Hitachi Metals : Report 2021 (Integrated Report)

The Hitachi Metals Group Report 2021

Integrated Report

Contents/Editorial Policy

PART 1

PART 1

PART 2

Strategies

4 Message from the President

1. Improving Our Quality Control System

1. Medium-TermManagement Plan

1. Advanced Metals
2. Advanced Components & Materials

16 Message from the General Manager of the Finance Division

18 Message from the General Manager of the Human Resources & General Administration Division

20 High-Performance Materials That Help Realize a Sustainable Society

22 R&D

1. Initiatives for the Environment

1. Financial/Non-FinancialHighlights

1. Milestones in Creating Value

Foundation

1. Message from the Chair of the Board of Directors
2. Corporate Governance

46 Health and Safety

1. Promotion of Diverse Human Resources

1. CSR-ConsciousProcurement
2. Respect for Human Rights
3. Financial Data

1. Non-FinancialData
2. External ESG-Related Recognitions
3. Stock Information
4. Corporate Data/Stock Price

S t r a t e g i e s

S t r a t e g i e s

Information provided by the Hitachi Metals Group

Information on how

the Hitachi Metals Group creates value andThe Hitachi Metals Group Report (Integrated Report) achieves sustainable growth

Information for various stakeholders

Securities Report

Notice of the Ordinary General

Company Profile

Corporate

CSR Detailed

Meeting of Shareholders

Governance Report

Activity Report

Publication of detailed information and

Corporate Website https://www.hitachi-metals.co.jp/e/

the latest information

Information for

Corporate information

Product information

CSR information

shareholders and investors

Financial information

Non-financial information

Editorial Policy

From 2016 (Fiscal 2015 Report), we have released the Hitachi Metals Group Report (Integrated Report) for all stakeholders, including shareholders and other investors. The aim of the report is to deepen understanding among stakeholders about how the Group utilizes its strengths to create value for customers and achieve sustainable growth. This report was edited referencing the International Integrated Reporting Council's The International Integrated Reporting Framework and the Ministry of Economy, Trade and Industry's Guidance for Integrated Corporate Disclosure and Company-Investor Dialogues for Collaborative Value Creation. In addition to the Hitachi Metals Group Report (Integrated Report), we provide information to our various stakeholders as shown in the chart. We also periodically update our corporate website with the latest information, including detailed information and news releases.

Review Period

Fiscal 2020 (April 1, 2020-March 31, 2021)

Note: Where possible, the latest information is used at the time of publication.

Relevant Entities

Hitachi Metals, Ltd. and its consolidated subsidiaries

Note: In cases where information contained herein refers to a review period and/or relevant entities different from those stated above, this is pointed out accordingly.

CONTENTS

4 Message from the President

1. Improving Our Quality Control System

1. Medium-TermManagement Plan

1. Advanced Metals
2. Advanced Components & Materials

16 Message from the General Manager of the Finance Division

18 Message from the General Manager of the Human Resources & General Administration Division

20 High-Performance Materials That Help Realize a Sustainable Society

22 R&D

1. Initiatives for the Environment

1. Financial/Non-FinancialHighlights

1. Milestones in Creating Value

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The Hitachi Metals Group Report 2021 (Integrated Report)

The Hitachi Metals Group Report 2021 (Integrated Report)

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Message from the President

				We will strive to
				enhance corporate
				value and renew
				growth.
				Mitsuaki Nishiyama
				Representative Executive Officer, Chairperson,
				President, and CEO
March 1979	Faculty of Economics, Tohoku University, Japan	April 2015 Vice President and Executive Officer, and General Manager of Finance
April 1979	Joined Hitachi, Ltd.			Group of Hitachi, Ltd.
July 1990	Master of Business Administration (MBA), Georgia State University, USA	April 2016 Representative Executive Officer, Senior Vice President and Chief
April 2008	General Manager of Finance Department I of Hitachi, Ltd.	Financial Officer and General Manager of Finance Group of Hitachi, Ltd.
April 2011	Executive Officer of Hitachi Cable, Ltd. (current name: Hitachi Metals, Ltd.)	April 2020 Representative Executive Officer, Chairperson and Chief Executive
June 2012	Executive Officer and Director of Hitachi Cable, Ltd.	Officer of Hitachi Metals, Ltd.
June 2020 Representative Executive Officer, Chairperson, President and Chief
April 2013	Vice President and Executive Officer	and	Director of Hitachi Cable, Ltd.
Executive Officer, and General Manager of Advanced Metals Division
July 2013	Vice President and Managing Officer	of	Hitachi Metals, Ltd.
April 2021 Representative Executive Officer, Chairperson, President and Chief
April 2014	Vice President and Executive Officer
		Executive Officer, (current position)

The Hitachi Metals Group is pursuing various measures to resolve management issues and regain a growth trajectory.

The Group's business performance has been on a declining trend for several years, resulting in bottom-line losses in fiscal 2019 and 2020. Those were due to several factors, including large investments in multiple directions that we made mainly during the period of the previous Medium-Term Management Plan, which ended in fiscal 2018. Due to changes in the market environment and inadequate management resources during the start-up phase, however, we were unable to derive the investment benefits we initially anticipated. As a result, our cost structure deteriorated and our operational structure became vulnerable to changes in the business environment. Therefore, we announced a

Strategies

Foundation

new Medium-Term Management Plan in October 2020, aimed at building a robust business structure for maintaining stable business activities even when the environment changes. On the basis of that plan, we are implementing various measures, including business structural reforms and inventory optimization. We will continue working relentlessly to transform our earnings foundation to allow us to secure resources for future growth investments.

In addition, we caused a great deal of anxiety and inconvenience to our customers and other related parties with the quality assurance issue announced in April 2020. All members of the Group have reflected deeply on the situation and will work to rebuild a corporate culture centered on "integrity" while steadily implementing measures to prevent any recurrence.

To accelerate these efforts toward transformation and growth, in April 2021, we decided to approve a tender offer for the Company's shares from a consortium of companies led by Bain Capital (hereinafter, the "New Partners"). Committed to becoming a high-performance materials company that supports a sustainable society, we will promptly pursue bold reforms by fully deploying the resources of the New Partners.

Medium-Term Management Plan

We have since reviewed the Fiscal 2021 Medium-Term Management Plan, announced in April 2019. Under the revised plan, released in October 2020 (see pages 12-13), we will implement another round of cost structure reforms to improve our business performance at an early stage and transform our earnings foundation to allow us to secure resources for future growth investments. Under the new plan, we are targeting an adjusted operating margin of 8% and ROIC of 8% in fiscal 2022. We envision a robust business structure to permit continued business activities from a long-term perspective even when the business environment changes, without being limited to short-term profit improvement measures, and thus return the Group to a growth trajectory.

We have positioned fiscal 2020-2021 as a preparatory period called "Set to Grow" to build up our capabilities for a quantum leap forward. In fiscal 2020, we implemented business structural reforms, including withdrawing unprofitable products and consolidating and eliminating business sites. We also improved the yield rate through manufacturing reforms, optimized inventories, and reduced material costs and expenses through our cross-lateral corporate functions. In addition, we sought to optimize personnel costs in line with revenue.

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The Hitachi Metals Group Report 2021 (Integrated Report)

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In fiscal 2021, we will continue striving to reform our business structure, reduce costs and expenses, and optimize personnel expenses to transform and make our profit structure more resilient to demand fluctuations. At the same time, we will perform benchmark analyses of the global competitive environment for each business. On the basis of those analyses, we will accelerate business revitalization in each segment to form an optimal portfolio of growth and core businesses.

Through these efforts, the Group will build a business structure capable of generating investment funds for future growth. Our aim is to become a high-performance materials company that supports a sustainable society.

Quality assurance issue

We sincerely apologize once again to our customers for the great anxiety and inconvenience caused by the quality assurance issue we announced in April 2020 (see pages 8-11). Our products are widely used in such fields as those for automobiles, electronics, and industrial infrastructure, and we deeply regret any impact that the issue may have had on society. Placing top priority on addressing quality assurance issues, the Group will work as one to implement rigorous measures to prevent any recurrence and restore trust. Going forward, we will commit to thoroughly improving our quality assurance organizational structure and processes to the point where we can say quality is our major strength.

High-performance materials company that supports a sustainable society

As a corporate citizen, we will work proactively to achieve the Sustainable Development Goals (SDGs) in our quest to realize a sustainable society.

In terms of the environment, we recognize that addressing climate change is a pressing issue for all humankind. Accordingly, we are working to reduce CO2 emissions from our business operations with the long-term goal of becoming carbon neutral by 2050. At the same time, we will foster the transition to a decarbonized society by developing and providing customers with advanced materials that help address climate change (see pages 44-45).

On the social front, we will step up efforts related to "health and safety" and "diversity," which are the foundations of our growth. In health and safety, we will hold Safety & Quality Meetings, led by top management, and emphasize basic safety for

Strategies

Foundation

equipment and operations through risk assessments (see pages 46-47). As for diversity, we will share the values of our diverse human resources and mobilize their wisdom to drive our growth (see pages 48-49).

Accelerate transformation and growth through capital restructuring

With regard to capital restructuring (the tender offer for the Company's shares and the corporate consortium's participation in management), at present, the tender offer process is expected to move forward in late November 2021, once domestic and overseas competition regulators have completed various approval processes. We believe this restructuring will provide an excellent opportunity for the Group to accelerate its transformation and growth by, for example, enabling the Group to implement growth strategies without being constrained by the portfolio strategy of Hitachi, Ltd. Moreover, by becoming a non-listed company, we can plan strategies from a long-term perspective and implement bold reforms promptly, rather than focus on quarterly results, which a listed company must do. These are the major benefits of the capital restructuring. In addition, we believe we can respond more quickly and more professionally to rapid market changes by utilizing the global knowledge and networks of our New Partners to explore investment opportunities, obtain funding, and develop and implement growth strategies. We will fully deploy the resources of our New Partners to restore our competitiveness and profitability and thus achieve sustainable growth and increase corporate value.

In conclusion, this report is intended to provide investors and other stakeholders with an overview of the Group's initiatives to enhance corporate value and achieve renewed growth. To foster a better understanding of these initiatives, we have systematically compiled financial and non-financial information that we consider important for sustainable growth, in addition to details of our medium- and long-term management strategies. We strive to disclose information in an easy-to-understand manner by having all departments work together to consolidate and report under the Group's cross- organizational approach.

We hope that this report will provide you with useful information and help deepen your understanding of the Hitachi Metals Group's initiatives.

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The Hitachi Metals Group Report 2021 (Integrated Report)

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Ryoichi Aita

Executive Officer

Chief Quality Officer (CQO)

Improving Our Quality Control System

Message from the Chief Quality Officer (CQO)

We will be reborn as a company that maintains integrity and will continue striving to regain people's trust.

Strategies

Foundation

Summary of Recurrence Prevention Measures Regarding the Quality Assurance Issue

With regard to the Quality Assurance Issue, we have formulated measures to prevent any recurrence based on recommendations from the special investigation committee.

1. Changes in awareness and behavior to emphasize quality

On April 27, 2020, the Company announced that it had discovered misrepresented test results in inspection reports submitted to customers for some products manufactured by the Company and its subsidiaries. We also announced the establishment of a special investigation committee of outside experts to confirm the facts and study the causes of the problem. The investigation confirmed the delivery of some products made by the Company and its subsidiaries that did not meet the specifications agreed upon with customers. These products included magnetic materials, specialty steel products, and automotive casting products. One cause was found to be misconduct that included rewriting the inspection

1. Commitment by top management and Code of Conduct
   We will clearly demonstrate our quality-oriented management commitment, both internally and externally, and top management itself will take the initiative in changing internal awareness and behavior. In our Corporate Creed, we will redefine our management commitment to integrity (sincerity and honesty) in all aspects of management and

business, including compliance, and establish it as part of the Code of Conduct for each and every employee.

1. Changes in awareness and behavior of all Group employees regarding quality assurance
   We will promote employee awareness and behavioral changes with the following measures:
2. 1. Re-establishquality assurance rules
   2. Strengthen quality compliance education

results related to product characteristics agreed upon with customers. (The cases that initially identified misconduct and the investigation that then revealed misconduct are collectively referred to as the "Quality Assurance Issue." For

details, please refer to "Results of investigation of the Quality Assurance Issue" below.)

It is truly regrettable that such misconduct affected multiple products and took place over a long time, and that we failed to draw on past cases at other companies as an opportunity to correct our own actions. We sincerely apologize once again for the inconvenience caused to our customers, shareholders, and other stakeholders.

2. Drastically improve quality assurance organizational structure and strengthen its foundation

We will strengthen the governance of our quality assurance	(2)	Ensure the independence of the Corporate Quality
organizational structure with the following measures:		Assurance Division
(1) Establish the new position of Chief Quality Officer	(3)	Clarify the roles and authority of the CQO and the
(CQO)		head of the Corporate Quality Assurance Division

3. Improve quality control processes

The Group has currently set as its highest priority a comprehensive effort to implement measures to prevent any recurrence. Acutely aware that our products and services are used in a wide range of fields in society, we will continue striving to regain the trust of customers by being reborn as a company that maintains integrity in all aspects of its operations.

• Results of investigation of the Quality Assurance Issue

In April 2020, the Company established a special investigation committee of outside experts to delve into the discovery of misrepresented test results in inspection reports about some products made by the Hitachi Metals Group. The committee spent around nine months confirming facts and identifying causes and announced the results in January 2021.

• Summary of investigation results

The investigation, which covered all products manufactured by the Group, confirmed the following misconduct pertaining to magnetic materials, specialty steel products, and automotive casting products made since the 1980s.

We will create clear Groupwide bylaws related to each quality control process, including the treatment of abnormalities, cataloging, design reviews from the development stage to the mass production stage, and handle management of change, and will make the bylaws known to all employees. In addition, we will implement the following measures:

1. Strengthen decision-making process for new orders One cause of the issue was that we accepted orders under conditions that did not match our process and production capabilities. As a result, we have now created guidelines for specification agreements with customers and will ensure that they are thoroughly understood. We will also establish a system to continuously check and improve the process and production capabilities at each site to enable stable

mass production. In addition, we will strengthen quality control by clarifying and reinforcing the role of the sales department-the point of contact for exchanging specifications with customers-in quality control.

1. Build IT system to prevent conduct such as inaccurate rewriting of inspection results We will invest approximately ¥10 billion to build a system that can automatically generate and manage inspection data appropriately, with minimal human involvement. We will incrementally introduce the system at each manufacturing site by around 2024. Between now and when the system is established and operational, we will take other measures such as stepping up monitoring by increasing the frequency and sample size of integrity audits.

• Rewriting of test results • Inspections conducted using inconsistent methods or procedures

• Unimplemented inspections and diversion of converted values and past actual values • 4M changes* made without customer approval

4. Strengthen monitoring and whistle-blower systems for quality compliance

As a result of such misconduct, the delivery of products that did not meet the specifications agreed upon with customers was confirmed.

• 4M changes: including changes in manufacturing locations, manufacturing facilities, subcontractors, manufacturing processes, and materials ("4M" stands for "man, machine, material, and method")

• Analysis of causes

The main causes of misconduct are as follows.

1. Causes of misconduct	2. Causes for continuation of misconduct
• Acceptance of orders without sufficiently verifying process	• Those involved found it difficult to make decisions about public
capabilities, etc.	disclosure of misconduct
• Lack of awareness about compliance with specifications	• It became difficult to be aware of the misconduct issue
agreed upon with customers and quality assurance
• Pressure to win orders and meet deadlines	• The monitoring function for quality compliance risks was weak,

To ensure compliance with specifications agreed upon with our customers, we will establish the following second line and third line of defense in addition to the first line of defense, which is an internal control system for sales, product development, design, and manufacturing. In this way, we aim to improve the effectiveness of our whistle- blower system. We will also strive to conduct multifaceted analyses and evaluations of quality compliance risks while examining and implementing cross-divisional countermeasures. To this end, we will provide opportunities to discuss risk evaluation and countermeasures at

management meetings and other forums. In addition, we will strengthen monitoring by the Audit Committee and the Board of Directors.

1. Have the Corporate Quality Assurance Division review internal audits (integrity audits) as the second line of defense
2. Have the Internal Auditing Office conduct audits of the Corporate Quality Assurance Division as the third line of defense
3. Strengthen the whistle-blower system

making it difficult to identify the misconduct

In addition, on April 1, 2021, we established the Quality Compliance Committee, whose members include outside experts, to serve as an advisory body to the Board of Directors to solidify and enhance the effectiveness of measures taken by the Group to prevent any future recurrence (see page 10).

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The Hitachi Metals Group Report 2021 (Integrated Report)

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