Never say “no” In this first Integrated Report for the Kaga Electronics Group, I would like to touch on the intangible assets that have become our cornerstone—the strengths that we have built up over our history of 50 years—before I talk about our medium- to long-term growth strategy. Half a century ago, when the Company was established, I had very little money and had achieved very few results. Fortunately, I was able to make a number of good personal connections and was committed to delivering whatever a customer ordered with a single phone call. As such, Kaga Electronics started out by selling electronics parts, basically handling anything and everything related to those parts. Later, I noticed a change in the kind of requests our customers made, due in part to advancements in the times and technology, and in part to exchange rates and the economic environment. The vacuum tube is an example of a product we handled around the time we were founded. This product soon made way for the transistor, integrated circuit (IC) and ultra large-scale integration (LSI), ushering in a rapid shift from the analog to the digital. By continuing to meet customer needs with simple honesty, we succeeded in enhancing and expanding our product lineup, handling everything from parts procurement to kit-parts sales and even contract production, known as electronics manufacturing services(EMS). We have also spread our wings beyond our position as a trading company to include assistance with development and support services. These factors have helped to form the backbone of the company known as Kaga Electronics today. Although it would be trendy to refer to our operations as offering one-stop services, our true origin lies in our customer-first approach. In addition, our present global network, one of our strengths, evolved from our efforts to venture overseas to procure parts and meet EMS needs locally in conjunction with our customers. This was a response to Japanese companies that transferred their production operations to China and other parts of Asia to counter the rising yen in particular. A key to our business is the enhancement of customer satisfaction. Over the past 50 years, we have worked tirelessly to gain the trust of our customers based on the motto “Never say no,” according to which we strive to fulfill any and all requirements, whatever they may be.
Personal connections are intangible assets Over the years, the idea that “personal connections are intangible assets” has formed one of the pillars of what we call KAGAism, the essence of who we are. To begin with, independent trading companies like Kaga Electronics handle an incredibly large number of product items by necessity to ensure that the customer comes first. This is because there are no limitations, unlike with manufacturing-type trading companies that are bound to a certain supplier for a certain product. This has enabled us to build up an exceptionally broad business network for an exclusive electronics trading company, with approximately 4,000 customers and 2,000 suppliers. But that does not mean we have created this network solely by dealing with products we think our customers really want. We combine the wealth of information we gain through frequent conversations with many customers so that we can constantly anticipate what the next trend may be. In other words, as human connections intensify, our ability to look ahead grows stronger and more refined. Our capacity to respond quickly and accurately to changes in the environment and needs can be attributed to our personal connections and business networks that we have built up through our relationships of trust. These connections and networks have become an integral part of our management foundation, as intangible assets in our work as a trading company.
Inventory is a liability There are also benefits to being free of inventory. In our earliest days, we had no choice but to place orders for products after receiving an order from a customer, since we lacked ample capital. There was really no other option, as it was more a case of not being able to have any inventory than not having any inventory. Nonetheless, such zero inventory management became the fundamental principle for Kaga Electronics and has evolved into how we receive and place orders, a critical feature of the Company. This may seem like a harsh way to phrase it, but without surplus capital, inventory would have been a dormant capital investment. Investing what capital we had in inventory would have meant borrowing money at interest when we required capital for other purposes. In addition, inventory would mean incurring other costs, including rent fees for storage space and insurance premiums. This is why we view inventory as a liability. Because we do not have any inventory, sales managers through out the Group actively go out to gather order information from customers as swiftly as possible, which enables us to respond even more quickly to changing needs. In addition, conveying order schedule informationto suppliers helps them to plan production better, which is greatly appreciated. Based on this information cycle, we have been able to create a sustainable business model built on win-win relationships with customers and suppliers. In a trading company business, the emphasis is on being quick to seize an opportunity. Ever since realizing that we can establish a culture in which we never miss an opportunity by being inventory free, we have continued to consciously communicate to employees the advantages this brings and hone them into our own unique ordering system.
An organization driven by communication The Kaga Electronics Group consists of more than 40 companies covering a wide range of business domains, from electronic parts and semiconductors to information equipment, amusement equipment and sports. There are limits to a person’s capacity to respond to changes and uncertainty in the environment and to quickly seize an opportunity. To maximize our capabilities, our organizational approach is critical. The keys to this are never saying “no” when it comes to the ambitions of employees and actively delegating authority once a decision has been made. People inherently want to grow and develop. That is why it is important to entrust them with tasks that help them togrow. A company will not grow if it does not nurture its people. Naturally, not all challenges go well, but it is vital to learn from failure. I have personally learned a great deal from my many mistakes, and these experiences have laid the platform for a culture in which we never fail to reward good work or punish bad work. Moreover, it is communication that really grabs the attention when encouraging employees to take on challenges and when delegating authority. Soon after founding the Company, I discovered that socializing with employees after work and communicating with them closely brought about a sense of unity. Having comrades around you makes you want to do your very best and work together to achieve goals. Based on such experience, we strive to create an organization that promotes communication in its different forms and the reconciling of values to ensure a more open workplace where everyone works toward the same objectives. This idea is connected to our belief that the Company belongs to everyone, not merely the founder, and that all finances should be transparent as a result. If the Company is profitable because of its employees’efforts, then everyone should have a share in its profits. During hard times, everyone should practice a little perseverance and aim for the next leap forward. I believe that true management lies in creating an environment in which the Company’s condition is open to scrutiny and all employees are free to discuss the future from amanagerial point of view.
People are a finite asset; companies are perpetual entities On a global basis, Japanese companies often lag in responding to changes in the business environment. The changing speed of business is high not only in Silicon Valley but also in China, South Korea and Taiwan. In a short space of time, we have seen the steady emergence of high-growth companies in China in particular in such fields as robotics and fuel cells. The electronics industry is expected to change and grow dramatically, driven by advancements in the Internet of Things (IoT) and artificial intelligence (AI) related technologies across the board. Against this backdrop, in the fast-changing domains of automotive electrification and computerization, it is now more important than ever to make decisions with overwhelming speed to succeed in business. And that is exactly why we need to keep a watchful eye from a broad perspective and remain sensitive to changes in the industry. This may mean trying to determine which parts are required for electric vehicles (EVs), what kind of ICs the market demands, and which units to focus on. People are a finite asset; companies are perpetualentities. There is no end goal to corporate activities. Even at Kaga Electronics—a company with 50 years of experience that aims to thrive and celebrate it scentenary—we must keep changing to drive sustainable growth. With this in mind, our efforts include earmarking ¥5 billion for investment in a venture company and developing new products and services to meet growing needs in society for safety, security and environmental preservation. As we take on these new endeavors, one thing has remained unchanged from times gone by and will continue into the future: our philosophy that “Everything we do is for our customers.”
Review of the fiscal year ended March 31, 2018 Achieved record-high ordinary income for the first time in 13 periods To begin with, I would like to report the main points of the Kaga Electronics Group’s consolidated financial results for the year ended March 31, 2018 (from April 1, 2017 toMarch 31, 2018). Performance for the fiscal year exceeded initial projections in all items, from net sales to profit attributable to owners of the parent. While business conditions for amusement machines were tougher than anticipated, this was offset by strong sales for electronics manufacturing services (EMS) and housing and commercial facilities, enabling us to revise forecasts upward twice during the period, and I believe we succeeded in following through on our commitments. We were able to firmly put down roots with these businesses as the foundation for profit, which helped us to post arecord high for ordinary income for the first time in 13 fiscal years. This shows that we have taken a solid step forward to establishing profit-oriented management, one of the aims of our Medium-Term Management Plan 2018.
Gross profit and SG&A expenses Aiming for profit-oriented management I will outline the initiatives we have taken from the perspective of profit-oriented management using gross profit and selling, general and administrative (SG&A) expenses. The fiscal year ended March 31, 2005, when we posted our previous record high for ordinary income , as a comparison with the four years starting in the fiscal year ended March 31, 2015, when I was appointed president , gross profit has increased significantly and the gross profit marjin is also improving. On analysis, we can see that the keys to this were twofold—expanding the high value-added EMS business and actively cultivating new fields that we did not have in 2005 such as the automotive, medical and power tools domains. We have achieved this based on efforts to strengthen organizational capabilities and business foundations through such means as allocating the right person to the right position with the aim of enhancing profitability. As the next step, we will look to achieve a profit ratio around the 14% or 15% range. While the absolute value of SG&A expenses as well as the ratio of SG&A expenses to sales increased in the fiscal year ended March 31, 2015 compared with the fiscal year ended March 31, 2005, in the past three years we have worked to hold both of these indicators in check as we forge ahead with structural reforms at Group companies. In 2016 we merged three Group companies engaged in the information equipment business. In 2017, we transferred shares in a subsidiary developing and producing SiC boards to an outside entity, and this fiscal year we integrated two domestic manufacturing subsidiaries. For our next step, we aim to lower the ratio of SG&A expenses to sales to under the 10% mark.
Strengthening resistance to changes in the external environment Expanding the scale of the EMS business Changes in trading rights, channels and amounts are practically an everyday occurrence for a trading company:losing, for example, agency rights for merchandise that have been painstakingly nurtured or facing a declinein orders of parts following a slowdown in customers’product sales despite the recent strong showing. The most important management challenge for us is to work out how to respond quickly to such changes in the external environment. With this in mind, if we compare net sales between the fiscal year ended March 31, 2008, when we achieved our previous record high, and the fiscal year ended March 31, 2018, we can see that the figure has dropped by more than ¥50 billion over that 10-year period. At the start of that period, we actually posted more than ¥40 billion in sales of products that we no longer handle, including PCs made by Apple and SanDisk memory. In addition, the business for amusement machines, which peaked around the same time, has witnessed a contraction in the market overtime due to the impact of the repeated reinforcement of regulations, driving sales down by more than ¥50 billion over that 10-year period. Excluding these factors, however, net sales for the fiscal year ended March 31, 2018 increased relative to 10 years ago in real terms. One of the biggest reasons we have been able to raise our resistance to changes in the external environment and ensure stable profit has been expansion of the EMS business. We have leveraged our ability to procure a wide range of parts as an independent general electronic strading company and our production system capable of high-mix, low-volume manufacturing to move into different industries and expand the applications we can handle. We have also established production bases around the world. As a result of these efforts, we have grown more resilient to changes in the environment and developed into a business that is more diversified and flexible. I would like to see us double sales in the EMS business,which amounted to just under ¥90 billion for the fiscal year ended March 31, 2017, during the period of our next Medium-Term Management Plan. We will aim to drive further growth by targeting growing fields: namely, the automotive field, where automation and computerization continue to advance; the air conditioning field, where there is demand for greater environmental compatibility; the industrial device field, including robots and factory automation (FA) equipment; and the medical field, where precise processing technology is required.
Forecast for the fiscal year ending March 31, 2019 A commitment to achieving the targets of the Medium-Term Management Plan We have already secured a series of new projects for the fiscal year ending March 31, 2019 on the back of efforts to expand overseas sites for the EMS business, and the future looks extremely bright. The demand-supply situation has tightened up for certain electronic components and semiconductors, however. In the EMS business, if we run out of just one part, our line stops flowing, so it is crucial for us to ensure the stable procurement of everything we need. We decided not to disclose financial forecasts at the start of the fiscal year given these uncertain factors. Nonetheless, since the fiscal year ending March 31, 2019 marks the final year of the current Medium-Term Management Plan, I remain committed to the end to achieve our targets. We are still within range, especially after factoring in the contribution upon making Fujitsu Electronics Inc. a subsidiary, a move announced recently(see page 14). We plan to announce financial forecasts when we present results for the second quarter in November, when the outlook is clearer.
Shareholder return Increased dividends for the fifth consecutive term Kaga Electronics has positioned the return of profits to shareholders as one of its most important management policies. We would like to reciprocate our shareholders’support by providing dividends from our surplus so that they feel they can continue to support us by retaining the Company’s shares over the long term. Based on the belief that we have held since our earliest days that profit generated by everyone’s hard work will be shared with everyone, we make it a principle to conduct transparent management in which we return profits to shareholders through extraordinary dividends when we expect to generate a level of profit that exceeds our initial target. I am pleased to report that we increased dividends once again for the fiscal year ended March 31, 2018, making it five consecutive years of dividend growth since the fiscal year ended March 31, 2014, as a result of revising the dividend forecast upward twice following dual financial forecast revisions during the period. Going forward, our basic policy regarding the distribution of profit we generate is to maintain a stable and continuous payment of dividends to shareholders while investing to drive further growth toward the next leap ahead as well as to ensure asound financial position from a long-term perspective.
Direction of the next Medium-Term Management Plan Aiming to be a leading global company We are now within reach of our targets under the current Medium-Term Management Plan 2018, including the aforementioned targets. As such, we are pushing ahead with formulation of our next Medium-Term Management Plan. We plan to report the full picture when we announce results for the second quarter of the fiscal year. We aim to become the industry leader in Japan and be a world-class company, a goal common to the current plan as well. To achieve this, we will further pursue establishment of profit-oriented management, where it is essential for us to considerably raise the scale of both sales and profit. Not even a specialist trading company can lay claim to be top in the industry unless it can achieve ¥500 billion in sales in quantitative terms. From a global point of view, the trillion yen mark has become the benchmark. That is the level required to outstrip the global competition and develop a profile that will make the international community take notice. At the same time, we aim to boost ROE, which currently sits just over9%, to beyond the 10% level, from the perspective of management efficiency. A key theme from a qualitative standpoint is the establishment of a corporate style and governance system be fitting the aforementioned company scale and industry positioning. We are currently engaged in deep discussions inside the Company about a range of matters in accordance with set priorities, including whether to shift to a flexible holding company structurein preparation for further corporate acquisitions and industrial reorganization; whether we need to strengthen personnel by adding another two outside directors; determining if our diversity policy is progressing effectively; and determining if our shareholder returns are sufficient. In any event, we will continue to strive for new growth without fear of change.