operations by reinforcing risk management as another element of its internal control system. Specifically, DENSO gives due attention to identifying and preventing risk before it materializes, and to ensuring a timely and accurate initial response and recovery measures in order to minimize damage when unforeseen crises do arise. To this end, the Company has established the Risk Management Meeting, an all-encompassing body that is designed to unite the entire Group in a common effort to enhance its ability to respond to risk in Japan and overseas. Specific Initiatives In fiscal 2010, we positioned risk management as the foundation of CSR, and worked to integrate and strengthen the risk management promotion system. Through these efforts, we developed a system in which measures to continuously improve and entrench risk management systems and 18 DENSO Corporation Annual Report 2011
frameworks during ordinary times are incorporated into the CSR Promotion Committee, while initial responses to crises (emergencies) are promoted by the Risk Management Committee as before. Furthermore, specialist response units are organized depending on the seriousness of the situation and the degree of urgency, in order to enable flexible measures to minimize damages. Risk Management Structure Board of Directors CSR Promotion Committee (Ordinary times) Risk Management Committee (Emergencies) Responsible Dept. Regional Headquarters Information Security Product divisions/ Each department Domestic DENSO Group Overseas DENSO Group Basic Approach DENSO views technology and information, as well as customer and employee data, as assets that must be safeguarded. This recognition prompted the Company to draft the DENSO Group s Basic Principles of Information Security in 2003, and to take steps to better protect and strengthen control of its information assets. In 2005, DENSO applied the DENSO Group Information Security Standards to 56 domestic Group companies and 76 Group bases overseas. Formulated with reference to Information Security Management System criteria, these standards contain 142 specific points pertaining to the management of information assets. In order to enable swift and accurate execution of business, while continuing to protect information assets, from fiscal 2008, the Company created a new policy on establishment of security measures that take into account not only confidentiality of information, but also completeness and usability (i.e., the difficulty of systems breaking down or malfunctioning), and started to implement this policy. System to Promote Measures Based on the Information Security Control Improvement Division, an Information Security Leader and Information Security Center has been established as a specialized department under the Information Strategy Committee, and Information Security Control Promotion Officers and leaders have been appointed in each department. For the promotion of these activities, DENSO has also built an information management system based on ISO/IEC 27001 and other internationally recognized information management system standards. In addition to the control of trade secrets, audits and Company-wide voluntary inspections, DENSO conducts annual monitoring surveys to ascertain actual conditions at each Group company to continuously raise the level of information security throughout the Group. Looking ahead, DENSO will strengthen its management system as regards to outside staff (temporary staff and contractors), information security of vendors, and its response to incidents and accidents. At the same time, DENSO will promote regular inventorying of confidential information and increasing the awareness of personnel about these matters. Working to Enhance Corporate Value Security Control Structure Direct/ Oversee Information Strategy Committee Propose/Report Report Direct/Oversee Information Security Control Improvement Division Direct/Oversee Persons responsible for information security Report Direct/Oversee Supervisory directors Report Direct/Oversee Responsible directors Report Direct/Oversee Respective Depts. Person responsible for security management Promoters for security management Security Control Secretariat General Administration Dept. IT Planning Dept. Eng. Administration Dept. Audit Department Audits Cooperation Legal Dept. Intellectual Property Dept. Human Resources Dept. Corporate Communications Dept. Production Planning Dept. Procurement Dept. Sales Administrative Dept. Business Planning Dept. DENSO Corporation Annual Report 2011 19
Executive Management (As of June 22, 2011) Board of Directors Chairman Koichi Fukaya President & CEO Nobuaki Katoh Executive Vice President Hiromi Tokuda Executive Vice President Koji Kobayashi Executive Vice President Sojiro Tsuchiya Executive Management Senior Executive Directors, Member of the Board Kazuo Hironaka Akio Shikamura Hikaru Sugi Haruya Maruyama Shinji Shirasaki Akio Tajima Masahiko Miyaki Executive, Director, Member of the Board Shoichiro Toyoda Corporate Auditors Standing Corporate Auditors Toshio Watanabe Masato Iwase Corporate Auditors Fujio Cho* Tsutomu Saito* Toshimichi Kondo* *External Corporate Auditors Managing Officers Executive Directors Shigehiro Nishimura Yasushi Nei Manfredo Nicolelli Yoshikazu Makino Yasushi Yamanaka Michio Adachi Hiroyuki Wakabayashi Noboru Yamada Satoshi Iwata Akihiro Yukawa Masahiko Ito Yoshihiro Saka Toshiyuki Kato Sadahiro Usui Hiroyuki Murayama Hitoshi Tasaka Koji Arima Katsuhisa Shimokawa Tatsuya Toyoda Yukihiko Murakami Hiroyuki Ina Shingo Kuwamura Yukihiro Kato Kazuaki Fujitani Shoji Tsuzuki Yoshifumi Kato Masanari Murakami Yukihiro Shinohara Kazumasa Kimura 20 DENSO Corporation Annual Report 2011