KOMATSU REPORT 2020 Contents Komatsu’s Business Model 01 Management Principle 02 History of Business Reforms in Response to Changes in the Operation Environment 04 Overview of Business Resolution of ESG Issues through Growth Strategies 32 Komatsu’s CSR Themes and Mid-Term Management Plan KPIs 34 Enhancing Quality of Life 06 Special Feature 1: Business Model Characteristics –Initiatives Based on TCFD Framework –Ever-Evolving DANTOTSU Initiatives –Reman and Rebuild Operations 40 Developing People 42 Growing with Society –Flexible Global Production and Procurement Systems –Social Contribution Activities 11 Business Segments 44 Corporate Governance Komatsu’s Growth Strategies 12 Message from the President 16 Message from CFO 22 Special Feature 2: Value Creation Story –SMARTCONSTRUCTION –Forestry Machinery Business Corporate Profile 54 Directors and Audit & Supervisory Boad Members 58 11-Year Summary 60 Non-Financial Highlights 61 External Evaluations and Index Inclusion 62 Corporate Information 28 Mid-Term Management Plan (FY2019–FY2021) 63 About KOMATSU REPORT DANTOTSU Value FORWARD Together for Sustainable Growth Cautionary Notice regarding Forward-Looking Statements This report contains predictions, plans, forecasts, and other forward-looking statements that have been judged by management to be rational based on the information available at the time of publication. Factors that may cause actual results to differ materi- ally from those predicted by such forward-looking statements include, but are not limited to, changes in economic conditions or product demand in major markets, foreign exchange rate fluctuations, domestic or overseas regulatory revisions, or changes to accounting standards or practices. Reporting Period: April 1, 2019–March 31, 2020 • This report also includes information on activities after the report- ing period in order to provide readers with the latest information. • “FY2019” refers to the period from April 1, 2019 to March 31, 2020, unless otherwise noted. Editorial Policy KOMATSU REPORT 2020 was published for the purpose of provid- ing clear explanations for all stakeholders on Komatsu’s medium- to long-term business strategies and the virtuous cycle generated as the Company resolves environmental, social, and governance (ESG) issues through its business. In preparation of this report, we referenced the International Integrated Reporting Framework released by the International Integrated Reporting Council and the Guidance for Integrated Corporate Disclosure and Company-Investor Dialogue for Collaborative Value Creation: ESG Integration, Non-Financial Information Disclosure, and Intangible Assets into Investment released by the Ministry of Economy, Trade and Industry. Komatsu’s Business Model Management Principle The cornerstone of Komatsu’s management principle is to commit ourselves to quality and reliability and maximize the total sum of trust given to us by all stakeholders and society, which it defines as corporate value. Maximizing trust requires corporate activities that are founded on social responsibility along with efforts to strengthen corporate gover- nance and enhance manufacturing competitiveness. With the addition of Komatsu Brand Management into this princi- ple, we are promoting awareness reforms that inspire all Komatsu Group employees to adopt the perspective of the customer from their standpoint in the Company as we move forward with human resource development to become a stronger company. Enhancing the trust placed in us by society Further growth Is management in line with societal needs? Always monitor Management Policy Management Strategy “DANTOTSU Value – FORWARD Together for Sustainable Growth” Mid-Term Management Plan The KOMATSU Way Corporate Citizenship Resolution of Needs of Society Implementation of management principle Contributing to society Maximizing the trust given to us by our stakeholders and society through a commitment to quality and reliability Mid-term Management Plan for securing sustainable growth Defines Komatsu’s Values, basic attitudes, and patterns of behavior 1. Leadership/Top Management 2. “Monozukuri” for all employees 3. Brand Management 1. Komatsu’s Worldwide Code of Business Conduct 2. Policies, standards, and principles 3. Komatsu’s CSR Themes Enhancing Quality of Life/Developing People/Growing with Society Global principles and international standards • The U.N. Global Compact • ISO 26000 • Keidanren (Japan Business Federation) Charter of Corporate Behavior • The U.N. Sustainable Development Goals (SDGs) All Stakeholders and Society Society Distributors Suppliers Employees Customers Shareholders Investors and Analysts Mass media Communities 01 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Business Model History of Business Reforms in Response to Changes in the Operation Environment Net Sales and Demand for 7 Major Products Japan North America Europe Other China Consolidated net sales (right scale) (Demand, Units) 600,000 450,000 300,000 150,000 0 1990s Maturity of Japanese, U.S., and European Markets 1980s Japan and Western Europe Era 1970s United States Era 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Expansion of Exports Expansion of Overseas Production Selective Focus and Global Consolidated Management (DANTOTSU Product DANTOTSU Service DANTOTSU Solution) (Net sales, Billions of yen) Chapter 1 1960s Chapter 2 1970s Chapter 3 1980s–1990s Era of Competition with Foreign Companies in the Domestic Market Prioritization of Quality, Exhaustive Product Research on Rival Bulldozers Trade deregulation prompted world-leading manufac- turers of construction equipment, Caterpillar Tractor Co. to enter into the Japanese market. Komatsu thus found itself faced with a pressing need to improve the quality of its products. The Company therefore commenced quality control measures and launched a Companywide quality control program. We also kicked off an exhaustive product research campaign targeting the bulldozers of our rivals. These efforts culminated in the September 1963 launch of the Model D50A-11 Super Bulldozer. At this time, we also doubled our warranty period, effectively cutting complaints to one-third. Era of Growing Exports Improvement of Durability and Reliability, Establishment of Sales Systems in European and U.S. Markets As it began a full-fledged expansion into global mar- kets, it became necessary for Komatsu to bring the performance and functionality of its large-sized bull- dozers, a mainstay product at the time, up to world- leading levels. To this end, we rolled out campaigns to earn greater levels of reliability based on perfor- mance data from the markets we served. These campaigns were advanced side-by-side with efforts to improve systems in areas spanning from develop- ment to sales and services. The result was improved reliability in the European and U.S. markets for major products and the reinforcement of the foundations of our export platforms. Expansion of Overseas Production and Diversification 3G Management Strategy In the 1980s, Komatsu accelerated local production in overseas markets in conjunction with the growth of demand in these markets. However, from the 1990s, demand grew stagnant in the Japanese, European, and U.S. markets as these markets matured in the latter half of the decade. In preparation for the inevi- table intensification of global competitiveness, Komatsu enacted its 3G (Global, Growth, Groupwide) management strategy in which it sought to become a global group with a solid manufacturing base that was resilient to fluctuations in construction equip- ment demand. This strategy led us to diversify our business by expanding operations in electronics and other non-construction equipment businesses. Bulldozer D50A-11 02 Hydraulic Power Excavator 15H-1 Silicon wafers produced by Komatsu Electronic Metals Co., Ltd. DiversificationCompetition with Foreign Companies History of Business Reforms in Response to Changes in the Operation Environment Net Sales and Demand for 7 Major Products Japan North America Europe Other China Consolidated net sales (right scale) (Demand, Units) 2000s (2002~) Era of Resource-Rich and Emerging Countries (Net sales, Billions of yen) 3,000 Chapter 7 2019~ DANTOTSU Value Realization of the safe, highly productive, smart, and clean workplaces of the future Digital Transformation of Entire Construction Workplaces 2,250 1,500 750 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Selective Focus and Global Consolidated Management DANTOTSU Solution) DANTOTSU Service (DANTOTSU Product Chapter 4 2001~ Chapter 5 2007~ Chapter 6 2013~ 1st Structural Reforms Selective Focus and Introduction of DANTOTSU Products Komatsu enacted its 1st structural reforms in response to the stagnant construction equipment demand in the maturing Japanese, European, and U.S. markets, the struggling performance of its elec- tronics business, and its first operating loss (in FY2001), which was incurred as a result of the Company’s high-cost, low-profit model that was ori- ented toward growth. These reforms were enacted based on the policies of separation of costs from growth, enhancing strengths and improving weak- nesses. Guided by these policies, we pursued fixed cost reductions, the strengthening of our position in Asia, and the development of DANTOTSU Products. 2nd Structural Reforms Promotion of Global Cross-Sourcing Through these reforms, we promoted global cross- sourcing to reform our value chain through the optimiza- tion of the production, sales, and inventory areas of the supply chain. We were thereby able to respond to fluctu- ations in demand and foreign exchange rate fluctuations while minimizing investment. Furthermore, KOMTRAX (Komatsu Machine Tracking System), which had become standard equipment at the beginning of the 2000s, was utilized to propose methods of supporting fuel-efficiency operation and reducing maintenance costs as we accel- erated the bolstering of services powered by information and communication technologies (ICT). Innovation and Reinforcement of Mining Equipment Business Introduction of DANTOTSU Solutions In its mining equipment business, Komatsu’s Autonomous Haulage System (AHS) has received high praise for its safety and productivity, and more than 100 AHS units have come to be in operation as mining businesses have grown. Also, we acquired Joy Global Inc. (currently, Komatsu Mining Corp.) in 2017, thereby strengthening our operations in the area of super-large surface and underground mining equipment, an area in which Komatsu previously lacked offerings. In the construction equipment business, mean- while, we were pursuing growth through innovation via such means as introducing the SMARTCONSTRUCTION ICT workplace solution as a DANTOTSU Solution. Announcement ceremony for MR-2 Series, the first DANTOTSU Product KOMTRAX (Komatsu Machine Tracking System) Komatsu Mining Corp. rope shovel and Komatsu super-large dump truck 03 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Business Model Overview of Business In the pursuit of sustainable growth, companies are expected to build robust yet flexible earnings structures that respond to changes in the operating environment while addressing the increasingly more important ESG issues. With the strength of the manufacturing platform it has forged over the years, Komatsu will respond to social needs by linking customers, distributors, partners, and communities and all Komatsu workplaces through its DANTOTSU excellence. Major Inputs Production / Logistics Komatsu production bases: 85* Parts distribution bases: 45* * As of April 1, 2020 Capital investment ¥86.5 billion Intellectual Properties Development bases: Nine mother plants and Asia Development Center R&D expenses: ¥74.7 billion (3.1% of net sales) Utilization of information: Equipment with KOMTRAX: Approx. 600,000 units Human Resources Number of consolidated employees: 62,823 Partners Machine population over past 10 years: Approx. 580,000 units* * Estimate of construction equipment operational at customer workplaces based on aggregate 10-year sales volumes Sales and service distributors: 210 distributors in 148 countries (construction, mining and utility equipment business) Suppliers: Approx. 2,700 Shareholders: 230,041 Environment Energy use: 8.1 PJ Including renewable energy use: 259 TJ Note: 1 PJ (petajoule) = 1015 J (joules); 1 TJ (terajoule) = 1012 J Water use: 3.6 million m3 Steel (iron) use: 846,000 tons Finance ¥ Consolidated net sales: ¥2,444.8 billion Operating income: ¥250.7 billion Free cash flow: ¥104.2 billion Total assets: ¥3,653.6 billion Note: Amounts are either for FY2019 or as of March 31, 2020 , unless otherwise noted. 04 Research and Development Procurement and Production • In-house development and • Collaboration with suppliers production of key components underpinning product performance (engines, hydraulic components, power trains, etc.) • Accelerated technological innova- tion achieved by merging core Komatsu technologies with external insight (Open innovation) (Midori-kai) enabling the following: P.43 1. “Monozukuri” (improvement of product quality, reliability, and competitiveness) 2. Stable supply of high-quality materials • Linking plants (visualization) • Digital transformation P.22 utilizing ICT • Product development systems tailored to global market needs • Cross-sourcing: Flexible global production and procurement systems that are resilient to demand and foreign exchange fluctuations P.10 • Mother plants structure enabling: Improvement of QCD (Quality, Cost, Delivery) • Skill transfer and TQM (Total Quality Management) Climate change impacts—Total CO2 emissions: 22,529,000 tons Enhancing Quality of Life —Providing Products Required by Society— Developing People B u s i n e s s A c t i v i t i e s a n d S t r e n g t h s ( C o n s t r u c t i o n a n d m n i i n g e q u i p m e n t o p e r a t i o n s ) I n i t i a t i v e s f o r R e s o v n g E S G i l I s s u e s Growing with Society Responsible Corporate Behavior Operations at Customer Workplaces Product Cycles Products Services Solutions Construction equipment • SMARTCONSTRUCTION P.24 Mining equipment • Autonomous Haulage System P.8 • Global supply of high-quality used equipment, etc. • Remanufacturing and rebuilding* P.9 * Systems for selling used engines, transmissions, and other components that have been repaired to be of the same quality as new products • DANTOTSU • Enhancement of mainte- Product Unrivaled prod- ucts in terms of environment, safety, ICT capacities, and productivity P.6 • Full lineup of construction and mining equipment • Product creation focused on quality and reliability nance contract services P.7 • Improvement of QCD (Quality, Cost, Delivery) achieved through close alignment of sales forecasts and production of spare parts Construction equipment • Utilization of information acquired through KOMTRAX P.7 Mining equipment • Utilization of information acquired through KOMTRAX Plus • Detailed support from directly owned distributors • Global distributor network • Cultivation of distributor personnel • Brand management Climate change impacts—Total CO2 emissions: 22,529,000 tons CO2 emissions from product use: 19,236,000 tons (85.4% of total) P.32-P.53 The KOMATSU Way P.41 Targets for FY2021 Accomplishment of targets of Mid-Term Management Plan “DANTOTSU Value – FORWARD Together for Sustainable Growth” P.28-P.31 Building foundations for 100th anniversary and beyond 05 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Business Model Special Feature 1: Business Model Characteristics DANTOTSU Product 01 Enhancement and Acceleration of Initiatives Pertaining to Three DANTOTSUs Ever-Evolving DANTOTSU Initiatives Realization of DANTOTSU Value DANTOTSU has been a keyword in Komatsu’s business strategies throughout the 2000s. In Japanese, this word expresses a level of excellence that is a cut above that of rivals, and this word rings with the same degree of strength found in Komatsu’s mainstay construction equipment. At Komatsu, we are accelerating initiatives pertaining to DANTOTSU Product, DANTOTSU Service, and DANTOTSU Solution while enhancing and evolving these initiatives to realize DANTOTSU Value (a positive cycle of resolving ESG issues and improving earnings through the creation of value for customers). DANTOTSU Product Case Examples Pursuit of New Heights of Quality and Value Komatsu refers to products with features in safety, environmental friendliness, ICT, and productivity to which no competitors can catch up with in the next several years as DANTOTSU products. By taking the technological advantage of in-house development and production of key components and through seamless coordination between development, production, and suppliers in product development, we have been able to introduce the world to numerous industry-leading products. Today, we are developing auto- mation, autonomous, electric, and remote-control technologies to create next-generation DANTOTSU products that contribute to the realization of the safe, highly productive, smart and clean workplaces of the future. Environment Hybrid Hydraulic Excavators (2008) Komatsu launched the first hybrid hydraulic excavator for market sale in 2008. By equip- ping these excavators with pro- prietarily developed systems, we have succeeded in achieving reductions in CO2 emissions and fuel consumption of more than 20%. In 2016, we began expanding our lineup of 30-ton class models to complement the existing 20-ton class models. To date, an aggregate of approximately 5,000 Komatsu hybrid hydraulic excavators have been sold in 40 countries worldwide. ICT ICT-Intensive Models (2013) The world was introduced to Komatsu’s first ICT-intensive model, an ICT- intensive bulldozer, in 2013. This was the first piece of equipment in the world to feature automated blade control for pro- cesses ranging from rough dozing to finish grading. Meanwhile, our first ICT- intensive hydraulic excavator was launched in 2014. The bucket teeth of this excavator are automatically maneuvered along the target surface to enable the operator to continue excavating with- out worrying about overcutting. Environment Electric Mini Excavators (2020) Rentals of electric mini excavators were commenced in April 2020. These excavators feature excavat- ing capacity equivalent to that of engine-powered excavators cou- pled with zero emissions and greatly reduced noise pollution. Anticipated to be used for indoor and nighttime construction, we will work to popularize and expand use of these excavators, which are friendly both toward the environ- ment and people. Safety Human Detection & Collision Mitigation System (2019) Our proprietary KomVision Human Detection & Collision Mitigation System was intro- duced into the Japanese market in December 2019 as a standard feature on hydraulic excavators, an industry first. When the system detects a person while driving or turning, it will stop the equipment to con- tribute to reduced accidents from collisions with people. 06 DANTOTSU Solution DANTOTSU Service DANTOTSU Service Visualization of Operating Status and Reduction of Lifecycle Costs Komatsu develops a value chain business in which it pursues reduction of lifecycle costs by means of the visualization of machine operations and multifaceted customer support that begin when new equipment is delivered and continue through to machine maintenance, parts supply, over- hauls, and finally trade-ins of used equipment. Case Examples ICT-Powered Lifecycle Support Business Model Encompassing Everything from New Equipment Sales to Trade-Ins of Used Equipment Komatsu installs the KOMTRAX (Komatsu Machine Tracking System) remote management system on its products as a standard feature. This system tracks information on equipment condition and operating status along with other metrics. By using this information to propose measures for supporting fuel-efficient operation and reducing maintenance costs, we are able to help customers increase the operating ratios and lower the maintenance costs of their equipment. In addition, we are enhancing the extended warranty programs we offer on a global basis. Through these pro- grams, we aim to raise the rate of equipment for which we continue to provide services and offer ongoing support to customers by encouraging them to use genuine parts to keep their equipment in top condition and offering trade-ins that realize high resale prices when they no longer need a piece of equipment. Moreover, we are planning the launch of a next-generation KOMTRAX system. This system will make greater contributions to improvements in customer productivity by enabling them to acquire the data they desire via smart- phone applications. Comprehensive Lifecycle Support Leveraging Komatsu Group’s Collective Strength to Enhance Customer Relationships Start of value chain business First-step in process of building long-term relationships New Equipment Sales Used Equipment Sale Realization of high resale prices by maintaining equip- ment in top condition Service Contracts Extended warranty programs for maintaining condition of equipment Repairs / Maintenance Monitoring of equipment condition data through KOMTRAX Rental / Lease Rental of high-quality equipment Operational Support Support for improving customer pro- ductivity using KOMTRAX data 07 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Business Model Special Feature 1: Business Model Characteristics DANTOTSU Product DANTOTSU Service DANTOTSU Solution DANTOTSU Solution Workplace Solutions Provided Using ICT Komatsu utilizes cutting-edge ICT to facilitate the visualization of construction by compiling data on all people, equipment, and materials at workplaces. We thereby aim to help improve the safety of customer workplaces, shorten construction periods, minimize costs, and other- wise optimize construction. This is the DANTOTSU Solution Komatsu aspires to deliver. By promoting digital transformations in construction, we aim to create the safe, highly pro- ductive, smart and clean workplaces of the future together with customers. Case Examples World-First Autonomous Haulage System Launched in 2008 Safe, Efficient, and Coordinated Operation Achieved through Fleet Management System In FY2019, we worked toward our goal of deploying 41 units of our latest model of super-large dump trucks, which can be retrofitted with the Autonomous Haulage System (AHS) to be operated autonomously, in the Pilbara region of Western Australia. At Northern Brazil’s Carajás iron ore mine, which is one of the largest in the world, in addition to taking steps to deploy 37 of the super-large dump trucks and introduce AHS, we opened Komatsu’s first “AHS Training Center” in the vicinity of the Carajás mine and promoted activities to provide training over a wide area of northern Brazil in relation to AHS operations and maintenance. Since its commercial launch in 2008, a total of 221 AHS-equipped vehicles have been deployed in Australia, North America, and South America (as of March 31, 2020). Acquisition of Mine Operator Training Company Contributions to Safe and Productive Mine Operations In July 2019, the Company acquired Immersive Corporation Pty Ltd, a mine operator training company. Immersive develops, manufactures, and sells mining equipment simulators for training machine operators for surface and underground mines. Immersive also offers educational programs using simulators and provides train- ing solutions by proposing improvements. The inclusion of Immersive’s solutions into our lineup has made us even better poised to contribute to the improvement of safety and productivity and the optimiza- tion of operations at customer mines. 08 02 Global Component Recycling Reman and Rebuild Operations Reuse and Recycling Business Made Possible by In-House Development and Production of Key Components Komatsu Group develops global remanufacturing (“Reman”) operations in which it restores the engine and transmission components collected during regular replacements to the same status as if they were new so that these products can once again be sold on the market. Restoring these products entails a process with various steps including disassembly, wash- ing, parts replacement, reassembly, painting, and shipping inspections. The restoration of components through Reman operations has the following benefits for customers. • Guaranteed quality and performance on a level with • Shorter equipment downtimes through supply of new products • Lower prices than new products appropriately stocked Reman components • Resource conservation and waste reduction through component reuse and recycling Reman operations are a strength of Komatsu made possible by in-house development and production of key components. Rebuild operations involve replacing perishable parts inside components with new parts whereas Reman operations involve recycling and reusing perishable parts to contribute to greater resource conservation and waste reduction amounts. Case Examples Two Global Bases To provide customers worldwide with Reman components, Komatsu has established two global bases, one in Indonesia and one in Chile. The base in Indonesia handles engine, transmission, and hydraulic cylin- ders for large-sized construction equipment while the base in Chile is responsible for components for electric dump trucks. Components that have been collected from around the world and restored are then stocked at the global bases to be shipped to locations across the globe as necessitated by demand. In addition, Komatsu has 13 regional Reman and rebuild bases around the world. Sharing of Reman Techniques through Network to Facilitate Quality Improvements and Development Our Reman bases are linked through a network that allows for informa- tion on the necessary Reman techniques to be shared on a global basis. In addition, the restoration history of Reman components is managed via IC tags and 2D-barcode to track information on component durability and allow for important information for developing components with optimal lifespans to be fed back into the development process. 09 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Business Model Special Feature 1: Business Model Characteristics 03 Flexible Global Production and Procurement Systems That Are Resilient to Demand and Foreign Exchange Fluctuations and Responsive to Wide-Ranging Market Changes through Global Cross-Sourcing Characteristic 1: Global Cross-Sourcing Komatsu has positioned assembly factories in the major markets it supplies and produces the same models at multiple facto- ries. This system enables the Company to practice cross-sourcing while manufacturing products in the optimal locations with consideration for demand and foreign exchange fluctuations as well as the need to evenly distribute production load. Komatsu also has global cross-sourcing systems in place for part procurement. In this manner, we have made it possible to maintain supply chains no matter how markets may change. Mid-Sized Hydraulic Excavator Cross-Sourcing Produced in nine countries Japan, United States, United Kingdom, Brazil, China, Thailand, Indonesia, Russia, India Benefits 1. Responsiveness to foreign exchange fluctuations 2. Responsiveness to production fluctuations 3. Reduced costs 4. Effective utilization of production capacity 5. Minimized investment Necessary Conditions 1. Base equipment standardization 2. Production management system standardization 3. Production and design bill of materials standardization 4. Manufacturing process and quality requirement standardization Characteristic 2: Balanced Development of Global Operations Komatsu establishes worldwide sales and services systems and utilizes the strength of its flexible production and procurement systems to develop its global operations while maintaining close ties with customers and local communities. FY2019 Construction, Mining and Utility Equipment Business Sales (to Outside Customers) by Region FY2019 ¥ 2,205.9 billion Traditional Markets 50% Japan ¥310.8 billion North America ¥573.5 billion Europe ¥219.7 billion Strategic Markets 50% Latin America ¥309.2 billion CIS China Asia ¥127.4 billion ¥127.0 billion ¥205.7 billion Oceania ¥203.3 billion Middle East ¥30.6 billion Africa ¥98.2 billion 10 Flexible Global Production and Procurement Systems That Are Resilient to Demand and Foreign Exchange Fluctuations and Responsive to Wide-Ranging Market Changes through Global Cross-Sourcing Komatsu’s Business Model Business Segments Consolidated Net Sales Operating Income / Operating Income Ratio Net Income Attributable to Komatsu Ltd. / Return on Equity 2,725.2 2,501.1 ¥2,444.8 billion 397.8 268.5 14.6%14.6% ¥250.7 billion 10.7%10.7% 10.3%10.3% 256.4 14.7%14.7% 196.4 12.1%12.1% ¥153.8 billion 8.6%8.6% FY2017 FY2018 FY2019 FY2017 FY2018 FY2019 FY2017 FY2018 FY2019 FY2019 Consolidated Net Sales ¥ 2,444.8 billion Construction, Mining, and Utility Equipment Business ¥ 2,205.9 billion Komatsu supplies a wide range of products, services, and solutions including construction and mining equipment for use in construction and mining workplaces around the world as well as forklift trucks, forest machines, recycling equipment, and tunneling machines. We have established a posi- tion as the international leader in the construction and mining equipment field by delivering unrivaled quality and technological innovation together with this full lineup. Dump truck Retail Finance ¥ 62.9 billion Komatsu conducts a retail finance business aimed at helping reduce customers’ funding burdens and otherwise assisting in the purchase of its products. Our strengths in this field include the prevention of overdue debt through effective utilization of KOMTRAX (location information, operating status information, engine locks, etc.) technologies, swift credit screening, and competitive financing condi- tions. These strengths have enabled us to build long-term relationships with customers. Industrial Machinery and Others ¥ 175.9 billion The industrial machinery and others business stands alongside the construction, mining, and utility equipment business as a core business of Komatsu. Offerings in this business include the large presses used to mold automobile hoods and side panels as well as sheet-metal machines, machine tools, and light sources for semiconductor lithography systems (excimer lasers). In this business, we also contribute to the business activities of various customers through production of specialty equipment for Japan’s Ministry of Defense. Large press 11 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Message from the President At Komatsu, we aim to reach new, unrivaled heights of excellence in our products, services, and solutions and generate DANTOTSU Value, by which we refer to a positive cycle of resolving ESG issues and improving earnings through the creation of value for customers. This is the approach we will take toward pursuing sustainable growth with an eye to the 100th anniversary of our founding in 2021 and beyond. Hiroyuki Ogawa President and Chief Executive Officer I would first like to take this opportunity to extend our sincere con- health and safety of our customers, business partners, community dolences and prayers to anyone who has lost loved ones to COVID- members, employees, and their families as our top priority. 19 or has fallen victim to this virus. I also want to express our Recognizing we are positioned as an essential business that sup- appreciation to all of the healthcare professionals and others who ports social infrastructure, and the obligation this represents to cus- are working diligently to stop the spread of this virus. tomers that are continuing their operations, we are committed to Komatsu Group is combating the global COVID-19 pandemic ensuring an ongoing supply of products, parts, services, and solu- based on the government policies of the relevant countries, with the tions while taking precautions against the spread of COVID-19. Pursuit of DANTOTSU Value Under DANTOTSU Value – FORWARD Together for Sustainable prior DANTOTSU Product (advancement of products), DANTOTSU Growth, the three-year mid-term management plan covering the Service (advancement of machine operations), and DANTOTSU period from FY2019 to FY2021, we are moving forward with initia- Solution (advancement of construction) initiatives. Through these tives based on the three pillars of our growth strategies: 1) value efforts, we aim to generate a positive cycle of resolving environmen- creation by means of innovation, 2) growth strategies based on busi- tal, social, and governance (ESG) issues and improving earnings ness reforms, and 3) structural reforms for growth. through the creation of value for customers. We thereby look to Our greatest focus is to achieve DANTOTSU Value, which is the build the safe, highly productive, smart, and clean workplaces of the slogan of this plan. DANTOTSU Value entails the evolution of our future together with customers. Steady Progress in Priority Initiatives Pertaining to Three Pillars of Growth Strategies We faced an opaque economic outlook in FY2019, the first year of and making for disappointing performance for the first year of the plan. the mid-term management plan, due to factors such as the trade In this environment, we made steady progress in advancing key friction between the United States and China and the United initiatives based on the three pillars of growth strategies aimed at Kingdom’s decision to withdraw from the European Union. Amid this realizing DANTOTSU Value. uncertainty, the global COVID-19 pandemic that struck in the fourth Looking first at value creation by means of innovation, we made quarter of the fiscal year drove down demand in China, North substantial progress in developing SMARTCONSTRUCTION opera- America, Europe, and Asia, resulting in declines in sales and income tions. At CONEXPO-CON/AGG 2020, a tradeshow held in Las Vegas 12 in March 2020, we announced our “SMARTCONSTRUCTION Digital conventional equipment. Transformation.” (Please see page 22) This solution comprises four Next, I would like to discuss our initiatives pertaining to growth new IoT devices and eight new applications that allow for digitization strategies based on business reforms. In April 2017, we acquired Joy of entire construction and production processes (“horizontal digitiza- Global Inc. (currently, Komatsu Mining Corp.). We have since been tion”). Through this “horizontal digitization,” which connects all con- carrying out initiatives to create synergies between Komatsu and struction processes digitally, this solution allows for worksite Komatsu Mining Corp. (KMC) by utilizing the management resources operations to be optimized by synchronizing the real worksite with of both companies. A great deal of success has been generated its digital twin, thereby realizing drastic improvement in the safety, through this approach. With a history in the mining equipment busi- productivity, and environmental performance of the entire worksite. ness spanning more than a century, KMC is a global manufacturer, We have also announced our plans to introduce the seller, and service provider dealing in super-large surface and under- “SMARTCONSTRUCTION Digital Transformation” solution into the ground mining equipment, an area in which Komatsu previously markets of the United States, the United Kingdom, Germany, lacked offerings. We had originally put forth the target of achieving France, and Denmark. In this manner, SMARTCONSTRUCTION, synergies that accounted for more than 10% of KMC’s net sales. In which has previously built its track record primarily in the Japanese FY2019, the third year since the acquisition of KMC, synergies pro- market, is finally prepared for its global launch. With its ability to con- duced benefits equivalent to ¥9.0 billion when including gross profit tribute to improved safety and productivity across construction and gains and cost reduction benefits. We have therefore judged that the production processes spanning from measurement to inspection, efforts to integrate KMC into the Group are going smoothly. SMARTCONSTRUCTION is a business model not found anywhere We will also expand applications of our equipment by introduc- else. We therefore see substantial potential for ing the next-generation KOMTRAX construction equipment opera- SMARTCONSTRUCTION to be used as a tool for fostering relation- tion management system, engage in preventive maintenance by ships with customers. Furthermore, we introduced the applying Internet of Things (IoT) and artificial intelligence (AI) pre- SMARTCONSTRUCTION Retrofit Kit to the Japanese market in April diction technologies, and introduce serial number-based manage- 2020. This offering can be installed on conventional construction ment. These initiatives will enable us to provide lifecycle support equipment to endow such equipment with the same ICT functions (lifetime warranties) for our customers’ machines, ranging from as ICT-intensive equipment, such as 3D machine guidance and pay- new machines to their disposal, and increase our after-sales ser- load functions. More than 98% of the equipment operating at con- vice businesses that are resilient to fluctuations in demand. struction worksites in Japan is conventional equipment without ICT Elsewhere, our remanufacturing operations for engines, axles, cyl- functions. Accordingly, the SMARTCONSTRUCTION Retrofit Kit has inders, and other components, are a business which we can pursue the potential to quickly spread digital transformations throughout because of our ability to develop and produce key components in- Japan’s construction industry by installing digital functions into such house, a strength of Komatsu. These operations also constitute a State of Progress of Focused Activity Items and Challenges from the Next Term Onward Three Management Strategies Examples of Activities 1. Value Creation by Means of Innovation FY2019 achievements • Expanded deployments of SMARTCONSTRUCTION (cumulative number of sites in Japan now exceeds 10,000) • Announced the provision of “SMARTCONSTRUCTION Digital Transformation,” starting from April 2020 • Announced the deployment of retrofit kits for hydraulic excavators to enable 3D construction, starting from April 2020 • Achieved a total of 221 dump truck units operating under the Autonomous Haulage System (AHS) • Acquired Immersive Corporation Pty Ltd, an operator training company for mining customers • Exhibited a battery-powered mini excavator at bauma 2019, and rolled it out as a rental machine for the Japanese market Challenges for the Next Term and Onward • Expand SMARTCONSTRUCTION overseas • Develop a new platform for mining • Development of technology for automation, autonomous operation, electrification and remote control 2. Growth Strategies Based on Business Reforms 3. Structural Reforms for Growth FY2019 achievements Challenges for the Next Term and Onward FY2019 achievements Challenges for the Next Term and Onward • Consolidation of facilities with Komatsu Mining Corp. (“KMC”) • Launched aggregate/cement models • Made model changes for hydraulic excavator for strategic regions • Introduced the KomVision Human Detection & Collision Mitigation System as a standard fitment to hydraulic excavators in the Japanese market • Improve the market position of the hard rock mining business • Launch next-generation KOMTRAX • Continue to promote value-chain reforms aimed at realizing full lifecycle support • Reforms of the industrial machinery business (Expansion of synergy with the construction equipment business and growth by capitalizing on core technologies) • Steadily implemented cost improvement activities • Won the Prime Minister’s Prize at the Monodzukuri Nippon Grand Awards for KOM-MICS realizing “connected plants” • Began construction on the new KMC Milwaukee plant and the new Komatsu Forest AB plant in Umeå, Sweden • Promote work reforms using ICT and IoT • Promote continuous cost improvement activities • Develop human resources with global perspective and promote diversity 13 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Message from the President cyclical business that helps reduce waste and recycle and reuse com- for efficient production control to be realized on a global scale by ponents amid rising global environmental awareness. We therefore look linking Komatsu factories with the factories of business partners, to proactively strengthen our systems in this business. making it possible to understand the operating status of various fac- Moving on to structural reforms for growth, a major initiative tory equipment at a glance. underway on this front is the promotion of KOM-MICS (KOMatsu KOM-MICS won the Prime Minister’s Prize in the manufacturing Manufacturing Innovation Cloud System)—a proprietarily developed and production process categories of the Eighth Monodzukuri Nippon production platform. KOM-MICS makes it possible to realize Grand Awards. This honor was a reflection of the system’s contribu- improvements in manufacturing sites using IoT technologies. These tions to the improvement and innovation of production processes at improvements are achieved through equipment operating status the Company’s production sites as well as at business partners. tracking and optimization made possible by collecting and analyzing data from machine tools and robots. The use of KOM-MICS allows Issues Arising from the COVID-19 Pandemic The global COVID-19 pandemic is impacting Komatsu in a variety of telecommuting system to streamline and revise work processes with ways. Of these impacts, I have particularly noticed the way in which the aim of realizing highly productive workstyles to facilitate opera- the pandemic has changed our customer worksites, workstyles, and tions during and after the global COVID-19 pandemic. In addition, we how we engage with stakeholders. recognize that the change in the nature of meetings, which include With regard to customer worksites, there is a need to take steps embracing both web conferences and face-to-face meetings, repre- to avoid crowded and confined spaces and close interactions. In sent opportunities for Komatsu. We will capitalize on such opportuni- terms of equipment, we can therefore expect rising demand for ties to realize further improvements in operation efficiency. We are remote, automated, and unmanned operation. On the nontangible also considering the distribution of wearable devices to employees side of operations, it is likely that the use of construction digitization for use in the management of their health. and digital twin methodologies will accelerate at customer work- Engagement with stakeholders is important to us. However, the places. To swiftly respond to these needs, Komatsu will accelerate ways of engaging are clearly changing. For example, we must be delivery of the “SMARTCONSTRUCTION Digital Transformation” and careful to avoid crowded and confined spaces and close interactions automation solutions in the construction equipment field, and provide in our investor relations activities. To this end, we are examining the solutions such as new platforms, the Autonomous Haulage System, potential of arranging online events for institutional investors and pri- and remote operation in the mining equipment field. vate investors. We are also looking at the possibility of a virtual Moving on to workstyles, we had more than 90% of headquar- General Meeting of Shareholders, although we will have to wait until ters employees and over 50% of employees at indirect factory divi- we can confirm the legality of such meetings before moving forward. sions telecommute during the period of Japan’s state of emergency We will work to achieve high levels of quality in our communication declaration. Going forward, we will plan to introduce a full-fledged with stakeholders, even as we maintain safe physical distance. Acceleration of Growth Strategies toward the Solution of ESG Issues Komatsu’s mid-term management plan delineates our intent to roughly 4% of the Company’s total consolidated net sales came address ESG issues through growth strategies in our core business. from coking coal used in iron refining processes and approximately In accordance with this intent, we have defined material ESG issues 10% was attributable to thermal coal, which itself is viewed as prob- in areas in which Komatsu is poised to make particularly large contri- lematic in terms of its contribution to CO2 emissions. We do not butions through its business. Key performance indicators have been expect any sharp declines in thermal coal demand to be seen over disclosed for these issues in our integrated reports, and we have the short term as it is still functioning as an important source of also established new ESG management targets. energy underpinning people’s daily lives in emerging countries. I would now like to explain some of our key initiatives for However, it can be anticipated that demand for thermal coal will addressing climate change, an area in which there is a great deal of decline gradually out of consideration for climate change and other interest from investors. environmental issues. Komatsu looks to counter the risk of future The first of our initiatives on this front is to enhance our hard declines in thermal coal sales by expanding its hard rock mining busi- rock mining businesses. Hard rock mining is the process of excavat- nesses, in which we expect to see growth going forward, while also ing minerals other than coal, such as copper and nickel. In FY2019, lowering the portion of net sales accounted for by thermal coal. In 14 Ratio of Coal Related Sales (FY2019) Coking coal Thermal coal Iron, copper, etc. Non-mining equipment 10% 4% Consolidated net sales: ¥2,444.8 billion Of which, coal-related ¥357.2 billion Mining equipment 39% sales of 30-ton class excavators in Europe, a market characterized by high environmental awareness. We believe that this is a product war- ranting attention amid the recent rise in the importance of environ- mental issues. The third of our key initiatives for addressing climate change is to expand our forest machine business. While forestry work is increas- ingly being performed by machines in Europe and the United States, it is still common for such work to be conducted using manpower in Japan and Asia. I was positioned in Indonesia over the period from 2015 to 2016. During this period, I visited customers engaged in for- estry work on several occasions. These visits made me aware of the large potential for forestry businesses, particularly in densely for- ested areas, while also giving me a strong interest in resolving the various issues faced by these businesses. Sustainable forestry busi- nesses are circular businesses in which the CO2 emitted into the order to do so, we will pursue synergies through joint development atmosphere during the process of cultivating seedlings is then with KMC while launching products with characteristics that absorbed by trees to help mitigate climate change. Komatsu is sup- respond to customer needs. porting sustainable forestry with equipment that is capable of per- Our second key initiative for addressing climate change is to forming all processes from tree planting to harvesting grown trees, launch and promote fuel-efficient products with low environmental improving soil, and planting new trees. There currently exists impacts. In addition to our electric mini excavators and compact demand for more than 10,000 forest machines on a global scale, and battery-powered forklifts, we also look to focus on the sale of I therefore see the potential for consistent growth in this business hybrid excavators. Komatsu’s hybrid excavators use our proprietary going forward. Eventually, we will look to promote smart forestry by technologies to substantially reduce CO2 emissions. Approximately digitally linking all forestry processes through our 5,000 such excavators are currently in operation around the world, SMARTCONSTRUCTION solution. In this manner, I hope to help and we are gradually building our track record with regard to this address the various issues facing forestry businesses while cultivat- equipment. In 2019, we launched a 30-ton hybrid excavator, and ing new pillars of earnings. this product has already come to represent more than 40% of Milestone of 100th Anniversary and Beyond We will celebrate the 100th anniversary of Komatsu’s founding offering electric mini excavators in the Japanese rental market. We in 2021. However, we recognize that this milestone is just that, have established a roadmap for promoting the spread of electric a checkpoint to be passed. Accordingly, we remain committed equipment going forward, and we look to make steady progress to working toward the resolution of the issues faced by society down this path through open innovation. and customers through flexible management in response to Komatsu is committed to sincerely addressing the issues faced changes in the external environment. by society and thereby raising its value as a company that grows One of the assumptions in the background of the formulation of together with society. We will also proactively participate in the the mid-term management plan was that we cannot anticipate sig- United Nations Global Compact, the World Business Council for nificant growth in demand for construction equipment over the fore- Sustainable Development, the Task Force on Climate-related Financial seeable future and must rather expect short-term fluctuations. As of Disclosures, and other initiatives as we work to fulfill our obligations today, demand has become highly volatile as a result of the global to society and the environment as a global company. I continue to COVID-19 pandemic. Regardless, there will be no change to our thank all of our stakeholders and ask for your continued support. basic approach during or after the pandemic. What will be important, however, will be the speed at which we act. Collaboration with part- ners who share our vision will be key to enhancing our products, services, and solutions. In launching the “SMARTCONSTRUCTION Digital Transformation,” we are benefiting from collaboration with 20 start-up companies and other development partners located in Japan, the United States, and Europe. In addition, we have begun Hiroyuki Ogawa President and Chief Executive Officer 15 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Message from CFO Review of First Year of Mid-Term Management Plan (FY2019–FY2021) FY2019, the first year of Komatsu’s mid-term management plan, DANTOTSU Value – FORWARD Together for Sustainable Growth, proved to be a challenging year. Factors behind this difficulty included declines in demand in strategic markets as well as the impacts of the global COVID-19 pandemic that emerged in the fourth quarter of the fiscal year. During the year, Komatsu continued to pursue sustainable increases in its corporate value by building a sound financial position and strengthening its competitiveness. We made steady progress during FY2019 in advancing key initiatives based on the three pillars of growth strategies described in the mid-term management plan. Examples of this progress included the introduction of the SMARTCONSTRUCTION solution and the launch of electric mini excavators. Faced with the current adverse operating environment, we are now pressed to demonstrate the true value of Komatsu that we have cultivated through our efforts to date. Takeshi Horikoshi Senior Executive Officer and CFO Financial Strategies Formulated in Response to Operating Environment Changes To maximize growth and profits, our accounting and finance depart- we have defined management targets, in light of the volatility in demand ments are responsible for the roles of developing business plans, man- in the construction and mining equipment business. aging business performance, and studying indices and methods thereof, In regard to profitability, we strive to build a financial position capa- as well as setting up investment decision-making criteria and making ble of weathering drastic market changes, and we will continue to thor- judgment on investment projects. oughly control fixed costs to this end. Fixed costs have been on the rise At the same time, we monitor management indices pertaining to over the past several years as a result of M&A activities. However, we profitability, financial soundness, and asset efficiency, areas for which have also made steady gains in efficiency through post-merger Net Sales and Operating Income Ratio (Billions of yen) Domestic construction, mining and utility equipment Industrial machinery and others Retail finance Electronics Overseas construction, mining and utility equipment 14.8 Operating income ratio (right scale) 14.6 (%) 15.0 10.1 7.1 3.9 4.5 3.2 4.2 2.7 1.6 1.8 2.5 2.3 2.6 1.6 0.4 –1.3 3,000 6.5 7.7 7.0 2,000 5.2 4.2 2.1 1,000 0 12.9 12.9 12.1 12.3 12.2 11.2 11.2 10.7 9.7 10.3 10.0 7.5 4.7 5.0 0.0 –5.0 –10.0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Business strategies Construction equipment and industrial machinery Mid-Term Management Plan Structural reforms Diversification Selective focus (DANTOTSU Product DANTOTSU Service DANTOTSU Solution) 3G ((G)97, (G)2000) G to the 21st Move the World Global Teamwork Together We Innovate GEMBA World Wide DANTOTSU Value 1st structural reforms 2nd structural reforms Note: Concerning the figures for the fiscal year ended March 31, 2002 and earlier, Komatsu Electronic Metals Co., Ltd. and its subsidiaries and outdoor power equipment (OPE) of Komatsu Zenoah Co. and its subsidiaries engaging in the OPE business were not reclassified as discontinued operations resulting from the sale thereof. 16 Komatsu’s Growth Strategies integration of the operations of acquired companies. In FY2019, we remains slightly above our ideal level, due in part to the impacts of the were able to absorb the rise in expenses for increased costs stemming global COVID-19 pandemic. There is thus a need to further shorten this from investments in growth areas through reductions in general period as we move toward the end of FY2020. expenses. As a result, total fixed costs were relatively unchanged year When selecting fund procurement sources, we aspired to secure on year. As for financial soundness and asset efficiency, we began work- funding reliability by considering factors such as source diversification ing to cut inventory assets in the first quarter of FY2019. These efforts and continuity along with procurement costs. Komatsu also issued its saw us systematically adjusting production levels while seeking to first green bond in July 2020. Through these bonds, we hope to spread lessen the impact on our suppliers from these efforts. As a result, inven- awareness regarding Komatsu’s efforts to address environmental tories stood at ¥805.3 billion on March 31, 2020, down ¥32.2 billion from issues while also expanding our investor base. the previous fiscal year-end. However, the inventory turnover period Growth (Fund Allocation Policy) In order to achieve sustainable growth, we are targeting a well-balanced allo- There is currently no clear end in sight for the global COVID-19 pan- cation of our funds to 1) investment for growth, 2) improvement of the bal- demic. Accordingly, we must continue to take a flexible approach in respond- ance sheet (maintaining financial soundness), and 3) shareholder return. ing to the massive changes seen in the operating environment while setting In FY2019, net cash used in investing activities totaled ¥190.9 billion, priorities based on cost-benefit analyses and assessments of strategic value. an amount equivalent to roughly 65% of the net cash provided by operat- By advancing key initiatives based on our three pillars of growth strategies ing activities of ¥295.1 billion. One specific target of investments was the through this approach, Komatsu will target sustainable growth. acquisition of mining- and forestry-related companies for the purpose of fueling future growth. Meanwhile, we accumulated cash and deposits to ensure our future ability to meeting funding demands in light of the global COVID-19 pandemic. As a result, interest-bearing debt on March 31, 2020 rose to ¥1,012.3 billion, up ¥81.6 billion from a year earlier, while the net debt-to-equity ratio was 0.43 times, unchanged from the previous fiscal year-end. As for shareholder returns, we adhered to the consolidated payout ratio target announced together with our financial results for the six months ended September 30, 2019, issuing returns that made for a ratio of 57.7%, regardless of the impacts of the COVID-19 pandemic. Response to the COVID-19 Pandemic Investment (Growth strategies) • Sales growth rate • Operating income ratio • ROI ROE Shareholder return Improvement of the balance sheet (Maintaining financial soundness) • Net debt-to-equity ratio • Consolidated payout ratio Even prior to the global COVID-19 pandemic, Komatsu has been prac- payment moratoriums to and purchasing the inventories of these dis- ticing global cross-sourcing and procurement for equipment bodies tributors and suppliers. and parts. The goal of these efforts has been to absorb the impacts of Moreover, we have taken a number of steps to ensure sufficient demand and foreign exchange rate fluctuations. After the COVID-19 liquidity to meet funding needs in this challenging environment. In pandemic struck, these prior efforts enabled us to minimize the addition to accumulating cash and deposits, we have concluded new impacts on production by procuring the necessary articles from alter- commitment line agreements, namely a yen-denominated line in the native sources and reallocating inventories. As a result, no issues have amount of ¥300.0 billion and a U.S. dollar-denominated line in the been faced with regard to our supply chain as of this point in time. We amount of USD1.3 billion. The funds procured through these commit- also are providing support as needed by distributors and suppliers suf- ment lines can be distributed to other countries through the Group’s fering in this challenging environment. This support includes offering global cash management system. Issuance of Green Bonds In July 2020, Komatsu issued its first green bonds, unsecured straight bonds. Komatsu plans to use the proceeds from these green bonds to research and develop, promote, and popularize its products, such as hybrid hydraulic excavators and electric construction equipment; fuel-efficient operation support services utilizing offerings like KOMTRAX (Komatsu Machine Tracking System); and SMARTCONSTRUCTION and other ICT-intensive construction equipment. With these products, we will aim to contribute to reduced CO2 emissions from product use. Komatsu also plans to use these proceeds for capital investment in facilities and equipment that help reduce CO2 emissions in manufacturing and increase the ratio of renewable energy use. TOPICS In this manner, the issuance of green bonds has enabled for the diversification of procurement sources and the expansion of our investment base while also supporting the accomplishment of targets set for environmental, social, and governance (ESG) factors in the mid-term management plan. Going for- ward, the proactive and ongoing issuance of such bonds will be positioned as an ESG initiative to be advanced by our accounting and finance departments. 17 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Message from CFO Profitability Operating Income Ratio unfavorable circumstances outweighed the benefits of our efforts to As the industry leader, it is important for Komatsu to maintain and increase selling prices and absorb the rises in fixed expenses attrib- increase sales prices while pursuing ongoing reductions in cost of utable to investment in growth areas. sales and fixed costs. The operating income ratio is an index that comprehensively reflects our success in these tasks and is therefore Cost Control an important indicator for evaluating this success. In the mid-term While making investments in growth areas, we have taken exhaus- management plan, we have set the target of maintaining an indus- tive steps to reduce cost of sales and fixed costs, thereby working try’s top-level operating income ratio. In FY2019, operating income to secure profitability (separation of costs from growth). In FY2019, came to 10.3%. This outcome was largely due to the heavy impacts we pursued steady decreases in cost of sales while also cutting of reduced sales volume, as partially affected by the global COVID- general and other standard fixed costs. Meanwhile, efforts were 19 pandemic, a change in the geographic composition of sales, and made to limit fix costs associated with investments in growth areas adverse effects of the Japanese yen’s appreciation. These by assessing and prioritizing investments based on strategic value. Fixed Costs (Billions of yen) 600 300 0 Acquisition of Joy Global Inc. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Note: Amounts for performance from FY2009–FY2019 have been translated based on the foreign exchange rates in the projection for FY2019 performance (JPY108.7 = USD1, etc.). Decision-Making of Investment Concerning specific investment projects, we make careful decisions ability above the industry’s average. As for key initiatives after considering strategic value and payback periods in our Strategy currently underway, we will be sure to collect the returns on our Review Committee and Steering Committee meetings. Based on investments after the initiatives have been completed to fuel these efforts, we are working to achieve growth and improve profit- ongoing growth. Investments in Production Facilities and Others and Depreciation (Billions of yen) 55.3 63.9 51.8 54.5 48.7 63.9 49.9 79.8 43.6 67.8 50.2 66.1 150 100 50 0 Construction, mining, and utility equipment Depreciation (right scale) 52.6 49.2 60.1 57.7 56.8 52.7 56.5 67.6 Industrial machinery and others (Billions of yen) 56.4 86.5 60 40 20 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Note: Excludes investments in rental assets R&D Expenses (Billions of yen) 100 3.2 2.7 2.8 46.4 49.0 54.8 50 0 18 Construction, mining, and utility equipment Industrial machinery and others Ratio of R&D expenses to net sales (right scale) 3.2 60.8 3.3 64.4 3.6 70.7 3.8 3.9 70.7 70.5 2.9 73.6 2.7 73.4 3.1 74.7 (%) 4.0 0 –4.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Komatsu’s Growth Strategies Efficiency ROE (return on equity) is a general index, covering profitability, asset profitability by giving weight to growth. Concerning asset efficiency, efficiency, and financial leverage. Thus, we monitor it as one of our we apply ROIC (return on invested capital) to internal control. To con- management indices while continuously keeping close attention to trol working capital appropriately in response to the volatility of cost of shareholders’ equity. market demand, we periodically monitor the cash conversion cycle We estimate that our cost of equity is around 8% on a global of working capital through ROIC, for which invested capital in the basis. Thus, we have set an ROE of 10% or higher as the manage- ROIC formula is defined by the corresponding working capital plus ment target. To expand equity spread (ROE – cost of shareholders’ tangible fixed assets. We recognize that improving asset efficiency is equity), we will work to both improve ROE and reduce cost of share- a task that we will need to emphasize over the foreseeable future, holders’ equity. and we intend to ramp up efforts to curtail inventory assets to this To promote improvement of ROE, we will work to improve end going forward. ROE Profitability Separation of costs from growth ROE (%) 20.0 Thorough control of fixed costs 17.2 17.3 Efficiency Fixed assets: Assessment of investment Outstanding days of working capital (overdue receivables and slow-moving inventory) To set up the guidelines for financial indexes which subsidiaries should achieve Financial leverage To optimize funding on a consolidated basis To manage net debt-to-equity ratio by considering business characteristics 12.4 11.5 10.6 14.7 12.1 9.0 7.3 8.6 15.0 10.0 5.0 0 4.1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Cross-Shareholdings to business relations or collaboration with the Company, for the pur- On March 31, 2009, Komatsu held shares of stock in 34 listed com- pose of avoiding the risk of stock price fluctuation as well as ensur- panies in the form of cross-shareholdings. Since then, we have pro- ing the efficiency of assets. ceeded to curtail such shareholdings while confirming those Later, a revision to U.S. GAAP standards prompted the Company holdings that we continued to hold offered quantitative and qualita- to adjust profit figures to reflect gains and losses on valuation of tive benefits that exceeded the associated cost of shareholders’ marketable securities from FY2018. It was judged that the remaining equity. As a result, these holdings had been decreased to five com- five holdings, in general, offered satisfactory quantitative benefits. panies on March 31, 2017. It was during this period that the Tokyo However, it was decided to sell all of these holdings through a Stock Exchange enacted Japan’s Corporate Governance Code in reevaluation of the relations between the Company and the invest- 2015. In response to this code, Komatsu put forth a policy of not ees and the potential impacts of stock price fluctuations on profits. owning stocks of listed companies, unless they are necessary due All of these holdings were sold as of December 2017. Cross-Shareholdings (Non-Consolidated) (Number of holdings) 34 33 40 30 20 10 0 19 15 12 11 9 7 5 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 2017 (FY) (March 31, 2018) 19 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Message from CFO Financial Position Monitoring of Net Debt-to-Equity Ratio changes in market demand. Taking into account the business charac- We believe it is important to maintain a sound financial position in ・リテールファイナンス事業以外：3,643 億円 teristics of retail finance and future investment opportunities, we order for us to achieve sustainable growth while being free from ・リテールファイナンス事業：6,480 億円 monitor net debt-to-equity ratio as an index of soundness. ・ネット D/E レシオ：0.43 Interest-Bearing Debt and Net Debt-to-Equity Ratio (Billions of yen) excl. Retail finance business Net debt-to-equity ratio (consolidated) (right scale) Retail finance business (Times) 2,000 1,500 1,000 500 0 0.60 0.50 0.56 0.49 0.37 0.32 0.23 0.18 0.40 0.43 0.43 0.9 0.6 0.3 0 –0.3 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Optimization of Funding on a Consolidated Basis Furthermore, a global CMS has been established to link all To optimize funding on a group-wide basis and reduce foreign regional headquarter companies, including the company in Japan. exchange risks by matching assets and liabilities in each currency, Through this system, we practice efficient funding on a consolidated we have built a funding system by region and maintain the policy of basis to complement the funding sources used in each region under local funding. Equipped with a local funding function, each regional normal circumstances. In addition, we have established new yen- headquarter company advances funds to Komatsu Group companies and U.S. dollar-denominated commitment lines through which the regardless of business segment in the corresponding region mainly procured funds can to be supplied to different regions to function as through the cash management system (CMS) for the region. a safety net for times of emergency. Retail Finance Business Role of the Retail Finance Business profitability and financial conditions. This segment is also responsible Our retail finance business, which handles financial products to help for promoting sales our products. From this perspective, we are customers purchase our products, was separated into an indepen- focused on generating synergies in this segment through measures dent business segment in FY2016. This segment is pursuing its own such as financing forest machines, a key initiative of the mid-term segment-specific management targets (1.5%–2.0% for ROA and 5 or management plan, in addition to financing mainstay construction and under for net debt-to-equity ratio) to ensure transparency of mining equipment. Risk Management of the Retail Finance Business Risk management is now more important than ever given that it In an effort to reduce risks in the retail finance business, we diver- is currently unclear when the global COVID-19 pandemic will end. sify portfolios and match the currencies, interest rates, and periods We have received requests for payment moratoriums from certain of lending and funding. In addition, we also work to safekeep our customers and distributors as a result of the pandemic, and we are credits by taking advantage of our strengths, for example, by using responding to these requests while confirming factors such as past KOMTRAX, installed in our construction equipment as a standard histories of overdue payments. feature, for credit management (monitoring the location and operat- ing conditions of construction equipment). 20 Total Assets and ROA of Retail Finance Business Japan North America Europe China Oceania Others ROA (right scale) (Billions of yen) 900 600 300 0 2.9 2.5 2.5 2.0 2.4 2.0 1.9 1.5 2.2 0.9 0.7 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) (%) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Shareholder Return Concerning cash dividends, we have the policy of continuing stable from FY2018, out of reflection of performance in this fiscal year as payment of dividends after comprehensively considering consoli- well as the future business outlook. These payments made for a dated business results and reviewing future investment plans, cash consolidated payout ratio of 57.7%, an increase of 17.2 percentage flows, and the like. Specifically, we have the policy of maintaining a points year on year. consolidated payout ratio of 40% or higher. In FY2019, we issued Concerning stock buybacks, we plan to do so timely and flexibly dividend payments of ¥94 per share, a decrease of ¥16 per share in response to market and financial conditions. Cash Flows (Billions of yen) 400 200 0 –200 –400 Net cash provided by operating activities Net cash used in investing activities Free cash flow 109.1 61.8 82.6 –18.9 122.8 15.3 104.2 151.9 161.8 170.9 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) –229.3 Cash Dividends per Share (Yen) 120 60 0 Stock buyback of approx. ¥30.0 billion conducted in FY2008, FY2011, and FY2014 in addition to dividend payments 38 42 48 16 110 94 84 58 58 58 58 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Dividend policy 20%–40% Consolidated payout ratio (Total return ratio) 38.0%* 24.4% 24.2% [42.2%] 36.2% 34.7% 30%–50% 35.8% [55.2%] * Excluding structural reform expenses 40%–60% 40%~ 39.8% 48.2% 40.3% 40.5% 57.7% 21 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Special Feature 2: Value Creation Story KOMATSU offers SMARTCONSTRUCTION in the USA and four countries in Europe. (United Kingdom, Germany, France, and Denmark) A video of the presentation by Rod Schrader, Chairman & CEO of Komatsu America Corp., at CONEXPO-CON/AGG 2020, a construction equipment tradeshow held in Las Vegas in March 2020, can be found below. https://www.youtube.com/watch?v=dd7oeh6MkCM&t=23s Realization of the Safe, Highly Productive, Smart, and Clean Workplaces of the Future Launch of “SMARTCONSTRUCTION Digital Transformation” Komatsu launched “SMARTCONSTRUCTION Digital Transformation,” a solution comprising four new IoT devices and eight new applications that accelerate digital transformations through SMARTCONSTRUCTION, in April 2020. While the previous version of SMARTCONSTRUCTION only digitized part of the construction process (“vertical digi- tization”), these new IoT devices and applications will allow for digitization of the entire process (“horizontal digitiza- tion”). This will enable worksite operations to be optimized by synchronizing the real workplace with its digital twin, thereby realizing drastic improvement in the safety, productivity, and environmental performance of the entire worksite. Customer Construction Process Surveying Planning Construction Inspection Traditional Analog Process Digital Transformation “DX” Digital Process “Vertical digitization”: Digitization of individual construction processes (previous SMARTCONSTRUCTION) Drone 3D measurement / visualization Construction simulation / digital task preparation 3D construction / management with ICT-intensive equipment and apps Drone 3D finished landform inspection l S o u t i o n “Horizontal digitization”: Digitization and connection of all processes to optimize entire construction process Digital transformation of construction (“SMARTCONSTRUCTION Digital Transformation”) 22 KOMATSU offers SMARTCONSTRUCTION in the USA and four countries in Europe. Rodney Schrader コココココココココココココココCEO Senior Executive Officer Rodney Schrader Chairman & CEO, Komatsu America Corp. Optimization of construction through synchronization between real workplace and its digital twin 23 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Special Feature 2: Value Creation Story 01 SMART CONSTRUCTION Since its introduction in February 2015, SMARTCONSTRUCTION has addressed the labor shortages facing the Japanese construction industry by realizing improved productivity and safety at customer worksites. This has been made possible by openly employing digital technologies in both Japan and overseas; domestically, these technologies have been introduced to more than 10,000 customer worksites. Komatsu is dedicated to contributing to the realization of the safe, highly productive, smart, and clean workplaces of the future by digitally transforming both products (automation and autonomation operation) and processes (optimization). SMARTCONSTRUCTION promotional videos and introduction case studies can be found below. SMARTCONSTRUCTION promotional videos (Japanese only) http://smartconstruction.komatsu/movie.html SMARTCONSTRUCTION introduction case studies (Japanese only) https://smartconstruction.komatsu/case/ Strategic Directives By accelerating the digital transformation of construction through both products (automa- tion and autonomation operation) and pro- cesses (optimization), we will realize the workplaces of the future. Processes: Optimization In addition to digitizing individual processes, such as condition surveys by drones (“verti- cal digitization”), we will link the 3D work- place information gained from such digitized processes with our LANDLOG platform (“horizontal digitization”) to pro- mote the automation and optimization of entire workplaces. Products: Automation and Autonomation Operation Realizing the safe, highly productive, smart, and clean workplaces of the future will require all construction equipment to work autonomously while collaborating with other equipment at the workplace. At the same time, it will be crucial to enhance ICT- intensive equipment, specifically through increased automation and through autonomy achieved via communication and coordination among equipment. Komatsu is moving ahead with research and development on sophisticated automation and autonomy technologies with an eye to the introduction of 5G and other ultrahigh-speed mobile com- munications systems and the utilization of high-precision global navigation satellite system technologies. 24 Level 5 Optimization of Construction Level 4 Automation of Construction Planning Level 3 3-Dimensional Construction Planning Level 2 3-Dimensional Topo graphical Map Level 1 3-Dimensional Design Data ) n o i t c u r t s n o C f o l e v e L n o i t a z i m i t p O ( s e s s e c o r P Workplaces of the future: Safe, highly productive, smart and clean Digital Transformation of Construction • Automatic generation of daily tasks from daily optimized construction plans • Collaboration and autonomous operation of equipment on the workplace “Visualization” of workplace data ICT Construction • ICT-intensive construction & machines • Visualization of progress • Utilization of topographical data Introduction of advanced ICT-intensive models Conventional construction Products (Level of Automation and Autonomous Operation) Level 1 Limited Operation Support Level 2 Advanced Operation Support Level 3 Advanced Solo Automation Level 4 Advanced Collaborative Autonomous Operation Level 5 Advanced Decision-making Autonomous Operation Komatsu’s Growth Strategies SMART CONSTRUCTION Profitability and Growth Compared with other industries, the construction industry is lacking in terms of safety and productivity and has significant room for improvement via digitization. SMARTCONSTRUCTION is still in the early stages of its introduction. Nonetheless, we have verified its significant benefits for con- tributing to improved safety and productivity at adopting workplaces. We therefore anticipate that the use of this solution will spread steadily against the backdrop of labor shortfalls and aging workplace operators. The global COVID-19 pandemic also presents an oppor- tunity in the form of potential for the rapid digitization of construction workplaces. Safety- and Productivity-Related Tasks More dangerous than other industries No. of deaths per 100,000 employees*1 S a f e t y P r o d u c t i v i t y Financial Information & communications Retail Manufacturing Public utilities Service Construction Mining Lower than other industries Nominal productivity by industry (¥1,000/hr.)*2 Public utilities Finance & insurance Information & communications Manufacturing Retail Construction Health Agriculture, forestry & fisheries *1 Source: National Census of Fatal Occupational Injuries in 2018, U.S. BUREAU OF LABOR STATISTICS *2 Source: Labor Productivity Trends in Major Industries, JAPAN PRODUCTIVITY CENTER Diffusion of Innovation Curve and Earnings Growth (as Projected by Komatsu) • The digitization of construction workplaces is projected to advance more swiftly than the popularization of enterprise resource planning (ERP) systems, a similar solution launched in the 1980s, due to the current availability of sophisticated and affordable technologies. • The global COVID-19 pandemic is expected to further accelerate this digitization trend. Customer type S-curve Adoption rate Smartphone Adoption in Japan (Past Nine Years) Laggards Late majority Early majority Early adopters Innovators Digitization of construction workplaces Acceleration due to COVID-19 pandemic Sales at Companies at Which ERP Systems Are De Facto Standard (Past 40 Years) FY2020 N years N+4 years Time Contributions to Resolution of Environmental and Social Issues TOPICS Launch of SMARTCONSTRUCTION Retrofit kit Provision of ICT Capabilities for Conventional Construction Equipment Komatsu launched SMARTCONSTRUCTION Retrofit kit, the add-on kit to offer ICT capabilities, such as 3D machine guidance and payload mea- surement, to conventional construction equipment in Japan in late April through LANDLOG Ltd. Currently, conventional construction equipment with no ICT capabilities accounts for over 98% of all construction equipment working at construction workplaces in Japan. To accelerate the pace of achieving digital transformation of construction workplace operations, the SMARTCONSTRUCTION Retrofit kit can be added on not only Komatsu-made models but also other models as long as they are hydraulic excavators. With the SMARTCONSTRUCTION Retrofit kit, Komatsu is going to promote digitization of conventional construction equipment and digital transformation of construction in order to realize safe, highly productive, smart, and clean workplaces of the future soon. ICT-intensive models SMARTCONSTRUCTION Retrofit kit Non-ICT-intensive models 3D construction based on 3D design data 3D construction: Impossible 3D construction: Possible 3D construction: Possible 3D control Impossible Possible: Machine control Impossible: Limited to machined guidance Staking & assistant workers 3D construction records Necessary Unnecessary Unnecessary Impossible to obtain High-precision 3D data: Possible to obtain High-precision 3D data: Possible to obtain Advanced ICT-intensive equipment Equipment with SMARTCONSTRUCTION Retrofit Kit (provisional name) 25 0.41.21.92.2 2.6 2.69.514.11.52.83.14.05.67.47.512.8Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Special Feature 2: Value Creation Story 02 Forestry Machinery Business Sustainable forestry is an undertaking with the potential to contribute to the accomplishment of the Sustainable Development Goals (SDGs) advocated by the United Nations. These contributions include helping mitigate climate change by reducing the amount of CO2 in the atmosphere and preserving biodiversity and water resources. Komatsu regards aforestry business as an important industry that contributes toward the achievement of the SDGs. In forestry, it is important to contribute to realizing the forest management cycle of planting, cultivating, and harvesting trees, and it is required to operate in a way that places due consideration on forest environments. Komatsu operates a wide-ranging forestry machine business on a global basis to help increase safety and productivity in forestry operation. Videos on forest machines, including a look at a forestry project adopting ICT in Sweden, can be found here. https://youtu.be/_D-EfqsrGT0 Strategic Directives Komatsu is working to mechanize forestry operation, including planting, cultivating, and harvesting trees, to contribute to sustainable forestry. In the realm of planting, we have developed subsoiling machines and automated tree planters based on our bull- dozers. These machines are currently being supplied to the Brazilian market. Moreover, in the area of timber harvesting and extracting operations, where most forestry-related occupational accidents tend to occur, we are making progress in developing and selling forestry equipment that enables to harvest and extract trees in steep area without people having to descend to the forest floor. • Introduction of New Tree Planting Products • Improvement of Harvesting and Extracting Productivity and Safety Planting Harvesting D61EM-23M0 automated tree planter Land preparation Cultivating Sustainable Forestry Planting Harvesting PC130F Harvester (forest machine based on hydraulic excavators) Extracting D85EX subsoiling machine Forwarder 895 Forest Forwarder Usable on Slopes 2626 Forestry Machinery Business Profitability and Growth Komatsu’s forest machine business has continued to grow smoothly since the 2004 acquisition of Partek Forest AB (currently, Komatsu Forest AB) of Sweden. Looking ahead, economic growth in emerging countries is expected to drive rises in housing starts and pulp demand. In addition, we anticipate stable growth in timber production volumes as a substitute for plastic amid rising envi- ronmental awareness. Forest Machine Business Sales (Billions of yen) Global Timber Production Volumes (Millions of m3) 140 105 70 35 0 2,400 1,800 1,200 600 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 (FY) 0 2010 2015 2020 2025 (FY) Total industrial timber Sawtimber Pulp materials Source: Food and Agriculture Organization of the United Nations (Figures for 2019 forward are the Company’s projections.) Contributions to Resolution of Environmental and Social Issues TO PICS Smart Forestry Powered by ICT We have been working on a smart forestry concept that makes it possible to visually monitor forestry supply chains. In Japan, we have been using drones to conduct tree planting and growth management surveys including forestry resource quantity estimates. This has enabled us to reduce the labor hours needed for surveys for felling from around five people per hect- are per day to one person per hectare per day. Moreover, by using ICT-equipped harvesters for processing and soring logs, we have been able to reduce the labor hours needed from about 13 people per hectare per day to about 0.5 people per hectare per day. We are also focusing our efforts on developing applications that are capable of drawing on the accumulated log pro- 3D image cessing and timber transport data of the LANDLOG open platform. We will thereby contribute to streamlining operations in the future by sharing information with forestry business opera- tors on lumber markets as well as lumber consumers. Going forward, we hope to help promote cyclical forestry around the world by facilitating further safety and productivity improvements in forestry. Through Komatsu’s smart forestry solutions, drone photog- raphy can be utilized to prepare 3D images of forests, which can be used to automatically estimate the number of trees, diameters of trees, and the volume of timber to be produced, thereby contributing to higher levels of efficiency in pre-felling forest resource surveys. 27 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Mid-Term Management Plan (FY2019–FY2021) DANTOTSU Value FORWARD Together for Sustainable Growth Komatsu’s External Environment Today, protectionism is growing around the world, and multipolarity is becoming evident. We are also witnessing grow- ing concerns over climate change. As the external environment is changing dynamically, in the construction, mining, and utility equipment business, we assume gradual growth of the demand in the medium to long term, but the volatility will remain high in the short term. In the industrial machinery and others business, we anticipate a structural change of demand in the automobile manufacturing industry, mainly resulting from ongoing progress toward electric vehicles. In addition, we anticipate assured growth in demand in the semiconductor manufacturing industry over the medium to long term, while a temporary adjustment phase is also expected. Achieving sustainable growth in this environment will require growth strategies that are not affected by demand fluctuations. Changes in the External Environment and of ESG Issues Politics & economy • Multipolarization of the world • Emergence of protectionism • Growth of emerging economies Technologies • Further spread of IoT, AI, and big data • The progress of electric and autonomous vehicles Environment & energy • Climate change • Growing demand for energy, foods and water • Decarbonization & renewable energy Society & values • Acceleration of diversity in advanced countries • A decline of working-age population • Achievement of a recycling-oriented society by accelerating the pace of sharing • Growing pursuit and needs for safety and comfort Expectations of achieving a sustainable society Our Tasks in the Growth Strategies 1. To solve ESG issues through the growth strategies of our core business 28 Mid-Term Management Plan (FY2019–FY2021) DANTOTSU Value FORWARD Together for Sustainable Growth Demand for Construction and Mining Equipment Period of the previous plan Period of the mid-term management plan • Growth strategies based on • Value creation by means of innovation innovation • Growth strategies of existing • Growth strategies based on businesses • Structural reforms designed to reinforce the business foundation business reforms • Structural reforms for growth Growth above the industry’s average by focusing investment in growth areas Demand recovery for mining equipment and in emerging economies d n a m e D / s e l a S Sustainable growth We assumed demand recovery would start in FY2019 in the previous plan. (Actually it started in FY2017.) We assume gradual growth in the mid to long ranges, but volatility will remain high in the short range. Assumed range of demand change FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022~ Construction, Mining, and Utility Equipment Business Sales (to Outside Customers) by Region (Billions of yen) 3,000 2,500 2,000 1,500 1,000 500 0 2,267.3 2,466.6 1,566.3 FY2016 FY2017 FY2018 Africa Middle East Oceania Asia China CIS Latin America Europe North America Japan Strategic Markets 54% Traditional Markets 46% Expectations of achieving a sustainable society 2. To promote sustainable growth based on our profit structure which is free of changes in the external environment and market demand 29 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Komatsu’s Growth Strategies Mid-Term Management Plan (FY2019–FY2021) Overview of the Mid-Term Management Plan The mid-term management plan sets forth the future vision Komatsu should aspire to and hope to accomplish as it approaches and moves beyond the 100th anniversary of its founding in 2021. As part of this vision, we seek to become a company that can help realize the safe, highly productive, smart, and clean workplaces of the future together with customers while generating a positive cycle of resolving ESG issues through the creation of value for customers and improving earnings. Management Principle Make commitment to Quality and Reliability and maximize corporate value (the total sum of trust from society and all stakeholders) 2021 100th anniversary and beyond Mid-Term Management Plan (FY2019–FY2021) Three Pillars of Growth Strategies 1. Value creation by means of innovation 2. Growth strategies based on business reforms 3. Structural reforms for growth 1 Previous Plan (FY2016–FY2018) • Growth strategies based on innovation • Growth strategies of existing businesses • Structural reforms designed to reinforce the business foundation 3 Integration of KMC (FY2017) 2 Future Vision ESG Solutions Positive cycle = Sustainable growth Workplaces of the future: Safe, highly productive, smart and clean Positive cycle = Sustainable growth Improvement of earnings Value creation by means of innovation • Optimization platform and solutions business strategies SMARTCONSTRUCTION, Autonomous Haulage System (AHS), and platforms (LANDLOG and IntelliMine) • Automation, autonomous operation, electrification and remote-controlling of construction, mining and utility (compact) equipment • Smart forestry and agriculture Growth strategies based on business reforms • KMC integration synergies and business reinforcement • Value chain reforms and redefinition of the aftermarket business Preventive maintenance by applying IoT and AI, and Lifecycle support under serial number-based management; logistics reforms; and next-generation key components • Next-generation KOMTRAX • Stronger focus on aggregate & cement, forestry, agriculture and other segments • Efforts for “DANTOTSU No. 1 in Asia” and in the growing markets of India and Africa • Reforms of the industrial machinery business (Expansion of synergy with the construction equipment business and growth by capitalizing on core technologies) Structural reforms for growth • Business reforms by means of ICT and IoT • Structural reforms of development operations Model based development Open innovation • Connected plants with Zero impact on environment and workers • Global human resource development 1 2 3 30 Komatsu’s Growth StrategiesBackcasting Growth strategies and management targets by backcastingthe roadmap to our future vision Management Targets of the Mid-Term Management Plan and Related Performance Management Target FY2019 (First year of the plan) Indicator Performance Growth • Growth rate above the industry’s average Sales growth rate 10.3% Profitability • An industry’s top-level operating income ratio Efficiency • 10%-level ROE Financial position • Keep a fair balance between investment for growth and shareholder return (including stock buybacks), while placing main priority on investment Shareholder return • Set the goal of a consolidated payout ratio of 40% or higher ESG • Reduction of environmental impact CO2 emissions: Decrease by 50% in 2030 from 2010. Renewal energy use: Increase to 50% of total energy use in 2030. • Evaluation by external organizations: Selected for DJSI (World & Asia Pacific) and CDP A-list (Climate Changes and Water Risk) Retail finance business • ROA: 1.5%–2.0% • 5.0 or under for net debt-to-equity ratio Operating income ratio ROE Net debt-to- equity ratio Consolidated payout ratio Reduction of environmental impact Evaluation by external organizations ROA Net debt-to- equity ratio 10.3% 8.6% 0.43 57.7% CO2 emissions: Decrease by 40% in 2021 Renewable energy use: Increase to 15% of total energy use in 2021 Selected for DJSI CDP Climate Change: A CDP Water Risk: A- 1.5% 3.80 Concepts and Stance of the Mid-Term Management Plan The mid-term management plan defines three pillars of growth strategies: 1) value creation by means of innovation, 2) growth strategies based on business reforms, and 3) structural reforms for growth. By prioritizing investment on growth areas based on the three pillars of growth strategies, we will seek to achieve sustainable growth through a positive cycle of improving earnings and solving ESG issues that is resilient to fluctuations in demand. Expectations of society and stakeholders Growth Strategy Aligned with Management Principles Stakeholders Communities Customers Employees Distributors Suppliers Business partners Shareholders Investors Solutions for ESG issues Sustainable growth Shared growth based on growth strategies Sustainable increase of earnings Maximize Corporate Value which is the Total Sum of Trust Enhance Corporate Brand ESG Solutions Positive cycle = Sustainable growth Three Pillars of Growth Strategies 1. Value creation by means of innovation 2. Growth strategies based on business reforms 3. Structural reforms for growth Positive cycle = Sustainable growth Improvement of earnings 31 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Resolution of ESG Issues Resolution of ESG Issues through Growth Strategies Komatsu’s CSR Themes and Mid-Term Management Plan KPIs Komatsu seeks to help resolve ESG issues by promoting the three pillars of growth strategies defined in the new mid- term management plan. We strive to realize a positive cycle of sustainable growth through improvements of earnings and resolutions to ESG issues. Our initiatives include reducing environmental impacts to combat climate change and CSR Themes ESG Solutions through Three Pillars of Growth Strategies Relevant SDGs Key Initiatives under Mid-Term Management Plan FY2019 KPI Performance FY2021 KPIs Enhancing Quality of Life —Providing Products Required by Society— • Provide products, service and solutions contributing to sustainable development of infrastructure, natural resources and circular environmental protection (remanufacturing and forestry). • Improve productivity, efficiency, safety and environmental impact (lower CO2 emissions and higher ratio of renewable energy use) through innovations, such as automation in the entire value chain. • Make commitment to DANTOTSU Value which will realize better Earth and future by means of technology and reliability (creation and maximization of customer value). Developing People • Develop a diverse workforce with a high level of productivity and technical skills. • Strengthen and develop diverse and global-scope talent to help achieve sustainable workplaces. • Develop talent with cross-value chain capabilities. Growing with Society • Offer resolutions for social issues through collaboration with stakeholders. • Act as a responsible corporate citizen ensuring corporate governance, compliance, and human rights. 32 • Reman component lifespan (compared to new components) 26,866 workhours (134% of new components) 20,000 workhours (100% of new components) Reduction of CO2 emissions (in comparison to FY2010) • Reduction of CO2 emissions from product use (fuel-efficiency equipment, hybrid hydraulic excavator, rate of SMARTCONSTRUCTION use, enhancement of ICT-intensive construc- tion, mine automation, and underground mining equipment) • Reduction of CO2 emissions from production (plants with zero impact on environment and workers) Plants with zero impact on environment and workers • Rate of renewable energy use (including purchase of renewable energy) • Work environment burden coefficient (particle matter density) • Water consumption • Spare parts sales Value chain reforms and redefinition of the aftermarket business Assurance of mine operation safety and productivity • AHS units’ population (promotion of mining platform business) DANTOTSU Product, DANTOTSU Service, and DANTOTSU Solution • ICT-intensive equipment introduced (United States, Europe, and Australia) • Sites adopting SMARTCONSTRUCTION • Automation, autonomous operation, electrification, and remote-controlling of equipment 14% reduction 16% reduction (in comparison to FY2010) 31.5% reduction 40% reduction (in comparison to FY2010) 10.7% 10.7% reduction 49.4% reduction 15% 30% reduction (in comparison to FY2018) 55% reduction (in comparison to FY2010) 3% increase 11% increase 380 units (aggregate) 1,590 units (per year) 4,850 (per year) 221 units 1,361 units 2,440 level 2 automation supporting automation Under development 1. Automation of construction equipment Verification tests conducted on user sites 2. Automation, autonomous operation, and remote operation of mining equipment Preparations advanced to launch mining bulldozer with Test introduction of hydraulic excavators for automated loading Entry into mining bulldozer market (level 4 automation) 3. Automation of utility equipment Development of peripheral safety technologies for Development of technology for automated forklifts 4. Enhancement of mining equipment and hard rock mining businesses Expansion of product series Agricultural solutions and smart forestry • Creation of construction equipment demand in agricultural field • Smart forestry projects IoT and ICT work reforms Japan: Commencement of verification tests at five agriculture business operators Indonesia: Started mass production and sales of D31PLL Japan: Expand lineup of agricultural loaders Indonesia: Increase number of users of agricultural techniques employing agricultural bulldozers agricultural bulldozer 10 50 • Sales in KOM-MICS platform business (visualization of production equipment operation) 865 units 1,900 units (including for internal use) Development of a diverse workforce with a high level of productivity and technical skills • Enhancing employee engagement Scheduled for FY2020 Improvement of global surveys and indexes • Work process reforms through expansion of diverse and flexible workstyles • Promotion of KOMATSU Way (global dissemination of KOMATSU Way) (1) 1,950 workhours per person/year (2) Commencement of trial in August 2019 Total workhours of less than 2,100; introduction of telework system (Japan) • Training hours: 31,625 hours (aggregate hours for all participants) • Number of participants: 1,461 in Japan, 307 overseas Training hours and number of participants Strengthening and development of diverse and global-scope talent to help achieve sustainable workplaces • Revision of role of Japan in global management Human resource system revisions started in Japan Shifting of human resources to projects and improvement activities; globalization of organizations on by-function basis • Foundations for global measures (systems, frameworks) Preparations advanced for introduction Introduction • Empowerment of female employees ((1) non-consolidated ratio of female employees, (2) non-consolidated ratio of female managers, (3) consolidated ratio of female managers (Japan)) (1) 12.3%, (2) 7.2%, and (3) 4.5% (1) 12.5%, (2) 10.0%, and (3) 5.0% • Rate of employment of people with disabilities (comply with requirements in Japan) 2.58% (non-consolidated) Above 2.3% (legally mandated rate) • Support for regional human resource development for job creation (regional human resource development with Cummins Inc.) Development of talent with cross-value chain capabilities • Cultivation of SMARTCONSTRUCTION consultants (capable of proposing solutions using ICT to improve productivity and safety throughout construction workplaces) Resolutions to social issues through collaboration with stakeholders • Human resource development program launched in Chile • Ongoing support provided in Peru, South Africa, and Australia • Participants’ success in finding employment tracked Chile, Australia, South Africa, others 396 430 (aggregate) • Promotion of industry-government-academia collaboration as well as of collaboration Examination of cutting-edge tools through activities Promotion of Brand Management and activities creating value with customers with domestic customers and regional dissemination for customers • Shareholders and individual investors (shareholder meetings, shareholder factory tours, individual investor meetings) • Shareholder meetings: 2 times • Shareholder factory tours: 10 times • Individual investor meetings: 7 times • Certain factory tours and meetings canceled due to impacts of global COVID-19 pandemic Number of meetings held • Institutional investors (ESG meetings) 11 (ESG-related meetings) Number of meetings held • Communities (business site fairs) • Employees (meetings) Business fairs at nine factories (Awazu, Osaka, Ibaraki, Kanazawa, Tochigi, Oyama, Koriyama, Shonan, and Himi); canceled only at Shonan Plant due to impacts of Typhoon Hagibis 34 (30 in Japan, 4 overseas) One fair held at each of nine factories per year Number of meetings held Action as a responsible corporate citizen addressing corporate governance, compliance, and human rights • Occupational health and safety, support for establishing environmental and safety systems at suppliers, response to Japan’s Corporate Governance Code (corporate governance Establishment of Human Rights Policy, disclosure in Ongoing improvements made in reflection of relevant laws reports), evaluations of effectiveness of Board of Directors, internal control, and internal integrated report and regulations and social expectations audits Resolution of ESG Issues through Growth Strategies Komatsu’s CSR Themes and Mid-Term Management Plan KPIs supplying high-quality, high-performance products, services, and solutions ensuring safety. KPIs have been set to guide these initiatives solving ESG issues through our core business. CSR Themes ESG Solutions through Three Pillars of Growth Strategies Relevant SDGs Key Initiatives under Mid-Term Management Plan FY2019 KPI Performance FY2021 KPIs Enhancing Quality of Life —Providing Products Required by Society— • Provide products, service and solutions contributing to sustainable development of infrastructure, natural resources and circular environmental protection (remanufacturing and forestry). • Improve productivity, efficiency, safety and environmental impact (lower CO2 emissions and higher ratio of renewable energy use) through innovations, such as automation in the entire value chain. • Make commitment to DANTOTSU Value which will realize better Earth and future by means of technology and reliability (creation and maximization of customer value). Developing People • Develop a diverse workforce with a high level of productivity and technical skills. • Strengthen and develop diverse and global-scope talent to help achieve sustainable workplaces. • Develop talent with cross-value chain capabilities. Growing with Society • Offer resolutions for social issues through collaboration with stakeholders. • Act as a responsible corporate citizen ensuring corporate governance, compliance, and human rights. Reduction of CO2 emissions (in comparison to FY2010) • Reduction of CO2 emissions from product use (fuel-efficiency equipment, hybrid hydraulic excavator, rate of SMARTCONSTRUCTION use, enhancement of ICT-intensive construc- tion, mine automation, and underground mining equipment) • Reduction of CO2 emissions from production (plants with zero impact on environment and workers) Plants with zero impact on environment and workers • Rate of renewable energy use (including purchase of renewable energy) • Work environment burden coefficient (particle matter density) • Water consumption Value chain reforms and redefinition of the aftermarket business 14% reduction 16% reduction (in comparison to FY2010) 31.5% reduction 40% reduction (in comparison to FY2010) 10.7% 10.7% reduction 49.4% reduction 15% 30% reduction (in comparison to FY2018) 55% reduction (in comparison to FY2010) • Spare parts sales 3% increase 11% increase • Reman component lifespan (compared to new components) 26,866 workhours (134% of new components) 20,000 workhours (100% of new components) Assurance of mine operation safety and productivity • AHS units’ population (promotion of mining platform business) DANTOTSU Product, DANTOTSU Service, and DANTOTSU Solution • ICT-intensive equipment introduced (United States, Europe, and Australia) • Sites adopting SMARTCONSTRUCTION • Automation, autonomous operation, electrification, and remote-controlling of equipment 221 units 1,361 units 2,440 380 units (aggregate) 1,590 units (per year) 4,850 (per year) 1. Automation of construction equipment Verification tests conducted on user sites 2. Automation, autonomous operation, and remote operation of mining equipment 3. Automation of utility equipment Preparations advanced to launch mining bulldozer with level 2 automation Development of peripheral safety technologies for supporting automation Test introduction of hydraulic excavators for automated loading Entry into mining bulldozer market (level 4 automation) Development of technology for automated forklifts 4. Enhancement of mining equipment and hard rock mining businesses Under development Expansion of product series Agricultural solutions and smart forestry • Creation of construction equipment demand in agricultural field • Smart forestry projects IoT and ICT work reforms Japan: Commencement of verification tests at five agriculture business operators Indonesia: Started mass production and sales of D31PLL agricultural bulldozer Japan: Expand lineup of agricultural loaders Indonesia: Increase number of users of agricultural techniques employing agricultural bulldozers 10 50 • Sales in KOM-MICS platform business (visualization of production equipment operation) 865 units 1,900 units (including for internal use) Development of a diverse workforce with a high level of productivity and technical skills • Enhancing employee engagement Scheduled for FY2020 Improvement of global surveys and indexes • Work process reforms through expansion of diverse and flexible workstyles • Promotion of KOMATSU Way (global dissemination of KOMATSU Way) (1) 1,950 workhours per person/year (2) Commencement of trial in August 2019 Total workhours of less than 2,100; introduction of telework system (Japan) • Training hours: 31,625 hours (aggregate hours for all participants) • Number of participants: 1,461 in Japan, 307 overseas Training hours and number of participants Strengthening and development of diverse and global-scope talent to help achieve sustainable workplaces • Revision of role of Japan in global management Human resource system revisions started in Japan Shifting of human resources to projects and improvement activities; globalization of organizations on by-function basis • Foundations for global measures (systems, frameworks) Preparations advanced for introduction Introduction • Empowerment of female employees ((1) non-consolidated ratio of female employees, (2) non-consolidated ratio of female managers, (3) consolidated ratio of female managers (Japan)) (1) 12.3%, (2) 7.2%, and (3) 4.5% (1) 12.5%, (2) 10.0%, and (3) 5.0% • Rate of employment of people with disabilities (comply with requirements in Japan) 2.58% (non-consolidated) Above 2.3% (legally mandated rate) • Support for regional human resource development for job creation (regional human resource development with Cummins Inc.) Development of talent with cross-value chain capabilities • Cultivation of SMARTCONSTRUCTION consultants (capable of proposing solutions using ICT to improve productivity and safety throughout construction workplaces) Resolutions to social issues through collaboration with stakeholders • Promotion of industry-government-academia collaboration as well as of collaboration with customers • Shareholders and individual investors (shareholder meetings, shareholder factory tours, individual investor meetings) • Human resource development program launched in Chile • Ongoing support provided in Peru, South Africa, and Australia • Participants’ success in finding employment tracked Chile, Australia, South Africa, others 396 430 (aggregate) Examination of cutting-edge tools through activities with domestic customers and regional dissemination Promotion of Brand Management and activities creating value for customers • Shareholder meetings: 2 times • Shareholder factory tours: 10 times • Individual investor meetings: 7 times • Certain factory tours and meetings canceled due to impacts of global COVID-19 pandemic Number of meetings held • Institutional investors (ESG meetings) 11 (ESG-related meetings) Number of meetings held • Communities (business site fairs) Business fairs at nine factories (Awazu, Osaka, Ibaraki, Kanazawa, Tochigi, Oyama, Koriyama, Shonan, and Himi); canceled only at Shonan Plant due to impacts of Typhoon Hagibis One fair held at each of nine factories per year • Employees (meetings) 34 (30 in Japan, 4 overseas) Number of meetings held Action as a responsible corporate citizen addressing corporate governance, compliance, and human rights • Occupational health and safety, support for establishing environmental and safety systems at suppliers, response to Japan’s Corporate Governance Code (corporate governance reports), evaluations of effectiveness of Board of Directors, internal control, and internal audits Establishment of Human Rights Policy, disclosure in integrated report Ongoing improvements made in reflection of relevant laws and regulations and social expectations 33 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Enhancing Quality of Life —Providing Products Required by Society— Climate Change Issues Komatsu established the Komatsu Earth Environment Charter in 1992, launching proactive initia- tives for addressing climate change and other environmental issues a step ahead of its peers. The enactment of the Paris Agreement in 2016 sparked a rapid rise in the importance of initia- tives for addressing climate change in the global society. As a global business operator, Komatsu recognizes that contributing to the transition to a low-carbon society is an important management issue in light of the increased frequency of abnormal climate events and natural disasters and changes in resource demand resulting from global warming. In April 2019, Komatsu announced its endorsement of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Through climate change risk and oppor- tunity assessments and scenario analyses based on these recommendations, we will pursue increases our resilience toward climate change impacts. At the same time, we will advance climate change response mea- sures through a healthy dialogue with stakeholders. Furthermore, we will supply high-quality, high-performance products, services, and solutions that are designed for reducing environmental impacts, par- ticularly in relation to climate change, and for safety. 34 Resolution of ESG Issues Initiatives Based on TCFD Framework Governance Komatsu views climate change as an important management issue, and targets for combating climate change have been incorporated into its business strategies. Discussions regarding climate change are held at meetings of the Earth Environment Committee, the Risk Management Committee, and the CSR Committee, and these committees make suggestions to the Strategy Review Committee and report to the Board of Directors, thereby furnishing a system of appropriate oversight. Meanwhile, the Executive Meeting fulfills the function of managing progress toward targets. Climate Change-Related Reporting and Deliberation System Board of Directors Strategy Review Committee Report 提提 Suggest Executive Meeting • Earth Environment Committee • Risk Management Committee • CSR Committee Major Discussion Items Related to Climate Change Name Chairperson Major Discussion Items Related to Climate Change Board of Directors Chairman of the Board and Representative Director • Report from Earth Environment Committee (once a year) • Reports from research, development, and product planning divisions and the Chief Technology Officer (once a year) • Reports from production and procurement divisions (once a year) • Mid-term management plan progress report (once a year) Strategy Review Committee President • Growth strategies for major plants (including climate change-related matters, five times a year) • Report from Environmental Affairs Department (once a year) Executive Meeting President • Progress in regard to product development and production systems (monthly) • Climate change lectures by external specialists (once a year) Name Chairperson Major Discussion Items Related to Climate Change Earth Environment Committee • Deliberations and reports regarding important environmental matters and key President performance indicators (KPIs) • Reports on overall environmental frameworks and activities Risk Management Committee Executive officer supervising general affairs • Reports on responses to natural disaster risks CSR Committee President • Initiatives for addressing ESG issues • CSR activity reports 35 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Resolution of ESG Issues Strategies Risk and Opportunity Identification In FY2019, a total of 16 climate change-related risks and opportunities were identified for Komatsu, primarily in relation to construction equipment operations, based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). We then assessed internal factors, which impact sales and earnings, and external factors, which affect projected scenarios. Through this process, the 16 risks and opportunities were grouped based on four major themes. Risks and Opportunities and Groupings 16 Risks and Opportunities Four Major Themes • Coal demand fluctuations • Changes in reputation among customers and investors Changes in resource demand • Reduced coal demand • Increased resource demand related to electric equipment • Environmental regulations • Trend toward electric equipment • Subsidiaries for renewable energy and energy conservation projects • Substitute fuel technologies • Next-generation technical services (new market) • Carbon prices • Popularization of renewable energy technologies • Raw material prices • Energy prices • Recycling Transition to low-carbon products • More stringent fuel regulations • Progress in electrification and next-generation technologies Maximized in 2°C scenario Manufacturing costs • Rising manufacturing costs due to higher carbon prices* *CO2 taxation measures for reducing emissions • More frequent abnormal weather events • Increased precipitation amounts and weather patterns • Higher average temperatures • Rising sea levels Natural disasters • Increased precipitation amounts and flood risks due to abnormal weather • Higher demand in conjunction with national resilience plans Maximized in 4°C scenario Business Risks and Opportunities Based on Climate Change Scenarios To gauge the potential impacts of climate change-related risks and Concentration Pathways 2.6 and 8.5) and the Sustainable opportunities on Komatsu’s business, we performed scenario analy- Development Scenario and Stated Policies Scenario of the ses of the Company’s four major risk and opportunity themes. For International Energy Agency (IEA). these scenario analyses, we defined a 2°C scenario and a 4°C sce- The risks and opportunities pertaining to specific ESG themes nario based on the Fifth Assessment Report of the and Komatsu’s strategies for addressing these risks and opportuni- Intergovernmental Panel on Climate Change (Representative ties are described on the following page. 36 Changes in Resource Demand Risks Opportunities • Regulation of power generation using electric equipment fossil fuels 2°C scenario • Massive reductions in coal production volumes under IEA scenarios • Higher demand for copper and other resources necessary for electric equipment (motors, batteries, fuel cells, etc.) • Reduced sales to coal-related customers • Increased sales to copper and other relevant mining- • Rapid transition from fossil fuel-powered equipment to by Komatsu related customers by Komatsu in conjunction with trend toward electric equipment 4°C scenario • Limited regulation of coal in developing nations • Coal production volumes in 2030 in line with current levels under IEA scenarios • Reduced appetite for investment in coal mines • Trend toward electric equipment less pronounced than in 2°C scenario • Higher demand for copper and other resources necessary for electric equipment • Rise in investment for streamlining mine operations Strategies Exploration of business opportunities arising from climate change through value creation by means of innovation and growth strategies based on innovation • Increased metal resource demand in conjunction with transition to electric equipment—Expansion of underground mining equip- ment operations • Contribution to sustainable forestry—Provision of equipment and systems for streamlining processes spanning from afforestation to logging • Contribution to rehabilitation of closed mine sites and greenification of deserts—Forest restoration projects at closed mine sites and forest machine operations • Transition to circular economies—Expansion of equipment restoration (“Reman”) business Transition to Low-Carbon Products Risks Opportunities 2°C scenario Strategies • Regulations promoting transition to fuel-efficient equip- ment, electric equipment, and other low-carbon products • Rapid changes in research and development trends and competitive climate and market entry by new competitors • Higher demand for electric, fuel-efficient, and bio-fuel equipment • Expansion of equipment restoration (“Reman”) business in conjunction with transition to circular economies • Increased demand for SMARTCONSTRUCTION and other solutions contributing to decarbonization • Respond to transition risks by shifting toward low-carbon products through realization of the safe, highly productive, smart, and clean workplaces of the future described in the mid-term management plan Manufacturing Costs Risks Opportunities 2°C scenario • Taxation of fossil fuels and CO2 emissions • Transfer of higher product purchase prices to Komatsu • Rising power fees and energy costs following investment in power generation facilities with low CO2 emissions • Increased competitiveness through production technologies that reduce CO2 emissions Strategies • Mitigation of cost increases by achieving CO2 reduction and renewable energy targets defined in the mid-term management plan Natural Disasters Risks Opportunities 4°C scenario • Increased frequency of heavy rain and floods due to abnormal weather • Risks of disaster damages to Komatsu plants at high risk of flooding • Component supply delays following damages to suppliers from disasters • Increased demand for flood-control works Strategies • Institute heavy rain and flood countermeasures across the value chain 37 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Resolution of ESG Issues Risk Management Please refer to page 52 for information on the Company’s risk management systems. Indicators and Targets Komatsu is mitigating climate change through its business by supplying high-quality, high-performance products, services, and solutions that include provisions for ensuring safety and reducing climate change-related environmental impacts. The following three indicators and accompanying targets have been set in the mid-term management plan to facilitate the appropriate assessment and management of climate change-related risks and opportunities. Climate Change-Related Indicators and Targets Indicators Targets CO2 emissions from product use Decrease by 50% in 2030 (Base year of 2010, basic unit) CO2 emissions from production Decrease by 50% in 2030 (Base year of 2010, basic unit) Rate of renewable energy use 50% in 2030 Please refer to ESG Databook 2020 for more information. https://komatsu.disclosure.site/en/themes/149 VOICE Message from the CTO (Supervising Research & Development and Environment) Komatsu’s mid-term management plan puts forth environmental impact reduction targets pertaining to cutting CO2 emissions, which contribute to mitigating climate change, and the increasing use of renewable energy. Approximately 90% of CO2 emissions from the lifecycles of Komatsu construction equipment, which span from production through to disposal, are attributable to the consumption of fuel during product use at active workplaces. Recognizing this fact, we are dedicated to lowering CO2 emissions from both production and product use. Efforts to reduce CO2 emissions from production include utilizing ICT to carefully track product manufacturing processes and all of the energy used therein and identifying where energy is wasted in these processes. We are addressing this waste through steadfast small reforms to remove each and every source of energy waste as well as large reforms that entail transforming the very way we do our work. By tracking metrics pertaining to factors such as plant air-conditioning, lighting, and machinery, we are endeavoring to eliminate wastes and switch to more efficient equipment. These energy conservation Yuichi Iwamoto Senior Executive Officer Chief Technology Officer (CTO) Supervising Research & Development and Environment efforts are being complemented by the increased use of renewable energy. encourage them to use their equipment more efficiently. Meanwhile, the Specific renewable energy initiatives include electricity generation using solar SMARTCONSTRUCTION solution monitors conditions throughout construc- power and thinned wood as well as air-conditioning systems that take advan- tion workplaces to propose more efficient construction methods and allows tage of differences in temperature between air and underground water. us to provide solutions for optimizing customer workplaces. To reduce CO2 emissions from product use, Komatsu is utilizing its pro- We are also pursuing CO2 reductions in the forest machine business, prietary technology development and production systems to improve effi- which has been identified as a core theme of the mid-term management ciency with regard to engines and hydraulic, electronic, and other plan. In this business, we see potential to cut emissions by delivering components. These efforts have led to the reduction of CO2 emissions products with superior safety and productivity to realize recycling-oriented through the introduction of the world’s first hybrid system for construction forestry, a woodland management approach entailing a cycle of planting, equipment. Through ongoing development and improvement measures cultivating, and felling forests. Accordingly, as part of our social contribu- driven by proprietary technologies, we seek to further reduce the CO2 emis- tion activities, we have been participating in forest restoration projects to sions from Komatsu products. For example, we have been promoting the greenify the sites of mines at which the excavation of underground miner- electrification of our products and have launched compact battery-powered als has been completed. forklifts and, more recently, electric mini excavators that do not emit CO2. Komatsu does not view climate change response measures exclu- Our attempts to improve the fuel efficiency of our products are not lim- sively in terms of the related risks. Rather, we see these measures as ited to performance enhancements to the products themselves; we are also representing prime opportunities to create new businesses. For example, utilizing Internet of Things (IoT) technologies obtained through open innova- we could create businesses that enable us to improve the value of cus- tion to reduce fuel consumption by tracking conditions across active work- tomer workplaces through the provision of solutions that take advantage places. For example, KOMTRAX includes a function that provides customers of products and open innovation capitalizing on the strength of our ability with operating status and fuel efficiency improvement recommendations to to develop and produce key components in-house. 38 TO PI CS Afforestation Projects Advanced Worldwide Surface mining operations are subject to rigorous regulation to protect the environment as they develop resources. The mine rehabilitation process, which includes filling mine sites and restoring them for use in agriculture or as forests, entails a great deal of effort within the confines of this regulatory framework. However, even such effort does not guarantee that former mine sites can be revived as sustainable forests. If the revegeta- tion process fails, the nutrition will be lost from the top soil, due to its reduced water-holding capacity, and the mine site will decay further. Komatsu believes that human intervention is needed to break this downward spiral and assist in the forest restoration pro- cess. In addition to helping forge relationships with our mining customers, these efforts utilize our construction equipment and forest machines, making them a social contribution activity that is highly compatible with Komatsu’s business. North America-Originating Forest Restoration Projects Spreading across the Globe Komatsu’s involvement in forest restoration projects can be traced back to projects launched in North America in April 2019. Through one of these projects, we are working to rehabilitate a mine site spanning 1,000 acres (4 square kilometers) in West Virginia over a period of three years. Komatsu provides monetary support, renting equipment, and dispatching employee volunteers for tree planting activities in this project (see KOMATSU REPORT 2019 for details). In FY2019, we planted 50,000 trees across a 93-acre (0.4 square kilometers) stretch of the former mine site. In March 2020, another forest restoration project was launched in Australia through collaboration between major mineral resource company Anglo American PLC and Komatsu Australia Pty. Ltd. and Komatsu Mining Corp. The current goal of this project is to plant more than 9,000 trees at the former site of Anglo American’s Dawson Mine to restore the forest of this site using indigenous tree species and with an eye to converting parts of the site to farmland. At the kickoff event held in March 2020, a total of 120 people, including employees of the three companies, local residents, and elementary school students, gathered to plant 4,000 trees in a single Kickoff event held in Australia in March 2020 at which a total of 120 people gathered to plant 4,000 trees in a single day day. In Europe, we have partnered with Belgium-based NPO Tree-Nation ASBL, which specializes in afforestation, and we are conducting donation campaigns to fund the afforestation activities this NPO is advancing on five continents. A major characteristic of this initiative is that it allows donators to check the progress in the tree planting activities they funded and confirm the resulting CO2 absorption volume via a smartphone application. European Komatsu Group companies are soliciting donations on various occasions via the efforts of employees as well as collaboration with partners to contribute to the restoration of forests. Carbon Offset Initiatives The forests to be restored through the on-schedule advancement of forest restoration projects in North America and Australia should absorb an estimated value of approximately 2,000 tons of CO2 each year. Komatsu anticipates that the spread of its forest restoration projects will have the positive benefit of mitigating climate change. 39 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Resolution of ESG Issues Developing People Founder Meitaro Takeuchi established Komatsu Ltd. in Komatsu City, Ishikawa Prefecture roughly a century ago. Having witnessed Europe’s cutting-edge tech- nologies at that time, Takeuchi put forth the four management principles of global expansion, quality first, technological innovation, and human resource develop- ment. The commitment to the development of human resources, an invaluable asset to Komatsu, lives on in the Company today. Employees Supporting Komatsu as a Global Company Komatsu develops its operations around the world, and approximately 70% of its employees are not Japanese. Accordingly, developing human resources that are rooted in the communities they serve while promoting mutual acceptance of the values and cultures of vari- ous countries and regions is becoming increasingly important. Operations around the world must be instilled with Komatsu’s manufacturing competitive- ness, which includes the values that support Komatsu and the workplace improvement, driven by employees. Komatsu Technical Institute lesson Japan 32% Overseas 68% Japan 6% (13) Overseas 94% (206) Number of Employees 62,823 (consolidated) (as of March 31, 2020) Number of Consolidated Subsidiaries 219 (as of March 31, 2020) VOICE Message from the General Manager of the Human Resources Department The ongoing growth of a company is driven by its people, or its employees, Group, including at overseas and these people are thus its most important resource. Group companies. A basic policy of human resource development at Komatsu is that The global COVID-19 pan- senior managers and other leaders are expected to foster their successors demic is spreading uncertainty of and other human resources capable of competing on the global stage an unprecedented degree. We are through their own actions. therefore pressed to make deci- At the same time, we are constantly working to improve group-wide sions and act swiftly and flexibly in GEMBA capability (employee-driven, continuous improvement capability) response to an ever-changing and support the career development efforts of individual employees. These environment. efforts are carried out through a diverse range of human resource develop- Currently, a large number of ment and personnel rotation programs advanced on a global scale. our employees are being forced to In recent years, employees of non-Japanese nationality have come to telecommute. Regardless, we are represent around 70% of our total employee base. In reflection of this fact, maintaining close coordination creating an environment where globally diversified employees can work with our colleagues around the together as one solid team and make contributions to business growth has world to remain up-to-date on the Koichi Honda Senior Executive Officer General Manager of the Human Resources Department Supervising Education been positioned as a central tenet of our human resource strategies under latest information. The health and safety of all of our employees and their the current mid-term management plan, and various initiatives are being families remains our top priority throughout this process. implemented accordingly. Meanwhile, on the front lines of business, our strength in enacting poli- Specifically, we are focused on the following four areas: cies is being utilized to its fullest as middle managers play a central role in 1. Enhancing global measures for recruiting and cultivating talented person- amassing the capabilities of the relative divisions to resolve the issues and nel and managing staff (visualization of human resources) problems faced at customer workplaces. 2. Increasing diversity and empowering female employees (increasing ratio Over the roughly one century since its founding, Komatsu has contin- of female employees and ratio of female managers) ued to surmount countless trials, growing rapidly in the process. The global 3. Improving employee health, engagement, and productivity through work- COVID-19 pandemic presents a need for constant vigilance going forward. style reforms Still, I am confident that, with the KOMATSU Way sculpted by our forebear- 4. Addressing birthrate decline and population aging in Japan ers and the principles of SLQDC (Safety, Law, Quality, Delivery, and Cost) In these areas, we are looking to heighten our capabilities across the as our guide, we can come together to overcome this challenge as well. 40 The KOMATSU Way The KOMATSU Way is the very DNA of Komatsu, an expression of the strengths of Komatsu, the beliefs supporting these strengths, the basic attitudes, and patterns of behaviors established based on the experiences of our predeces- sors as they proceeded to tackle the challenges facing them. Komatsu seeks to develop its operations on a global scale and to become a stronger company and grow. To accomplish these objectives, it will be crucial for us to transmit the KOMATSU Way to employees with different cul- tures and customs around the world and to implement these principles in a manner that aligns employees along the same vector. To spread understanding of the KOMATSU Way among all employees worldwide, we published the third edition of the K-Way booklet in 2019. This booklet is being utilized in human resource development through training programs, improvement activities, and daily communication. 1 Leadership/ Top Management 2 “Monozukuri” for All Employees 3 Brand Management Leaders must be directly involved in the workplaces and manage businesses with an emphasis on contributing to the entire Group, including distributors and suppliers. We have also defined guidelines for leaders related to actively engaging in regular board meetings, communicating with stakeholders, complying with rules of the business community, managing risks, and grooming successors for management positions. Komatsu aims to pass on the manufacturing competitiveness, perspectives, and values that, based on total quality management, have continued to drive Komatsu’s competitiveness and support its growth. We look to transmit these principles through a joint effort encompassing all internal divisions as well as our suppliers, distributors, and other partners and to continue promoting involvement by all of these parties. (Customer Value Creation Activities) Komatsu defines “Brand Management” as all the activities that “make Komatsu indispensable to our customers.” This objective is accomplished by visiting customer workplaces to understand the ideal state of these customers and to build relationships that enable us to work together with them to help achieve their goals through concerted efforts by the Group and its distributors. Diversity & Inclusion Development Seminar for Cultivating Female Leaders on a Global Basis In March 2019, a Diversity & Inclusion Development Seminar was held for female managers at Komatsu and at local overseas subsidiaries, and 15 individuals from 12 countries took part. Through this seminar, we hope that participants will deepen their understanding of the history of Komatsu, the KOMATSU Way, and management strategies, and become leaders promoting diversity initiatives at their companies. Komatsu Technical Institute for Fostering Production Engineers The Komatsu Technical Institute is an internal boarding school system that offers a program for fostering the distinctive production engineers that underpin our manufacturing competitiveness. At the Komatsu Technical Institute, junior engineers selected from the production sites of Group companies and affiliates take part in a structured, two-year education program while stimulating mutual growth through communal living. A new training facility was completed in February 2020, and it was also at this time that we began accepting employees from overseas subsidiar- ies into this program. As a result, the Komatsu Technical Institute now offers an even more diverse environment for cultivating future global production leaders. AI Education for Developing Key Personnel for AI Field Coordination Looking ahead, it can be anticipated that there will be growth in opportunities for business coor- dination with external partners in the field of artificial intelligence (AI). Based on this recognition, Komatsu launched dedicated programs for cultivating key personnel in the AI field in 2019. Through the basic and advance programs, we are working to heighten the AI technological capabilities of our staff, foster key personnel in the field, identify pertinent themes from cus- tomer-oriented and business perspectives, and develop human resources capable of playing a central leadership role in internal and external coordination. Discussion between participants and senior management New Komatsu Technical Institute training facility at the Awazu Plant Requirements of Key AI Coordination Personnel Technical Skill Communication Skills Customer- Oriented Perspective Business Perspective 41 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Resolution of ESG Issues Growing with Society —Social Contribution Activities Komatsu recognizes that social contributions to the communities in which it conducts its business activities are an important corporate responsibility. Komatsu defines the social contribution activities as activities related to its three CSR themes that are not directly aimed at generating earnings. Based on this definition, we seek to contribute to society in a manner that leverages the strengths of our core business. Social Contribution Activities in FY2019 The following chart shows expenditures for social contribution activities by Komatsu Group aggregated based on six general categories. Academic and Industry-Academia Collaborations 22% Culture & Sports 26% Disaster Relief 7% FY2019 Social Contribution Expenditures (Consolidated) ¥2,136 million Human Resource Development 25% Local Community Support 17% Environment 3% Type of Social Contribution Expenditure Cash contributions Employee dispatchment and time contributions ¥707 million ¥316 million Expense related to providing own facilities for public use ¥314 million Expense related to events for the community Total ¥797 million ¥2,136 million Commencement of Agricultural Support Project Following Demining Project Since 2008, Komatsu has been engaging in collaborative efforts with efforts, which are shaped by local needs, in which we will use con- the Japan Mine Action Service (JMAS) to support the demining of struction equipment to contribute to agriculture. For example, it is anti-personnel landmines in Cambodia and other areas threatened possible to increase rice yield by flattening out rough areas to make by these weapons. In addition to removing mines, we also provide a smooth and level surface prior to planting. We therefore see the reconstruction work, building roads and schools in demined areas, potential for ICT-intensive agricultural bulldozers equipped with auto- as part of a community development project. In January 2020, we matic blade control functions to be used to increase rice production embarked on a new project with JMAS. Through this project, volumes by flattening direct-planting rice paddies to the greatest Komatsu ICT-intensive bulldozers, wheel loaders, and hydraulic exca- degree possible. We also anticipate that agricultural wheel loaders vators will be deployed to Cambodia to provide agricultural support. can be utilized in the production and harvesting of crops such as cas- This project represents a new step in our community development sava, which has been the target of growing demand in recent years. 42 Social Support Activities in Response to the COVID-19 Pandemic Producing and Donating Medical Supplies in Collaboration with Business Partners, The Komatsu Midori-kai The COVID-19 pandemic has directly damaged our lives and health, but has also sig- nificantly impacted the economy, finance, medical infrastructure, and other aspects of society. In Japan, as the number of people infected by COVID-19 increased, the short- Members of donation recipient National Hospital Organization Osaka National Hospital ages of medical devices became a critical issue. Though we do not have the equip- ment or skills to produce medical devices, Komatsu has some assets, like long-time collaborative relationships with our business partners and our production and sales networks. By utilizing these assets, we have procured and donated isolation gowns and face shields, which are personal protective equipment (PPE) for medical workers for which there is particularly urgent need. To procure them, we asked a Midori-kai member company to begin PPE produc- tion. At Komatsu, the staff of our production technology also participated in the activ- ity to improve the strength of the parts, productivity, and the comfort of the PPE during the prototyping phase of the face shield. After medical experts inspected the protective ability and comfort of the proto- types, 10,100 gowns and 8,000 face shields were produced. We distributed them to medical institutions around the nation for free through the NPO Peace Winds Japan and the government, of which part was funded by donations from our employees. In addition to the isolation gowns and face shields, Komatsu and our employees are carrying out the following support activities: Through the personal network of our supplier, we also received support from a garment making voca- tional school in Nagano Prefecture. The teachers and students made 100 pieces of PPE from materials donated by a filter maker, one of Midori-kai member companies and donated them to the medical institu- tions in the region. Country/Region Major Activities USA Chile India Europe Japan • Donations equivalent to 350,000 dollars in total Breakdown: • A 250,000-dollar joint donation with our employees to the hunger relief organization, Feeding America • 100,000 dollars donated to local communities • Support for sanitation of streets using cistern trucks (in collaboration with the government) • Donations equivalent to 10 million rupees (national or state welfare funds and technical training support for con- struction equipment operators) • Donations equivalent to 100,000 euros from our group companies in Europe (for medical and food-related purposes depending on local needs, and support for multiple organizations) • Donation of 100,000 N95 medical masks from our stock to the Red Cross, the government, medical institutions, etc. Business Partners—They are Invaluable to Komatsu For manufacturers, business partners (the suppliers of materials, parts, and components) are important partners that support product quality and reliability. Komatsu especially places great value on relationships with business partners and has grown together with TOPICS them throughout our long history. We have been thinking together with them and supporting each other, not only in terms of the pro- curement of goods but also from the perspective of management and human resource development. The Komatsu Midori-kai comprises 156 member companies that are the main suppliers in Japan. They supply approximately 80% of the items we procure in Japan. Representatives of Midori-kai member companies and top Komatsu management participate in general con- ferences and roundable discussions for managers, etc. to share policies and issues with each other. We also established regional Midori-kai member comprises for China, North America and Europe. With the addition of the member companies of the Joint Associations of Business Partners in Asia, the total number of overseas member companies exceeds 140. 43 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Resolution of ESG Issues Corporate Governance Basic Stance on Corporate Governance To become a company which enjoys more trust from shareholders and all other stakeholders, the Company is working to strengthen corporate governance, improve management efficiency, advocate corporate ethics and ensure sound management on a group-wide basis. To further improve the transparency of management for its shareholders and investors, the Company discloses information in a fair and timely manner and actively engages in investor relations’ activities by holding meetings with shareholders and investors. Corporate Governance Framework At the Company, the Board of Directors is positioned as the core of Officer (Shikko Yakuin) System in 1999, the Company has separated corporate governance, and to improve the effectiveness of discus- management decision making and supervisory functions from exec- sions at meetings of the Board of Directors, the Company has utive functions to the extent permitted by laws and regulations, and worked to put in place a system to ensure thorough discussions of while appointing both Outside Directors and Outside Audit & important management matters and prompt decision making, and Supervisory Board Members, limits the Board of Directors to a small reform their operational aspect. Having introduced the Executive number of members. Corporate Governance of the Company (As of June 30, 2020) Figures in represent the number of meetings in FY2019. Elect / Discharge 15 times Audit & Supervisory Board (Standing 2 / Outside 3) General Meeting of Shareholders Elect / Discharge 15 times Board of Directors (Standing 5 / Outside 3) Audit Office of Corporate Auditors’ Staff Advise / Suggest International Advisory Board Elect / Discharge / Supervise Report / Submission Elect / Discharge Audit reports Recommend Recommend Accounting Auditors (Audit corporation) Human Resource Advisory Committee 3 times Compensation Advisory Committee 1 time Collaboration Audit Internal Auditing Dept. Executive Functions President and CEO Strategy Review Committee Major Committees Product Safety Committee Compliance Committee Risk Management Committee Export Control Committee Internal audit Komatsu Group’s Global Operations Earth Environment Committee Executive Officers and Global Officers 60 • Japan 32 • Global 28 (including 19 foreign nationals) CSR Committee Disclosure Committee Collaboration Decide on the details of the items including election and discharge / Confirm suitability or independency of the Accounting Auditors Recommend Audit reports 44 Activities of the Board of Directors The Company holds Board of Directors’ meetings periodically at and objective management. least once every month. The Board of Directors deliberates and To promote efficient management of the Board of Directors, the makes resolutions on important matters, determines management Company has established a Strategy Review Committee consisting of policies of Komatsu, and rigorously controls and supervises the Senior Executive Officers and senior managers. Based on the reviews execution of duties by all members of the executive management of the Committee, Executive Officers and senior managers execute team including Representative Directors. Of the eight (8) Directors their duties within the authority delegated by the Board of Directors. on the Board, three (3) are Outside Directors to ensure transparent Board of Directors Meeting Attendance and Agenda Item Numbers in FY2019 (April 1, 2019–March 31, 2020) Characteristics of Komatsu’s Board of Directors • Monthly reports from the CEO (recent important items and other topics) • Monthly reports from the CFO (performance, order trends, borrowings, etc.) • Annual proposal plans and follow-up • Multiple discussions on important items (deliberation → resolution) Attendance • Business reports to Board of Directors covering nearly 100% of sales-generating activities • Proactive expression of opinions by Audit & Supervisory Board Members in addition to Directors Agenda item numbers • Opportunities for free discussion at Board of Directors meetings Free discussion Outside Directors Outside Audit & Supervisory members Reports Deliberations, Resolutions 100% 100% 45 28 2 times Evaluation of the Effectiveness of the Board of Directors The Company is working to improve the effectiveness of the Board of Directors and performs annual evaluations and analyses of the effective- ness of the Board of Directors for this reason. Evaluation Process Survey After discussion by the Board of Directors on the method to be used for FY2019 evaluation, based on the method applied in the previous year and the results thereof, the Company conducted a survey out of consider- ation for the nature of an effective Board of Directors. Survey Topics: Collection of survey results from all Directors and Audit & Supervisory Board Members Discussion among Outside Directors and Outside Audit & Supervisory Board Members based on survey responses Report of discussion results, evaluation and analysis of effectiveness, and discussion of the matters for improvement at meeting of the Board of Directors • Composition of the Board of Directors • Contents of agendas • Straightforward and meaningful discussions • Provision of information and presentation of agendas by executives • Structure through which important matters are reported, proposed, and followed up • Succession plans for CEO • Other items Outline of the the Results The assessment shows a generally high level of achievement for variety of viewpoints, and the fact that Board members followed up each item and confirms that there were no serious problems con- the conditions of resolutions which were regularly reported. cerning the effectiveness. The Company received excellent evalua- With respect to the conducting of Board meetings, there were tions for factors, such as the following: the timely sharing of issues, a few suggestions for improvement. The Company will make those problems, and other information provided in monthly reports by the improvements and work to make the Board of Directors further President himself in Board meetings, the fact that Board members effective in the future. discussed the directions of overall business multiple times from a 45 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Resolution of ESG Issues Corporate Governance Corporate Governance Reforms The Company has proceeded to implement reforms to its corporate supplement executive functions, the Company established the governance system in order to ensure effective and adequate perfor- International Advisory Board (IAB) in 1995. Through the IAB, the mance of matters related to decision making, management and Company aims to secure objective advice and suggestions from supervision, such as separation of corporate management from experts from Japan and abroad about how to function as a global business execution, enhancement of corporate management deci- company by exchanging opinions and holding discussions. Going for- sion making by the Board of Directors, strict management and ward, the Company will pursue increases to the effectiveness of the supervision of business execution, measures undertaken by Outside Board of Directors while appointing Outside Directors to ensure Directors to improve transparency and objectivity of management, transparency and soundness and promoting openness and account- and measures undertaken by the Audit & Supervisory Board to ability in management. appropriately audit Directors’ execution of duties. As a means to Board of Directors 28 members (0 Outside Directors) Audit & Supervisory Board 1999: 8 members (1 Outside Director) 2003: 8 members (2 Outside Directors) 2005: 10 members (3 Outside Directors) 2017: 8 members (3 Outside Directors) Audit & Supervisory Board (1994) 1999: 3 members (1 Outside Audit & Supervisory Board Member) 1994: 4 members (2 Outside Audit & Supervisory Board Members) 2006: 5 members (3 Outside Audit & Supervisory Board Members) Other organizations and systems Executive Officer System (1999) Compensation Advisory Committee (1999) 4 outside members, 1 standing member Global officers (2016) International Advisory Board (1995) 3–4 domestic and overseas experts Human Resource Advisory Committee (2015) 3 outside members, 2 standing members Hitech & Innovation International Advisory Board (2015) 4–6 overseas experts Compliance Committee (2001) Members of senior management and labor representatives Internal Composition of Directors and Audit & Supervisory Board Members (As of June 30, 2020) Outside 3 Of whom, non-Japanese 1 Directors Internal 5 Outside 3 Of whom, women 1 Of whom, women 1 Audit & Supervisory Board Members Internal 2 46 Major Activities of Outside Directors and Outside Audit & Supervisory Board Members in FY2019 Outside Directors Masayuki Oku Major Career Representative Director of Sumitomo Mitsui Banking Corporation Mitoji Yabunaka Major Career Vice-Minister for Foreign Affairs Makoto Kigawa Major Career Representative Director at both Yamato Holdings Co., Ltd. and Yamato Transport Co., Ltd. Attendance to the Meetings Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Attendance to the Meetings Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Attendance to the Meetings Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Mr. Masayuki Oku previously served as Representative Director of Sumitomo Mitsui Banking Corporation. During the fiscal year ended March 31, 2020, based on his rich experience in the business world, he provided comments at the meet- ings of the Board of Directors concerning such issues as product and service demand trends, busi- ness strategy and utilization of AI. In addition, he was a member of the Company’s Human Resource Advisory Committee and the Compensation Advisory Committee. Mr. Mitoji Yabunaka previously served as Vice- Minister for Foreign Affairs. During the fiscal year ended March 31, 2020, based on his standpoint as a specialist in international affairs, he provided com- ments at the meetings of the Board of Directors concerning such issues as market conditions in the Asian region, development of emerging markets and environmental measures. In addition, he was a member of the Company’s Human Resource Advisory Committee. Mr. Makoto Kigawa previously served as Representative Director at both Yamato Holdings Co., Ltd. and Yamato Transport Co., Ltd. During the fiscal year ended March 31, 2020, based on his rich experience in the business world, he provided com- ments at the meetings of Board of Directors con- cerning such issues as the utilization of new technologies, information disclosure policies and ICT strategies using platforms. In addition, he was a member of the Company’s Human Resource Advisory Committee. Outside Audit & Supervisory Board Members Hirohide Yamaguchi Major Career Deputy Governor of the Bank of Japan Attendance to the Meetings Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Meeting of the Audit & Supervisory Board 100% (15 meetings out of the 15 meetings held) Mr. Hirohide Yamaguchi previously served as Deputy Governor of the Bank of Japan. During the fiscal year ended March 31, 2020, based on his professional standpoint, he provided comments at the meetings of the Audit & Supervisory Board and the meetings of the Board of Directors concerning such issues as M&A risks, inventory management and audit systems. In addition, he was a member of the Company’s Compensation Advisory Committee. Eiko Shinotsuka Major Career Professor Emeritus, Ochanomizu University, Commissioner, National Personnel Authority, Member of the Bank of Japan’s Policy Board Attendance to the Meetings Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Meeting of the Audit & Supervisory Board 100% (15 meetings out of the 15 meetings held) Ms. Eiko Shinotsuka possesses wide-ranging knowl- edge and experience in fields such as economics, labor relations and law. During the fiscal year ended March 31, 2020, based on her professional stand- point, she provided comments at the meetings of the Audit & Supervisory Board and the meetings of the Board of Directors concerning such issues as the compliance system, securing and utilizing human resources, and mental care for employees. In addition, she was a member of the Company’s Compensation Advisory Committee. Kotaro Ohno Major Career Prosecutor-General, Special Counsel, Mori Hamada & Matsumoto Attendance to the Meetings Meeting of the Board of Directors 100% (15 meetings out of the 15 meetings held) Meeting of the Audit & Supervisory Board 100% (15 meetings out of the 15 meetings held) Mr. Kotaro Ohno possesses rich experience in the legal profession. During the fiscal year ended March 31, 2020, based on his professional standpoint, he provided comments at the meetings of the Audit & Supervisory Board and the meetings of the Board of Directors concerning such issues as legal compli- ance, internal reporting system and risk manage- ment. In addition, he was an observer of the Company’s Compliance Committee. Internal Introduction of New Outside Directors In conjunction with the resignation of Masayuki Oku and Mitoji Yabunaka, the following two new directors were appointed at the General Meeting of Shareholders held in June 2020. New Takeshi Kunibe Takeshi Kunibe has considerable knowledge and rich experience in the business world, including the field of finance and in group company management, etc., having served successively as Representative Director, President and Chief Executive Officer of SMBC, as well as Representative Director and President, Director President and Representative Executive Officer, and Chairman of the Board of SMFG. Utilizing this knowledge and experience, his recommendations concerning the overall management of the Company are expected to contribute to sustaining and improving transparency and soundness of management as well as enhancing corporate governance. Therefore, the Company appointed him as an Outside Director. New Arthur M. Mitchell Mr. Arthur M. Mitchell has worked for many years as a New York state attorney and foreign law attorney in Japan, and has consider- able knowledge and rich experience in the field of international legal affairs. Utilizing this knowledge and experience, his recommendations concerning the overall management of the Company are expected to contribute to the mitigation and avoidance of risk in the Company’s global business operations, and to the enhance- ment of the Company’s medium- and long-term corporate value. Therefore, the Company appointed him as an Outside Director. 47 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Members Purpose Resolution of ESG Issues Corporate Governance Activities of Advisory Committees Committee Name Human Resource Advisory Committee Compensation Advisory Committee Chairperson Outside Director (Masayuki Oku) 3 Outside Directors (Masayuki Oku, Mitoji Yabunaka, Makoto Kigawa) Chairperson of the Board President External expert (Advisor: Tsuguoki Fujinuma, The Japanese Institute of Certified Public Accountants) 1 external expert (Advisor: Tsuguoki Fujinuma, The Japanese Institute of Certified Public Accountants) 1 Outside Director (Masayuki Oku) 2 Outside Audit & Supervisory Board Members (Hirohide Yamaguchi, Eiko Shinotsuka) Chairperson of the Board Selection of next President and deliberation, resolution, and reporting to the Board of Directors on human resource development methods, succession plans, and appointment and dismissal of Directors Deliberation, resolution, and reporting to the Board of Directors and Audit & Supervisory Board on remuneration systems for Directors, Audit & Supervisory Board Members, and Executive Officers to ensure objectivity and transparency Meetings in FY2019 3 1 Agenda items in FY2019 • Selection and cultivation of candidates for next President • Proposal of Directors and Audit & Supervisory Board Members for FY2020 • Monthly compensation levels for Directors and Audit & Supervisory Board Members in FY2020 • Terms of Directors and Audit & Supervisory Board Members • Composition of Outside Directors • Concurrent positions held by Chairman of the Board and • Performance-based remuneration for Directors for FY2019 (projections) • Evaluation methods for the mid-term management plan Outside Directors, etc. Succession Plans One of the items contained in the Code of Conduct for Leadership/ important domestic and overseas positions up to and including that Top Management that has been described in the KOMATSU Way of the President are decided through the annual implementation of since its establishment in 2006 is “continue to think about your suc- succession plans (see chart below). cession plan.” Selected successors are assigned to challenging tasks and In order to ensure that Komatsu’s management values are trans- granted even larger roles in the organization to systematically mitted to the next generation, the basic requirements for candidates develop them in an environment that encourages the pursuit of for the position of President are discussed and clearly defined by the mutual growth. Human Resource Advisory Committee. In addition, successors for Overview of Succession Plans Results Feedback Succession Plans Evaluation and Selection of Successors Human Resource Relocations and Cultivation Oversight of Implementation Process Board of Directors Human Resource Advisory Committee Key Points for Cultivating Leadership/Top Management Successors 1. Foster willpower necessary to overcome challenges by having candidates experience extremely difficult situations 2. Nurture organizational operation capabilities needed to unite parties with differing interests 3. Cultivate compliance awareness to prevent misconduct 48 Remuneration Systems In an effort to maintain an objective and transparent remuneration single fiscal year (bonus in cash and the Stock-Based Remuneration A) system, the policy and levels of remuneration for Directors and Audit as well as the performance-based remuneration (Stock-Based & Supervisory Board Members of the Company are deliberated by the Remuneration B) that will reflect the degree of achievement of the Compensation Advisory Committee. Taking its reports and recommen- targets raised in the mid-term management plan, so that it will further dations into consideration, the remuneration for Directors is deter- contribute to the enhancement of the medium- and long-term corpo- mined by the Board of Directors, and the remuneration for Audit & rate value of the Company, by linking the remuneration. The remunera- Supervisory Board Members is determined by discussions by the tion for Outside Directors only consists of basic remuneration (fixed Audit & Supervisory Board Members, respectively, within the range remuneration) designed to support their role to make recommenda- previously determined by resolution of the General Meeting of tions with respect to the overall management of the Company as a Shareholders. With regards to remuneration levels, their comparison member of the Board of Directors. Furthermore, the remuneration for by position at other key, globally active manufacturers in Japan is Audit & Supervisory Board Members only consists of basic remunera- made by the Compensation Advisory Committee and is reflected in its tion (fixed remuneration) designed to support their independent posi- reports and recommendations. The remuneration for Directors exclud- tion with authority to audit the execution of duties by Directors ing the Outside Directors (hereinafter “Internal Director”) comprises without getting fettered by the movements of corporate performance basic remuneration (fixed remuneration) and performance-based of the Company. The retirement allowance system for Directors and remuneration linked to the Company’s consolidated performance for a Audit & Supervisory Board Members was terminated as of June 2007. Composition of Remuneration of Directors and Audit & Supervisory Board Members Basic Remuneration (Fixed Remuneration) Performance-Based Remuneration for a Single Year (Monthly Remuneration x 0–24 months) Performance-Based Remuneration Linked to Performance of Mid-Term Management Plan (Monthly Remuneration x 0–3 months) Monthly remuneration x 12 months Bonus in Cash (2/3, in principle)* Stock-Based Remuneration A (1/3, in principle) Restricted Stocks Stock-Based Remuneration B Restricted Stocks Basic Remuneration (Fixed Remuneration) Monthly remuneration x 12 months Not influenced by Company performance Internal Directors Outside Directors and Audits * The upper limit for Bonus in Cash is set at 12 months’ worth of monthly remuneration; the remainder of bonuses is to be paid as Stock-Based Remuneration A. Performance-Based Remuneration Linked to Performance of Mid-Term Management Plan The Company will pay Internal Directors the equivalent of a three-month portion of monthly remuneration every fiscal year as remuneration linked to the period of the Company’s Mid-Term Management Plan by granting restricted stock as stock-based remuneration (Stock-Based Remuneration B). In deciding Stock-Based Remuneration B, after the expiry of the period of the mid-term management plan, the number of shares on which to lift transfer restrictions (within range of 0–100%) will be decided based on the achievement of the management targets of the Mid-Term Management Plan presented in the following table and as a general rule, the restriction of transfer on the shares will be lifted after three years from delivery. Management Indicators and Management Targets in Mid-Term Management Plan (FY2019–FY2021) Management Indicator Management Target Growth Profitability Efficiency • Sales growth rate • Growth rate above the industry’s average*1 • Operating income ratio • Industry’s top-level operating income ratio*1 • ROE • ROE of 10% or higher Financial position • Net debt-to-equity ratio*2 • Industry’s top-level financial position Retail finance business • ROA • Net debt-to-equity ratio*2 • ROA 1.5% to 2.0% • 5.0 or under for net debt-to-equity ratio*2 ESG • Reduction of environmental impact • Evaluation by external organizations • CO2 emissions: Decrease by 50% in 2030 from 2010 Renewable energy use: Increase to 50% of total energy use in 2030 • Selected for DJSI*3 (World & Asia Pacific) and for CDP*4 A-list (Climate Changes and Water Risk), etc. Shareholder return • Consolidated payout ratio (including stock buybacks), while placing main priority on investment • Keep a fair balance between investment for growth and shareholder return • Set the goal of a consolidated payout ratio of 40% or higher *1 Relative comparison with domestic and foreign major competitors in the same industry. *2 Net debt-to-equity ratio = (Interest-bearing debt – Cash and cash equivalents – Time deposits) / Shareholders’equity of the Company *3 Dow Jones Sustainability Indices: SRI indices generated by S&P Dow Jones of the United States and RobecoSAM of Switzerland. *4 International non-profit organization which advocates the reduction of greenhouse gas emissions and protection of water resources and forests by companies and governments. 49 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Resolution of ESG Issues Corporate Governance Major Executive Committees Committee Name (Committees indicated with an asterisk [*] are chaired by the President.) Purpose Product Safety Committee Effective promotion of Companywide product safety activities based on basic product safety policies defined in product safety regulations Compliance Committee* Discussion on and decision and execution of policies and important measures pertaining to group-wide compliance Meeting Frequency 2 times a year and when necessary 2 times a year and when necessary Risk Management Committee Primarily discussion and approval of group-wide risk management tasks and risk countermeasures 1 time a year and when necessary Export Control Committee Discussion on and decision and execution of policies and important measures regarding group- wide export control (trade security management) 1 time a year and when necessary Earth Environment Committee* CSR Committee* Disclosure Committee KOMATSU Way Committee* Formulation of group-wide environmental measures and discussion of progress to facilitate promotion of environmental preservation throughout the Group Discussion on and decision and execution of group-wide CSR policies and important measures and activities 1 time a year 1 time a year Discussion and assessment to facilitate accurate information disclosure as required by the Financial Instruments and Exchange Act and submission of recommendations to internal information control representatives regarding judgments on material developments 4 times a year and when necessary Discussion on and decision and execution of policies and important measures regarding human resources, labor affairs, education and human resource development, the KOMATSU Way, total quality management, employee benefits, and occupational health and safety management for the Company and the Group 2 times a year Appointments of Advisors of the International Advisory Board TOPICS Komatsu established the IAB back in 1995 for the Board of Directors to incorporate, from external experts, objective advice and suggestions concerning management and operations of Komatsu as a global company. The IAB has met a total of 35 times in the conventional and new organizations combined. In April 2020, Komatsu is going to start the 8th the session of the IAB for Management of the IAB with the following new advisors. The term of service for each advisor is set at three years as a general rule. Komatsu will continue to incorporate advice and suggestions from IAB members with expertise in global business, further improve management and strengthen its corporate governance in order to enhance its corporate value. Name Current Position and Brief Background R. David Hoover Kusmayanto Kadiman Risto Siilasmaa Mitoji Yabunaka 2018–Present 2015–Present 2009–2018 2000–2015 1996–2013 2015–Present 2010–Present 2004–2009 2001–2004 2006–Present 2012–May, 2020 2010–Present 2014–June, 2020 2008–2010 Chairman of the Board, Elanco Animal Health Board of Directors, Edgewell Personal Care Company Board of Directors, Eli Lilly and Company Board of Directors, Energizer Holdings, Inc. Board of Directors, Ball Corporation (Chairman, 2002–2013) Vice President Commissioner of PT Adaro Power President Commissioner of BFI Finance The State Minister for Research and Technology of the Republic of Indonesia President of Bandung Institute of Technology (ITB) Chairman of the Board of Directors, F-Secure Corporation (He is the founder of F-Secure Corporation.) Chairman of the Board of Directors, Nokia Corporation Visiting Professor, Ritsumeikan University Outside Director, Komatsu Ltd. Vice Minister, Ministry of Foreign Affairs 50 Stakeholder Engagement In order to gain more trust from all stakeholders, the Company is strengthening corporate governance and top management is practicing direct engagement with stakeholders. Corporate Value = Total Sum of Trust Given to Us by Society and All Stakeholders Share information on the Komatsu Group’s vision and the issues it faces (employees, suppliers, distributors) Society Provide as many opportunities for engagement as possible and practice proper information disclosure to facilitate understanding of Komatsu Distributors Suppliers Employees Customers Shareholders Distributor meetings Midori-kai General meetings with management Meetings with the president Visits from top management General Meeting of Shareholders Shareholder meetings Investors and Analysts Visits to investors worldwide Analysts meetings Financial results briefings Mass media Communities Interviews Meetings with mayors, governors, etc. Direct Communication by Top Management Major Investor Relations Activities in FY2019 To further improve the transparency of management for our shareholders and investors, we disclose information in a fair and timely manner and actively engage in investor relations activities by holding meetings with shareholders and investors. For Institutional Investors For Shareholders and Individual Investors Homepage Financial results briefings (4 times) Small meetings (7 times) Business briefings (2 times) Business site tours (1 time) Overseas investor relations activities (5 times; approx. 70 companies) Individual meetings (over 240) Shareholder meetings (2 times) Factory tours for shareholders (10 times) Individual investor meetings (7 times) Gifts of appreciation for long-term shareholders * Certain tours and briefings have been cancelled as a result of the global COVID-19 pandemic. Financial information • Financial results briefings • Sales and profits gains reports • Quarterly reports, etc. Web interviews with the president (4 times) KOMATSU REPORT, etc. Engagement Topics Komatsu holds meetings with institutional investors and securities analysts to deepen their understanding of the Company. Date Meeting Name Attendants Contents September 18, 2019 Investors Meeting 39 (1) Komatsu business development in Africa and (2) Komatsu’s digital transformation strategy December 11, 2019 ESG Meeting 40 (1) Solving ESG issues in the new mid-term management plan, (2) KOMATSU REPORT 2019 / corporate governance, and (3) KOMATSU REPORT 2019 / Komatsu’s social contribution activities WEB For materials from meetings held in FY2019, please refer to Komatsuʼs corporate website: https://home.komatsu/en/ir/library/results/1203311_1764.html 51 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Resolution of ESG Issues Corporate Governance Risk Management Basic Principles and Structure for Risk Management In addition to the basic policy for risk management to ensure busi- We are developing risk reporting lines, preparing related man- ness continuity and stable development, Komatsu has established uals and making other efforts to further improve the risk manage- Risk Management Rules to correctly recognize and manage risks. ment system of the entire Group, including overseas subsidiaries. Komatsu has established a Risk Management Committee to We have reflected climate change risks in this system for devise relevant policies for the entire Group, review the risk man- management. agement system, and evaluate and improve upon response mea- sures in place for each risk, as well as to take control of risks when they arise. The committee regularly reports on its deliberations and activities to the board of directors. Komatsu will establish an emergency headquarters when serious risks occur and implement appropriate measures to mini- mize damage. Risks Surrounding the Company Risk Management System Hazard Risk Risks of natural disasters and other disasters caused by external factors Operational Risk Inherent risks associated with cor- porate activities such as the viola- tion of laws and scandals Strategy Risk Risks related to the significant change of social situations and business uncertainties Financial Risk Risks related to finance including fluctuations in interest rates and stock prices Report as needed Review regularly Board of Directors President Report regularly R i s k M a n a g e m e n t R u l e s B a s i c M a n u a l f o r R i s k M a n a g e m e n t Risk Management Committee (When serious risks are exposed: Emergency Headquarters) Risk Management Committee Executive Office (Administration Department) Primary division responsible for each risk • Identify and review risk recognitions • Perform activities to prevent risks and minimize their effects • Take action when a risk is exposed Each division and each Group company Expert committees • Product Safety Committee • Export Control Committee • Earth Environment Committee, etc. • Compliance Committee • CSR Committee Compliance The Company shall establish the “Compliance Committee” as establishment of the Compliance Department. Through all of these, Komatsu to oversee compliance, and the Committee regularly we work to supervise, educate and train Directors, Audit & reports its reviews and activities to the Board of Directors. The Supervisory Board Members and employees. Company shall also establish a system to ensure all Directors and In addition, the Company shall establish the internal reporting employees thorough compliance to business rules as well as laws system where those who are discretely reporting questionable and regulations through a variety of measures, including the provi- actions in light of laws and regulations and business rules will not be sion of“Komatsu Code of Worldwide Business Conduct,” appoint- given any disadvantageous treatment. ment of the Executive Officer in charge of compliance, and 52 ESGののののの Establishing a business continuity plan (BCP) and providing training Komatsu has established business continuity plans (BCPs) for individ- swift decisions by senior management should a disaster strike. ual bases and conducts initial response training drills to prepare pri- We are focused on not only strengthening the BCPs of Komatsu marily for earthquakes. At production bases, we implement measures Group but also on strengthening the supply chain system through to reinforce the seismic resistance of structures and production equip- support of our business partners. Recent initiatives to this effect ment while implementing countermeasures to safeguard against have included holding nationwide seminars on initial disaster water and wind damage from concentrated heavy rains and other responses and hazard map use led by experts on these subjects. weather events in order to minimize the impacts of increasingly more Several partners were invited to take part in these seminars. severe natural disasters. Moreover, the disaster response reporting Going forward, we will continue to promote and enhance our chains and standards for frontline sites have been clarified to facilitate Groupwide BCP initiatives. Recent Natural Disasters and Response Measures 1995 2007 2011 2018 2019 Great Hanshin Earthquake Chuetsu Offshore Earthquake Great East Japan Earthquake Heavy Rain in West Japan Typhoon Hagibis • Initial response manual devel- opment for ensuring safety • Preparation of disaster response manuals • Formulation of risk-related regulations • Business continuity manual • Group-wide deployment of development • Preparation of BCPs for specific bases • Establishment of headquar- ters BCP drill regulations response measures • Installation of equipment and communications infrastructure • Establishment of base-specific BCP drill regulations • Reconfirmation of natural disaster risks and coun- termeasure development • Improvement of BCP implementation procedures at Komatsu Group and business partners • Improvement of BCP implementation procedures at individual bases • Establishment of BCPs for business partners regulations Response to the COVID-19 Pandemic With the safety and health of our customers, partner companies, headquarters with our president as its Chairperson. Since the state people in local communities, and our employees and their families of emergency was declared in Japan in April, we have carried out set as our priority, the Komatsu Group is striving to prevent the remote meetings almost every day that include the president, inter- spread of the COVID-19 pandemic based on the government policies nal directors, and the heads of functions to share the latest informa- in each country. tion about the situation at the global level and determine the correct To fulfill our responsibilities to customers involved in businesses actions to take. In addition, the president has also regularly reported that support social infrastructure (essential businesses), we have this information and these actions to the board of directors. continued to supply products, parts, and services to our customers We have posted news releases on our website to keep all stake- while thoroughly taking measures to prevent infection. holders updated on the status of our mask donation and other support In the middle of March, we determined that we had entered the activities, our global production activities, and other matters as needed. Infection and Pandemic phase, a management item in the Basic We will continue to exercise accountability toward stakeholders Manual for Risk Management, and set up an emergency through timely and appropriate information disclosure going forward. Government policy Management of the physical condition of employees Avoid the three C’s Hygiene measures Measures appropriate to the phase and local situation Safety and security of employees Sustainable measures Response to Climate Change Approximately 90% of the CO2 emissions associated with Komatsu operation by 2030, and R&D activities are being advanced toward Group’s operations are attributable to product operation. Accordingly, the accomplishment of this goal (response to transition risks). we have the potential help mitigate climate change by providing low- Meanwhile, the rise in natural disasters associated with climate carbon products and solutions. However, if efforts to deliver such change is creating risks of damages to the Company and its supply offerings do not conform to the regulatory requirements of the chain. We are therefore taking steps to identify the water-related relevant countries or with the demands of markets, we will risk risks threatening the Company and its supply chain while instituting suffering future impacts to our earnings. For this reason, Komatsu BCP drills and other measures to mitigate these risks (response to has set the goal of halving the CO2 emissions from product physical risks). 53 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Corporate Profile Directors and Audit & Supervisory Board Members Directors Chairperson of the Board and Representative Director 1 Tetsuji Ohashi President and Representative Director, and CEO 2 Hiroyuki Ogawa Director and Senior Executive Officer 3 Masayuki Moriyama Director and Senior Executive Officer 4 Kiyoshi Mizuhara President of Mining Business Division President of Construction Equipment Marketing Division Number of Year (s) in Office Attendance to the Meetings of the Board of Directors 11 years Number of Year (s) in Office Attendance to the Meetings of the Board of Directors 2 years Number of Year (s) in Office Attendance to the Meetings of the Board of Directors 1 year Number of Year (s) in Office Attendance to the Meetings of the Board of Directors 1 year 15/15 (100%) Number of Shares of the Company Held 151 thousand shares Important Concurrent Positions Held in Other Organizations: Outside Director of Yamaha Motor Co., Ltd. Special Interests Between the Candidate and the Company: None 15/15 (100%) 11/11 (100%) 11/11 (100%) Number of Shares of the Company Held 55 thousand shares Important Concurrent Positions Held in Other Organizations: None Special Interests Between the Candidate and the Company: None Number of Shares of the Company Held 52 thousand shares Important Concurrent Positions Held in Other Organizations: None Special Interests Between the Candidate and the Company: None Number of Shares of the Company Held 35 thousand shares Important Concurrent Positions Held in Other Organizations: None Special Interests Between the Candidate and the Company: None 4/1977 4/2019 Joined the Company Took office as Chairperson of the Board and Representative Director (current) 4/1985 4/2019 Joined the Company Took office as President and Representative Director (current) CEO (current) 4/1982 6/2019 Joined the Company Took office as Director and Senior Executive Officer (current) 4/1983 6/2019 Joined the Company Took office as Director and Senior Executive Officer (current) Director and Senior Executive Officer 5 Kuniko Urano Outside Director 6 Makoto Kigawa Outside Director 7 Takeshi Kunibe NEW Outside Director 8 Arthur M. Mitchell NEW Supervising Safety & Health Care, Corporate Communications, and CSR Number of Year (s) in Office Attendance to the Meetings of the Board of Directors 2 years Number of Year (s) in Office Attendance to the Meetings of the Board of Directors 4 years 15/15 (100%) Number of Shares of the Company Held 34 thousand shares Important Concurrent Positions Held in Other Organizations: None Special Interests Between the Candidate and the Company: None 4/1979 6/2018 Joined the Company Took office as Director and Senior Executive Officer (current) 15/15 (100%) None Number of Shares of the Company Held Important Concurrent Positions Held in Other Organizations: Special Advisor of Yamato Holdings Co., Ltd. Outside Director of Seven Bank, Ltd. Outside Director of Oki Electric Industry Co., Ltd. Outside Audit & Supervisory Board Member of The Higo Bank, Ltd. Special Interests Between the Candidate and the Company: None 4/1973 4/2004 3/2005 4/2005 6/2005 11/2005 4/2006 6/2006 3/2007 4/2011 4/2015 6/2016 4/2018 6/2019 Joined The Fuji Bank, Limited (currently Mizuho Bank, Ltd.) Took office as Managing Director, Chief Risk Officer / Head of Risk Management Group, and Chief Human Resources Officer / Head of Human Resources Group of Mizuho Corporate Bank, Ltd. (currently Mizuho Bank, Ltd.) Retired from Mizuho Corporate Bank, Ltd. Joined Yamato Transport Co., Ltd. (currently Yamato Holdings Co., Ltd.) Took office as Managing Director of Yamato Transport Co., Ltd. (currently Yamato Holdings Co., Ltd.) Took office as Representative Managing Director of Yamato Holdings Co., Ltd. Took office as Representative Director and Managing Executive Officer of Yamato Holdings Co., Ltd. Took office as Representative Director and Senior Managing Executive Officer of Yamato Holdings Co., Ltd. Took office as Representative Director and Executive Officer of Yamato Holdings Co., Ltd. Took office as Representative Director, President and Executive Officer of Yamato Transport Co., Ltd. Took office as Representative Director, President and Executive Officer of Yamato Holdings Co., Ltd. Took office as Chairman of the Board and Representative Director of Yamato Holdings Co., Ltd. Took office as Director of the Company (current) Took office as Director and Chairman of Yamato Holdings Co., Ltd. Special Advisor of Yamato Holdings Co., Ltd. (current) 54 None Number of Shares of the Company Held Important Concurrent Positions Held in Other Organizations: Foreign lawyer of White & Case LLP Outside Director of Sumitomo Mitsui Financial Group, Inc. Special Interests Between the Candidate and the Company: None 7/1976 1/2003 9/2007 1/2008 6/2020 Registered as attorney at law in New York State, USA (current) Took office as General Counsel of Asian Development Bank Joined White & Case LLP Registered as registered foreign lawyer in Japan (current) Registered foreign lawyer of White & Case LLP (current) Took office as Outside Director (current) None Number of Shares of the Company Held Important Concurrent Positions Held in Other Organizations: Chairman of the Board of Sumitomo Mitsui Financial Group, Inc. Outside Member of the Board of TAISHO PHARMACEUTICAL HOLDINGS CO., LTD Outside Auditor of Nankai Electric Railway Co., Ltd. Special Interests Between the Candidate and the Company: None 4/1976 6/2003 10/2006 4/2007 6/2007 4/2009 4/2011 4/2017 6/2017 4/2019 6/2020 Joined The Sumitomo Bank, Ltd. (currently Sumitomo Mitsui Banking Corporation, hereinafter the “SMBC”) Took office as Executive Officer of SMBC Took office as Managing Executive Officer of SMBC Took office as Managing Executive Officer of Sumitomo Mitsui Financial Group, Inc. (hereinafter “SMFG”) Took office as Director of SMFG Took office as Director and Senior Managing Executive Officer of SMBC Took office as Representative Director, President and Chief Executive Officer of SMBC Took office as Representative Director and President of SMFG Retired from Director of SMBC Took office as Director President and Representative Executive Officer of SMFG Took office as Chairman of the Board of SMFG (current) Took office as Outside Director (current) (As of June 30, 2020) Audit & Supervisory Board Members Standing Audit & Supervisory Board Member 1 Hironobu Matsuo Standing Audit & Supervisory Board Member 2 Terumi Sasaki NEW Number of Shares of the Company Held 22 thousand shares Important Concurrent Positions Held in Other Organizations: None Special Interests Between the Candidate and the Company: None Number of Shares of the Company Held 21 thousand shares Important Concurrent Positions Held in Other Organizations: None Special Interests Between the Candidate and the Company: None 4/1982 6/2017 Joined the Company Took office as Standing Audit & Supervisory Board Member (current) 4/1983 6/2020 Joined the Company Took office as Standing Audit & Supervisory Board Member (current) Outside Audit & Supervisory Board Member 3 Hirohide Yamaguchi Outside Audit & Supervisory Board Member 4 Eiko Shinotsuka Outside Audit & Supervisory Board Member 5 Kotaro Ohno Number of Shares of the Company Held 0 shares Important Concurrent Positions Held in Other Organizations: Chairman of the Advisory Board of Nikko Financial Intelligence, Inc. (currently Nikko Research Center, Inc.) Outside Audit & Supervisory Board Member of Mitsui Fudosan Residential Co., Ltd. Special Interests Between the Candidate and the Company: None 4/1974 10/2008 3/2013 7/2013 6/2014 Joined the Bank of Japan Took office as Deputy Governor of Bank of Japan Retired from Bank of Japan Took office as Chairman of the Advisory Board of Nikko Financial Intelligence, Inc. (currently Nikko Research Center, Inc.) (current) Took office as Audit & Supervisory Board Member of the Company (current) Number of Shares of the Company Held 0 shares Important Concurrent Positions Held in Other Organizations: Professor emeritus at Ochanomizu University Special Interests Between the Candidate and the Company: None 4/1993 4/2008 6/2015 Took office as Professor at Ochanomizu University Took office as Professor emeritus at Ochanomizu University (current) Took office as Audit & Supervisory Board Member of the Company (current) Number of Shares of the Company Held 0 shares Important Concurrent Positions Held in Other Organizations: Attorney at law, Special Counsel of Mori Hamada & Matsumoto Outside Director of AEON Co., Ltd. Outside Audit & Supervisory Board Menber of ITOCHU Corporation Special Interests Between the Candidate and the Company: None 4/1976 7/2009 7/2012 7/2014 9/2016 11/2016 6/2017 Appointed as Prosecutor Took office as Vice-Minister of Justice Took office as Superintending Prosecutor of Tokyo High Public Prosecutors Office Took office as Prosecutor-General of Supreme Public Prosecutors Office Retired from the position of Prosecutor-General of Supreme Public Prosecutors Office Attorney at law, Special Counsel of Mori Hamada & Matsumoto (current) Took office as Audit & Supervisory Board Member of the Company (current) WEB Komatsuʼs Independence Standards for Outside Directors and Outside Audit & Supervisory Board Members can be found via the link below. https://home.komatsu/en/ir/profile/corporate-governance/independence-criterion.html (As of June 30, 2020) 55 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Corporate Profile Executive Officers and Global Officers (As of June 30, 2020) Executive Officers Senior Executive Officer (Senmu) Executive Officers Keiko Fujiwara GM, Department for Promotion of Distributor HR Development, Construction Equipment Marketing Division GM, Business Reform Department, Construction Equipment Marketing Division Chikashi Shike President, Smart Construction Promotion Division Yasuo Suzuki Vice President, Production Division (Responsible for Parts & Reman) Nozomu Okamoto Awazu Plant Manager, Production Division Masami Naruse Vice President, Development Division GM, Vehicle Development Center 1, Development Division Takuya Imayoshi GM, Business Coordination Department GM, Komatsu Economic Strategy Research Center Kosei Okamoto President, Product Marketing Division Kenichi Tanaka President, Defense Systems Division Shinji Maeda President, Information Strategy Division Yuichi Iwamoto Chief Technology Officer (CTO) Supervising Research & Development and Environment Senior Executive Officers (Jomu) Susumu Ueno President, Japanese Domestic Marketing, Construction Equipment Marketing Division Masaki Nobuhara President, Production Division Taiichiro Kitatani Vice President, Construction Equipment Marketing Division GM, ICT Project Department GM, Project Promotion Department Naoki Fujita Supervising Industrial Machinery Business Chairman of the Board, Komatsu NTC Ltd. (Part time) Seiichi Fuchita President, Development Division Yoshiharu Sato President, Quality Assurance Division Kazuya Kuriyama President, Procurement, Production Division Kazuaki Miura Vice President, Japanese Domestic Marketing, Construction Equipment Marketing Division President, Komatsu Customer Support Japan Ltd. Takeshi Horikoshi Chief Financial Officer (CFO) Koichi Honda GM, Human Resources Department Supervising Education Norikatsu Nishiyama Himi Plant Manager, Production Division Hiroshi Makabe Supervising Legal, General Affairs & Compliance Mitsuko Yokomoto GM, General Affairs Department Responsible for Risk Management Hidefumi Obikane Oyama Plant Manager, Production Division GM, Aftermarket Technology Development Department Toru Sunada President, Service Division, Construction Equipment Marketing Division Takayuki Furukoshi Osaka Plant Manager, Production Division Kenichi Sato President, Aftermarket Business Division, Construction Equipment Marketing Division GM, Marketing Department, Aftermarket Business Division, Construction Equipment Marketing Division Jun Taniguchi Vice President, Development Division GM, ICT System Development Center, Development Division Naoyuki Sakurai Ibaraki Plant Manager, Production Division 56 Executive Officers (Global) Note: Executive officers overseas concurrently serve as global officers. North America South America Asia/Oceania Senior Executive Officers Executive Officer Executive Officer Rodney Schrader Chairman & CEO, Komatsu America Corp. Jeffrey Dawes President & CEO, Komatsu Mining Corp. Vice President, Mining Business Division Korekiyo Yanagisawa EVP & COO, Komatsu Mining Corp. Ichiro Nakano Vice President, Mining Business Division Technical Director, Modular Mining Systems, Inc. Executive Officers Taisuke Kusaba President & COO, Komatsu America Corp. Gary Kasbeer Executive Vice President & CFO, Komatsu America Corp. Yuushi Oshikawa Executive Vice President & President, North America R&D Division, Komatsu America Corp. Technical Director, Komatsu Mining Corp. Global Officers Yasuji Nishiura Representative of All Latin America* Operations President, Komatsu Cummins Chile Ltda. President, Komatsu Holding South America Ltda. Pratjojo Dewo S. President, PT Komatsu Indonesia China * “Latin America” does not include Brazil Senior Executive Officer Europe Senior Executive Officer Masatoshi Morishita President & CEO, Komatsu Europe International N.V. Executive Officer Umeda Hiroyuki President, Komatsu Forest AB Yasuhiro Inagaki Representative of All China Operations Chairman, Komatsu (China) Ltd. Executive Officers Quanwang Zhang President & CEO, Komatsu(China) Ltd. Takashi Yasukawa President, Production & Procurement Division, Komatsu (China) Ltd. Africa Executive Officer Michael Blom President & MD, Komatsu South Africa (Pty) Ltd. North America Europe Asia/Oceania Peter Salditt President, Underground and Hard Rock Mining, Komatsu Mining Corp. John Koetz President, Surface Mining, Komatsu Mining Corp. Jorge Mascena President & CEO, Modular Mining Systems, Inc. John Fiedler President, Hensley Industries, Inc. Paul Blanchard President & MD, Komatsu UK Ltd. Charoen Ruengwilai President, Bangkok Komatsu Co., Ltd. Göksel Güner Chief Operating Officer, Komatsu Europe International N.V. Sean Taylor Managing Director, Komatsu Australia Pty. Ltd. Ralf Petzold President & MD, Komatsu Germany GmbH China Ingo Büscher Executive Vice President & President, Construction Division, Komatsu Germany GmbH David Bazzi President & MD, Komatsu Italia Manufacturing S.p.A. Fangchang Liu President, Komatsu (Shandong) Construction Machinery Corp. Dechun Tian President, Komatsu Shantui Construction Machinery Co., Ltd. 57 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Corporate Profile 11-Year Summary Net sales Operating income Operating income ratio (%) 1,431,564 1,843,127 1,981,763 1,884,991 1,953,657 1,978,676 1,854,964 1,802,989 2,501,107 2,725,243 2,444,870 67,035 4.7 222,929 12.1 256,343 12.9 211,602 11.2 240,495 12.3 242,062 12.2 208,577 11.2 174,097 9.7 268,503 10.7 397,806 14.6 250,707 10.3 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 Millions of yen 64,979 219,809 249,609 204,603 242,056 236,074 204,881 166,469 291,807 377,471 223,114 Income from continuing operations before income taxes and equity in earnings of affiliated companies Net income attributable to Komatsu Ltd. Capital investment Depreciation and amortization*1 Research and development expenses Total assets Shareholders’ equity Shareholders’ equity ratio (%) Net interest-bearing debt*2 Net debt-equity ratio (times) Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities Cash and cash equivalents, end of year Number of common share issued (thousands of shares) 998,744 Net income attributable to Komatsu Ltd. per share (yen) Cash dividends per share (yen) Consolidated payout ratio (%)*3 ROA (%) ROE (%) Exchange rate for the U.S. dollar (yen)*4 Exchange rate for the Euro (yen)*4 Exchange rate for the Chinese Renminbi (yen)*4 34.67 16.0 38.0 3.3 4.1 93 131 13.6 33,559 96,191 90,215 46,449 150,752 97,738 88,442 49,005 1,959,055 2,149,137 833,975 42.6 502,818 0.60 182,161 (72,967) (116,363) 82,429 923,843 43.0 459,110 0.50 150,402 (88,509) (56,365) 84,224 998,744 155.77 38.0 24.4 10.7 17.2 85 113 12.7 167,041 122,038 89,015 54,843 2,320,529 1,009,696 43.5 563,814 0.56 105,608 (124,539) 18,781 83,079 983,130 173.47 42.0 24.2 11.2 17.3 79 110 12.4 126,321 136,962 88,005 60,788 2,517,857 1,193,194 47.4 585,926 0.49 214,045 (131,397) (71,814) 93,620 983,130 132.64 48.0 36.2 8.5 11.5 83 107 13.2 Number of employees (persons) 38,518 41,059 44,206 46,730 59,632 61,908 62,823 Overseas employee ratio (%) CO2 emissions (thousand t) Waste generated (thousand t) Volume of water used (thousand m3) 51.9 359 69.5 7,022 55.5 554 111.1 7,400 57.5 583 119.5 6,784 64.3 468 112.1 5,737 *1 Depreciation is the total of depreciation on property, plant and equipment and on intangible assets. *2 Net interest-bearing debt = Interest-bearing debt – Cash and equivalents – Time deposits. *3 Figures for FY2009 exclude structural reform expenses. *4 Average exchange rates for the fiscal year. 58 159,518 179,070 85,837 64,479 2,651,556 1,376,391 51.9 513,918 0.37 319,424 (167,439) (155,349) 90,872 983,130 167.36 58.0 34.7 9.4 12.4 100 133 16.3 47,208 61.8 458 101.4 5,114 154,009 192,724 100,666 70,715 2,798,407 1,528,966 54.6 481,817 0.32 343,654 (181,793) (143,983) 105,905 971,967 162.07 58.0 35.8 8.7 10.6 110 140 17.7 47,417 61.0 412 83.2 4,265 137,426 160,051 111,174 70,736 2,614,654 1,517,414 58.0 349,081 0.23 319,634 (148,642) (173,079) 106,259 971,967 145.80 58.0 39.8 7.6 9.0 121 132 19.0 47,017 60.7 342 62.4 3,627 113,381 142,006 103,219 70,507 2,656,482 1,576,674 59.4 286,512 0.18 256,126 (133,299) (107,718) 119,901 971,967 120.26 58.0 48.2 6.3 7.3 109 119 16.2 47,204 62.7 384 83.5 3,351 196,410 145,668 132,442 73,625 3,372,538 1,664,540 49.4 663,740 0.40 148,394 (377,745) 243,949 144,397 971,967 208.25 84.0 40.3 9.7 12.1 111 130 16.8 66.7 459 113.1 4,016 256,491 179,210 129,860 73,447 3,638,219 1,815,582 49.9 779,890 0.43 202,548 (187,204) (3,660) 148,479 972,252 271.81 110.0 40.5 10.8 14.7 111 129 16.5 68.4 519 117.8 3,941 153,844 166,552 129,525 74,761 3,653,686 1,771,606 48.5 762,705 0.43 295,181 (190,930) (3,457) 247,616 972,581 162.93 94.0 57.7 6.1 8.6 109 121 15.6 68.4 404 95.1 3,557 Net sales Operating income Operating income ratio (%) equity in earnings of affiliated companies Net income attributable to Komatsu Ltd. Capital investment Depreciation and amortization*1 Research and development expenses Total assets Shareholders’ equity Shareholders’ equity ratio (%) Net interest-bearing debt*2 Net debt-equity ratio (times) Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities Cash and cash equivalents, end of year Cash dividends per share (yen) Consolidated payout ratio (%)*3 ROA (%) ROE (%) Exchange rate for the U.S. dollar (yen)*4 Exchange rate for the Euro (yen)*4 Exchange rate for the Chinese Renminbi (yen)*4 Overseas employee ratio (%) CO2 emissions (thousand t) Waste generated (thousand t) Volume of water used (thousand m3) Number of common share issued (thousands of shares) 998,744 Net income attributable to Komatsu Ltd. per share (yen) 1,959,055 2,149,137 33,559 96,191 90,215 46,449 833,975 42.6 502,818 0.60 182,161 (72,967) (116,363) 82,429 34.67 16.0 38.0 3.3 4.1 93 131 13.6 51.9 359 69.5 7,022 150,752 97,738 88,442 49,005 923,843 43.0 459,110 0.50 150,402 (88,509) (56,365) 84,224 998,744 155.77 38.0 24.4 10.7 17.2 85 113 12.7 55.5 554 111.1 7,400 167,041 122,038 89,015 54,843 2,320,529 1,009,696 43.5 563,814 0.56 105,608 (124,539) 18,781 83,079 983,130 173.47 42.0 24.2 11.2 17.3 79 110 12.4 57.5 583 119.5 6,784 126,321 136,962 88,005 60,788 2,517,857 1,193,194 47.4 585,926 0.49 214,045 (131,397) (71,814) 93,620 983,130 132.64 48.0 36.2 8.5 11.5 83 107 13.2 64.3 468 112.1 5,737 Number of employees (persons) 38,518 41,059 44,206 46,730 *1 Depreciation is the total of depreciation on property, plant and equipment and on intangible assets. *2 Net interest-bearing debt = Interest-bearing debt – Cash and equivalents – Time deposits. *3 Figures for FY2009 exclude structural reform expenses. *4 Average exchange rates for the fiscal year. FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 1,431,564 1,843,127 1,981,763 1,884,991 1,953,657 1,978,676 1,854,964 1,802,989 2,501,107 2,725,243 2,444,870 67,035 4.7 222,929 12.1 256,343 12.9 211,602 11.2 240,495 12.3 242,062 12.2 208,577 11.2 174,097 9.7 268,503 10.7 397,806 14.6 250,707 10.3 Millions of yen Income from continuing operations before income taxes and 64,979 219,809 249,609 204,603 242,056 236,074 204,881 166,469 291,807 377,471 223,114 159,518 179,070 85,837 64,479 2,651,556 1,376,391 51.9 513,918 0.37 319,424 (167,439) (155,349) 90,872 983,130 167.36 58.0 34.7 9.4 12.4 100 133 16.3 47,208 61.8 458 101.4 5,114 154,009 192,724 100,666 70,715 2,798,407 1,528,966 54.6 481,817 0.32 343,654 (181,793) (143,983) 105,905 971,967 162.07 58.0 35.8 8.7 10.6 110 140 17.7 47,417 61.0 412 83.2 4,265 137,426 160,051 111,174 70,736 2,614,654 1,517,414 58.0 349,081 0.23 319,634 (148,642) (173,079) 106,259 971,967 145.80 58.0 39.8 7.6 9.0 121 132 19.0 47,017 60.7 342 62.4 3,627 113,381 142,006 103,219 70,507 2,656,482 1,576,674 59.4 286,512 0.18 256,126 (133,299) (107,718) 119,901 971,967 120.26 58.0 48.2 6.3 7.3 109 119 16.2 47,204 62.7 384 83.5 3,351 196,410 145,668 132,442 73,625 3,372,538 1,664,540 49.4 663,740 0.40 148,394 (377,745) 243,949 144,397 971,967 208.25 84.0 40.3 9.7 12.1 111 130 16.8 256,491 179,210 129,860 73,447 3,638,219 1,815,582 49.9 779,890 0.43 202,548 (187,204) (3,660) 148,479 972,252 271.81 110.0 40.5 10.8 14.7 111 129 16.5 153,844 166,552 129,525 74,761 3,653,686 1,771,606 48.5 762,705 0.43 295,181 (190,930) (3,457) 247,616 972,581 162.93 94.0 57.7 6.1 8.6 109 121 15.6 59,632 61,908 62,823 66.7 459 113.1 4,016 68.4 519 117.8 3,941 68.4 404 95.1 3,557 59 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Corporate Profile Non-Financial Highlights Reduction of CO2 Emissions from Product Operation In the mid-term management plan (FY2019–FY2021), Komatsu has set the target of reducing the CO2 emissions from the operation of products (construction, mining, and forest equipment) by 50% by 2030 (compared to 2010). To evaluate progress toward this goal, we compared the performance of the current year’s products to the products of the reference year (2010) and estimated CO2 reduction rates through the improvement of fuel consumption and work efficiency. The products of 2019 achieved a CO2 reduction of 14%, compared to the reference year. CO2 Emission Index for Product Operation 100 100 88 86 80 60 40 20 0 Target 50 2010 2018 2019 2030 Changes in Reman Sales (Base FY2004 = 100) (%) 500 400 300 200 100 0 451 402 414 349 304 313 270 250 239 200 168 160 156 137 112 100 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Incidence Rate of Occupational Accidents (Frequency Rate of Lost Work Time) (Frequency rate) 2.0 1.5 1.0 0.5 0.0 1.66 1.61 1.63 1.66 1.83 1.80 1.02 0.87 0.42 0.05 2014 0.81 0.79 0.32 0.14 0.73 0.72 0.45 0.32 0.79 0.75 0.46 0.36 2015 2016 2017 1.44 0.56 0.44 0.20 2018 0.88 0.59 0.29 0.16 2019 (FY) All industries (Japan) Komatsu Group (Japan and Global) Komatsu (Non-consolidated) Construction and mining equipment manufacturing industry (Japan) Komatsu Group (Japan) Number of Global Officers (People) 32 24 16 8 0 27 16 29 26 18 18 2017 2018 2019 (FY) ■ Total ■ National top managers out of total executive officers 60 Notes: 1. The data for all industries (Japan) and construction and mining equipment manufacturing industry (Japan) are provided by the Ministry of Health, Labour and Welfare. 2. The scope of Komatsu Group (Japan) includes Komatsu Ltd. and Group companies in Japan. 3. The scope of Komatsu Group (global) includes “Komatsu Group (Japan)” and overseas production plants. Numbers and Ratios of Female Employees and Female Managers (People) 1,600 1,200 800 400 0 1,281 1,321 12.0 5.5 94 2017 12.2 6.2 109 2018 (%) 16 1,463 12.3 12 7.0 129 8 4 0 2019 (FY) ■ Number of female employees ■ Number of women in management and executive positions Ratio of female employees (right scale) Ratio of women in management and executive positions (right scale) Corporate Profie External Evaluations and Index Inclusion WEB For more information on the above indexes, please refer to Komatsu’s corporate website: https://komatsu.disclosure.site/en/themes/133 CDP Climate A-List Dow Jones Sustainability MSCI Global Indices (DJSI) Sustainability Indexes*1 ISS-Oekom EURONEXT VigeoEIRIS FTSE Blossom Japan Index*2 MSCI Japan ESG Select MSCI Japan Empowering Leaders Index*1 Women Index*1 S&P/JPX Carbon Efficient Index Digital Transformation SBT Grand Prix of the Corporate Value Stock Selection Grand Prix 2020 Improvement Award, Tokyo Stock Exchange *1 THE INCLUSION OF KOMATSU LTD IN ANY MSCI INDEX, AND THE USE OF MSCI LOGOS, TRADEMARKS, SERVICE MARKS OR INDEX NAMES HERIN, DO NOT CONSTITUTE A SPONSORSHIP, ENDORSEMENT OR PROMOTION OF KOMATSU LTD BY MSCI OR ANY OF ITS AFFILIATES. THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES AND LOGOS ARE TRADEMARKS OR SERVICE MARKS OF MSCI OR ITS AFFILIATES. *2 FTSE Russell confirms that Komatsu has been independently assessed according to the index criteria, and has satisfied the requirements to become a constituent of the FTSE Blossom Japan Index. Created by the global index and data provider FTSE Russell, the FTSE Blossom Japan Index is designed to measure the performance of companies demonstrating strong Environmental, Social and Governance (ESG) practices. The FTSE Blossom Japan Index is used by a wide variety of market participants to create and assess responsible investment funds and other products. 61 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile Corporate Profile Corporate Information (As of March 31, 2020) Name Komatsu Ltd. Head Office 2-3-6 Akasaka, Minato-ku, Tokyo 107-8414 Date of Establishment May 13, 1921 Common Stock Outstanding Consolidated: ¥68,689 million based on U.S. GAAP Non-consolidated: ¥70,973 million Number of Employees Consolidated: 62,823 Non-consolidated:11,692 Average age (non-consolidated) : 39.5 Average years of continuous service (non-consolidated) : 15.1 Shares of Common Stock Issued and Outstanding 972,581,230 shares (including shares of treasury stock) Number of Shareholders 230,041 Number of Shares per Trading Unit 100 Securities Code 6301 (Japan) Stock Listings Tokyo Transfer Agent for Common Stock/ Management Institution for Special Account Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-8212, Japan Depositaries (ADRs) The Bank of New York Mellon 101 Barclay Street, New York, NY 10286, U.S.A. Tel: +1-(201)-680-6825 for international calls and 888-269-2377 (888-BNY-ADRS) for calls within U.S.A. URL: https://www.adrbnymellon.com/ Ticker Symbol: KMTUY Major Shareholders Number of shares held (Thousands of shares) Shareholding ratio (%) The Master Trust Bank of Japan, Ltd. (Trust Account) Japan Trustee Services Bank, Ltd. (Trust Account) STATE STREET BANK AND TRUST COMPANY 505223 (Standing proxy: Mizuho Bank, Ltd., Settlement & Clearing Services Division) Taiyo Life Insurance Company Nippon Life Insurance Company (Standing proxy: The Master Trust Bank of Japan, Ltd.) Japan Trustee Services Bank, Ltd. (Trust Account 7) Japan Trustee Services Bank, Ltd. (Trust Account 5) Sumitomo Mitsui Banking Corporation JP MORGAN CHASE BANK 385151 (Standing proxy: Mizuho Bank, Ltd., Settlement & Clearing Services Division) THE BANK OF NEW YORK MELLON AS DEPOSITARY BANK FOR DEPOSITARY RECEIPT HOLDERS (Standing proxy: Sumitomo Mitsui Banking Corporation) 75,533 45,657 32,244 27,200 26,626 22,815 18,449 17,835 15,951 14,237 Notes: 1. Shareholding ratio is calculated by subtracting treasury stock. 2. Although the Company holds 27,479 thousand shares of treasury stock, it is excluded from the major shareholders listed above. 7.99 4.83 3.41 2.87 2.81 2.41 1.95 1.88 1.68 1.50 Stock Information (including shares of treasury stock) Breakdown of Shareholders (%) Financial ..........................34.5% Foreign ............................39.1% Individual and other .........20.7% Corporate ..........................2.5% Securities ..........................3.1% 335,868,341 shares 213 shareholders 380,368,180 shares 1,068 shareholders 201,375,918 shares 226,946 shareholders 24,395,112 shares 1,648 shareholders 30,573,679 shares 166 shareholders 62 About KOMATSU REPORT Published annually, Komatsu report (integrated report) provides financial and non-financial information on the Company’s efforts to realize continuous, long-term improvements in corporate value. Separate reports are prepared and disclosed to provide detailed financial information and information on environmental and social initiatives. Structure of Komatsu’s Annual Reports KOMATSU REPORT (Integrated reporting) Annual Securities Report (Financial conditions) ESG Databook (Social activities and Environmental performance) * KOMATSU REPORT, Annual Securities Report and ESG Databook, in both Japanese and English, are uploaded on Komatsu’s website. * Komatsu Ltd. issues the Komatsu Report only on the website. Please refer to “Annual Securities Report” for more company and financial information. Please refer to “ESG Databook” for more infor- mation concerning social and environmental efforts. • Overview of the Company and Its Consolidated • Stance on CSR Efforts Subsidiaries • Business Overview • Theme 1: Enhancing Quality of Life (Safety, environmental indexes, etc.) • Property, Plants and Equipment • Theme 2: Developing People (Diversity, etc.) • Information on the Company • Theme 3: Growing with Society (Compliance, risk • Financial Information management, governance, etc.) WEB https://home.komatsu/en/ir/library/annual-security-report/ WEB https://komatsu.disclosure.site/en • Komatsu has signed the United Nations Global Compact (UNGC). Click this link for more information about the Ten Principles advocated by the UNGC and how they pertain to Komatsu’s initiatives. https://komatsu.disclosure.site/en/themes/129 Komatsu has joined the World Business Council for Sustainable Development (WBCSD). 63 Komatsu’s Growth StrategiesKomatsu’s Business Model Resolution of ESG Issues through Growth StrategiesCorporate Profile 2-3-6, Akasaka, Minato-ku, Tokyo 107-8414, Japan https://home.komatsu/en Corporate Communications Department e-mail: JP00MB_info@global.komatsu