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12 Review of Operations

Information Systems & Electronics

Information & Telecommunication Systems Several factors drove greater investment in IT in all fields in fiscal 1999. Most important were rapid diffusion of the Internet and e-commerce as well as greater networking and progress toward an information-intensive society. But curbs placed on investments in IT, particularly in the U.S., in the latter half of the year due to Y2K concerns negated these gains somewhat. Buyers stood on the sidelines waiting for the Y2K issue to pass. Mainframe sales were affected the most. In the computer business, net sales and earnings both fell. In , the Company’s systems integration (SI) business posted strong sales. Most of the growth came in two sectors: the financial sector, where investments are being made in information systems to respond to Japan’s “Big Bang”; and the public sector for systems to provide a new care insurance system for the elderly and to support other online government services. Overseas, sales turned downward, as Y2K concerns caused buyers to hold off purchasing the Skyline Trinium mainframe, shipments of which started in September 1999. Intensifying price competition also took its toll. Sales of systems also dropped below year- ago levels. In disk array systems for open systems, OEM production for Hewlett-Packard Company remained strong. This was outweighed, however, by lower sales of systems for mainframes. In this area, businesses other than hardware——, SI and services—— account for a greater proportion of sales as Hitachi moves forward. To reflect this shift in emphasis, in January 2000, the Information & Telecommunication Systems Group was reorganized into five business groups, four by distinct customer-defined fields——the Finance & Distribution Systems Group, the Industrial Information Systems Group, the Government & Public Corporation Information Systems Group, and the Telecommunication & Information Systems Group. The fifth new group, the Information & Computer Systems Group, will handle products. Hitachi took this step to enhance its capability to deliver solutions to specific industry sectors. Sales and systems engineering capabilities have been integrated into each business group for this. Overseas, too, Hitachi has taken restructuring measures. Hitachi restructured Corporation, a U.S.-based subsidiary, to effect a shift from hardware sales to solutions businesses. By sector, the Finance & Distribution Systems Group posted higher year-on-year sales due to growth in demand for services such as development of network systems and joint Internet banking centers. In November 1999, Hitachi inked a strategic alliance with Computer Sciences Corporation, which will see Hitachi join forces to offer expert IT consulting services and supply leading-edge information systems in Japan’s financial markets. In another development, in March 2000 Hitachi started a debit card settlement service targeted at local banks, retailers and distributors. Also, Hitachi reached a basic agreement with THE MICHINOKU BANK, LTD., The San-in Godo Bank, Ltd. and The Higo Bank, Ltd. for the joint outsourcing of core information systems. Plans call for the core systems of the three banks to be progressively transferred to a joint center at Hitachi’s outsourcing center in Okayama Prefecture during fiscal 2001 and fiscal 2002. In April 2000, Hitachi reached a broad-based agreement with Nihon Unisys, Ltd. in the area of financial information systems. This agreement encompasses the supply of each other’s solutions products and services and the sharing of outsourcing resources. Furthermore, Hitachi linked its TWX-21 extranet-based media service with cash management system solution Integrated Treasury support services run by the Industrial Bank of Japan, Limited. Joint operation of this service began in July 1999. 13

The Industrial Information Systems Group strengthened application service provider services that provide enterprise resource planning packages. In October 1999, Hitachi acquired a majority holding in Computer Service Co., Ltd., an information-processing subsidiary of Showa Denko K.K., to bolster its solutions business for the chemicals industry. The Government & Public Corporation Information Systems Group had a good year, posting sales gains. This was primarily attributable to solid demand for systems to handle a new care insurance system for the elderly ahead of its April 2000 start in Japan. In September 1999, Hitachi started selling total electronic administrative solutions to support the provision of all manner of government services over the Internet. Rooted in advanced security and verification technology, the solutions cover everything from consultation to systems planning, construction and outsourcing. The Japanese government plans to use IT to improve administrative services, including online-based administrative procedures, by fiscal 2003. The Information & Computer Systems Group, Hitachi’s products business, recorded a sharp year- on-year decline in sales. The main reasons were Y2K concerns and intensifying price competition, which hurt overseas demand for mainframes. In July 1999, Hitachi started a solution services business that uses Storage Area Network environments. In November 1999, Hitachi started the joint development of next-generation automated teller machines (ATMs) with Corporation to effectively use business resources and strengthen ATM operations. In the Telecommunication & Information Infrastructure Systems Group, sales of exchange systems decreased from a year ago, primarily because telecommunications carriers curbed capital expenditures in this area. Optical products performed well, however, amid rising demand for Internet Protocol (IP) networks and mobile communications. Sales of optical transmission systems, optical modules and other optical products in the U.S. market rose. Looking ahead, more growth is expected in IP networks and mobile communications. This is where Hitachi will focus its attention. In January 2000, Hitachi commenced sales of gigabit routers boasting an ultra-high speed IP routing capability of 40 million packets/second, ranking them among the fastest in the industry. They are ideally suited to applications ranging from corporate enterprise networks to carrier and Internet Service Provider core networks. In November 1999, Hitachi entered into a business alliance with 3Com Corporation that covers the development of IP gateway systems and sales. Furthermore, Hitachi started joint development with QUALCOMM Incorporated of a mobile telephone system based on that company’s High Data Rate technology. Hitachi Software Engineering Co., Ltd.’s net sales and net income amounted to ¥160,084 million (US$1,510 million) and ¥5,576 million (US$53 million), respectively, thanks to strong demand for systems software development for government agencies and financial institutions. To upgrade its systems outsourcing business targeted at financial institutions, the company acquired an equity interest in INES Corp. In December 1999, subsidiary Hitachi Business Solution Co., Ltd. listed its shares. Looking ahead, the company wants to grow new businesses. Two notable examples are the provision of satellite image content from its investment in EarthWatch Incorporated, and life science businesses such as DNA chips.

Hitachi Outsourcing The “GR2000 Gigabit Okayama Center Router” boasts a maximum effective performance of 40 million packets/second, making it a powerful ally for Internet businesses. 14

Hitachi Information Systems, Ltd.’s net sales and net income increased 7% to ¥108,526 million (US$1,024 million) and 170% to ¥2,552 million (US$24 million), respectively, on the back of strong demand for development of new care systems for the elderly, outsourcing services involving the data entry of family registry information for local governments and network outsourcing services. In fiscal 1999, the company advanced its solutions business in the Internet security field with the launch of its Digital Verification Service for verifying the identity of people on the Net. Furthermore, to consolidate Hitachi Group resources in the field of wireless communications and to reinforce the company’s ability to offer total solutions, it announced plans for a merger in October 2000 of group companies Kokusai Electric Co., Ltd., Hitachi Denshi, Ltd. and Yagi Antenna Co., Ltd.

Electronic Devices Semiconductor operations as a whole bounced back from the preceding year’s loss to return a profit, and net sales rose for the first time in four years. This result was mainly attributable to dramatic growth in the semiconductor market, which was fueled by higher worldwide demand from manufacturers of information appliances and PCs. Restructuring carried out in the previous year was another contributing factor.

The “PF08103B” RF Hitachi’s “16MB power module gained MultiMediaCard™ ” is the top share in the the world’s smallest GSM market. class flash card for mobile applications.

In system LSIs, demand was robust across a broad spectrum of fields, most notably information appliances, resulting in higher sales of H8 and SH series microprocessors. In November 1999, Hitachi announced with STMicroelectronics the SH-5 64-bit RISC microprocessor architecture. This cutting- edge microprocessor is ideally suited for next-generation digital home appliances. Other news included the signing of a broad-based technology agreement with LSI Logic Corporation. The agreement includes joint development of state-of-the-art logic process technology and cooperation on embedded DRAM system LSIs. In DRAMs, demand for 64Mb DRAMs was strong, particularly for use in servers and PCs. This kept the production lines at Singapore-based Hitachi Semiconductor Singapore Pte. Ltd. and other facilities operating at full capacity. Hitachi’s quickness in rolling out products that take advantage of cutting-edge 0.18-micron process technology resulted in a dramatic recovery in earnings in fiscal 1999. In December 1999, NEC-Hitachi Memory, Inc., a DRAM joint venture, was established with NEC Corporation. The company started design and development of 256Mb DRAMs and 512Mb DRAMs using 0.13-micron process technology in April 2000. In memories other than DRAMs, sales soared, particularly of large-capacity AND-type Flash memories for application in data storage. Future plans include increasing production of large-capacity AND-type Flash memories. In general-purpose semiconductors, sales continued to be solid, as Hitachi maintained its leading share in Radio Frequency (RF) power modules for GSM-standard mobile phones. In 2000, plans call for investments to raise production capacity of RF power modules. 15

In March 2000, Hitachi joined with Taiwan’s United Microelectronics Corporation to establish Trecenti Technologies, Inc. for the construction of a full-scale 300mm semiconductor wafer plant. In April 1999, Hitachi sold its silicon wafer business to Shin-Etsu Chemical Co., Ltd. and in October this was followed by the sale of the Company’s semiconductor mask unit to Co., Ltd. as part of measures taken to improve operational efficiency. In display products, sales of CRTs for PC monitors fell sharply owing to price competition. LCDs achieved good year-on-year growth due to higher demand for 14.1- and 15.0-inch thin-film (TFT) LCDs for notebook PCs and 14.1- and 15.0-inch Super TFT displays for desktop PCs and monitors. The overall result was that the Displays Group posted a sharp improvement in net income, reversing a loss in the previous year. In October 1999, construction of a production line in Mobara city, Chiba Prefecture, was started to meet growing demand in the TFT displays market. Slated to come on line in 2001, the new facility will produce a wide range of products from low-temperature polysilicon TFT LCDs to Super TFT LCDs for diverse applications, including mobile terminals and TVs. In April 1999, Hitachi and Limited established Fujitsu Hitachi Limited to design and develop plasma display panels for the wide-screen TV market.

Hitachi’s LCD monitor Hitachi’s advanced CD- with Super TFT display SEM “S-9220,” the new industry standard in semiconductor manufacturing equipment.

Other In the digital media field, sales of display monitors slumped due to fierce price competition. Unit prices for DVD-ROMs, DVD-RAMs and other optical storage devices also fell as a result of declining PC prices. One highlight of the year was the commencement of sample shipments in January 2000 of 4.7GB DVD-RAM drives. The Instruments Group’s sales were flat in fiscal 1999. On the positive side, there was increased demand for semiconductor manufacturing equipment, as the world semiconductor market staged a recovery, and Hitachi’s CD-SEMs, scanning electron microscopes used exclusively for measurement of critical dimensions, turned in a solid performance. These CD-SEMs have the leading share of the market for semiconductor evaluation equipment. However, lower sales of industrial systems because of sluggish private-sector capital expenditures offset these results. Looking ahead, the Company intends to expand sales of DNA sequencers developed jointly with PE Biosystems. Hitachi Medical Corporation’s net sales increased 4% to ¥109,512 million (US$1,033 million) and net income decreased 1% to ¥1,511 million (US$14 million) due to the strong yen and soft demand for ultrasound diagnosis equipment and X-ray equipment amid an extremely price-competitive climate. To strengthen the medical information systems business, which is showing signs of growth, in November 1999 the company acquired Oki Medical Systems Co., Ltd. 16 17 Central to the Japanese government’s Millennium Project is the establishment of a “cyber government” by fiscal 2003 to handle a host of administrative procedures online. This will entail overcoming many thorny issues, including security. Enter Hitachi’s SolutionMax for CyberGovernment. Launched in September 1999, SolutionMax for CyberGovernment is a total electronic administrative solutions suite that includes advanced encryption and verification technologies designed to bring the government’s blueprint of the future to fruition. In March 2000, Hitachi unveiled Japan’s first “CyberGovernment Square” to showcase this package and give a glimpse of the shape of next-generation government. 18

Power & Industrial Systems

Power Systems Power systems faced an extremely challenging market in fiscal 1999. This reflected two factors: slowing growth in demand for electricity in Japan, and cutbacks in capital expenditures by electric power companies. While sales of nuclear power systems increased, sales in Hitachi’s hydroelectric power, thermal power and other operations dropped. To raise competitiveness and improve operational efficiency, several measures were taken. In April 1999, seven subsidiaries were reorganized by merging them into three companies. The following November, Xuji Hitachi Electric Co., Ltd., a joint venture, was established in China to manufacture and sell protection and control equipment for electric power companies and other markets. In January Hitachi delivered the 2000, a joint venture, Power EPC Co., Ltd., was moisture separator formed in Taiwan to handle engineering work reheater for unit 3 of Tohoku Electric Power related to substation construction. The same Co., Inc.’s Onagawa month Hitachi teamed up with Nuclear Plant. Company and Corporation to form a joint venture, Global Nuclear Fuel, to develop, design, manufacture and market nuclear fuel.

Industrial Systems Rolling stock, sewage systems and environmental systems performed well, but the operating environment was made difficult by declining private-sector capital expenditures in Japan. During the year, the strategic focus was on two areas. First was the strengthening of the service business. One component of this strategy involved the launch of HDRIVE, a system under which highly efficient motors and high-voltage inverters are supplied to client plants in exchange for a fixed percentage of money saved——in the form of reduced power bills——by these energy-conserving products. An entirely new business format, HDRIVE does not involve the sale of hardware and is instead totally service oriented. Hitachi also focused on environmental systems, a market that is expected to grow. In this vein, Hitachi established a joint public- and private-sector entity in Hokkaido to generate electricity from industrial waste. Hitachi also established joint venture companies in Hokkaido and in October and December, respectively, to recycle household appliances. Other strategies were executed with the aim of bolstering Hitachi’s competitiveness and improving operational efficiency. In air-conditioning equipment, Hitachi reorganized parent company operations to form a wholly owned subsidiary in April 1999 and merged it with a sales subsidiary in July to form an integrated manufacturing and sales company. In November 1999, Hitachi established Fuji Hitachi Power Semiconductor Co., Ltd., a joint venture with Co., Ltd., for the design and development of power semiconductors. In April 2000, to speed up management, Hitachi also reorganized two design and manufacturing divisions to form two new entities: one for motors, inverters and other products, and the other for substations, power transmission and other systems. 19

This pilot plant for The Eastern Division recycling mixed waste Monitoring Center of plastics was built for the Hitachi Building New Energy and Systems Co., Ltd. Industrial Technology Development Organization by the Clean Japan Center with the cooperation of Hitachi.

Other In Japan, sales of and decreased in line with a decline in the number of commercial buildings being built. During the year, Hitachi set out to achieve two goals. One was to become more competitive in and hardware. The other was to mold Hitachi into a total solutions provider of comprehensive building management systems, encompassing everything from facility management to security and cleaning services. In this vein, in November 1999 Hitachi acquired SEISHIN SERVICE CO., LTD., a building management firm with particular expertise in the retail store sector. The next month Hitachi took an equity interest in BRAIN CO., LTD., a leading direct marketing company in Japan. Hitachi intends to leverage that company’s knowhow to win new orders and expand the service business. Steps will also be taken to improve operational efficiency by eliminating any overlap in operations. Hitachi will achieve this by merging five elevator and escalator manufacturing subsidiaries into a single entity in July 2000. Automotive products posted flat sales in Japan in fiscal 1999. Growth in domestic sales of automotive equipment for minicars, sales of which jumped during the year, were offset by sluggish sales of passenger cars. Overseas sales were flat, too. Here, a strong yen negated robust sales in the U.S. In April 1999, Hitachi invested in UNISIA JECS CORPORATION, with whom Hitachi is developing cutting-edge vehicle control technologies for Intelligent Transport System applications. Net sales of Hitachi Construction Machinery Co., Ltd. increased 10% to ¥320,127 million (US$3,020 million). Although domestic sales of construction machinery rose, competition remained fierce. Overseas, exports to Asia increased sharply, reflecting the economic recovery in that region. By contrast, in the U.S. demand was lackluster. The strong yen also had an adverse effect. As a result, net income dropped 19% to ¥1,530 million (US$14 million). Net sales of Hitachi Plant Engineering & Construction Co., Ltd. plummeted in all areas. In water treatment and air pollution control operations, sales were down, despite being relatively solid to the public sector. Electric power plant operations were hurt by reduced capital expenditures at Japanese electric power companies. In air-conditioning operations, a decline in private-sector capital expenditures took its toll. Net sales thus fell 22% to ¥196,268 million (US$1,852 million) and operating income declined 21% to ¥5,553 million (US$52 million). Net income, however, increased 11% to ¥2,316 million (US$22 million) as a result of the adoption of tax-effect accounting in the fiscal year. 20 21 Hitachi’s technology came to the fore in developing next-generation bullet . The state- of-the-art 700 series, pictured opposite, showcases Hitachi technology to reduce noise and vibrations, ensuring a comfortable ride as the sleek hurtles along at speeds of up to 285 km/h. These technologies include double-skin aluminum alloy car bodies, low-noise pantographs and an aerodynamically designed front nose cone. And, cutting-edge keeps passengers comfortable even when the outside air temperature is a sweltering 40°C. The 700 series has already entered service on the Tokaido and routes of Central Japan Railway Company and West Japan Railway Company, respectively. 22

Consumer Products

Demand for household appliances in Japan softened in fiscal 1999 as the employment picture remained bleak and household incomes stagnated. However, net sales increased 1% year on year thanks largely to growth in distinctive products that deliver extra value to customers. Such products included energy- efficient refrigerators, washing machines featuring superior cleaning power, and a mobile phone equipped with a wireless application protocol (WAP) compliant microbrowser. Hitachi , Ltd. also posted higher sales, especially in storage media, notably computer tapes. Overseas, Hitachi’s projection TVs, which have a high market share in the US$2,500 and over price range in the U.S., once again turned in a solid performance. In room air conditioners, demand soared in China as the mercury rose in the summer months, and exports from Japan to Europe increased. The restructuring of the Consumer Products Group that began in fiscal 1997 entered its last stage with the transfer of manufacturing and design operations to affiliated companies. Improved efficiency and greater competitiveness have been the results. Hitachi is currently concentrating on ways to cut operating and distribution costs. To do so, Hitachi is achieving greater speed by using supply chain management to more closely link its sales

activities with its production system. The goal is The “R-K46EPAM” to hold as little inventory as possible. The first target energy-efficient refrigerator uses pulse was room air conditioners, a product category in amplitude modulation which there is a large seasonal variation in demand. technology. Hitachi has dramatically shortened the time between order receipt and delivery from over two month to six days. Moving forward, the company will shorten lead times for other consumer products in a similar manner.

Home Appliances Domestic home appliances operations languished amid a sluggish Japanese economy. Two product lines, however, earned high marks from the market. First were energy-efficient refrigerators using pulse amplitude modulation technology. Second were washing machines that achieve a substantial improvement in washing power by removing metal ions contained in tap water. In overseas markets, unseasonable summer conditions in Southeast Asia dampened room air conditioner sales there. In China, however, room air conditioner sales soared thanks to a heat wave. Shanghai Hitachi Electrical Appliances Co., Ltd., which manufactures room air conditioner compressors, saw its sales climb to record levels. In exports, shipments of room air conditioners to Europe and refrigerators to Asia increased. In refrigerator operations, Hitachi Consumer Products (Thailand), Ltd. (HCPT) decided to construct a new refrigerator manufacturing plant adjacent to its existing plant at the Kabinburi industrial estate. Around ¥4.0 billion has been earmarked for the plant, which is slated to commence operations in 2001. HCPT started operations in 1980 manufacturing small refrigerators and now has staked out a solid position in Thailand’s refrigerator market. The new plant will help Hitachi expand refrigerator sales in the Asian region, including Japan, and in the Middle East. In July 1999, Hitachi GE Lighting, Ltd., a lighting sales joint venture formed by Hitachi and General Electric Company, announced development of Japan’s first 110W high frequency fluorescent lamp system that fuses the technology of both companies. This eight-foot-long lamp with a diameter of 25.5mm is slim and lightweight and achieves a sharp increase in energy efficiency. 23

Consumer Electronics Sales of consumer electronics products, including TVs and VCRs, decreased in fiscal 1999 due to an anemic Japanese economy. In Japan, in April 1999 Hitachi started shipping a mobile phone featuring a WAP-compliant microbrowser for e-mail and surfing the Internet. The first such phone in Japan, it was an immediate hit and has continued to sell strongly. These phones are for Japan’s IDO CORPORATION and DDI Corporation. In TVs, demand was brisk. However, although sales were strong in North America of projection TVs with a built-in tuner for receiving digital broadcasts and in Europe for color TVs, TV sales were down as a whole, due to the negative impact of a high yen. In Japan, 29-inch flat-screen TVs were very popular. During the year, Hitachi broadened its lineup of high-resolution, flat-screen TVs to respond to mar- ket needs. In Japan, in July 1999, Hitachi started sales of a rear projection TV that is the first in the industry to use a liquid-coupled cooling system applied for LCD projection. In November 1999, Hitachi released plasma displays that are able to receive satellite digital broadcasting, which is set to begin in Japan at the end of 2000. In recording devices, Hitachi is becoming more digital. In July 1999, Hitachi launched the world’s first VCR that can convert analog broadcasts into a digital format for recording. With digital broadcasts scheduled to start at the end of 2000 in Japan, Hitachi is stepping up efforts to improve VCR picture quality. Also, the Company is positioning as a next-generation recording medium. In this vein, Hitachi is developing consumer products that incorporate DVD technology. In November 1999, Hitachi started sales of a DVD player that utilizes PC technology to achieve a two-fold increase in disk speed. In October 1999, a prototype of a DVD equipped with an 8cm 4.7GB DVD- RAM drive made its debut at the “Electronics Show 1999” in Japan.

Hitachi Maxell, Ltd. In fiscal 1999, Hitachi Maxell posted increases in both net sales and net income. Net sales were up 3% at ¥214,953 million (US$2,028 million) and net income increased 133% to ¥5,892 million (US$56 million). Computer tapes performed extremely well. Sales soared due to the trend toward increasing data capacity. In the audio, videotape segment, which includes videotapes and audiotapes, sales declined due to intense price competition. In batteries, sales of lithium ion rechargeable batteries were strong for use in mobile phones. Furthermore, alkaline dry batteries, which are used in portable information terminals, digital cameras and other devices, posted sharp growth, particularly in high-capacity products. In new businesses, the company is active in many fields. Hitachi Maxell has developed a Radio Frequency Identification (RFID) chip that uses electro-fine forming technology to mount an antenna coil on the surface of a chip measuring 2.3mm in diameter. This innovative RFID chip is the smallest chip of its type in the world but is relatively inexpensive to produce and can be embedded in plastic and other materials, opening the way for widespread application in contactless IC cards and other products. Hitachi Maxell is also developing iD PHOTO DISK, a next- generation magneto-optical disk system for digital cameras, with Olympus Optical Co., Ltd. and SANYO Electric Co., Ltd. A third project is a polymer lithium ion rechargeable battery that sets new records for its slender profile and high capacity.

Hitachi Maxell has Hitachi Maxell has developed an RFID, a developed a polymer coil-on-chip device. lithium ion rechargeable Including 1Kbit of battery with a capacity EEPROM memory, this of 1500mA.h. This makes chip can be embedded it ideally suited for use in plastic and other in notebook PCs. materials. 24 25 In April 1999, Hitachi capitalized on the advent of cdmaOneTM digital wireless services in Japan by launching C201H, the first cdmaOneTM mobile phone to feature a microbrowser for accessing wireless application protocol-compliant websites. In Japan, mobile phones are increasingly being used as the gateway to the Internet, including e-mail. The C201H takes advantage of the crystal-clear voice quality, superior connection stability and enhanced privacy offered by this technology. Combining high-speed data transmission capability with a sophisticated and compact design, Hitachi has produced yet another hit product. The newly released C302H boasts similar qualities. Hitachi intends to continue supplying next-generation products to Japan’s rapidly developing mobile phone market. 26

Materials

Hitachi Chemical Co., Ltd. Net sales increased 4% to ¥544,837 million (US$5,140 million) in fiscal 1999. Net income surged 55% year on year to ¥12,587 million (US$119 million). This result reflected increased sales of higher-value-added offerings such as electronics-related products, and gains from cost-containment initiatives. Electronics-related products sales were fueled by strong demand for mobile phones and PCs. Products that performed well were anisotropic conductive films for use in fine circuit connections for LCDs, and copper-clad laminates for multilayer printed wiring boards. In addition, polishing slurry that enables high-precision planarization of the surfaces of silicon wafers for semiconductors, volume production of which started in fiscal 1999, posted solid sales growth. In chemical-related products, sales increased slightly. Environmentally friendly, nonaqueous dispersion-type acrylic resins for paints performed well. In addition, sales of adhesive films rose on the back of expanding applications in electronics-related fields. Sales of negative electrode carbon materials for lithium ion batteries, volume production of which started in fiscal 1999, increased sharply. In housing equipment and environmental facilities, sales were flat. Barrier-free bathroom units without drains around the washing area turned in a good performance. In addition, results benefited from higher sales of compact household dual-use septic tanks for treating sewage. Sales of toilet seats with warm water cleansing and bidet functions, on the other hand, declined. In fiscal 1999, in Southeast Asian multilayer printed wiring board operations, the company expanded production capacity at Hitachi Chemical Asia-Pacific Pte Ltd to meet rising demand, particularly from customers in Europe and the U.S. In addition, in the U.S. in February 2000 Hitachi Chemical established a subsidiary for the production and sale of products for gene expression analysis.

Anisotropic HERCUNITE™ exhaust conductive films for manifolds for use in fine circuit passenger cars connections for LCDs

Hitachi Metals, Ltd. Net sales increased 7% in fiscal 1999 to ¥463,470 million (US$4,372 million) and operating income rose 118% to ¥21,193 million (US$200 million) on the strength of robust demand for specialty steels related to PCs, components for mobile phones and HERCUNITETM, a heat-resistant cast-iron product capable of withstanding high automotive exhaust temperatures. Nevertheless, Hitachi Metals posted a net loss of ¥1,246 million (US$12 million). This was due mainly to an extraordinary loss that resulted from transferring giant magneto-resistive (GMR) head operations to the parent company as part of a restructuring program. In rolls for rolling mills, sales declined year on year due to the effects of downsizing by steel manufacturers. In magnets, sales were negatively affected by declining prices, while in pipe fittings, sales declined in a soft market. In high-quality specialty steels, demand was strong for electronics- related materials. In automotive materials, sales of HERCUNITETM increased, particularly export sales. Sales also increased in three other business areas——electronic components, information systems 27

components and environment-related products——for differing reasons. In electronic components, the company started volume production of GMR heads in the latter half of fiscal 1999. In information systems components, demand soared for components for antenna switch modules, isolators and other components used in mobile phones. In environment-related products, the company aggressively sought to win orders. Leveraging technological superiority in selected fields, the company is placing emphasis on generating earnings through a tight focus on quality rather than quantity. Demonstrating this drive, the company channeled resources into three areas: HERCUNITETM, components for mobile phones and specialty steel for electronics. One field Hitachi Metals has already invested heavily in is GMR heads for hard disk drives, on the expectation that they would turn into a core growth driver. Although the market for GMR heads is expected to expand, intensifying competition has made present operating conditions extremely difficult. After a detailed review of its results and where the technology is headed, Hitachi Metals decided to transfer this business to the parent company. GMR heads will now be conducted as a unified business of the entire Hitachi Group. To raise management efficiency, in fiscal 1999 Hitachi Metals decided to reorganize its 21 subsidiaries into seven companies, each organized to be competitive in specific product categories and regions. Moving ahead, to speed up decision-making, the company will delegate more authority to subsidiaries and carry out further consolidations.

Hitachi Cable, Ltd. ’s net sales decreased 6% to ¥359,119 million (US$3,388 million) in fiscal 1999 due to a downturn in demand for mainstay products such as wires and cables, and copper products. On the profit front, net income rose 204% to ¥6,077 million (US$57 million) thanks to strong demand for electronic components. In wires and cables, demand was lackluster, with the exception of optical submarine cables. The main factors behind soft sales were declining private-sector capital expenditures in a sluggish Japanese economy, and curbs placed on investment by domestic electric power companies. In copper products, sales fell as a result of lower sales of copper tubes for air conditioners. This was in spite of strong growth in copper strips for semiconductors. In electronic components, sales rose on solid demand for compound semiconductors, mainly for mobile phones, and semiconductor packaging materials, most notably Tape Automated Bonding tape. Hitachi Cable formulated a medium-term management plan in September 1999. The plan calls for a shift in focus from its traditional businesses of wires and cables, and copper products, to electronics- related products. Two fields in particular are being targeted. First is optical products, including submarine cables and Wavelength Division Multiplexing (WDM) multi/demultiplexers. The second field is semiconductor components such as compound semiconductors and semiconductor packaging materials. Major steps have already been taken to execute the plan. Hitachi Cable started work to raise production capacity at its compound semiconductor, WDM multi/demultiplexer, and optical submarine cable plants. In November 1999, the company established a joint venture company in Thailand with Finland’s Outokumpu Copper Products Oy for the manufacture of copper tubes. During the year, Hitachi Cable repurchased 2,988,000 of its own shares. 28 29 As PCs and mobile information devices get smaller, semiconductor packages have to follow suit. Tape Automated Bonding (TAB) tape is poised to benefit. Why? Because it will become the next preferred semiconductor packaging material. In this sense, TAB tape will drive progress in the electronics industry. By leveraging its technological superiority, Hitachi Cable has achieved a high pin count and downsized semiconductor packages in such TAB tape applications as Tape Ball Grid Array (TBGA), Fine Pitch BGA (FBGA) and Chip Scale Package (CSP) package interposers. The picture on the opposite page shows TAB tape developed by Hitachi Cable for FBGA. 30

Services & Other

Nissei Sangyo Co., Ltd. Nissei Sangyo’s operating environment in fiscal 1999 remained severe. Although capital investment in IT increased, other private-sector capital investment in Japan turned downward. In this climate, the company worked to set up new businesses and to enhance management efficiency such as by reducing selling, general and administrative expenses. Nevertheless, net sales decreased 1% to ¥725,348 million (US$6,843 million) and net income fell 3% to ¥5,386 million (US$51 million). By product, sales of semiconductor manufacturing equipment increased on the back of a recovery in demand for semiconductors and TFT LCDs. Microcontrollers and rechargeable lithium ion batteries also enjoyed brisk sales, reflecting increased production of mobile phones in Korea. Sales of optoelectronic products continued to increase due to expansion in the fiber-optic communications market. Sales of mainframe and disk array systems to Europe decreased due to fierce price competition and the fact that customers held off on purchases owing to Y2K concerns. In addition, color display tube sales to Taiwan and Korea decreased sharply on account of declining market prices. During the year under review, a stock repurchase of 1,550,000 shares was conducted. Cash dividends were increased to ¥25 per share from ¥20 a year ago. Looking ahead, the company aims to bolster its capabilities to be a global business creator.

Specifically, emphasis is being placed on areas Optoelectronic products such as semiconductors, life sciences, information for the fiber-optic communications market and communications and digital media. The company will work more closely with Hitachi Group companies and is expanding its business of high-value-added products that leverage the Group’s software and engineering capabilities.

Hitachi Credit Corporation The card sector continued to post solid growth in Japan’s credit market in fiscal 1999. The domestic leasing market showed signs of recovery, posting a slight gain compared to the preceding year. It was another banner year for Hitachi Credit as it recorded solid business volume growth and its 14th consecutive year of increased earnings on a consolidated basis. During the year under review, the company expanded its business for new such as securitization and new cards. Automobile loans, a strategic component of the credit business, and leases for information and communications equipment and industrial equipment also increased. The result was a 15% increase in the volume of business to ¥1,745,806 million (US$16,470 million), and a 1% increase in net sales to ¥459,440 million (US$4,334 million). Net income was ¥12,502 million (US$118 million), up 21%. In April 1999, Hitachi Credit began issuing Multi-Application (MULTOS) ID cards for Hitachi employees and added Mondex® electronic cash functionality to these cards in February 2000. In March 2000, the company opened an Internet shopping mall as its first B2B Internet service. In February 2000, the company participated in the establishment of Hitachi Triple Win Corp., which performs personnel, payroll, accounting and finance and other services for Hitachi Group companies on an outsourcing basis. 31

Financial services have been positioned as a MULTOS ID card with Mondex® functionality strategic growth area in the “i.e. HITACHI” business plan. As part of this plan, in April 2000 Hitachi Credit and Hitachi Leasing, Ltd. decided to merge in October 2000. The resulting entity will rank first in the Japanese leasing industry in terms of volume, making it a powerful base for becoming even more competitive. At the same time, Hitachi Credit will grow in new financial services such as the card business and payment and collection services by leveraging the Hitachi Group’s IT expertise.

Hitachi Transport System, Ltd. The volume of domestic freight continued to decline in fiscal 1999. Also, shippers demanded cuts in distribution costs and streamlining of distribution channels as they implemented supply chain management principles. The operating environment thus posed many challenges during the year. Set against this backdrop, net sales declined 3% to ¥266,112 million (US$2,510 million), primarily due to declining freight volumes and services provided for existing domestic customers. Net income, however, was ¥2,808 million (US$26 million), up 2% on account of the adoption of tax-effect accounting. In its domestic distribution business, Hitachi Transport System won many new orders in its third- party logistics business. Nevertheless, this was offset by a sharp drop in distribution work for existing customers and demands for larger cost reductions from customers. In the overseas distribution business, air cargo exports continued to perform well and results of overseas subsidiaries were firm. Passenger operations, however, posted lower sales as passenger numbers at Tokyo Co., Ltd. declined in the face of stiff competition. In November 1999, a strategic alliance was formed with Fukuyama Transporting Co., Ltd. The agreement is designed to strengthen Hitachi Transport System’s domestic distribution and freight network and to develop joint operations to expand business and raise competitiveness. In March 2000, the company participated in the establishment of a service company to run the e-commerce business of the MINISTOP CO., LTD. convenience store chain, marking its entry into distribution in the e-commerce arena. In April 2000, third-party logistics operations Strategic alliance with were overhauled by consolidating sales, IT and Fukuyama Transporting logistics engineering into a single organization to Co., Ltd. create a unified logistics solutions business platform. This gives the company a powerful means to attract new customers as one part of the Hitachi Group’s emphasis on “solution businesses.”

In addition, overseas-based general trading companies recorded strong trading transactions for semiconductors due to recovery in the semiconductor market. Including the subsidiaries above, Services & Other as a whole recorded sales largely the same as a year earlier. 32 33 Japanese manufacturers, wholesalers and retailers are increasingly turning to outsourcing to solve distribution problems. The spotlight is falling on third-party logistics as their next strategic ally in reducing costs and increasing competitiveness. Hitachi Transport System is well positioned to benefit. Its strengths——in-depth knowledge of supply chains, a global logistics network, and distribution system design and development expertise——are underscored by the pivotal role it plays supporting the sale of adidas-brand products in Japan. The adidas distribution center, pictured opposite, was custom built to meet the needs of adidas Japan K.K.