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 computer sales were affected the most. In the computer business, net sales and earnings both fell. In Japan, 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 Hitachi Skyline Trinium mainframe, shipments of which started in September 1999. Intensifying price competition also took its toll. Sales of disk array 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——software, SI and services——will 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 Infrastructure 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 Hitachi Data Systems 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 outsourcing 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 Showa Denko 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 OMRON 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