NEC Corp.
Annual Report 2018

Plain-text annual report

Integrated Report 2018 Year ended March 31, 2018 Message from the President p.03 Approach to the Creation of Value and Initiatives p.11 Dialogue and Co-Creation with Our Stakeholders p.15 p.03(cid:665)18 Message from the CFO p.19 p.19(cid:665)38 Corporate Governance p.39 Business and Human Rights p.49 p.39(cid:665)53 Editorial Policy NEC has published integrated annual reports containing both financial and non-financial information since 2013. This year, having defined its materiality in July 2018 in line with the Mid-term Management Plan 2020, NEC has changed the name of the report to the “Integrated Report.” The Integrated Report 2018 comprises four chapters respectively entitled Business Strategy and Vision, Business Activities, Management Foundation, and Corporate Data. Business Strategy and Vision describes the newly formulated the Mid-term Management Plan 2020 and priority themes from an Environmental, Social and Governance (ESG) perspective, or “materiality.” Business Activities includes a message from the CFO along with an overview from each of our segments and an introduction of our international business execution structure. Management Foundation introduces the Company‘s initiatives in support of sustainable management, such as corporate governance and environmental management promotion. NEC will keep endeavoring to provide increasingly transparent and continuous information while incorporating feedback from institutional investors and various other stakeholders. Reporting Period April 1, 2017 to March 31, 2018 (hereinafter referred to as “Fiscal 2018.” Any other fiscal years would be referred to similarly) This report also includes information obtained after this reporting period. Scope of Report NEC Corporation and its Consolidated Subsidiaries 01 Business Strategy and VisionManagement FoundationBusiness ActivitiesNEC Corporation Integrated Report 2018Innovation Management p.17 Performance Highlights p.21 Review of Operations p.25 Human Resource Development and Diversity p.50 Promoting Environmental Management p.51 Reference Guidelines • ISO 26000 • GRI Standards • United Nations Global Compact • International Integrated Reporting Council’s “International Integrated Reporting Framework” • Japan’s Ministry of Economy, Trade and Industry’s “Guidance for Collaborative Value Creation” NEC is a signatory to the United Nations Global Compact. Other Related Information • Earnings Releases/Annual Securities Report • Corporate Governance Report • Sustainability Report • Annual Environmental Report • Information Security Report Contents Business Strategy and Vision 03 Message from the President 11 Approach to the Creation of Value and Initiatives 15 Dialogue and Co-Creation with Our Stakeholders 17 Innovation Management Business Activities 19 Message from the CFO 21 Performance Highlights 23 At a Glance 25 Review of Operations 25 29 Public Business Enterprise Business 31 Network Services Business 33 System Platform Business 35 Global Business 37 International Business Structure Management Foundation 39 Corporate Governance 43 Ensuring Compliance and Risk Management 44 Messages from an Outside Director and an Audit & Supervisory Board Member 45 Directors and Audit & Supervisory Board Members 47 Cross-company Corporate Strategy Promotion Framework 49 Business and Human Rights 50 Human Resource Development and Diversity 51 Promoting Environmental Management Corporate Data Financial Section 55 58 Non-Financial Section 59 Corporate Overview 60 Our History 02 NEC Corporation Integrated Report 2018 Message from the President To restore NEC’s strength, now is the time to transform ourselves and start the journey of development and growth July 2018 Takashi Niino President and CEO September 1954 Born in Fukuoka Prefecture, Japan March 1977 Graduated from the Faculty of Engineering of Kyoto University April 1977 Joined NEC Corporation April 2008 Senior Vice President April 2010 Executive Vice President June 2011 Executive Vice President and Member of the Board April 2012 Senior Executive Vice President and Member of the Board April 2016 President and CEO (Representative Director) (to present) 03 NEC Corporation Integrated Report 2018 Message from the President NEC’s Role as a Social Value Innovator Since its establishment in 1899, NEC has been creating products and combines them with diverse knowledge and ideas in collaboration services of value to customers under the motto of “Better Products, with people around the world, this is our aim. As a social value Better Services.” I believe NEC’s enduring commitment since its innovator, we will continue to provide value in the form of safety, foundation to utilize its powerful technical capabilities to provide security, efficiency and equality, which are prerequisites for all better value to customers and society is the reason that it has been people, and an abundant society by leveraging our strengths. This is accepted by society for 119 years. This approach has been passed our approach to sustainability and our vision for the Company. down to us in the NEC Way, which encapsulates the NEC Group’s In 2005, NEC became a signatory to the United Nations Global management philosophy, vision and business framework. The NEC Compact (UNGC), a global initiative aimed at sustainable growth for Way guides all of us at NEC. society and companies. In our corporate activities we now observe Meanwhile, the value that customers and society expect from us is the compact’s 10 principles pertaining to the fields of human rights, constantly changing. Up until now, our technologies and products labor, the environment, and anti-corruption. As part of efforts in have been a sufficient source of value, but customers and society are “Orchestrating a brighter world,” I am confident that NEC can also now requiring increasingly diverse sources of value. To remain an contribute to the achievement of the Sustainable Development Goals essential company in the eyes of society in the years to come, we (SDGs) adopted by the UN in 2015. must create new value by constantly keeping our finger on the pulse In addition, with the formulation of the Mid-term Management of what it consists of. Plan 2020, NEC has defined its materiality—priority management To express this resolution both internally and externally, we themes from an ESG perspective. This outlines the approach to social adopted “Orchestrating a brighter world” as our Brand Statement in value creation that we have practiced since our foundation and 2014. This Brand Statement reflects NEC’s determination to realize connects our business strategies with ESG initiatives as a new bright, hope-filled societies and ways of life. As a leading integrator declaration to our various stakeholders of our commitment to that possesses both computing and network technologies who achieving the mutual growth of NEC and society. Review of the Mid-term Management Plan 2018 The Mid-term Management Plan 2018 covered the three years from fiscal 2017 to fiscal 2019. Under this plan, we worked to transform NEC into a social value innovator through reorganization of our profit structure and getting back on the track to growth. In our efforts in reorganizing the profit structure, we have made steady overall progress through to fiscal 2018; however, with getting back on the track to growth, significant underperformance in our existing businesses, which were meant to support the Company over the short term, left us unable to realize our operating profit target of ¥150.0 billion. In light of this situation, we revised our targets before the completion of the plan and formulated a new mid-term management plan in January 2018. Mid-term Management Plan 2018 Operating profit (Billion ¥) 150.0 1 Reorganization of profit structure Mostly on track for cost reduction targets 91.4 2 Getting back on the track to growth Evidently underperformed in existing businesses 63.9 41.8 2016 Result 2017 Result 2018 Result 2019 MTP Target (Fiscal year ended on March 31) 04 NEC Corporation Integrated Report 2018Issues Facing NEC I have always felt that NEC has had an issue with a lack of speed in Another issue is a lack of execution capability to carry out responding to changes in society and the markets. This has some declarations and decisions to completion. The root cause of these bearing on why we haven’t managed to grow the businesses that we issues is the absence of a culture of commitment as well as a lack of had positioned as growth areas in the past. NEC has not moved on well-defined consequences or rewards at NEC. I am painfully aware from the approaches and culture of an era where technology itself that while these fundamental issues have been recognized at NEC for represented value. I feel that the persistence of old structures and some time, we have made little progress in improving them. I am systems inside the Company has been a hindrance to new initiatives. deeply aware of my responsibility in this regard as CEO. Overcoming Issues Requires a Cultural Transformation How then can these issues be overcome? How can we become a rapidly to changes in global society and leverage our capabilities to company that tackles its own targets quickly and carries them out to the fullest. completion? The only way is to engage with a host of issues, I have been highlighting that NEC needs to change for some time. including organizations, systems, human resources, and work styles, However, while we may recognize the necessity, when we set about reviewing them from scratch in order to change NEC’s culture. The making changes, we come up against obstacles and find ourselves at value of NEC lies in its approach of striving to provide better value to an impasse. I think this is because we have tried to transform by our our customers and society with our founding spirit of “Better own efforts alone. This time, I will make use of external powers as Products, Better Services.” While retaining this value, we must build well in order to execute changes thoroughly. the methods, structures, and culture that will enable us to respond My Commitment as CEO NEC has come to a point where it is truly imperative to make major we must discern what is truly necessary, be prepared to break from changes. If we do not change, NEC will not survive. With this sense of our conventional ways of thinking, and drive transformation that will crisis, I will pour every effort as CEO into changing NEC. To enable restore NEC’s strength. NEC to continue developing and growing sustainably with society, 05 NEC Corporation Integrated Report 2018Overview of the Mid-term Management Plan 2020 Main Points of the Mid-term Management Plan 2020 The Mid-term Management Plan 2020 has set the following mid-term of ¥90.0 billion, free cash flow of ¥100.0 billion, and ROE of 10%. targets as a level to be achieved in order to be a sustainable company: To realize these targets, we have established three mid-term revenue of ¥3,000.0 billion, operating profit of ¥150.0 billion (5% management policies: reform of profit structure, achievement of operating profit ratio), net profit attributable to owners of the parent growth, and restructuring of execution capabilities. Mid-term Management Targets (Billion ¥) Revenue Operating profit (Operating profit ratio) Net profit attributable to owners of the parent Free cash flows* Return on equity (ROE) * M&A excluded Mid-term Management Policies FY2017/3 Results 2,665.0 FY2018/3 Results 2,844.4 FY2021/3 Targets 3,000.0 41.8 1.6% 27.3 99.0 3.4% 63.9 2.2% 45.9 115.8 5.3% 150.0 5.0% 90.0 100.0 10% (Note) Forecasts and targets as of January 30, 2018 Implement fundamental reform of profit structure, including reduction of fixed costs, to be able to carry out investments needed to get back on the track to growth Reform of profit structure SG&A expenses (Personnel expense reduction/cost cutting) Business structure (Telecom carrier business/ Energy business) Production system Achievement of growth Japan Global • Securely capture growth opportunities in Japan market • Shift to service business • Focus on safety business as the growth engine • Reorganize global structure supporting growth Restructuring of execution capabilities Pursuing the creation of customer value by leveraging the latest technologies Restructuring of personnel system to enable employees to maximize their capabilities 06 NEC Corporation Integrated Report 20181 Reform of Profit Structure For the reform of profit structure, we will take steps to fundamentally aim to achieve growth by concentrating our previously multi- reform our profit structure, including reduction of fixed costs, in order directional operations anew in the energy system integration (SI) to carry out investments needed to get back on the track to growth. business centered on NEC Energy Solutions, Inc. Through three reforms targeting selling, general and administrative The Telecom Carrier business is facing extremely rapid market (SG&A) expenses, business structure, and our production system, we changes, which have dramatically reshaped the state of the business will create a structure capable of succeeding globally. up to now. First, in the network infrastructure area, we will strive to With regard to SG&A expenses, in fiscal 2019 we will carry out improve profitability. In Japan, we will optimize resources in structural reforms targeting 3,000 personnel working in back office accordance with revenue scale, while internationally we will look at functions and the hardware business in Japan. We will look to withdrawing from and scaling-down low-profit businesses. streamline fixed property, IT, and marketing costs, aiming to bring Meanwhile, the software and services area will be strengthened as a the SG&A expense ratio down to 20% or less, and we will work to growth area. In Japan, we will accelerate the shifting of skills and improve the profit structure so that we can continue the necessary partnering in order to adapt to changes in our customers’ investments required to transform our business model. investments and expand our provision of services to telecom carriers. With regard to our business structure, we will resolutely We will also grasp diversifying network needs and accelerate our implement reforms to improve profitability in the Telecom Carrier business*1 and the Energy business. In the Energy business, we have made the decision to sell the electrode business and to discontinue development and production of small-scale storage batteries. We business development for non-telecom carriers. Outside of Japan, we will position software and services as a key area and expand our business, revising our strategy and business structure and setting our strong TOMS*2 business as a core driver. Reform of Business Structure: Telecom Carrier Business New network business in the IoT/5G era Construction Transportation Police Software & services Applications & services Value Proposition Network infrastructures Current main business area Business applications/ Data analysis Added-value services Optimized network Wi-Fi LPWA LTE 5G Telecom Carrier Enterprise Customer Segment Public Regarding the production system, we will standardize production processes and systems for all factories worldwide and reorganize the global value chain to achieve further efficiency gains and downsize back-office personnel. *1 With an organization change on April 1, 2018, the business for international customers was transferred to the Global business and business for customers in Japan was renamed the Network Services business. *2 TOMS: Telecom Operations and Management Solutions 07 NEC Corporation Integrated Report 2018Overview of the Mid-term Management Plan 2020 2 Achievement of Growth To achieve growth, NEC will focus on two areas based on its strengths in development of platforms that enable people to live abundantly in artificial intelligence (AI), biometrics, security, and network services. and outside of Japan, including public safety, digital government, The first area is NEC Safer Cities. Here, we will expand the and smart transportation. Achievement of Growth: NEC Safer Cities Realizing NEC Safer Cities that utilize biometrics and AI technologies The second is NEC Value Chain Innovation. In this area, we will work Meanwhile, in our global domain, we plan to grow revenues on initiatives for the formation of sustainable smart supply chains. We mainly in the safety business, expanding the business domain from will promote initiatives for realizing food supply and demand areas such as criminal investigation and immigration control to optimization, cashless transactions, non-stop factories and plants, as include administrative platforms and citizen services, among others. well as the provision of technologies such as AI, IoT, and networks. To accelerate growth in the global domain, we acquired U.K. company By focusing on these two areas, NEC aims to achieve revenues of Northgate Public Services Limited in January 2018 and we will ¥3,000 billion in fiscal 2021. Looking at revenues in Japan and actively continue to pursue M&As in this vein. internationally, we expect most of the increase from fiscal 2018 to To achieve rapid growth, NEC shifted to a dedicated operating fiscal 2021 to be realized outside of Japan, with domestic revenues structure for its global business in April 2018 and appointed external remaining stable over this period. This projection is based on an personnel with abundant global business experience and expectation of growth opportunities in Japan related to performance history to take charge. Through this appointment, we infrastructure preparation for the Olympic and Paralympic Games seek to examine whether our approach to date has been on the right Tokyo 2020 and digital government, offset by an expected path, and to drive our transformation from a wider perspective, contraction of our existing businesses. giving consideration to how we might overcome the obstacles that have defied our efforts up to now. 08 NEC Corporation Integrated Report 20183 Restructuring of Execution Capabilities The final policy of the Mid-term Management Plan 2020, that automates data science processes using AI in the field of big restructuring of execution capabilities, is the most important one in data utilization, and analytic work that requires large amounts of my view. Specifically, we will seek to strengthen business time to process manually. development capabilities and build an organization with the capacity With regard to solutions development via co-creation, we will to carry out actions to completion. In strengthening our business step up our initiatives by expanding our bases for co-creation and development capabilities, we will break away from the closed trials in Japan and Singapore into other regions. In June 2018, we innovation mindset to promote solutions development via announced the establishment of NEC X, Inc. in the U.S. to serve as co-creation with our customers and business partners, aiming to an incubator for accelerating the commercialization of our core create new social value beyond existing frameworks. This approach is technologies. NEC X, Inc. aims to create an ecosystem centered on aimed at addressing NEC’s existing task of anticipating customer the advanced technologies of NEC’s talent and research needs and accelerating monetization of competitive technologies. laboratories and to accelerate new business development through In our effort to break away from the close innovation mindset, we open innovation. have already seen results from initiatives such as open research and In addition, we will strengthen our relations with governments, solution development, incubation through diverse schemes, and international institutions, and standardization bodies with a view to software product delivery services. In April 2018, we announced the creating new social value as we strive to anticipate the future needs establishment of dotData, Inc. in the U.S. to develop and sell software of society and our customers. Strengthening of business development capability Break away from closed innovation Promotion of solutions development via co-creation Creation of new social value beyond existing frameworks [ Examples of Initiatives ] Endeavor to create new business models dotDat a Automation of data analysis process Deploy people and technologies externally to create globally competitive businesses NEC X Specialize in incubation Accelerate new business development in Silicon Valley 09 NEC Corporation Integrated Report 2018Overview of the Mid-term Management Plan 2020 In order to realize an organization with the capacity to carry out human resources with diverse skills into executive and other actions to completion, we will introduce structures to allow us to positions. These measures will enhance our execution capability complete execution quickly while enabling employees to maximize while firmly establishing a culture that encourages innovative actions their capabilities, thereby enhancing NEC’s execution capability. and challenges. Specifically, we will define management’s responsibilities and To realize these initiatives, in April 2018 we launched the NEC Group authority more clearly to strengthen their commitment to results. We Culture Transformation Division, appointing a professional from will also introduce a new evaluation and compensation system for outside NEC to execute human resource system and culture reforms. rewarding those who take action and actively hire and appoint Restructuring of Execution Capabilities Organization with the capacity to carry out actions to completion Restructuring to enable employees to maximize their capabilities Define the management’s responsibilities and authorities more clearly Encourage innovative actions and challenges Accelerate diversification of the NEC Group It is important that this transformation in our corporate culture actively share my ideas about the transformation with them. I have ultimately creates an environment where NEC Group employees can therefore instituted dialogue sessions where I can personally share move into action. I believe communication is important to enable my ideas with NEC Group employees, and I will continue to hold every employee to undertake this transformation willingly, and I will these sessions going forward. Starting the Transformation Process to Achieve the Mid-term Management Plan 2020 The target operating profit ratio of 5% under the Mid-term Now is the time when NEC must make dramatic changes if it is to Management Plan 2020 is not NEC’s final goal. We consider this 5% be regarded by society as a sustainable company. We are margin to be only the starting point that will enable us to compete determined to break from our conventional ways of thinking, globally as a social value innovator. This is another reason why we discern what is really necessary, and drive a transformation that will must first complete the reform of profit structure in fiscal 2019, as it restore NEC’s strength. is the first step towards getting back on the track to growth. 10 NEC Corporation Integrated Report 2018Approach to the Creation of Value and Initiatives Priority Management Themes from an ESG Perspective Support NEC's Growth, Society's Development and Maximize Value Since its foundation, NEC has conducted business with consideration for the environment and society, aiming to achieve sustainable development for society and the NEC Group. In formulating our Mid-term Management Plan 2020, we identified “materiality” comprising of new priority management themes for sustainable management from environmental, social, and governance (ESG) perspectives in order to connect our non-financial initiatives more closely with our business strategies so that they can be translated into growth not only for NEC but for society. NEC identified candidate themes making reference to global megatrends, the sustainable development goals (SDGs), and other items that the Company is observing to achieve its goal of “Orchestrating a brighter world.” We then conducted dialogues with external experts in the fields of sustainable management, civil society, and medium- to long-term investment, to determine themes with a strong awareness of connecting them to our mid-term management plan. By working through a PDCA cycle for the mid-term management plan, we will check on the progress of our initiatives as we move forward. Priority Management Themes from an ESG Perspective—Materiality We identified nine priority management themes based on issues that have a powerful impact on both NEC and society, arranging them in three layers. 1 Sustainable Growth Enablers We will engage on these themes to minimize risks to NEC and society, and to maximize the social value that NEC generates. 2 Engines of Change We will engage in these themes as engines for maximizing economic value and social value as well as minimizing risks to NEC and society. 3 2020 Growth Focus to Create Social Value The growth areas of the Mid-term Management Plan 2020 are defined as the themes that management should place priority on from ESG perspectives. Sustainable Growth Enablers Social Issues Global megatrends, SDGs, etc. 11 Privacy policies and measures aligned with societal expectationsSecurity to maximize ICT possibilitiesGovernance and complianceEnvironmental action with a particular focus on climate changeSustainably and socially literate human resourcesNEC Corporation Integrated Report 2018 Priority Management Themes from an ESG Perspective Support NEC's Growth, Society's Development and Maximize Value Engines of Change Dialogue and co-creation with our stakeholders Innovation management with Global No. 1 / Only 1 Technology Approach to the Creation of Value and Initiatives 2020 Growth Focus to Create Social Value NEC Safer Cities NEC Value Chain Innovation Materiality Identification Process 1 Tentatively define materiality and carry out dialogues with experts NEC tentatively identified themes making reference to ISO26000, the GRI Standard, the SDGs, and others, then carried out dialogues with experts. 2 Incorporate ESG perspectives into the Mid-term Management Plan 2020 3 Set up non-financial indicators 4 Hold dialogues with experts on our materiality and indicators 5 Report materiality and indicators to the Board of Directors and define materiality NEC announced that it would establish priority management themes and KPIs from the ESG perspectives in the first half of fiscal 2019. NEC examined indicators for quantifying contributions to society as much as possible. Dialogues were held on human resource development, privacy and climate change, as well as overall materiality. The Chief Strategy Officer (CSO) in charge of corporate strategy reported to the Board of Directors. Confirm progress through the PDCA cycle of the Mid-term Management Plan For further information, please refer to Sustainability Report 2018 “Priority Management Themes from an ESG Perspective—Materiality” 12 NEC Corporation Integrated Report 2018Vision for the Company and Non-Financial Indicators For each of the following nine themes, NEC has established a vision for the Company and non-financial indicators for measuring progress. Materiality Company Vision and Initiatives Main Non-financial Indicators and Targets Sustainable Growth Enablers Governance and compliance p.39, 43 NEC trusted by society Ensure compliance Response on human rights issues and maintain and improve quality Indicator: Number of cases of involvement with serious cartels and/or bid-rigging Target for fiscal 2019: 0 (zero) Environmental action with a particular focus on climate change p.51 Contribute to worldwide reduction in greenhouse gas emissions together with the efforts our customers and society are making to address climate change Effectively reduce CO2 emissions associated with NEC’s business activities to zero by 2050 Provide products and services that address environmental issues, primarily climate change Indicator: Rate of contribution to CO2 emission reductions across the whole supply chain Target for fiscal 2021: 5 times Sustainably and socially literate human resources p.50 Deliver products and services that will be accepted by society, including our customers Develop personnel who are capable of sensing the needs of society and discovering potential issues, and of working swiftly to solve issues Foster an organizational culture that can take on a diverse range of values and continuously create social value Indicator: Rate of employees who have a strong sense that NEC is changing to create social value by accepting a diverse range of values Target for fiscal 2019: To review the questions in the opinion survey among NEC Group employees and set a specific target number for fiscal 2021 Develop and provide products and services that are responsive to differences in privacy needs between different countries and regions due to cultural perspectives and are sensitive to human rights issues, such as the challenge of discrimination that could potentially be furthered through the usage of AI Clarify position on respect for human rights such as privacy in NEC’s business activities Privacy policies and measures aligned with societal expectations p.49 Security to maximize ICT possibilities Provide an environment that allows customers and society to securely use ICT Promote efforts to minimize risks in the fields of “Information Security” and “Cyber Security” in particular Indicators: 1 To have discussions with multi-stakeholders regarding sensitive cases from human rights or privacy perspectives 2 Number of cases incorporated in areas such as R&D, product development and proposals for services, based on the “Human Rights by Design*” concept * Incorporation of the approach of respect for human rights (privacy, fairness, etc.) into each process in the value chain Target for fiscal 2019: 1 Carry out once per quarter 2 Set the specific target number for fiscal 2021 Indicators and targets: 1 Minimize the effects of major security incidents by ensuring that we enhance cyber security measures while also enhancing information security measures in order to prevent leakage of information 2 Promote products and services that incorporate security measures and case studies taken from the NEC Group’s own information security practices as a reference Information Security Report Engines of Change Dialogue and co-creation with our stakeholders Innovation management p.15 p.17 Through dialogues with stakeholders, develop insights into the issues customers and society face and their opinions regarding NEC’s activities, while developing partners with whom to engage in the co-creation of value No indicator set Even if technologies demanded keep changing as society changes, provide value through technologies as needed by society in the form of products and services No indicator set 2020 Growth Focus to Create Social Value NEC Safer Cities NEC Value Chain Innovation As populations rapidly concentrate in urban areas, new value is created through economic growth and the diversification of life and culture; at the same time, cities also face a wide range of social challenges, such as increasing levels of crime and terrorism. NEC will contribute to realizing safe, secure, efficient and fair cities where individuals can exhibit their potential to the full and live better lives, by utilizing cutting-edge technology such as biometric authentication, AI, and the IoT. For example, by having a wider range of our customers use NEC products and services such as biometric authentication solutions and AI-based crime/disaster-prevention systems and providing these to a larger number of organizations, NEC will ensure that the social value we provide will be amplified in terms of both quantity and quality. For fiscal 2021, NEC will focus on expansion of our international sales and aims to increase our international sales to ¥200 billion. Our society faces various kinds of social issues, such as food waste, labor shortages, changes in consumption patterns, and diversifying threats. NEC will develop cutting- edge technologies and promote co-creation with customers in order to connect people, goods, and processes, reaching across the boundaries between enterprises and industries to create new value. In doing so, NEC will support a more sustainable planet, sustainable growth for companies, a society where people can live in abundance, and a brighter world for the future. For example, NEC aims to amplify the social value we provide by developing and supplying larger numbers of services, such as promoting NEC Value Chain Innovation, which aims to optimize the demand-and-supply balance. For fiscal 2021, we have set out a goal of expanding our domestic sales to ¥85 billion in growth fields including NEC Value Chain Innovation. 13 NEC Corporation Integrated Report 2018Approach to the Creation of Value and Initiatives NEC Initiatives for Contributing to the Achievement of the SDGs Since information and communications technology (ICT) has the potential for responding to a variety of issues, we believe that we can contribute in various ways to all the goals outlined in the SDGs by engaging in dialogues and co-creation with customers and stakeholders. For example, looking only at the targets among the areas defined as growth fields in the Mid-term Management Plan 2020, “NEC Safer Cities” and “NEC Value Chain Innovation,” there are various SDGs initiatives to which NEC wishes to contribute on its own, namely No. 3, No. 7, No. 8, No. 9, No. 11, No. 12, No. 16 and No. 17. There are a large number of targets that could potentially be set out as goals. Meanwhile, it has been pointed out by some external experts that narrowing down the range of SDGs to pursue brings the risk of narrowing the scope of our business expansion and the possible range of social value that could be delivered by our products and services as well. To demonstrate NEC’s approach of contributing to the SDGs on a wider basis, we have categorized the targets of materiality into the two following areas: “Targets to which NEC wishes to contribute on its own initiative and/or positively,” and “Targets to which NEC is able to contribute or wishes to contribute in the future,” for each of the SDGs. Going forward, we will promote educational activities on the SDGs within the Company to ensure that the SDGs are used proactively for expanding the fields where NEC can contribute and as indicators for measuring the social value that is generated by NEC’s business. Fields that NEC Contributes to SDGs Targets to which NEC wishes to contribute on its own initiative and/or positively Targets to which NEC is able to contribute or wishes to contribute in the future 1.4 3.8 4.a 6.4 2.1 2.4 2.a 2.c 3.6 3.8 3.6 3.8 3.b 4.3 4.4 4.a 4.3 4.4 4.5 4.a 5.2 5.1 5.5 5.2 1.5 2.4 3.d 6.4 8.3 8.1 8.2 8.8 8.1 8.2 8.3 8.8 8.1 8.2 8.3 8.8 8.3 8.5 8.7 9.3 9.a 9.1 9.3 9.4 9.1 9.4 9.1 9.3 9.4 9.5 9.a 9.2 10.7 10.5 10.2 10.3 8.7 9.5 9.5 9.4 11.2 11.3 11.7 11.b 11.2 11.2 11.3 11.b 11.2 11.3 11.b 11.1 11.7 11.5 11.b 7.2 7.3 7.3 7.2 7.3 7.a 7.b NEC Safer Cities NEC Value Chain Innovation Dialog and co-creation with our stakeholders Innovation management Sustainably and socially literate human resources Privacy policies and measures aligned with societal expectations Security to maximize ICT possibilities Environmental action with a particular focus on climate change Governance and compliance 14.1 16.6 16.a 17.16 12.2 12.3 13.3 12.8 13.3 12.2 12.3 12.5 13.1 15.2 17.16 17.16 17.17 17.6 16.6 16.7 16.a 16.1 16.2 16.6 16.9 16.a 13.3 16.5 17.16 16.1 16.9 16.10 17.16 16.1 16.3 17.16 17.16 17.16 16.1 16.2 16.5 16.6 13.1 13.3 14.2 14.5 15.1 15.4 15.5 5.1 5.2 5.5 8.5 8.7 8.8 10.2 10.3 12.7 Figures in the table are the target numbers of the SDGs. Further information can be found on the United Nations website. https://www.un.org/sustainabledevelopment/ 14 NEC Corporation Integrated Report 2018 Dialogue and Co-Creation with Our Stakeholders The meaning of value is constantly changing for our customers and society. To provide products and services that deliver real value, NEC must incorporate processes for dialogue and co-creation with stakeholders into its corporate activities. Through dialogue with our stakeholders, we will develop insights into the issues our customers and society face and their opinions regarding NEC’s activities, while developing partners with whom to engage in co-creation. By connecting these activities to value, we aim to realize NEC’s goal of “Orchestrating a brighter world.” Participating Actively in International Community Networks and Aiming to Solve Social Issues NEC introduced its safety solutions, including facial recognition demonstration, at the World Economic Forum Annual Meeting in Davos, Switzerland in January 2018, as well as at various meetings, individual interviews, and receptions. We conducted lively exchanges of opinions with key members of various national governments, executives of international institutions, and CEOs of global corporations on themes such as contributing to the achievement of the SDGs and public safety. NEC will leverage the global connections it has created at Davos in order to deepen its ongoing dialogue with various stakeholders going forward. Representative Director and Chairman of the Board Nobuhiro Endo at the World Economic Forum Social values achieved by co-creating with customers Safety Security Awareness of social issues Amplifying Social Value through Open Innovation In April 2018, NEC announced the establishment of dotData, Inc., a new venture company in Silicon Valley for developing and selling software that automates data science processes using artificial intelligence (AI). dotData, Inc. will accelerate and democratize data science using Big Data in enterprise organizations. The new company was founded by a leader in the development of cutting-edge core technologies as a strategic carve-out scheme by NEC to create globally competitive products. The start-up will reinforce business development while acquiring external capital. (Photograph from left) Senior Vice President, Osamu Fujikawa CEO & Founder of dotData, Dr. Ryohei Fujimaki Executive Director, Hideto Mori 15 NEC Corporation Integrated Report 2018 Dialogue and Co-Creation with Our Stakeholders Practicing Responsible Procurement with Suppliers NEC has formulated the NEC Group Procurement Policy based on the international ISO 26000 social responsibility guidance standard and ISO 20400 sustainable procurement guidance standard. It works together with its suppliers to conduct procurement with an awareness of six key supply-chain risk factors (human rights, labor and occupational safety, fair trade, the environment, information security, and product quality and security). For example, information security is one of NEC’s priority management themes from an ESG perspective and we have taken steps to thoroughly strengthen management in this regard, including at our suppliers. In fiscal 2018, we held seminars for suppliers’ management to explain our measures at 13 locations in Japan, with around 1,500 companies participating. In addition, we conducted documentation inspections to confirm the status of suppliers’ initiatives among other efforts aimed at working with suppliers to strengthen information security. Social values achieved by co-creating with customers Efficiency Equality Value creation by leveraging ICT Collaboration for value creation Pro Bono Initiatives to Contribute to Regional Revitalization NEC promotes pro bono activities in which employees use their professional skills to help solve social issues as part of the NEC Group’s social contribution initiative, the “NEC Make-a-Difference Drive.” In fiscal 2018, we assisted i local, Inc., (Sanriku Sekken Koubo KURIYA), a local soap manufacturer and seller in Onagawa town, Miyagi Prefecture by analyzing its operational processes and then introducing a new operation system. Meeting in Onagawa town NEC also has been engaged in Tohoku reconstruction support activities through the NEC “TOMONI” Project since 2011. The project supports employees in volunteer activities in the areas affected by the Great East Japan Earthquake. In 2015, NEC concluded a reconstruction cooperation agreement with the town of Minamisanriku and is conducting various support activities such as a monthly “Fukkou Ichi” market to assist the recovery. Dialogue with Shareholders and Investors Is Conducive to Corporate Value Enhancement NEC actively engages in investor relations (IR) activities, including meetings with shareholders in Japan and internationally, quarterly financial result briefings and business briefings conducted mainly by its CEO, CFO and Investor Relations (IR) Office, a department within the Corporate Strategy Division. Meanwhile, IR staff proactively relay shareholder and investor feedback to management, and periodically report to the Board of Directors. In fiscal 2018, NEC strove to increase opportunities for dialogue in conjunction with the announcement of the Mid-term Management Plan 2020 and continued to hold ESG meetings with institutional investors specializing in the environmental field. Small meeting with the President of NEC 16 NEC Corporation Integrated Report 2018 Innovation Management Over the years since NEC was founded, we have cultivated our technologies based on NEC’s motto of “Better Products, Better Services.” In a society that is constantly changing, the technologies in demand keep changing as well; by implementing appropriate innovation management in response to the changes of the times, we can continue to provide the technologies that society demands as products and services and contribute to social value creation. NEC continuously allocates approximately 4% of its revenue to R&D, concentrating its investment in No.1/Only 1 core technologies that are needed for social value creation. NEC will engage proactively in open innovation globally to accelerate the monetization of competitive technologies. R&D Strategy At NEC, the Chief Technology Officer (CTO) is responsible for overall technology development, optimizing development investment company-wide, and drawing up an open innovation strategy. R&D is a source of technological development. NEC’s basic approach to R&D is to deliver value to society as quickly as possible by identifying the best solutions we should create for the social issues presented in the SDGs and other guidelines, then efficiently and rapidly aligning the necessary technology assets to realize them. These technology assets include NEC’s No.1/Only 1 core technologies that have been refined to a high level based on technology trends, as well as technologies produced through open innovation. “Bio-IDiom” and “NEC the WISE” Support Growth Areas in the Mid-term Management Plan 2020 “Bio-IDiom” is our comprehensive brand for biometric authentication products, launched in April 2018. It covers six biometric authentication technologies for face, iris, fingerprint and palmprint, finger vein, voice, and ear acoustic. One of NEC’s strengths is in multimodal authentication, which combines multiple biometric authentication technologies to achieve higher accuracy. By combining these technologies with the “crowd behavior analysis” of the “NEC the WISE” AI technology group, and others, we can create completely new value. NEC will continue to invest intensively in world-leading biometric authentication and AI technologies. Prescription Planning & optimization Autonomous and Adaptive Control Only 1 Only 1 Predictive Robust Optimization Framework Visualization Analysis Digitalization, improvement of data quality Recognition & identification using the five senses Only 1 Only 1 Only 1 Only 1 Image Clarification Learning Based Super-Resolution Multi-Modal Image Fusion Micro-Size ID as a Dot Discovery of Rare Critical Events No.1*1 No.1*2 No.1*3 Only 1 Only 1 Only 1 Face Recognition No.1*4 Only 1 Only 1 Only 1 No.1*5 Fingerprint Recognition Iris Recognition Object Fingerprint Recognition Ear Acoustics Authentication Optical Vibration Sensing Speech, Emotion Recognition Understanding of meaning & intent Textual Entailment Recognition Crowd Behavior Analysis Profiling Across Spatio-Temporal Data Customer Profile Estimation Acoustic Situation Awareness Analysis with interpretation Heterogeneous Mixture Learning Invariant Analysis Log Pattern Analysis Automated Security Intelligence Predictive Analytics Automation Technology Only 1 Only 1 Only 1 Only 1 Only 1 High-precision analysis RAPID Machine Learning Immune Function Prediction *1 Ranked 1st four consecutive times in task assessment sponsored by the U.S. National Institute of Standards and Technology (NIST) *2 Ranked 1st eight times in task assessment sponsored by NIST *3 Ranked 1st in task assessment sponsored by NIST (2018) *4 Ranked 1st in task assessment sponsored by NIST (2012) *5 Ranked 1st in task assessment sponsored by IEEE AASP challenge DCASE2016 17 NEC Corporation Integrated Report 2018Innovation Management Major Research Achievements Core Technology Achievement Invariant Analysis Provided invariant analysis technology for use in satellite and aerospace industries Client/Fields to develop Lockheed Martin Corporation Autonomous Learning System-based Anomaly Detection Launched a security anomaly detection service capable of unknown cyber-attack response System operations, etc. Face Recognition Provided face recognition system for improving services for VIP customers OCBC Bank, Singapore Face Recognition Launched access control solution based on using walk-through face recognition Heterogeneous Mixture Learning Forged business collaboration with Japan Weather Association to optimize supply and demand across entire value chain Commercial facilities, event management, etc. Food manufacture, food wholesaling, logistics, retail, etc. Predictive Analysis Automation Established dotData, Inc. in the U.S. to automate data analysis processes Data analytics, etc. Log Pattern Analysis Commercialized product that performs diverse log analysis, anomaly detection, and causal analysis System operations, etc. Machine Learning Data Processing for Vector Computer Accelerated the execution of statistical AI learning process by more than 50 times compared to conventional technology using data processing for vector computers Data analytics High-speed Blockchain Established the world’s fastest blockchain technology, capable of over 100,000 transactions per second Financial and various other transactions and information sharing Intellectual Property Strategy At NEC, because intellectual property is regarded as an essential business resource supporting the group’s competitiveness and stability, as well as for contributing to co-creation with our customers, we strive to strengthen and protect not only our patents and know-how but also the designs and trademarks that support our global brand. To create and develop social value, we are not only building IP-based barriers to entry and securing competitive advantage, but also building and using our IP portfolio to strengthen and protect collaborations with customers and partners. NEC owns some 51,000 patents worldwide (including approximately 22,000 Japanese patents) as of March 2018. For further information, please refer to Sustainability Report 2018 “Innovation Management” 18 NEC Corporation Integrated Report 2018Message from the CFO Senior Executive Vice President, CFO (Chief Financial Officer) and Member of the Board (Representative Director) Takayuki Morita Performance in Fiscal 2018 The NEC Group recorded consolidated revenue of ¥2,844.4 billion for fiscal 2018, an increase of ¥179.4 billion (6.7%) year on year. This increase was mainly due to increased sales in the Public business. Operating profit improved by ¥22.0 billion year on year to ¥63.9 billion, mainly due to the increase in consolidated revenue. Net profit attributable to owners of the parent was ¥45.9 billion, an increase of ¥18.6 billion year on year. As a result, return on equity (ROE) was 5.3%, improving by 1.9 percentage points from the previous fiscal year. Although net profit attributable to owners of the parent was higher than planned, in consideration of capital requirements for achieving the Mid-term Management Plan 2020, NEC declared an annual dividend of ¥60 per share of common stock as announced at the beginning of the fiscal year. * On October 1, 2017 the Company changed the number of shares per share unit from 1,000 shares to 100 shares and carried out a share consolidation of the Company’s shares with a ratio of 10 shares to 1 share. (Billion ¥) Revenue International revenue International revenue ratio Operating profit Operating profit ratio Net profit attributable to owners of the parent Return on equity (ROE) (Billion ¥) Total assets Current assets Non-current assets Total liabilities Interest-bearing debt D/E ratio Net D/E ratio Total equity Equity attributable to owners of the parent Equity attributable to owners of the parent ratio 19 FY2017/3 Results 2,665.0 571.0 21.4% 41.8 1.6% 27.3 3.4% FY2017/3 2,684.0 1,508.7 1,175.3 1,667.9 466.9 0.55 0.27 1,016.1 854.3 31.8% FY2018/3 Initial Forecasts 2,800.0 50.0 1.8% 30.0 Results 2,844.4 740.2 26.0% 63.9 2.2% 45.9 5.3% FY2018/3 2,821.4 1,640.3 1,181.0 1,767.1 520.7 0.59 0.20 1,054.3 880.8 31.2% NEC Corporation Integrated Report 2018 Message from the CFO Plan for Fiscal 2019 We regard fiscal 2019 as the first step on our envisaged growth trajectory for fiscal 2021 and beyond. We will execute structural reforms and consolidate our base for realizing transformation. We are planning to achieve consolidated revenue of ¥2,830.0 billion, approximately level year on year, as expected declines in the System Platform Business and Network Services Business are offset by an increase in the Global Business. We anticipate consolidated operating profit of ¥50.0 billion after factoring in restructuring costs of ¥40.0 billion, growth investments, and others. Our planned net profit attributable to owners of the parent is ¥25.0 billion. For annual dividends, we regret to announce a decrease in the dividend to ¥40 per share of common stock due to a projected year-on-year decline in net profit. Net Debt-Equity Ratio Equity attributable to owners of the parent, Ratio of equity attributable to owners of the parent Operating Cash Flows, Investment Cash Flows, Free Cash Flows (times) (Billion ¥) (Billion ¥) 0.53 0.41 0.36 0.27 0.20 823.7 769.8 854.3 880.8 31.4% 30.4% 31.8% 31.2% 695.9 27.8% 94.1 87.9 97.8 92.5 55.2 40.4 65.6 –38.9 –47.5 –32.2 130.0 99.0 6.4 115.8 –14.2 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 J-GAAP IFRS J-GAAP IFRS J-GAAP IFRS (At year-end) (At year-end) Equity attributable to owners of the parent Ratio of equity attributable to owners of the parent Operating Cash Flows Free Cash Flows (Years Ended March 31) Investment Cash Flows Strengthening Earning Capability to Realize the Mid-term Management Plan 2020 Over the past few years, NEC has been actively working to strengthen its financial structure, such as its cash conversion cycle. As a result of these efforts, we have succeeded in building a more stable financial base, as shown by marked improvements in indicators such as our free cash flow and net D/E ratio. We will maintain this financial base while allocating our current cash reserves to strengthening our earning capability in preparation for realizing the Mid-term Management Plan 2020 and growth beyond that. Specifically, we will improve our profit structure even further by executing structural reforms. In addition, we will execute growth investments such as M&As aimed at developing new businesses and increasing operating cash flow. With regard to M&As, we will maintain the investment budget of ¥200.0 billion set under Mid-term Management Plan 2018. NEC acquired Northgate Public Services Limited in January 2018, and we will continue to examine further M&As to follow this. We will endeavor to execute deals that will increase our earnings, as well as enabling us to leverage NEC’s existing strengths, in areas such as biometrics and AI. For investments in excess of our total ¥200.0 billion budget, we intend to give careful consideration to our financial structure based on our cash flow status before executing them. As CFO, I will work to lift our earning capability and increase our corporate value over the long term. 20 NEC Corporation Integrated Report 2018 Performance Highlights NEC Corporation and Consolidated Subsidiaries For the fiscal years ended or year-end as of March 31 Key Management Measures 1 2 3 4 3,583.1 Revenue 3,115.4 3,036.8 3,071.6 3,043.1 50.9 57.8 73.7 Operating profit 114.6 106.2 2010 2011 2012 2013 2014 2015 2016 2016 ¥3,583,148 712,886 19.9 50,905 11,428 134,816 (41,241) 93,575 ¥3,115,424 479,349 15.4 57,820 ¥3,036,836 481,492 15.9 73,742 JGAAP ¥3,071,609 483,118 15.7 114,647 ¥3,043,114 569,172 18.7 106,193 (12,518) (110,267) 30,434 33,660 (146,244) (112,584) 83,857 (49,706) 34,151 143,748 (101,742) 42,006 33,742 94,124 (38,893) 55,231 275,970 176,514 161,968 151,676 142,723 134,205 123,995 123,602 109,319 108,093 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International revenue ratio (%) . . . . . . . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net profit (loss) attributable to owners of the parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from operating activities . . . . . . . . . . . . . . . . . . Cash flows from investing activities . . . . . . . . . . . . . . . . . . . Free cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R&D expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditures (property, plant and equipment) . . . . . . . . . . . . . . . . . . . . 83,098 Depreciation (property, plant and equipment) . . . . . . . . . . . . . . . . . . . . 111,167 Per share data (in yen): Net profit (loss) attributable to owners of the parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owner’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on equity (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owner’s equity ratio (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt-equity ratio (times) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of consolidated subsidiaries . . . . . . . . . . . . . . . . . Number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04 4.00 2,937,644 790,904 1.6 26.9 729,548 0.92 310 142,358 CO2 emissions reduction by providing IT solutions (thousand tons) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900 Improvement in energy efficiency of products (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 21 52,850 62,097 41,980 53,306 45,614 51,167 98,708 45,167 (4.82) 0.00 2,628,931 757,054 – 28.8 675,798 0.89 283 115,840 2,120 53 (42.44) 0.00 2,557,570 656,956 – 25.7 692,734 1.05 265 109,102 2,310 66 11.71 4.00 2,580,966 710,666 4.5 27.5 603,451 0.85 270 102,375 2,980 64 12.99 4.00 2,505,329 695,949 4.8 27.8 575,151 0.83 258 100,914 2,290 75 ¥2,935,517 ¥2,821,181 ¥2,824,833 ¥2,665,035 ¥2,844,447 586,844 20.0 128,084 57,302 87,917 (47,510) 40,407 37,425 48,518 22.05 4.00 7.5 31.4 0.63 232 2,540 91 603,169 21.4 107,306 68,749 97,829 (32,202) 65,627 36,347 44,879 26.45 6.00 8.5 31.8 0.61 217 2,620 97 603,135 21.4 91,418 75,923 97,829 (32,202) 65,627 36,347 50,493 29.22 6.00 9.5 30.4 0.62 217 2,620 97 2,620,652 823,650 2,493,441 792,092 2,528,904 769,827 2,683,996 854,264 2,821,351 880,833 10.51 6.00 176.54* 60.00* 520,778 480,987 479,523 466,946 520,743 98,882 98,726 98,726 107,729 109,390 2017 IFRS 570,967 21.4 41,838 27,310 92,525 6,425 98,950 31,472 49,853 3.4 31.8 0.55 238 2,630 17 Millions of yen 2018 740,179 26.0 63,850 45,870 129,981 (14,231) 115,750 45,391 63,831 5.3 31.2 0.59 303 4,220 35 NEC Corporation Integrated Report 20185 6 Performance Highlights Key Management Measures l Measures to optimize business portfolio l Measures to grow business and strengthen financial foundation (Billions of yen) Fiscal year ended March 31, 2011 2,935.5 128.1 2,821.2 2,824.8 2,665.0 2,844.4 1 Made NEC Electronics Corporation, a semiconductor business currently Renesas Electronics Corporation, into an equity-method affiliate Fiscal year ended March 31, 2012 2 Made the consumer PC business into an equity-method affiliate Fiscal year ended March 31, 2013 63.9 Acquired the business support system business of U.S.-based Convergys Corporation 41.8 2017 IFRS ¥2,665,035 570,967 21.4 41,838 27,310 92,525 6,425 98,950 Millions of yen 2018 ¥2,844,447 740,179 26.0 63,850 45,870 129,981 (14,231) 115,750 Acquired the IT service business of Australia-based CSG Limited Fiscal year ended March 31, 2014 3 Divested all of NEC’s stakes in NEC Mobiling, Ltd., currently MX Mobiling Co., Ltd., a mobile phone sales business 4 Stopped the development of new smartphones Fiscal year ended March 31, 2015 5 Divested all of NEC’s stakes in NEC BIGLOBE, Ltd., currently BIGLOBE Inc., an internet service provider in March, 2014 Established NEC Management Partner, Ltd. in a reorganization of four back office operation subsidiaries Completed acquisition of an energy storage system business for electric power companies and established NEC Energy Solutions, Inc. in the U.S. 107.3 91.4 2010 2011 2012 2013 2014 2015 2016 2016 JGAAP ¥2,935,517 586,844 20.0 128,084 ¥2,821,181 603,169 21.4 107,306 ¥2,824,833 603,135 21.4 91,418 57,302 87,917 (47,510) 40,407 68,749 97,829 (32,202) 65,627 75,923 97,829 (32,202) 65,627 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,583,148 ¥3,115,424 ¥3,036,836 ¥3,071,609 ¥3,043,114 owners of the parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,428 (12,518) (110,267) 30,434 International revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International revenue ratio (%) . . . . . . . . . . . . . . . . . . . . . . . Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 712,886 19.9 50,905 479,349 15.4 57,820 Net profit (loss) attributable to Cash flows from operating activities . . . . . . . . . . . . . . . . . . Cash flows from investing activities . . . . . . . . . . . . . . . . . . . Free cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,816 (41,241) 93,575 33,660 (146,244) (112,584) Capital expenditures Depreciation (property, plant and equipment) . . . . . . . . . . . . . . . . . . . . 83,098 (property, plant and equipment) . . . . . . . . . . . . . . . . . . . . 111,167 Per share data (in yen): Net profit (loss) attributable to owners of the parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,937,644 Owner’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 790,904 Return on equity (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owner’s equity ratio (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt-equity ratio (times) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of consolidated subsidiaries . . . . . . . . . . . . . . . . . 5.04 4.00 1.6 26.9 0.92 310 CO2 emissions reduction by providing IT solutions (thousand tons) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900 Improvement in energy efficiency of products (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 52,850 62,097 (4.82) 0.00 2,628,931 757,054 – 28.8 0.89 283 2,120 53 481,492 15.9 73,742 83,857 (49,706) 34,151 41,980 53,306 (42.44) 0.00 2,557,570 656,956 – 25.7 1.05 265 2,310 66 483,118 15.7 114,647 143,748 (101,742) 42,006 45,614 51,167 11.71 4.00 4.5 27.5 0.85 270 2,980 64 569,172 18.7 106,193 33,742 94,124 (38,893) 55,231 98,708 45,167 12.99 4.00 4.8 27.8 0.83 258 2,290 75 Number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,358 115,840 109,102 102,375 100,914 Interest-bearing debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 729,548 675,798 692,734 603,451 575,151 2,580,966 710,666 2,505,329 695,949 R&D expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,970 176,514 161,968 151,676 142,723 134,205 123,995 123,602 109,319 108,093 Fiscal year ended March 31, 2016 37,425 48,518 36,347 44,879 36,347 50,493 31,472 49,853 45,391 63,831 22.05 4.00 2,620,652 823,650 7.5 31.4 520,778 0.63 232 98,882 2,540 91 26.45 6.00 2,493,441 792,092 8.5 31.8 480,987 0.61 217 98,726 2,620 97 29.22 6.00 2,528,904 769,827 9.5 30.4 479,523 0.62 217 98,726 2,620 97 10.51 6.00 2,683,996 854,264 3.4 31.8 466,946 0.55 238 107,729 2,630 17 176.54* 60.00* 2,821,351 880,833 5.3 31.2 520,743 0.59 303 109,390 4,220 35 Transferred administrative staff functions and shared IT assets from NEC to NEC Management Partner, Ltd. (Business Process Optimization Project) Fiscal year ended March 31, 2017 6 Consolidated Japan Aviation Electronics Industry, Limited Fiscal year ended March 31, 2018 (The fiscal year under review) Acquired U.K. company Northgate Public Services Limited Fiscal year ending March 31, 2019 Established dotData, Inc. in the U.S. Established NEC X, Inc. in the U.S. Notes: 1. Net profit (loss) attributable to owners of the parent per share is calculated based on the weighted-average number of shares outstanding during each period. 2. Owner’s equity = equity attributable to owners of the parent 3. The debt-equity ratio is calculated by dividing interest-bearing debt by owner’s equity. 4. Improvement in energy efficiency of products is based on a comparison with the fiscal year ended March 31, 2006. * The amounts reflect a share consolidation (with a ratio of 10 shares to 1 share) that took effect on October 1, 2017 22 NEC Corporation Integrated Report 2018 At a Glance NEC Corporation and Consolidated Subsidiaries Revenue, operating profit (loss), and composition of revenue are financial results for the fiscal year ended March 31, 2018 (IFRS). Revenue Composition of revenue 2,844.4 billion yen Public Business Enterprise Business Network Services Business System Platform Business Global Business Others 33% 14% 13% 19% 16% 5% Public Business Enterprise Business Revenue Operating profit 933.1 billion yen 53.2 billion yen Major Products and Services Systems Integration (Systems Implementation, Consulting) Maintenance and Support Outsourcing/Cloud Services System Equipment Public Solutions Public Infrastructure Examples of Major Customers and Main Solutions Public: Firefighting Command, Firefighting Emergency Radio Systems, Disaster Prevention, Traffic Control, Railroad Communication, Local Government Healthcare: Electric Medical Record, Regional Healthcare Information Network Regional industries: Backbone service Examples of Major Customers and Main Solutions Government: Social Security and Tax, Fingerprint Identification, Air Traffic Control, Satellite Communications/Earth Observation, Outdoor Communication, School/ Education, Postal Tracking, Infrastructure Surveillance/Energy Management Media: TV Program Production/ News Production/Transmission, Digital TV Transmitters Revenue 408.7 billion yen Operating profit 35.7 billion yen Major Products and Services Systems Integration (Systems Implementation, Consulting) Maintenance and Support Outsourcing / Cloud Services Examples of Major Customers and Main Solutions Manufacturing: Global SCM, Product Lifecycle Management, Production Management, Sales Management Retail and Services: Retail Systems for Stores and Head Offices, Logistics Management Finance: Banking, Business Branch Systems, Insurance and Securities Infrastructure, Insurance and Securities Channel Major Consolidated Subsidiaries Major Consolidated Subsidiaries Major Consolidated Subsidiaries NEC Nexsolutions, Ltd. NEC Facilities, Ltd. ABeam Consulting Ltd. NEC Network and Sensor Systems, Ltd. NEC Space Technologies, Ltd. Nippon Avionics Co., Ltd. Japan Aviation Electronics Industry, Limited 23 NEC Corporation Integrated Report 2018 At a Glance (Note) Figures for revenue, operating profit (loss), and composition of revenue for the fiscal year ended March 31, 2018 are restated to conform with the new segments, which have not been audited by the accounting auditors. Operating profit Net profit attributable to owners of the parent Free cash flows 63.9 billion yen 45.9 billion yen 115.8 billion yen Network Services Business System Platform Business Global Business Revenue Revenue Revenue 377.6 billion yen 531.7 billion yen 453.7 billion yen Operating profit Operating profit Operating loss 17.3 billion yen 30.0 billion yen –28.0 billion yen Major Products and Services Major Products and Services Major Products and Services Network Infrastructure Core Network, Mobile Phone Base Stations, Optical Transmission Systems, Routers/Switches Systems integration (systems implementation, consulting) Services & Management OSS*1/BSS*2 , Services/Solutions *1 OSS: Operation Support System *2 BSS : Business Support System Hardware Servers, Mainframes, Supercomputers, Storage, Business PCs, POS, ATMs, Control Equipment, Wireless LAN Routers Software Integrated Operation Management, Application Servers, Security and Database Software Enterprise Network Solutions IP Telephony Systems, WAN/Wireless Access Equipment, LAN Products Services Maintenance Services Safety Biometric Solutions (such as Face Recognition, Fingerprint Identification), Surveillance Software Services for Service Providers (OSS/BSS, SDN*3 / NFV*4) Network Infrastructure Submarine Systems (Submarine Cable Systems, Ocean Observation Systems), Mobile Backhaul System Devices Displays, Projectors Energy Storage Solutions *3 SDN: Software-Defined Networking *4 NFV : Network Functions Virtualization Major Consolidated Subsidiaries NEC Networks & System Integration Corporation Major Consolidated Subsidiaries Major Consolidated Subsidiaries NEC Platforms, Ltd. NEC Fielding, Ltd. NEC Embedded Products, Ltd. NEC Display Solutions, Ltd. OCC Corporation NEC Energy Solutions, Inc. Netcracker Technology Corporation Northgate Public Services Limited 24 NEC Corporation Integrated Report 2018Review of Operations Public Business In the Public Business, we provide safe, secure and efficient social solutions for governments, governmental agencies, local governments, public institutions and other organizations by combining our distinctive technology assets, including network, sensor and analysis technologies, with a broad expertise in systems integration. Revenue (Billion ¥) 760.4 933.1 945.0 Operating Profit, Operating Profit Ratio (Billion ¥) Operating Profit Operating Profit Ratio 61.0 2018 result 53.2 5.7% 6.5% Operating profit improved by ¥23.0 billion year on year to ¥53.2 billion, mainly due to increased revenue. 30.2 4.0% 2018 result Revenue was ¥933.1 billion, an increase of ¥172.7 billion (22.7%) year on year, mainly due to Japan Aviation Electronics Industry, Limited becoming a consolidated subsidiary, despite decreased sales from firefighting and disaster prevention systems. 2017 2018 2019 (Forecasts) 2017 2018 2019 (Forecasts) (Fiscal year ended on March 31) Public Business Comprised of Two Areas Public business consists of “Public Solutions,” which is responsible for business involving regional sales functions and local governments in Japan, the “Public Infrastructure,” which takes charge of business involving government organizations and enterprises supporting national and social infrastructure. Based on the new organization established in April 2017, the “Public Solutions” considers both the local needs and the required policy seeds. In this area NEC works together with regional stakeholders, such as local governments, universities, and businesses, to accelerate the development of new regional businesses, such as smart cities and utilization of the Social Security and Tax Number System (“My Number”), and health care. Based on our many years of achievements gained in supporting government agencies, the “Public Infrastructure” further improves the social infrastructure we provide to support a safe and comfortable lifestyle for everyone. 25 NEC Corporation Integrated Report 2018Review of Operations Public Business Public Business — SWOT Analysis STRENGTHS WEAKNESSES Strong track record gaining high credibility, advanced technologies in the While there is a high proportion of large-scale projects in Japan, there are process, and high market share in Japan in delivering products and fewer projects which provide regular income streams, such as in services, systems that support social infrastructure – such as systems for leading to exposure to risk from demand volatility. governmental organizations, broadcasters, power companies, as well as in cyber- security – Additional costs result from the complexity of project management for large-scale projects and the issues inherent in system development Ability to propose concepts for customers’ future based on “domain using cutting-edge technology. These costs can have an impact on knowledge,” specifically operational expertise and deep understanding of business results. database construction acquired through many years of working with customers. Provision of vertically integrated solutions with the “NEC the WISE” lineup of AI technologies, “Bio-IDiom” biometrics, IT and networks including security, and full-layer ICT including sensing technology. OPPORTUNITIES THREATS The Japanese government’s “Digital Government action plan” will drive Competition for orders is intensifying, increasing the number of projects the creation of a common platform for government, and wider use of the with difficult requirements in cost and delivery. As a result, constant My Number System is being examined. improvement of quality and cost competitiveness is necessary. Expectations for safe, secure, efficient administration of the Olympic and We need a new business structure that can cope with changes in the Paralympic Games Tokyo 2020 and further investment to respond to market environment, such as a shift in the industry itself with the trend increasing number of tourists visiting Japan. towards broadcasting via IP and transformation of the viewer rating and advertising model. Cyber-attacks pose a growing threat around the world, gaining attention and increasing demand for reinforcement of systems and monitoring services for cyber security. We expect increased investment toward utilization of ICT across a variety of domains, such as health care and education. 26 NEC Corporation Integrated Report 2018Public Solutions Business Japan is facing social issues arising from declining birthrates and aging population, increasing social security costs, a declining work force, and reduced spending and economic power. NEC’s job is to grasp these issues and address them firmly and create sustainable social value. Using our accumulated experience, the latest AI and biometrics technologies, and co-creation, we will tackle these issues as a leader in providing value across industry boundaries. Executive Vice President Chikara Nakamata Expanding the Business Domain to Solve Social Issues Initiatives in the Medium- to Long-Term In the environment surrounding the Public Solutions Business, the market in Japan continues to be brisk, with business model changes driven, in particular, by AI and IoT developing on a scale that far exceeds the traditional scope of ICT vendors. Meanwhile, the traditional ICT market is contracting, and we need to expand its opportunities in business domains for solving social issues. In this environment, the Japanese government’s “Digital Government action plan” is promoting a review of government which itself is predicated on digital technology and with a focus on increasing convenience for citizens and business operators. In the government sector and various areas where the government interacts with the private sector, NEC will help to realize “Digital Government action plan” by working to create highly convenient services from a user perspective by leveraging the My Number System and biometrics. In the area of health care, NEC will contribute to dealing with labor shortages and managing social security costs, for example by developing an endoscopy diagnosis support system that uses AI-driven image analysis technology and an electronic medical record system intended for use with medical data. In this way, we will help to realize a healthy, long-lived society where individually tailored, high-quality healthcare and medical services can be provided to people easily. In the lead up to the Olympic and Paralympic Games Tokyo 2020, we will ensure safety and security by providing public safety-related solutions such as biometrics and behavior detection and analysis, as well as providing wireless networks for administration use and urban operation centers. We will focus our efforts on these areas of digital government, healthcare, and public safety, as we build infrastructure to support abundant living for people. Examples of Initiatives Healthcare: Real time endoscope diagnosis support system using AI National Cancer Center Japan and NEC announced the development of a real time endoscopy diagnosis support system using AI in July 2017. We aim to prevent failure to diagnose bowel cancers and precancerous lesions (neoplastic polyps in the bowel) during endoscope examinations of the bowel by discovering them in real time during the endoscopy. Digital Government: Contributing to Wider Use of My Number Cards among Local Governments NEC’s system was adopted for the pioneering use of My Number cards as employee identification cards by the Tokushima prefectural government. The system manages room access based on My Number cards to provide secure staff access management within designated areas at government buildings. Meanwhile, in Chiba City, NEC has built a library system that allows patrons to borrow books by simply swiping their My Number card at the library counter. Through initiatives such as these, NEC will contribute to wider use of My Number cards. 27 NEC Corporation Integrated Report 2018Review of Operations Public Business Public Infrastructure Business In this area, NEC supports stable operation of key national infrastructure. The experience and trust we have cultivated over the years ensure stable profits in excess of company-wide targets. These profits are continuously invested in advanced technologies including biometric technologies, such as facial recognition, and space-related technologies, such as “Hayabusa 2.” Executive Vice President Kazuhiro Takada Creation of Stable Earnings and Investment in Advanced Technologies to Prepare for the Future Initiatives in the Medium- to Long-Term We have a duty to support the stable running of mission critical operations in the field of security using ICT for customers including governments, governmental agencies, broadcasters and power companies. By supporting key national infrastructure over the long term, we will ensure stable profitability. Under the Mid-term Management Plan 2020, we will generate stable operating profits in excess of company- wide targets as an earnings base for the whole company. To further capture earnings, we will undertake a transformation towards a profitable structure by increasing cost efficiency, including cost reductions. In the space business, which faced profitability issues, we achieved a profit in fiscal 2018 by implementing cost structure reforms and business portfolio selection and concentration. Through these improvements to our earnings, we will secure funds for investments that we will be focused on advanced technologies—the supporting core of our business. Specifically, investment targets include biometrics technology, such as fingerprint, facial, and iris recognition that offer world-leading accuracy, satellite-related technologies for carrying out missions in uncharted places in the harsh environment of space, such as “Hayabusa 2,” and cyber security technologies including the security field. Continuous investments will enable us to strengthen our competitive advantages in the future and our ability to create value. To support business expansion over the medium to long term, we will leverage our advanced technologies to provide solutions for the Olympic and Paralympic Games Tokyo 2020. These will include cyber security, security ICT such as image analysis and accident prediction solutions, rigorous and efficient border control using biometrics, and 4K and 8K TV broadcasting systems. Examples of Initiatives NEC Iris Recognition Technology Ranked First in Accuracy Evaluation by U.S. National Institute of Standards and Technology Contributing to 4K and 8K Broadcasts in Japan and Internationally In April 2018, NEC’s iris recognition technology achieved the highest matching accuracy evaluation in an evaluation test performed by the U.S. National Institute of Standards and Technology (NIST), a world- leading authority. Furthermore, in past testing performed by NIST, NEC’s facial recognition was ranked first four consecutive times, and its fingerprint recognition has ranked first eight times in total. NEC is contributing to the construction of television master control equipment *1 for a BS4K trial broadcast scheduled to commence in December 2018. Major broadcasters in countries around the world are conducting trial testing of 4K and 8K broadcasts. NEC has been the technical partner for trial testing of an 8K terrestrial broadcast by Brazilian broadcaster TV GLOBO, and NEC’s codecs*2 have been used in 4K broadcast trials by BBC of the U.K. and TV Station of South Korea. *1 Television master control equipment: A system for compiling broadcast data, including programs and commercials, and outputting it according to a program *2 Codec: Image compression and decompression equipment 28 NEC Corporation Integrated Report 2018Enterprise Business Our society faces various kinds of social issues, such as food waste, labor shortages, changes in the consumption environment, and diversifying threats in both real society and cyber space. NEC will develop cutting-edge technologies and promote co-creation with customers in order to connect people, goods, and processes, reaching across the boundaries between enterprises and industries to draw out the potential of society and create new value across the entire value chain. To realize this goal, we will work rapidly to transform our business into a recurring income stream model. Revenue (Billion ¥) 408.6 408.7 410.0 Executive Vice President Hiroshi Kodama 2018 result Revenue was ¥408.7 billion, almost remaining flat year on year. Operating Profit, Operating Profit Ratio (Billion ¥) 39.7 9.7% 35.7 8.7% 32.0 7.8% Operating Profit Operating Profit Ratio 2018 result Operating profit worsened by ¥4.0 billion year on year to ¥35.7 billion, mainly owing to increased investments in the IoT area. 2017 2018 2019 (Forecasts) 2017 2018 2019 (Forecasts) (Fiscal year ended on March 31) Enterprise Business — SWOT Analysis STRENGTHS WEAKNESSES Reliability and achievements cultivated over many years of providing IT services to domestic clients in the manufacturing, retail and service, and financial industries Ability to integrate technology and business to create value and respond bimodally to customers’ needs in business development and solutions development scenarios The knowledge and expertise we have developed in manufacturing innovation at our own plants as a company in the manufacturing industry, as well as SCM transformation for global corporations Need to strengthen initiatives that will impact society positively across the boundaries between enterprises and industries In order to achieve further growth, need to transform to a business model that makes use of knowledge and resources accumulated for each industry and client and consolidates them across the organization OPPORTUNITIES THREATS Our society faces various kinds of social issues, such as global food waste and energy consumption, as well as changes in the human resources environment due to labor shortages, diversification of consumption patterns, including an emphasis on customer experience and a shift towards cashless societies, and fraudulent transactions involving internet banking. AI, IoT, and other advanced digital technologies are increasingly expected to provide solutions for these social issues. Although the private sector market in IT is expanding, the acceleration in adoption of cloud computing and the penetration of AI and IoT are bringing dramatic change to NEC’s business environment in terms of customers’ investment fields and competitors. We expect a decrease in existing solutions businesses in the medium term, and new business model creation and the capability to support customers’ digital transformation will be increasingly important for achieving growth. 29 NEC Corporation Integrated Report 2018Review of Operations Enterprise Business Shift to a Recurring Income Stream Model through Co-creation Initiatives in the Medium- to Long-Term The period through to fiscal 2021 has been positioned as a period of solidifying a base for future growth in the Enterprise Business. Throughout this period, NEC will offer solutions for solving social issues as services through partnering with customers, thereby transforming its business model into a recurring income stream model. Towards this goal, we have been working to establish common business platforms, refine the value of existing businesses where we have strengths, develop human resources, and prepare and strengthen co-creation programs with customers and partners. Initiatives in Fiscal 2018 to Realize our Goals Social Issues Accomplishments in Fiscal 2018 Optimization of Supply and Demand NEC announced the “Demand and Supply Optimization Platform.” Through this solution, NEC will contribute to the optimization of demand and supply and reduction of food loss and waste by increasing accuracy in forecasting through the use of white box AI for sharing and utilizing inventory and sales data among all companies comprising the value chain. In this project, NEC collaborates with the Japan Weather Association (JWA), combining the weather data and data analysis technologies of JWA with NEC’s technology to create social value together. NEC worked with Seven-Eleven Japan Co., Ltd. to use image data from cameras of store terminals to improve ordering accuracy, and bolster security using face recognition technology while enhancing the convenience. NEC will keep contributing to labor-saving, sophisticated solutions using AI to forecast product demand and IoT to ensure stable operations of all store equipment. Realizing a Safe, Comfortable Society Sumitomo Electric Industries, Ltd. and NEC have begun collaborating by using Sumitomo Electric’s rich range of in-vehicle products and technologies as well as expertise in traffic infrastructure together with NEC’s cutting-edge technologies in security, AI, IoT, and cloud services. The two companies will take full advantage of their strengths to develop products with advanced security and to expand mobility business. Preventing Diversifying Cyber Space Threats and Digital Fraud NEC has provided Japan Exchange Regulation with deep learning technology for market surveillance operations, which is used in the initial investigation of suspicious transactions. NEC is conducting test demonstrations with several securities companies aiming to prevent digital fraud, and will help to realize efficient, sophisticated market surveillance operations. Realizing a Highly Efficient Society through ICT Japan Airlines Co., Ltd. and NEC conducted test demonstrations using AI to perform predictive analysis for the purchase of airline tickets. These tests confirmed the effectiveness of NEC’s Predictive Analytics Automation Technology towards resolving the issues of a scarcity of data scientists with advanced analytical skills and uncertainty as to how best to utilize the enormous amounts of data. 30 NEC Corporation Integrated Report 2018Network Services Business As a partner supporting digital transformation of all industries, we will create new social value by working with various customers to co-create business. NEC’s total capability in networks and IT will enable us to expand the value we provide from network infrastructure to services, as we contribute to realizing a society where people, things, and contexts are richly connected. Executive Vice President Atsuo Kawamura Revenue (Billion ¥) 394.5 377.6 360.0 Operating Profit, Operating Profit Ratio (Billion ¥) 34.6 8.8% 2018 result Revenue decreased ¥16.9 billion (4.3%) year on year to ¥377.6 billion due to reduced capital investment by domestic telecom carriers. Operating Profit Operating Profit Ratio 2018 result Operating profit worsened ¥17.3 billion year on year to ¥17.3 billion, mainly due to lower revenues and changes in the product mix. 17.3 4.6% 11.0 3.1% 2017 2018 2019 (Forecasts) 2017 2018 2019 (Forecasts) (Fiscal year ended on March 31) Network Services Business — SWOT Analysis STRENGTHS WEAKNESSES Among the best in Japan in terms of track record and accumulated expertise for delivering networks and IT systems for telecom carriers. Core technologies in the network area such as 5G, mobile, optical IP and IT, and network system integration capabilities utilizing on these technologies. Easily impacted by market trends in capital investment. Delay in expanding from business centered on network infrastructure equipment to software/application service area. OPPORTUNITIES THREATS As traffic expands with sophistication of services, telecom carriers have increasing needs to improve the sophistication and efficiency of their infrastructure. Expected expansion of business opportunities due to connection of people, things, and contexts with the digital transformation at companies, including operation reforms. Capital investment by Japanese telecom carriers is in a low-season awaiting full-scale investment in 5G. Possibility that overseas vendors will further increase their share of the domestic market in the commodities area. 31 NEC Corporation Integrated Report 2018Review of Operations Network Services Business Providing Network Services That Can Support Digital Transformation Initiatives in the Medium- to Long-Term Recently, a host of industries have been promoting the use of new technologies such as AI and the IoT to resolve increasingly serious social issues such as environmental problems and labor shortages. The digital transformation is accelerating in the form of new business creation through the use of technology and work style reform through management. NEC has been contributing to the evolution of telecommunications infrastructure by providing telecom carriers with network control platform systems and services for operations management, along with equipment for network implementation. Now, in the age of IoT, where everything is connected wirelessly, NEC is leveraging its strengths, including in sophisticated wireless technologies developed in the telecom carrier market, to realize flexible, efficient networks that can support digital transformation and networks that can comfortably handle huge data volumes from 5G high-speed, large-capacity, ultra-low latency, multiple device connections. We are also working to automate and simplify service operations, provide solutions for efficiently operating networks, and to provide service platforms that will enable and optimize networks and IT environments for flexibly handling various 5G-era services. By utilizing these, NEC will co-create sophisticated services with telecom carriers and partners from various industries by combining intelligent networks and advanced IT. Recently, NEC and a major Japanese telecom carrier agreed on the provision of 5G base station equipment aiming for the commercialization of 5G services. NEC is also working in the following domains on co-creation products with partners from various industries in preparation for the 5G era. Security: By combining AI for abnormality detection through image analysis with 5G’s characteristic ultra-high speed, large capacity, low latency communications, NEC is taking steps to create a safe, secure society through trials for realizing security services for preventing crimes and accidents. Construction: NEC is working to solve issues at construction sites, such as a shortage of engineers and workers, by conducting trials of advanced construction technologies such as unmanned construction machinery and real-time remote construction using 5G. Healthcare: Local government and telecom carrier with NEC conducted field trials of remote medical examinations using large- capacity 5G transmission to connect local medical institutions with a medical university, enabling them to communicate in real time and share images taken by a 4K close-up camera, high-definition echocardiographic video and MRI images. The trial is part of efforts to realize a society where everyone has equal access to healthcare. Through these efforts, NEC will create new value for society by co-creation with telecom carriers and partners from various industries to prepare for the 5G era. Looking ahead, NEC will provide richly connected value to contribute to the successful digital transformation of society and our customers. 32 NEC Corporation Integrated Report 2018System Platform Business There is a growing move towards proactively using ICT for operational innovation, such as work style transformation, and operational expansion to capture increasing demand from inbound tourism. NEC is directly experiencing these global trends as it constantly reviews its platforms to strengthen products and services centered around AI, IoT image analysis, and security. Revenue (Billion ¥) 548.9 531.7 510.0 Executive Vice President Kimihiko Fukuda 2018 result Revenue was ¥531.7 billion, a decrease of ¥17.2 billion (3.1%) year on year, mainly due to decreased sales in maintenance services. Operating Profit, Operating Profit Ratio (Billion ¥) 34.6 Operating Profit Operating Profit Ratio 30.0 32.0 2018 result 6.3% 5.6% 6.3% Operating profit declined by ¥4.6 billion year on year to ¥30.0 billion, mainly owing to a change in the product mix. 2017 2018 2019 (Forecasts) 2017 2018 2019 (Forecasts) (Fiscal year ended on March 31) System Platform Business — SWOT Analysis STRENGTHS WEAKNESSES Reliability and high quality cultivated under an intensely competitive domestic market; high share in Japan for IT platform products Distinguished group of technologies*, including AI, IoT image analysis and security * Image recognition technology including face recognition, heterogeneous mixture learning, textual entailment recognition technology, etc. Smaller business scale compared with global mega-vendors due to many areas being specialized for the Japanese market, leading to relatively lower profit margins A need to expand the proportion of software and services as a large proportion of the business comprise of conventional sales for standalone hardware OPPORTUNITIES THREATS With the rapid advance of digitalization, an increase in customers’ use of AI in actual business is expected, and there are rising expectations for new value creation using AI technology. As customers increasingly utilize data, they will need to respond to security risks such as increasingly sophisticated cyber-attacks and information leakages; increasing demand for advanced security is therefore expected. The advance of commoditization mainly of general products in the hardware domain is driving increased global competition. In areas such as IoT image analysis and AI, more companies are entering the market, including those from other industries, making it necessary to establish points of differentiation. 33 NEC Corporation Integrated Report 2018Review of Operations System Platform Business Providing Platforms to Support Business Innovation through Digitalization Initiatives in the Medium- to Long-Term In System Platform Business, there is a need to transform the conventional business model. We aim to do more than simply streamline customers’ business operations by providing highly reliable ICT products; we will work to increase the capabilities of our customers and contribute to solving their issues by providing NEC’s solutions and services as a comprehensive package. The key to realizing this transformation is to leverage NEC’s strengths, such as AI, IoT image analysis, and cyber security, to establish platforms that provide unique value. To achieve this, the System Platform Business will first pursue maximization of profit by increasing efficiency in every aspect of its existing businesses and reforming its cost structure through operational reforms. We will then focus our management resources on areas such as AI, IoT image analysis, and security and concentrate on developing a platform lineup to support digitalization. In this way, we will realize a business portfolio aligned with the needs of today. Initiatives in Fiscal 2018 for Achieving Our Vision for the Medium to Long Term In fiscal 2018, we made continuous efforts to improve our costs with a view to improving profits in a harshly competitive business environment. Specifically, we integrated five companies and departments, including NEC Network Products, Ltd., with NEC Platforms, Ltd. in April 2017 to streamline our production and development systems and took steps to implement sharing of materials procurement and resources. Furthermore, on the business front, as an initiative to build platforms utilizing AI, we started providing a big data analysis platform that enables an integrated approach from data collection to accumulation, processing, and analysis. We also launched sales of the SX-Aurora TSUBASA platform, which can be used in new areas such as AI and big data analytics, resource exploration, image analysis, and security. In addition, we made efforts to maintain our position in existing product areas, achieving the No. 1 share of the domestic PC server market for the 22nd consecutive year*. In fiscal 2019 and beyond, we expect the System Platform Business to continue facing a harsh business environment, but we will streamline our existing businesses while strengthening and expanding our focus businesses. * CY1996-2017 Japan Product Category: x86 server, Units Source: IDC Quarterly Server Tracker 2018Q1 Note: IDC declares a statistical tie in the server market when there is less than one percent difference in the revenues or the unit shipment of two or more vendors. 34 NEC Corporation Integrated Report 2018Global Business To accelerate the growth of global business, NEC business divisions that are primarily tasked with expanding in global markets were newly incorporated into the Global Business Unit, which was launched in April 2018. The dedicated global structure will improve management speed and strengthen links between local subsidiaries to provide real solutions for social issues. Senior Executive Vice President Akihiko Kumagai Revenue (Billion ¥) 432.9 453.7 505.0 2018 result Revenue increased ¥20.7 billion (4.8%) year on year to ¥453.7 billion due to increased sales in safety. 2017 2018 2019 (Forecasts) Operating Profit (Loss), Operating Profit Ratio (Billion ¥) –9.0% –39.0 2017 0.0% 0 Operating Profit (Loss) Operating Profit Ratio 2018 result Operating loss improved by ¥11.0 billion year on year to an operating loss of ¥28.0 billion yen, mainly owing to increased sales and cost efficiency. –6.2% –28.0 2018 2019 (Forecasts) (Fiscal year ended on March 31) Global Business — SWOT Analysis STRENGTHS WEAKNESSES Safety business: Integrated systems that fuse world-leading biometric authentication technology with urban surveillance operation expertise and analysis technologies (status recognition, crowd behavior analysis, indication detection, etc.), and enable not only past event analysis but also the ability to grasp phenomena in real time. Software services for service providers: In addition to product competitiveness and track records at Netcracker Technology Corporation, product capabilities and advanced solutions provided through links with SDN/NFV. Strong presence and adoption results in the markets for network equipment (mobile backhaul), submarine cable, displays and projectors, and unified communications products. Need to strengthen the structure to enable expansion of the scope for providing value in the area of safety to customers beyond governments and police in the domains requiring safety, security, efficiency and equality. Need to accelerate shift of business model from equipment sales to a solutions business. OPPORTUNITIES THREATS Expanding opportunities to realize solutions through ICT, such as skilled labor shortages in advanced countries and emergence of social issues due to rapid urbanization in emerging countries. Expansion in demand for safety solutions in countries where there is growing interest in safety and security. Expansion in demand for software services for service providers following advancement of network services. The smart energy market is expected to expand following the spread of renewable energy use, bringing growth in business opportunities in Europe and North America. Aggressive approach by emerging-market vendors and others in the field of biometric authentication. Intensified competition in the field of software services for service providers due to the rise of the network virtualization market. Though our mobile backhaul business is in the global market leaders group, price competition is increasing due to market maturity. 35 NEC Corporation Integrated Report 2018Review of Operations Global Business Expansion of Safety Business and Profit Structure Reforms of Issues Businesses Initiatives in the Medium- to Long-Term Realizing “NEC Safer Cities” based on the safety business is the main growth engine for the Global Business. Amid demand for responses to global issues such as labor shortages, rapid urbanization, geopolitical risk and the risk of spreading terrorism, NEC will continue to provide traditional solutions in public safety involving recognition and urban surveillance, while expanding its business scope to encompass digital government, where it will provide asset management and fee payment platforms to national and local governments, and smart transportation, where it will provide traffic congestion alleviation and public service improvements that will form the core of smart cities. Through these efforts, we will contribute to realizing a safe, secure, efficient and equal society. Looking ahead, we will increase our presence globally by expanding the digital government sector from regions where we have a track record in the public safety field, such as Singapore, Hong Kong, North America, and Argentina, into the British Commonwealth and the United States using Northgate Public Services Limited, acquired in January 2018, as a base. In addition, we will make aggressive use of M&As and partnerships, aiming to achieve revenue of ¥200 billion by fiscal 2021. In software service for service providers, investment aimed at increasing the sophistication of customer billing and operation management systems and for establishing new businesses utilizing digitalization and new technologies is accelerating. We will work with NEC’s subsidiary Netcracker Technology Corporation, leveraging the high competitiveness and customer satisfaction of its charging and operation management solutions, and its multivendor handling capabilities to provide diverse solutions utilizing our own track record in advanced virtualization in the field of SDN/NFV. In doing so, we will respond to customers who need to rapidly start up services associated with digital transformation and expand investments for operational streamlining and profit increase. In submarine cable, displays and projectors, and unified communications product business, we aim to maintain and expand our industry presence and business scale, including examining new business models. In mobile backhaul, where we face challenges, we have assumed increasing price competition and market contraction. We are therefore implementing selection and concentration measures, including organizations, processes, and resources, and will carry out structural reforms to restore profitability with a view to securing profits even with a conservative revenue scale. In the same way, within smart energy, we will focus on Europe and North America, where liberalization of power networks is advanced while progressively optimizing our operations to improve profits. 36 NEC Corporation Integrated Report 2018International Business Structure (As of July 1, 2018) Strengthening Our Ability to Provide Solutions for Society in Countries and Regions around the World NEC will work to strengthen its local proposal and service provision capabilities, enabling it to provide advanced technologies such as biometric authentication as solutions for individual customers. We will expand our network of five regional headquarters and local subsidiaries in each country and region, while strengthening our links with Netcracker Technology Corporation and Northgate Public Services Limited, which was acquired in January 2018. Particularly, in the safety business we will continue to accelerate our business expansion utilizing M&As, aiming to contribute to solutions and social value creation for even more customers worldwide. Toshiya Matsuki Executive Vice President NEC Corporation Vice President of the Global Business Unit NEC Corporation of America has been focused on delivering solutions for society, especially in the areas of safety, security and operational efficiency for the North America market. This has traditionally included information and communications technology (ICT) for service providers, enterprises, and retail, as well as biometrics authentication solutions for government agencies. In the fiscal year ended March 31, 2018, we accelerated our strategic pivot toward digital transformation and delivering solutions to enhance the customer experience across industries. As a result, while continuing to supply traditional customers among law enforcement and federal agencies, we expanded our biometric solutions footprint in airports, stadiums, theme parks, hotels, casinos, and other spaces. In the coming year, we will focus on customer NEC Latin America has its businesses strongly aligned with the needs of Central and South America and is promoting business based on deep ties with the local community. Here in the Latin America/Caribbean area, there is a demand for environments that enable people to live more safely and securely. In order to fulfill these demands, technology such as biometrics plays an extremely important role in cities with efficiency and equality. In the fiscal year ended March 31, 2018, we utilized various biometrics technologies to provide solutions and add value to police and border control systems in Mexico, Costa Rica and Argentina. NEC Latin America will continue North America Masahiro (Mark) Ikeno President & CEO NEC Corporation of America Central and South America Masazumi Takata Senior Vice President NEC Corporation, President & CEO NEC Latin America 37 experience solutions along with the enterprise architecture and core ICT technology that has evolved to support them. In doing so, we will create new business opportunities as we transition from the realm of content processing to context processing. An example of easing the flight boarding process using optional facial recognition technology to collaborate with its customers and partners to orchestrate a brighter world for the people of Central and South America. An immigration e-gate that uses biometrics NEC Corporation Integrated Report 2018EMEA (Europe, the Middle East and Africa) NEC Europe promotes a sustainable society by providing solutions tailored to regional needs in Europe, the Middle East, Africa and Russia. During the fiscal year ended March 31, 2018, NEC Europe received orders for biometrics systems from the South Wales Police in the U.K. and at various airports, as well as for smart city projects from local governments in the U.K. and Portugal. In the Middle East, we won contracts from major telecommunications operators in the UAE and Saudi Arabia, which further expanded our achievements in the network field. To accelerate our business expansion in Africa, we increased our investment in the South African company XON Holdings Proprietary Limited to make it a subsidiary. This has already resulted in the acquisition of a major project. NEC (China) Co., Ltd. provides solutions in security and retail as well as telecommunication and IT systems, tailored to meet the needs of local markets in China, Hong Kong/Macao, Taiwan, and South Korea. In the area of security, NEC supplies biometrics systems, gate systems, and other solutions using fingerprint and facial recognition technology to national and regional police and airports, contributing to safe, stress-free movement. In the area of retail, NEC supplies cutting-edge solutions to retail stores such as convenience store chains, enabling unattended operation, and efficient ordering that helps to reduce food waste losses. In this way, NEC is contributing to solutions to social issues facing this region, which has a vast population. NEC Asia Pacific operates business in 14 countries across the Asia-Pacific region, helping to solve social challenges in each country by delivering advanced ICT solutions. During the fiscal year ended March 31, 2018, in the field of public safety, NEC Asia Pacific received orders from multiple governments and law enforcement organizations in ASEAN for biometrics systems for use in criminal investigations, border control, and surveillance of critical infrastructures. In the area of transportation, we provided BRT systems to the Indian cities of Ahmedabad and Surat, bringing its track record of BRT solutions in India to four cities. We also won large-scale managed services contracts from multiple state governments in Australia and from a Singaporean government institution. In the fiscal year ending March 31, 2019, we will Hironobu Kurosaki President & CEO NEC Europe China/East Asia Takeshi Tsukamoto President NEC (China) APAC (Asia Pacific) Tetsuro Akagi Senior Vice President NEC Corporation, CEO NEC Asia Pacific Review of Operations Global Business Looking ahead, we will continue to contribute to enhancing social infrastructure in EMEA by providing cutting-edge technologies and solutions including biometrics and telecommunications solutions in the areas of safety, smart cities, and energy. Moreover, in response to emerging demand in the energy and data center areas in the Middle East and Africa, we will work with XON Holdings Proprietary Limited and regional partners to expand our business. A police vehicle fitted with a facial recognition system NEC also provides Bus Rapid Transit (BRT) systems for monitoring, management and payment in various regions including India and Hong Kong, where its development center is located. Through these and other activities, we will continue to contribute to realizing an affluent society. Image recognition self-checkout POS system further accelerate the development of innovative solutions by capitalizing on our regional assets such as the Advanced Centre for Experimentation, which was established in 2017 in Singapore, to realize “NEC Safer Cities” together with our customers. People using the BRT system provided to Surat City 38 NEC Corporation Integrated Report 2018Corporate Governance In recognition of the fact that reliable corporate governance is essential to the continuous creation of social value and the maximization of corporate value, NEC is committed to strengthening its corporate governance practices through (1) assurance of transparent and sound management, (2) realization of prompt decision making and business execution, (3) clarification of accountability and (4) timely, appropriate and fair disclosure of information. Main Initiatives for Strengthening Corporate Governance NEC Group Corporate Philosophy formulation 2000.4-2003.3 In-house company structure 2003.4-2010.3 Business line structure NEC Group Charter of Corporate Behavior/Code of Conduct formulation NEC Group Vision/ NEC Group Core Values formulation 2010.4-2013.3 Structure driven by products and services 1990 1999 2000 2001 2003 2004 2007 2008 2010 2011 2012 2013 2013.4-Present Structure driven by markets and customers 39 Instituting Corporate Officer System NEC instituted a corporate officer system in April 2000 and worked to delegate authority from the Board of Directors to corporate officers with the aim of separating management supervision from business execution and expediting business execution based on prompt decision making. Reducing the Number of Directors The number of Directors was reduced to streamline the Board of Directors. The aim is to ensure even sounder management through greater discussion at meetings of the Board of Directors and to deliver prompt decision making. Reduction in the number of Directors (At the conclusion of the Ordinary General Meeting of Shareholders) 1999 37 2000 17 From 2012 onward 11 Appointing Multiple Outside Directors NEC added an Outside Director in June 2001 for a total of two Outside Directors in order to strengthen the supervisory functions of the Board of Directors. The number of members has increased and the system of five Outside Directors has continued since its inception in June 2007. Ratio of Outside Directors to all Directors (At the conclusion of the Ordinary General Meeting of Shareholders) 1999 2.7% 2010 33.3% From 2012 onward 45.5% Shortening Directors’ Terms In June 2004, the term of Directors was shortened from two years to one year in order to clarify their responsibility for management. Establishing a Nomination and Compensation Committee The committee has been established to enhance transparency of nomination and remuneration of Directors*. The committee is made up of five members, including three Outside Directors, one of whom is appointed as the chairperson. * The Compensation Committee established in 2001 was enhanced to become the Nomination and Compensation Committee in 2010. Instituting the Chief Officer Position The Chief Officer position was instituted in July 2011 to strengthen a company-wide strategy for realizing the NEC Group Vision. In April 2017, NEC extended the authority delegated to the Chief Officers in order to strengthen the corporate functions and accelerate the speed of decision making. NEC Corporation Integrated Report 2018Corporate Governance Overview of the Corporate Governance Structure Elect and Dismiss Elect and Dismiss Elect and Dismiss GENERAL MEETING OF SHAREHOLDERS Accounting Auditors Audit Cooperate Management/Supervision AUDIT & SUPERVISORY BOARD Cooperate Cooperate CORPORATE AUDITING BUREAU Audit BOARD OF DIRECTORS NOMINATION AND COMPENSATION COMMITTEE Report Supervise EXECUTIVE COMMITEE BUSINESS PROGRESS COMMITTEE CHIEF OFFICERS Business Execution Internal audits CORPORATE OFFICERS BUSINESS UNITS/CORPORATE STAFF/AFFILIATE COMPANIES Purpose and Activities The Board of Directors holds regular meetings basically once a month and extraordinary meetings as necessary to determine important matters related to business execution, including business realignment, funding plans and financing and investment, as well as matters concerning business plans. Main Matters Discussed in Fiscal 2018 1. Mid-term Management Plan 2020 2. Activity reports from Chief Officers 3. Management plans and progress reports for each business segment 4. Introduction of a performance-linked stock compensation plan 5. Sale of the electrode business 6. Acquisition of U.K.-based company Northgate Public Services Limited The Executive Committee discusses important NEC Group management issues such as policies and strategies. This committee extensively discusses matters of particular importance prior to putting them forward to the meetings of the Board of Directors for approval. In doing so, the committee enhances the deliberations and ensures appropriate decision making. Members Number of Meetings in Fiscal 2018 11 Directors 13 times Attendance rate of Outside Directors: 95.4% Attendance rate of Outside A&SBMs: 100% 6 Inside Directors 5 Outside Directors (of which 4 are independent Directors) Around 20 corporate officers 18 times The Business Progress Committee deliberates and reports on matters related to the status of the NEC Group’s business execution, such as monitoring progress with respect to meeting budgets adopted by the Board of Directors, with the aim of sharing management information and promoting business execution efficiency. Corporate officers and general managers of business units etc. 11 times The Nomination and Compensation Committee deliberates on (i) nomination for Directors, representative Directors and Audit & Supervisory Board Members (KANSAYAKU) (“A&SBMs”), the Chairman of the Board, and the President and (ii) the structure and the level of compensation for Directors, representative Directors and corporate officers with taking the business result of NEC and other conditions into account and from an objective perspective. The committee reports the results of its deliberations to the Board of Directors. Main Matters Discussed in Fiscal 2018 1. Nomination for Directors and A&SBMs 2. Succession planning for the President 3. Stock compensation plan for Directors The A&SB holds regular meetings basically once a month and extraordinary meetings as necessary, decides on audit policies, standards, annual auditing plan and other matters, and receives status reports on audits and on other matters from each A&SBM. 5 Directors 6 times Outside Directors Takeshi Kunibe Motoyuki Oka (Chair) Kaoru Seto Inside Directors Nobuhiro Endo Takashi Niino 5 A&SBMs 16 times 2 Inside A&SBMs Attendance rate of Outside A&SBMs: 100% 3 Outside A&SBMs (All are independent A&SBMs) 40 Board of Directors Executive Committee Business Progress Committee Nomination and Compensation Committee Audit & Supervisory Board (KANSAYAKU-KAI) (“A&SB”) NEC Corporation Integrated Report 2018Continued Strengthening and Improvement of the System NEC adopts the Company with Audit & Supervisory Board Members (KANSAYAKU) corporate structure to provide a double-check process: the Board of Directors supervises business execution and the A&SB audits the legitimacy and appropriateness of NEC’s decision making or activities. We have established a hybrid structure by utilizing the combination of a corporate officer system, multiple Outside Directors, and the Nomination and Compensation Committee, which we established voluntarily and is comprised of a majority of Outside Directors. In this way, we separate management supervision from business execution while striving to ensure management transparency and soundness. NEC believes that its corporate governance is functioning adequately under the current system described above. However, NEC is focusing its efforts on enhancements and improvements of this system in order to realize more effective corporate governance responding to changes in the business environment. Evaluation of the Effectiveness of the Board of Directors With external advices on a method of effectiveness evaluation of the Board of Directors, NEC has conducted an analysis and evaluation on the effectiveness of the Board of Directors once a year to improve the function of the Board of Directors since Fiscal 2016. In Fiscal 2018, based on the result of the analysis and evaluation on the effectiveness of the Board of Directors conducted in the previous fiscal year, NEC improved the contents to be reported in the Board of Directors and the format of the meeting materials in order to narrow down the agenda to be discussed and clarify the point of discussion at the Board of Directors. Furthermore, NEC introduced a new mechanism in order to reflect opinions and advices of Outside Directors in the operation of business. Under this mechanism, NEC notified those opinions and advices to the relevant parties in NEC, and reported the progress to the Board of Directors. Procedure of the analysis and evaluation (1) Questionnaire In Fiscal 2018, NEC sent a questionnaire regarding the role, composition and operation of the Board of Directors to all Directors and A&SBMs, and all of them answered the questionnaire. Before sending the questionnaire, NEC improved the questionnaire by adding questions for free descriptive answers and questions for evaluation of achievement of the measure introduced in the previous fiscal year based on the result of the analysis and evaluation conducted in the previous fiscal year so that evaluation and opinions of Directors and A&SBMs could be reflected more adequately on their answers to the questionnaire. (2) Discussion based on the result of the analysis and evaluation After analyzing the effectiveness of the Board of Directors based on the result of the questionnaire, NEC reported such result to the Board of Directors in March 2018. In the said Board of Directors, all Directors and A&SBMs discussed the improvement for the Board of Directors from the viewpoint of the reinforcement of the function and governance system of the Board of Directors, the best practice to discuss the management strategy and a method for decision making 41 and the clarification of management policy looking ahead to the future vision of NEC. Summary of the results of the analysis and evaluation for Fiscal 2018 In conclusion, it has been evaluated that in terms of the decision making for NEC’s important business execution and a method for discussion for management strategies and management plan, the Board of Directors is structured and operated to facilitate active discussion among the Directors, and the Board of Directors has been appropriately supervising the business execution. Meanwhile, it has been confirmed that the Board of Directors needs to improve a method for the discussion for future vision of NEC and strategies to improve corporate value of NEC for medium and long term, and a method for distributing information to Directors in order to enrich constructive discussion in the Board of Directors. Future challenges Based on the results above, by conducting the following countermeasure, NEC will continuously enhance and strengthen the Board of Directors function in order to deepen the Directors’ and A&SBMs’ understanding of the President’s vision for the future of NEC, and deliberation on the mid- and long-term management strategy. To arrange opportunities for sufficient discussion of a long term management strategy; To improve the contents of information distributed to Directors in advance for discussion in the Board of Directors; To arrange an opportunities for exchanging opinions among the Chairman of the Board, the President and the Outside Directors; In each Board of Directors, to report the recent important matters and topics by the President to other Directors; and To improve the format of the meeting materials. NEC Corporation Integrated Report 2018Corporate Governance Remuneration for Directors and Audit & Supervisory Board Members (KANSAYAKU) For the purpose of continuously improving corporate value and strengthening its competitiveness, NEC’s basic policy on the remuneration for Directors and A&SBMs is to set the level and system appropriate for a global company which enables NEC to secure excellent human resources and serves as an incentive to improve performance of the NEC Group. Remuneration System Monthly remunerations Bonuses (short term incentive) Stock compensation (mid-and long-term incentive) Inside Directors Outside Directors A&SBMs Remuneration for Directors Remuneration for Directors consists of fixed monthly remunerations and performance-linked bonuses as short term incentive, and performance- linked stock compensation as mid- and long-term incentive. Neither bonuses nor stock compensation are paid to Outside Directors, from the viewpoint of securing their independence from NEC because NEC expects that Outside Directors play a leading role in supervision over business execution. The fixed monthly remunerations The fixed monthly remunerations are determined according to the positions of Directors and the distinction of Inside Director and Outside Director, to the extent of the maximum amount *1 approved at the General Meeting of Shareholders. *1 The maximum monthly remuneration for Directors is 65,000,000 yen (approved at the 153rd Ordinary General Meeting of Shareholders held on June, 27 1991). The bonuses The bonuses are calculated by, adding to the standard amount determined for each positions of Directors, evaluation, under certain rules, of the contribution by Director to the business results during previous fiscal year. Standard amount for each Director position × Evaluation of performance of duties (calculated by revenue, operating profit and others) = Bonus The stock compensation NEC shares will be granted after the expiry of period of Mid-term Management Plan in accordance with the Directors’ titles and the level of the achievement of Mid-term Management Plan. Number of granting shares based on the applicable Directors’ titles × Performance-based allotment rate = Stock compensation Revenue Achievement Level ×35% + Operating Profit Achievement Level ×35% + ROE Achievement Level ×30% Remuneration for Audit & Supervisory Board Members Remunerations for A&SBMs are only fixed monthly remunerations and do not include bonuses linked to the business results because the responsibility of A&SBMs is to audit execution of Directors’ duty. The fixed monthly remunerations The fixed monthly remunerations are determined depending on whether he or she is a full-time A&SBM or not, to the extent of the maximum amount *2 approved at the General Meeting of Shareholders. *2 The maximum monthly remuneration for A&SBMs is 12,000,000 yen (approved at the 170th Ordinary General Meeting of Shareholders held on June 23, 2008). [ Process of Determination ] Remuneration for Directors is determined by the resolution of the Board of Directors, based on the results of the deliberation from an objective viewpoint by the Nomination and Compensation Committee, the majority of the members of which are the Outside Directors (one of whom is the chairperson). Remuneration for A&SBMs is determined through discussions between A&SBMs. [ Determination of the Level of Remuneration ] In order to ensure objectiveness and properness of the remuneration for Directors and A&SBMs, the level of the remuneration is determined on the result of the third party’s investigation regarding the remunerations of other companies whose business contents and scale are similar to those of NEC. [ Amounts of Remuneration for Fiscal 2018 ] (Millions of yen) Total amount by type Monthly remunerations Inside Directors Inside A&SBMs Outside Directors and A&SBMs 281 60 96 Bonuses 113 – – Stock compensation Total amount Headcount 26 – – 420 60 96 7 3 8 Notes: 1. NEC does not disclose remuneration per individual. 2. The total amount of the stock compensation is the value posted during Fiscal 2018. 3. The headcount of Inside Directors includes one Director who retired at the close of the 179th Ordinary General Meeting of Shareholders held on June 22, 2017. Of these, six Directors are eligible to receive stock compensation. 4. The headcount of Inside A&SBMs includes one A&SBM who retired at the close of the 179th Ordinary General Meeting of Shareholders held on June 22, 2017. 5. NEC abolished its retirement allowance system for Directors and A&SBMs at the close of the 168th Ordinary General Meeting of Shareholders held on June 22, 2006. Composition of Remuneration for Inside Directors in Total (Fiscal 2018) Stock compensation 6% Bonuses 27% Monthly remunerations 67% For further details on the corporate governance of NEC Corporation, please visit the following URL: https://www.nec.com/en/global/about/governance.html 42 NEC Corporation Integrated Report 2018 Ensuring Compliance and Risk Management NEC considers “compliance” to not only mean compliance with the law, but also in the wide sense to include compliance with socially accepted norms and common sense. Likewise, our “risk management” activities include properly understanding risks that have an impact on the company’s business, and taking preventive measures efficiently and effectively, including compliance violations. NEC positions compliance at the foundation of management, and recognizes compliance and risk management as priority themes “Materiality” which are essential for corporate governance. We, including the top management, will continue to promote these company-wide efforts. Establishing “NEC Compliance Day” In fiscal 2017, NEC Corporation received notification of three violations of the Antimonopoly Act from the Japan Fair Trade Commission. On November 18, we received an on-site inspection in regard to transactions for wireless digital emergency firefighting equipment. To keep these events fresh in mind and reconfirm the importance of compliance for each individual, we have decided to make November 18 “NEC Compliance Day.” In the period around NEC Compliance Day, NEC Corporation and its domestic consolidated subsidiaries held workplace roundtable meetings on themes such as preventing fraudulent accounting and compliance with the competition law. These provided opportunities for individual employees to consider compliance themselves. On the day, the President, the Chief Compliance Officer (CCO) and all general managers (approximately 130 people) of NEC Corporation, and the Presidents of domestic consolidated subsidiaries communicated messages to employees reaffirming the importance of compliance. Fostering a Corporate Culture that Makes Compliance a Top Priority through Face-to-Face and Dialogue-Based Educations As part of NEC’s effort to ensure compliance, we annually conduct an online education course on compliance, and moreover, we conduct fair trading education including multiple case studies for employees mainly working in divisions undertaking public sector projects every year. In fiscal 2018, in addition to these education programs, NEC also worked to ensure compliance with the competition law by conducting 140 face-to-face education programs for employees of NEC Corporation and its domestic consolidated subsidiaries to communicate the facts, including the background to the three bid- rigging incidents caused by NEC Corporation. Furthermore, we also conducted dialogue-based education for upper management personnel at sales divisions throughout Japan, mainly regional headquarters and branches. We conducted a discussion on the organizational management for practicing compliance and reconfirmed how we should behave. Measures to Prevent another Competition Law Violation In fiscal 2018, NEC transferred and changed the employees who had had long-term responsibility for the same governmental agency- related customers to prevent competition law violations. We also conducted special courses for employees who had not been able to be applied for their assignment reasons and so forth, confirming important points of the competition law in person. In addition, we conducted internal audits, email monitoring, and other steps, identifying nascent infringements of the competition law and acting quickly to counter them in cases that will likely cause a risk. For further information, please refer to Sustainability Report 2018 “Compliance and Risk Management” 43 NEC Corporation Integrated Report 2018Messages from an Outside Director and an Audit & Supervisory Board Member Creating a competitive business model with a healthy sense of urgency Today’s society is in the midst of a fundamental transformation that is being driven by technologies such as AI, IoT, and big data. Such a dramatic shift in our environment presents significant business opportunities for NEC, considering that its competitive advantages are derived from its cutting-edge technologies and top-tier talent pool. With international competition becoming even more intense, it is no longer enough to develop the most advanced technologies. A company is also required to triumph over its competitors from a business standpoint. I have been an Outside Director of NEC for seven years, and during this time I have come to the conclusion that developing the ability to consistently convert technological prowess into revenue is a challenge which NEC should be focusing on. In order to achieve this goal, NEC would first need to acquire a clear understanding of current trends, how those trends are evolving, and customers’ latent needs. Using this understanding as the starting point, NEC would then move beyond its traditional boundaries and engage in dynamic third-party collaborations while establishing a competitive business model that will flourish on the global stage. Outside Director Takeshi Kunibe The Mid-term Management Plan 2020 which was introduced in Fiscal 2019 is an important step towards realizing this transformation. Given the rapid pace at which technology is evolving, it is vital that all NEC directors, corporate officers, and employees share a healthy sense of urgency and focus on swiftly achieving the mid-term management targets. I hope to see NEC push forward with its efforts to create social value under its brand message “Orchestrating a brighter world” by assembling knowledge and expertise from both internal and external sources. I look forward to supporting NEC in realizing sustainable growth and increasing its corporate value in my role as an Outside Director. Appointment as an Outside Audit & Supervisory Board Member at a time of transformation I was appointed Outside Audit & Supervisory Board Member in June 2018. NEC is working to enable people to live in abundance by using advanced technologies. I feel strongly motivated to participate in NEC’s activities as a global corporation providing social value in the form of safety, security, efficiency and equality. I am also aware that I will need to prepare myself to grow further so that I can contribute not only in my own field of expertise, but also in the various areas covered by NEC’s diverse business activities. I have worked for many years as an attorney at law specializing in labor law and have been involved in corporate legal affairs in the fields of personnel and labor. Over this time, the labor law field has continued to change in step with economic trends and social changes. Furthermore, as society undertakes workstyle reforms going forward, Japan’s personnel and labor affairs are going to be radically transformed. As society changes at a dizzying pace, I believe the experience and knowledge that I have accumulated in the fields of personnel and labor will prove to be a strength. NEC is taking steps to restructure execution capabilities under the Mid-term Management Plan 2020. Outside Audit & Supervisory Board Member (KANSAYAKU) Taeko Ishii These include introduction of a fair personnel evaluation and compensation system that rewards people who produce results and a sweeping transformation of the corporate culture. People are the foundation that supports a company’s organizations and technologies, and transforming personnel systems to achieve corporate growth requires serious and bold decisions. My strengths in the fields of personnel and labor will find use in risk management as NEC faces these huge changes. I plan to contribute to increasing corporate value by actively providing opinions from a legal perspective and an external perspective. 44 NEC Corporation Integrated Report 2018Directors and Audit & Supervisory Board Members (As of July 1, 2018) Directors Nobuhiro Endo Chairman of the Board (Representative Director) Mr. Endo has been engaged in the management of NEC as President (Representative Director) since 2010 and as Chairman of the Board (Representative Director) since April 2016. Takashi Niino President (Representative Director) and CEO (Chief Executive Officer) After being engaged in the management of the financial solutions business and the NEC Group’s management strategies, Mr. Niino has been engaged in the management of NEC as President (Representative Director) and CEO since April 2016. Takayuki Morita Senior Executive Vice President, CFO (Chief Financial Officer) and Member of the Board (Representative Director) After being engaged in the management of NEC’s M&A and global business, Mr. Morita has been in charge of its global business strategy and in April 2018 was appointed as Representative Director and Senior Executive Vice President and Member of the Board. Norihiko Ishiguro Senior Executive Vice President and Member of the Board Mr. Ishiguro has extensive experience and a track record relating to industrial policy and a trade policy through working at the Ministry of Economy, Trade and Industry. In addition, he has been in charge of global business strategy and external relations as Senior Executive Vice President since October 2016. Katsumi Emura Executive Vice President, CTO (Chief Technology Officer) and Member of the Board After being engaged in the management of intellectual properties and Research and Development, Mr. Emura is now in charge of the NEC Group’s technology strategy. Hajime Matsukura Executive Vice President, CSO (Chief Strategy Officer), CHRO (Chief Human Resources Officer) and Member of the Board After being engaged in the management of corporate strategies at the corporate departments and in the NEC Group’s operational reform, Mr. Matsukura is now in charge of the NEC Group’s corporate strategies and human resource strategies. Takeshi Kunibe Member of the Board Director President (Representative Executive Officer), Sumitomo Mitsui Financial Group, Inc. Mr. Kunibe has extensive experience and deep insight with management of a bank. • Attendance at meetings of the Board of Directors: 11 out of 13 Motoyuki Oka Member of the Board Honorary Adviser, Sumitomo Corporation Mr. Oka has extensive experience and deep insight with management of a general trading company including the management of overseas firms. • Attendance at meetings of the Board of Directors: 13 out of 13 Kunio Noji Member of the Board Chairman of the Board, Komatsu Ltd. Mr. Noji has extensive experience and deep insight with management of a manufacturing company. • Attendance at meetings of the Board of Directors: 12 out of 13 Kaoru Seto Member of the Board Special Adviser, Yamato Holdings Co., Ltd. Mr. Seto has extensive experience and deep insight as a manager of a logistics service company. (Appointed in June 2018) Noriko Iki Member of the Board President, Japan Institute for Women’s Empowerment & Diversity Management Ms. Iki has abundant experience and deep insight in the fields of administration and diplomacy. (Appointed in June 2018) Notes: 1. NEC has notified the Tokyo Stock Exchange of its four independent Directors and three independent Audit & Supervisory Board Members (“A&SBMs”). Independent Directors: Mr. Motoyuki Oka Mr. Kunio Noji, Mr. Kaoru Seto and Ms. Noriko Iki Independent A&SBMs: Mr. Takeshi Kikuchi, Mr. Kazuyasu Yamada and Ms. Taeko Ishii 2. Attendance at meetings: the number of attendance at meetings (meetings of the Board of Directors or meetings of the Audit & Supervisory Board) out of the number of the meetings held in the fiscal year ended March 31, 2018 45 NEC Corporation Integrated Report 2018 Directors and Audit & Supervisory Board Members Board of Directors 11 Directors The Board of Directors makes important decisions regarding the Company’s business execution, starting with deciding on its basic management policies. It also fulfills the responsibility of overall supervision of business execution, and therefore requires viewpoints based on broad knowledge, and the Board of Directors is comprised with consideration given to diversity in such factors as career background, specialties and gender. Chairman of the Board (Chair of the Board of Directors) Outside Directors (of which 4 are independent Directors) Non-Corporate Officer Corporate Officer Inside Directors Career background and specialties of 5 Outside Directors Tenure of 5 Outside Directors 1 Finance 1 General Trading Company 1 Manufacturing Logistics services 1 Government and diplomacy 1 7 years 5 years 0 years 1 2 2 Audit & Supervisory Board (KANSAYAKU-KAI) 5 Audit & Supervisory Board Members NEC appoints as Audit & Supervisory Board Members personnel who have the knowledge and experience necessary for audits, such as considerable expertise in finance and accounting or experience as an attorney at law, and who strengthen the auditing functions of the Audit & Supervisory Board. 3 Outside Audit & Supervisory Board Members (All members are independent Audit & Supervisory Board Members 2 Inside Audit & Supervisory Board Members Career background and specialties of 3 Outside Audit & Supervisory Board Members Audit & Supervisory Board Members (KANSAYAKU) Hajime Kinoshita Audit & Supervisory Board Member (full-time) Mr. Kinoshita has experience being in charge of the legal and internal control division for many years. Isamu Kawashima Audit & Supervisory Board Member (full-time) Mr. Kawashima has experience as the person responsible for accounting and financial affairs of the Company for many years. Takeshi Kikuchi Audit & Supervisory Board Member Attorney at Law Mr. Kikuchi has a lot of experience and professional insight as an attorney at law in the field of IT and other fields. • Attendance: At meetings of the Board of Directors: 13 out of 13 At meetings of the Audit & Supervisory Board: 16 out of 16 Kazuyasu Yamada Audit & Supervisory Board Member Certified Public Accountant Mr. Yamada has a lot of auditing experience as a Certified Public Accountant and professional insight in finance and accounting. • Attendance: At meetings of the Board of Directors: 13 out of 13 At meetings of the Audit & Supervisory Board: 16 out of 16 Taeko Ishii Audit & Supervisory Board Member Attorney at Law Ms. Ishii has a lot of experience and deep insight as an attorney at law in the fields of personnel affairs, labor and others. (Appointed in June 2018) For further details on the Directors and Audit & Supervisory Board Members of NEC Corporation, please visit the following URLs: Directors https://www.nec.com/en/global/about/executives/directors.html Audit & Supervisory Board Members (KANSAYAKU) https://www.nec.com/en/global/about/executives/auditors.html Certified public accountant Attorney at law (IT field, etc.) Attorney at law (personnel affairs, labor, etc.) 1 1 1 46 NEC Corporation Integrated Report 2018Cross-company Corporate Strategy Promotion Framework (As of July 1, 2018) NEC introduced its Chief Officer System in 2011 in order to promote a strategy that spans across the entire company. We have appointed Chief Officers to cover themes representing efforts that go beyond the boundaries of our business units and Group companies. Here, each of the Vice Presidents and Chief Officers, the head of the Central Research Laboratories, and the head of the Business Innovation Unit, who are in a position to plan and execute cross-company strategies, will introduce the issues they face in their respective areas and their efforts to solve those issues. Norihiko Ishiguro Senior Executive Vice President Takayuki Morita Senior Executive Vice President, CFO (Chief Financial Officer) Akihiko Kumagai Senior Executive Vice President Katsumi Emura Executive Vice President, CTO (Chief Technology Officer) We will increase our presence and speed, realizing growth on a global level as a company that creates value for society I will strive to increase NEC’s presence further so that it can make an even greater contribution to solving the world’s issues and grow even more as a global social value creation company. To this end, I will increase and proactively undertake PR and sales activities pitched at governments, local governments, and public institutions, international institutions, and local companies, both in Japan and internationally. At the same time, I will work to transform our organizational culture so that NEC can realize the fullest value for customers even faster than before. Realizing an operating profit ratio of 5% by fiscal 2021 The greatest issue facing NEC today is strengthening its earning capability. As CFO, I will steadily promote the following three initiatives to achieve the Mid-term Management target of a 5% operating profit ratio: 1) resolute optimization of fixed costs, 2) execution of countermeasures for underperforming businesses with clear timeframes, 3) execution of growth investments, including M&A, to generate additional earnings. A culture of “playing offense” In today’s world, where huge amount of information fly back and forth, companies need to respond much faster than in the past, and it is critical to stay one step ahead at all times by taking proactive approaches. Particularly, in order to win in the global market where competition becomes tougher everyday and the needs from customers are diverse, we need to be proactive in proposing new solutions rather than waiting for requests from customers. I am committed to create a culture of taking risks and playing offense, with everyone working together. Taking a wide look at technology and building core competencies for the next generation of business growth I intend to read the trends in society and technologies from a long-term perspective, then plan and execute multifaceted technology strategies to contribute to the next generation of NEC’s growth. In businesses that utilize AI and data, we will create a competitive advantage by taking a wide look at our technological competencies, as well as social standing, intellectual property, standards, and rules. We will also leverage NEC’s strengths in technology to strengthen ties with customers, and others such as academia, and venture companies. We will proactively advance these activities to maximize the social value that NEC provides. Kazuhiro Sakai Executive Vice President, CIO (Chief Information Officer) and CISO (Chief Information Security Officer) Establishing a digital management foundation We are in an era where to survive companies must visualize their businesses through digitalization, and use that information as an asset to continuously transform and innovate their approach. As CIO and CISO, I will promote digitalization of business processes and workstyle reforms to establish a digital management foundation to support NEC as it shifts into a higher gear. 47 NEC Corporation Integrated Report 2018Cross-company Corporate Strategy Promotion Framework Hajime Matsukura Executive Vice President, CSO (Chief Strategy Officer) and CHRO (Chief Human Resources Officer) Carrying out the Mid-term Management Plan 2020 to completion I consider it my No.1 mission to achieve the Mid-term Management Plan 2020 with a sense of conviction, and to restore the trust of all our stakeholders. To help achieve it, the most important task is to transform NEC’s culture through reforms of the personnel evaluation and compensation system, and other means. To this end, we will unify the business strategy and personnel strategy, and accelerate our efforts to create a strong business model and develop human resources. Makoto Enomoto Senior Vice President, CMO (Chief Marketing Officer) Establishing the NEC brand as an essential presence in the digital age While treasuring our traditional NEC brand image of being trustworthy and familiar, NEC will prepare for an era where digital technology penetrates every part of society by positioning itself to realize a safe, secure, efficient, and equal society through the power of innovation. I will promote end-to-end marketing and support NEC’s transformation, responding quickly to market trends and customers’ expectations to ensure that NEC is recognized and supported as an essential presence by all manner of stakeholders. Motoo Nishihara Senior Vice President in charge of the Central Research Laboratories Taking on the challenge of new global research and development to create robust businesses Society is changing dramatically through AI and IoT. NEC’s Central Research Laboratories is responsible for creating the next robust businesses and driving businesses going forward. Through our global research laboratory network, world-leading research personnel, and co-creation with global business partners, we will provide outstanding technological capabilities, business verification, and the necessary common platform. By transforming R&D into an ecosystem-type structure, we will create key technologies to unlock one-to- many solutions that have unrivalled impact. Shinobu Obata Senior Vice President, CCO (Chief Compliance Officer) Further promoting compliance among Group employees in Japan and internationally The NEC Group has treated compliance as an important management priority for some time. Management has often declared that compliance is a top priority and has been promoting employee awareness through various measures. I aim to study and implement even more effective measures to further promote compliance among Group employees and firmly establish compliance as a part of the NEC Group’s corporate culture. Osamu Fujikawa Senior Vice President in charge of the Business Innovation Unit Strengthening business development capability by creating customer value using the latest technologies Up to now, NEC has received high evaluations from the markets for its latest technologies, but has not shown a sense of urgency in developing them into businesses. As such, it has not reached its full growth potential. I will pursue various possibilities to create new business opportunities without being tied to existing paradigms and accepted ideas, involving inventive people from in and outside the Company in order to realize growth by promoting commercialization of core technologies. Shigeki Shimizu Senior Vice President, CSCO (Chief Supply Chain Officer) Realizing a sustainable global supply chain I will engage in co-creation with NEC’s partners and focus on streamlining and optimizing the entire supply chain through to the delivery of our technology and solutions as value to customers. By contributing to further gains in quality and safety, I will contribute to driving NEC’s global business expansion by realizing environmentally friendly, sustainable supply chains. For further details on the corporate officers of NEC Corporation, please visit the following URL: https://www.nec.com/en/global/about/executives/svp.html 48 NEC Corporation Integrated Report 2018 Business and Human Rights As a global company that operates its business globally, NEC believes that it is imperative for us to mitigate and prevent any negative impacts our corporate activities may have on human rights. Guided by this belief, NEC makes it clear that it endeavors to respect human rights under all circumstances in the NEC Group Charter of Corporate Behavior and the NEC Group Code of Conduct, which are the foundations of its corporate activities. The “NEC Group Human Rights Policy” states that NEC will promote initiatives on respecting human rights across the Company’s entire value chain by dialogue and consultation with its stakeholders and implementing human rights due diligence. Dialogue with External Experts on Privacy Issues The increased use of AI and IoT brings a risk of privacy infringements and negative impact on human rights in the form of discrimination. Privacy is one of the Company’s materiality issues, and in April 2018 we held a dialogue session based on the theme of “Privacy-related challenges for business.” During the dialogue, we heard opinions pointing out that “the flipside of technology is that there are ethical issues and NEC is called upon to communicate its stance,” also that “it is important to include consideration of ethical issues in business and to develop these as competitive strengths.” Furthermore, we heard a strong message that “the future era of manufacturing is one of QCD*”E”, and people would like companies to change their values towards “E”thics and “E”cology while considering whether they have properly prioritized human aspects ahead of technology, or whether they have put ethical perspectives on the back-burner.” * QCD: Quality, Cost, Delivery Dialogue with external experts Compliance with the UK Modern Slavery Act NEC also complies with international rules and regulations on human rights. NEC issued the statement on the UK Modern Slavery Act on behalf of itself and its consolidated subsidiaries in 2017. The statement asserts that NEC Group companies respect human rights and will never accept forced labor based on the NEC Group Charter of Corporate Behavior, the NEC Group Code of Conduct and the NEC Group Human Rights Policy. It also explains the various measures implemented to prevent modern slavery within the NEC Group organization and across its supply chain. I Want to Contribute to Social Development in Africa Assistant Manager, Africa Business Development Office, Safer City Sales Division, NEC Miho Hara During my student days, I participated in an internship at an African NGO and I have wanted to contribute to the lives of African people ever since. Since joining the Company, I have been responsible for overall sales in the East African region. In my second year, I was posted to Nairobi in Kenya for on-the-job training, and there I learned sales skills such as proposing, negotiating, and responding flexibly through serving local customers. NEC has been helping to enhance telecoms networks in Africa. Having a telecoms environment has enabled the rapid spread of new services such as mobile money. When I see this startling pace of development in Africa, it really impresses me with the huge potential that ICT brings to society. Meanwhile, we are currently focused on the safety business utilizing biometrics. I am working each day to try and make daily life safer and more secure for people using ICT, while giving consideration to human rights such as privacy. As a mother with one child, I work short hours and so I strive to make my work more efficient. For further information, please refer to Sustainability Report 2018 “Respecting Human Rights” “Personal Information Protection and Privacy” “Dialogue Sessions on Materiality with Experts” 49 NEC Corporation Integrated Report 2018Human Resource Development and Diversity NEC is aiming to develop human resources who are able to continuously create value for society, constantly acting from a customer-oriented perspective with a high sense of ethical values and a deep understanding of the essential issues faced by customers and society, based on the approach of “self-development,” where employees consciously develop their own skills. In addition, we consider that promoting diversity and inclusion and fostering an organizational culture that can incorporate diverse perspectives and ideas will lead to new value creation and innovation. Based on these ideas, in April 2016 we formulated our “People Philosophy”*. * A philosophy that states our ideas and attitudes for human resources that will lead the creation of value for society based on the “NEC Group Values” and “NEC Group Code of Conduct.” Dialogue with External Experts on the Theme of “Sustainably and Socially Literate Human Resources” In April 2018, NEC held a dialogue session on its materiality theme, “Sustainably and socially literate human resources.” Participants evaluated NEC’s human resource development policy highly, but also commented that “the program is lacking with regard to independent learning, and it would be desirable to develop human resources who are capable of taking responsibility for their own learning cycles.” We also received a critical comment that “NEC should cultivate a corporate culture where people can take up new challenges without fearing failure. Innovation does not come about through coercion.” We responded by noting that “partly because NEC has mission critical solutions that support social infrastructure, there have been times when NEC’s culture has felt as though it will not tolerate failure; however, recently the corporate culture has started to change, with top management beginning to talk more about their aspirations.” NEC will further accelerate its activities while confirming its own direction of creating value for society. Developing Human Resources Who Can Support Innovation In our R&D divisions, in order to create solutions for society, we are actively promoting development of human resources who can take on advanced global issues and recruitment of experienced personnel with wide-ranging knowledge on social issues. We are also taking steps to stimulate personnel exchanges between operating divisions and research divisions in an effort to develop skills to promote commercialization of technologies. In addition, we are aggressively recruiting people with the highest levels of skill in their industries, both in Japan and internationally. We will continue to encourage richly diverse human resources from various professional fields to engage in multidimensional discussions, respecting one another regardless of gender or nationality, as we transform our organization to enable it to generate great innovations. We Should Not Stop by Just Experiencing Social Issues, We Need to Create Fields and Mechanisms that Takes It All the Way to Commercialization Head of NEC Laboratories India, Akihiko Iketani, Ph.D At the Value Co-creation Center, when we decide on research themes, we start with social issues as a starting point, rather than technologies. Currently, we are working on the themes of urban congestion and aging infrastructure. Having diversity within companies has become more and more important these days. My group also has members coming from diverse backgrounds. In my group, however, we have never tried to consciously push diversity. It is just that the human resources we gathered to achieve our goal happened to be a woman or someone with a foreign nationality. To me, diversity is not a goal in itself; it is merely a means to an end. There are numerous training modules in NEC and at other companies that enable participants to experience social issues. However, the problem is that after they complete the training, they return to their ordinary lives and forget about what they have learned. In July 2018, NEC opened its sixth global research facility in India. Here, I want to create fields and mechanisms where employees not only experience social issues, but also conduct research and development to solve the social issues and ultimately commercialize them. For further information, please refer to Sustainability Report 2018 “Diversity and Inclusion” “Human Resource Development and Training” “Dialogue Sessions on Materiality with Experts” 50 NEC Corporation Integrated Report 2018 Promoting Environmental Management The negative effects that are brought about by climate change cover a range of different circumstances, such as an increasing number of natural disasters caused by abnormal weather conditions, depletion of water resources, and effects on the supply of and demand for food. NEC has set “environmental action with a particular focus on climate change” as one of its “materiality,” the priority management themes from an ESG perspective. Since fiscal 2017, we have been focusing on measures to mitigate and adapt to climate change. Strengthening Climate Change Countermeasures In fiscal 2018, NEC formulated guidelines on climate change measures from a long-term perspective up to 2050. Based on these guidelines, we aim to reduce CO2 emissions linked to our business operations to effectively zero by 2050 as well as reduce CO2 emissions from the whole supply chain by cooperating with suppliers and partners. Through these efforts, NEC is contributing to reductions in greenhouse gases on a global scale. The Four Components of the Climate Change Policy Guidelines for 2050 II. Achieving sustainable society by collaboration 3 Low carbon society as the global target (Keeping global average temperature rise between 1.5 and less than 2 degrees) 4 Safe and secure society that is strong against climate change risks 1 Aiming for zero CO2 emissions from supply chains 2 Strict measures against climate change risks in supply chains I. Building sustainable management foundation e g n a h c e t a m i l c f o ” n o i t a g i t i M “ e g n a h c e t a m i l c f o ” n o i t a t p a d A “ Furthermore, we are committed to achieving our CO2 emission reduction targets by 2030 as Science Based Targets (SBT), and we are proceeding with the development of specific SBTs. 51 NEC Corporation Integrated Report 2018 Promoting Environmental Management Progress on “Environmental Management Action Plan 2020/2030” In accordance with the Environmental Management Action Plan 2020/2030, NEC has set a goal of attaining a level of CO2 reduction for society that is five times the total volume of CO2 emissions from its entire supply chain through the provision of NEC products and services by 2020. In fiscal 2018, NEC’s contribution to reducing CO2 emissions was 21.78 megatons, 3.5 times its impact of 6.16 megatons. Climate Change Mitigation Target for 2020 5 times Social value created by NEC 1.2 times 1.5 times 2.4 times Adaptation 4.53 megatons 3.5 times Adaptation 5.39 megatons 11.81 megatons 14.88 megatons Mitigation 14.00 megatons Mitigation 16.39 megatons Contribution Preparation for climate change (adaptation) + CO2 emissions reductions (mitigation) FY2015/3 FY2016/3 FY2017/3 FY2018/3 FY2021/3(Target) Impact 9.50 megatons 9.65 megatons 7.76 megatons 6.16 megatons Supply chain CO2 emissions (Scope 1, 2, 3) Impact of NEC’s businesses Improvements to Environmental Management through Dialogue with Our Stakeholders NEC holds dialogues with stakeholders, aiming to promote deeper understanding of its efforts in non-financial areas. We also seek to improve future initiatives and information disclosure by ascertaining opinions from external experts and the ESG information required by investors. IR Meetings related to ESG Continuing from fiscal 2017, NEC held an IR meeting specializing in the “E” (environment) of ESG. A total of 13 institutional investors from 12 companies participated. At the meeting, we gave an explanation of our progress on mid- term environmental management targets as well as our newly formulated guidelines on climate change measures looking ahead to 2050. We received wide ranging feedback and proposals, such as requests to clearly indicate how environmental activities connect with business competitiveness, or how we are trying to connect them. Looking ahead, we will hold regular IR meetings related to ESG to improve our ESG initiatives. Dialogue with External Experts Regarding Climate Change NEC conducted a dialogue between our personnel responsible for environmental management promotion and in charge of demand- supply optimization solution business promotion, and external experts with perspectives on sustainable management and the environment. The experts mentioned with regard to NEC’s desired environmental management, KPIs for environmental targets, and initiatives to connect these with operations, that “NEC should strategically conduct environmental management to find ways of connecting environmental issues to sales and increased brand value, and ways of developing human resources to achieve this,” and that “NEC needs to take a wide perspective, such as driving innovation by envisaging a future of limited electric power availability.” The knowledge that we obtained through these dialogues will be reflected in our initiatives on environmental management. 52 NEC Corporation Integrated Report 2018Examples of Providing Environmental Value through Business DMIC logistic visualization solution in India Energy efficiency in mobile phone base stations in India NEC and DMICDC*1 have established a joint venture company, DMICDC Logistics Data Service Limited. Since July 2016, it has provided the information service basis to visualize distribution infrastructure and to perform real-time searches based on positional information of containers being transported. The joint venture company affixes RFID tags to shipping containers being loaded and unloaded at ports of Mumbai. It has also installed RFID reader/writers at locations such as port entrances and exits, toll plazas on the expressway, and inland container depots where customs inspections are carried out. The information is uploaded to the cloud and shared with other logistics systems. By this service, consigners and freight forwarders could obtain accurate positional information of their container in transit along the 1,500 km stretch between Delhi and Mumbai on a near real-time basis, just inputting the container number. As the result, this service shortens shipping lead times, reduces inventory levels, improves the accuracy of production plans and also contributes to reduce the consumption of fossil fuel by realizing efficient transportation. NEC approved this service as “ECO Symbol Star*2” since we expect that the service will reduce approximately 170,000 t-CO2e emission annually in addition to shortening shipping lead times and to reducing shipping cost. RFID easily attachable to container using magnets *1 DMICDC: Delhi Mumbai Industrial Corridor Development Corporation Limited. *2 Eco Symbol Star: Assigned to NEC hardware, software, and service products that are environmental top runners. These products meet NEC‘s self-defined standards such as reducing CO2 emissions by 50% or more compared to conventional products. The number of base stations is expanding rapidly due to the sharp increase of mobile phone subscribers nationwide in India. However, there are many regions in India with fragile power supplies that suffer from frequent power outages and regions that are not supplied with power at all. In such regions, mobile telecom operators use diesel generators during power outage to operate base station continuously, therefore the burden of diesel fuel cost of the generator becomes a big financial problem. Since the Indian government requests for green-industry, mobile base station companies in India are required to reduce fuel consumption by diesel generators, operation cost and CO2 emissions simultaneously on the viewpoints of both business management and environmental issue. These issues were taken up for the energy related discussion between the governments of India and Japan (the India-Japan Energy Dialog), and the demonstration project by Japan’s New Energy and Industrial Technology Development Organization (NEDO) opened to the public in 2013. As the result of NEC’s application for the project, NEC was selected by NEDO to implement the demonstrational operation from September 2013 to March 2017. Through this operation, the energy management systems, which consisted of photovoltaic generation systems, lithium-ion rechargeable battery systems, remote monitoring of whole EMS systems, operation planning and battery charging/ discharging control, were installed into 20 mobile phone base stations in India. Since the systems were confirmed to be able to reduce the annual CO2 emissions to about 40% of their original level by the most suitable operation plan using the data acquired by the system itself, NEC approved this EMS system as “ECO Symbol Star.” Through the 2-year-operation on the actual sites, we could acquire know-how needed as a business, like various knowledge for the operation. We are going to link these findings to develop specific business in India where more than 400,000 mobile phone base stations exist. Demonstration Project for Telecom Tower Sites in India For further information, please refer to Sustainability Report 2018, “Environmental Management Initiatives“ “Dialogue Sessions on Materiality with Experts“ 53 NEC Corporation Integrated Report 2018Corporate Data 5 5 Financial Section 5 5 Consolidated Statements of Financial Position 5 6 Consolidated Statements of Profit or Loss Consolidated Statements of Comprehensive Income Consolidated Statements of Cash Flows 5 7 Consolidated Statements of Changes in Equity 5 8 Non-Financial Section 59 Corporate Overview 60 Our History Note: Please refer to the separate publication “Integrated Report 2018 (Financials)” for details of “Note XX” on pages 55 to 57. 54 NEC Corporation Integrated Report 2018Financial Section (See notes to consolidated financial statements.) NEC Corporation and Subsidiaries Years Ended March 31, 2017 and 2018 Consolidated Statements of Financial Position Millions of yen 2017 2018 Millions of yen 2017 2018 Assets Current Assets Liabilities and equity Liabilities Current liabilities Cash and cash equivalents (Note 16) . . . . . . . . ¥ 239,970 ¥ 346,025 Trade and other payables (Note 24) . . . . . . . ¥ 497,051 ¥ 512,115 Trade and other receivables (Note 15) . . . . . . . 952,258 Inventories (Note 14) . . . . . . . . . . . . . . . . . . . . . 205,855 Other financial assets . . . . . . . . . . . . . . . . . . . . . 4,485 931,231 220,254 6,350 Bonds and borrowings (Note 20) . . . . . . . . . 118,915 Accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,161 Other financial liabilities . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . 106,169 112,543 Accrued income taxes . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,508,737 1,616,403 Provisions (Note 23) . . . . . . . . . . . . . . . . . . . . 139,687 171,434 9,835 13,844 45,621 12,507 21,014 52,210 Assets held for sale (Note 17) . . . . . . . . . . . . . . — 23,932 Other current liabilities (Note 22) . . . . . . . . 145,683 158,840 Total current assets . . . . . . . . . . . . . . . . . . . . . 1,508,737 1,640,335 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,002,541 1,051,376 Non-current assets Property, plant and equipment, net (Notes 8 and 10) . . . . . . . . . . . . . . . . . . . . . . . 419,078 399,590 Goodwill (Notes 9 and 10) . . . . . . . . . . . . . . . . 63,220 103,967 Liabilities directly associated with assets held for sale (Note 17) . . . . . . . . . . . － 11,689 Total current liabilities . . . . . . . . . . . . . . . . 1,002,541 1,063,065 Non-current liabilities Bonds and borrowings (Note 20) . . . . . . . . . 342,854 376,383 Other financial liabilities . . . . . . . . . . . . . . . . 8,285 9,118 Defined benefit liabilities (Note 21) . . . . . . . 264,272 275,326 Provisions (Note 23) . . . . . . . . . . . . . . . . . . . . 13,736 13,754 Other non-current liabilities (Note 22) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,242 29,420 Intangible assets (Notes 9 and 10) . . . . . . . . . . 142,139 156,248 Total non-current liabilities . . . . . . . . . . . . 665,389 704,001 Investments accounted for using the equity method (Note 12) . . . . . . . . 68,132 67,747 Other financial assets . . . . . . . . . . . . . . . . . . . . . 262,284 Deferred tax assets (Note 13) . . . . . . . . . . . . . . 156,622 245,852 142,402 Other non-current assets (Notes 10 and 21) . . . . . . . . . . . . . . . . . . . . . . 63,784 65,210 Total non-current assets . . . . . . . . . . . . . . . . . 1,175,259 1,181,016 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,667,930 1,767,066 Equity Share capital (Note 18) . . . . . . . . . . . . . . . . . . . . . 397,199 397,199 Share premium (Note 18) . . . . . . . . . . . . . . . . . . . 147,879 138,704 Retained earnings (Note 18) . . . . . . . . . . . . . . . . 235,601 265,879 Treasury shares (Note 18) . . . . . . . . . . . . . . . . . . . (3,101) (3,364) Other components of equity (Notes 18 and 21) . . . . . . . . . . . . . . . . . . . . . . . . . Total equity attributable to owners of the parent . . . . . . . . . . . . . . . . . . . . . 76,686 82,415 854,264 880,833 Non-controlling interests (Note 11) . . . . . . . . . . 161,802 173,452 Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,016,066 1,054,285 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,683,996 ¥2,821,351 Total liabilities and equity . . . . . . . . . . . . . . . . . ¥2,683,996 ¥2,821,351 55 NEC Corporation Integrated Report 2018Financial Section Consolidated Statements of Profit or Loss Consolidated Statements of Cash Flows Revenue (Notes 6 and 25) . . . . . . . . . . . . . . . . . . . Cost of sales (Notes 14 and 28) . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses (Note 28) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating income (loss) (Note 27) . . . . . . . Operating profit (Note 6) . . . . . . . . . . . . . . . . . . . Financial income (Notes 6 and 29) . . . . . . . . . . . . Financial costs (Notes 6 and 29) . . . . . . . . . . . . . . Share of profit of entities accounted for using the equity method (Note 6) . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . Millions of yen 2017 ¥2,665,035 1,909,414 755,621 2018 ¥2,844,447 2,046,853 797,594 698,413 (15,370) 41,838 38,420 20,817 8,617 68,058 729,855 (3,889) 63,850 29,553 11,568 5,106 86,941 Income taxes (Note 13) . . . . . . . . . . . . . . . . . . . . . Net profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,834 ¥ 35,224 26,784 ¥ 60,157 Net profit attributable to Owners of the parent . . . . . . . . . . . . . . . . . . . . . Non-controlling interests . . . . . . . . . . . . . . . . . . 27,310 7,914 ¥ 35,224 45,870 14,287 ¥ 60,157 Earnings per share attributable to owners of the parent Basic earnings per share (yen) (Note 31) . . . . . Diluted earnings per share (yen) (Note 31) . . . . . 105.10 105.10 176.54 176.54 Note: The Company implemented share consolidation with a ratio of 10 shares of common share to 1 share as of October 1, 2017. The basic earnings per share (“EPS”) and diluted EPS on common share are calculated assuming that the share consolidation was carried out from the beginning of the fiscal year ended March 31, 2017 (April 1, 2016). Consolidated Statements of Comprehensive Income Net profit Other comprehensive income, net of tax Items that will not be reclassified to profit or loss Remeasurements of defined benefit plans (Notes 18 and 21) . . . . . . . . . . . . . . . . . . . . . . Share of other comprehensive income of associates (Note 18) . . . . . . . . . . . . . . . . . . . . . Total items that will not be reclassified to profit or loss . . . . . . . . . . . . . . . . . . . . . . . . . . . Items that may be reclassified subsequently to profit or loss Exchange differences on translating foreign operations (Note 18) . . . . . . . . . . . . . . . . . . . . Cash flow hedges (Note 18) . . . . . . . . . . . . . . . Available-for-sale financial assets (Note 18) . . . . Share of other comprehensive income of associates (Note 18) . . . . . . . . . . . . . . . . . . . . . Total items that may be reclassified subsequently to profit or loss . . . . . . . . . . . . . Total other comprehensive income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income . . . . . . . . . . . . . . . Total comprehensive income attributable to Millions of yen 2017 ¥ 35,224 2018 ¥60,157 56,276 3,368 534 10 56,810 3,378 (1,869) 623 15,533 702 14,989 (6,434) (92) 8,462 1,520 3,456 71,799 ¥107,023 6,834 ¥66,991 Owners of the parent . . . . . . . . . . . . . . . . . . . . . Non-controlling interests . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,929 7,094 ¥107,023 51,599 15,392 ¥66,991 Cash flows from operating activities Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization (Note 6) . . . . . . . . . . . . . Impairment loss (Notes 6 and 10) . . . . . . . . . . . . . . . . . . Increase (decrease) in provisions . . . . . . . . . . . . . . . . . . . Financial income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share of (profit) loss of entities accounted for using the equity method . . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in trade and other receivables . . . . Decrease (increase) in inventories . . . . . . . . . . . . . . . . . . Increase (decrease) in trade and other payables . . . . . . Others, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest and dividends received . . . . . . . . . . . . . . . . . . . . Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . Cash flows from investing activities Purchases of property, plant and equipment . . . . . . . . . Proceeds from sales of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions of intangible assets . . . . . . . . . . . . . . . . . . . Purchases of available-for-sale financial assets . . . . . . . Proceeds from sales of available-for-sale financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of shares of newly consolidated subsidiaries . Acquisitions of subsidiaries, net of cash acquired . . . . . Proceeds from sales of shares of subsidiaries . . . . . . . . . Purchases of investments in affiliated companies . . . . . Proceeds from sales of investments in affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from collection of loans receivable . . . . . . . . . Others, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by / (used in) investing activities Cash flows from financing activities Increase (decrease) in short-term borrowings, net (Notes 16 and 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from long-term borrowings (Notes 16 and 20) . . Repayments of long-term borrowings (Notes 16 and 20) . . Proceeds from issuance of bonds (Notes 16 and 20) . . . Redemption of bonds (Notes 16 and 20) . . . . . . . . . . . . Dividends paid (Note 19) . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid to non-controlling interests . . . . . . . . . . Others, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and Millions of yen 2017 2018 ¥ 68,058 80,376 2,571 12,302 (38,420) 20,817 ¥ 86,941 96,037 1,530 (7,450) (29,553) 11,568 (8,617) 22,201 22,659 (31,666) (43,141) 107,140 5,866 (8,646) (11,835) 92,525 (5,106) 12,244 (16,115) 17,036 (16,701) 150,431 6,076 (5,764) (20,762) 129,981 (37,201) (43,253) 2,676 (7,888) (4,117) 4,359 (984) 11,220 339 (162) 23,698 12,958 1,527 6,425 15,228 204,082 (240,127) — (10,000) (15,592) (2,386) (86) (48,881) 6,334 (10,134) (2,336) 12,442 (23,110) 5 228 (471) 21,997 25,466 (1,399) (14,231) 8,214 11,512 (65,864) 100,000 (40,000) (15,586) (4,258) (1,257) (7,239) (2,422) (2,447) cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,647 106,064 Cash and cash equivalents, at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in cash and cash equivalents resulting from transfer to assets held for sale (Note 17) . . . . . . . . . . Cash and cash equivalents, at the end of the year 192,323 239,970 — (9) (Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 239,970 ¥ 346,025 56 NEC Corporation Integrated Report 2018 Consolidated Statements of Changes in Equity Equity attributable to owners of the parent Millions of yen Share capital Share premium Retained earnings Treasury shares Other components of equity Total Non- controlling interests Total equity As of April 1, 2016 . . . . . . . . . . . . . ¥397,199 ¥147,755 ¥223,883 ¥(3,077) ¥ 4,067 ¥769,827 ¥ 67,393 ¥ 837,220 Net profit . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (Note 18) . . . . . . . . . . . . . Comprehensive income . . . . . . . . Purchase of treasury shares (Note 18) . . . . . . . . . . . . . . . . . . . . Disposal of treasury shares (Note 18) . . . . . . . . . . . . . . . . . . . . Cash dividends (Note 19) . . . . . . . Subscription rights to shares . . . . Changes in interests in subsidiaries (Note 11) . . . . . . . . . Total transactions with owners . . — — — — — — — — — — — — — (2) — 5 121 124 27,310 — 27,310 — — (15,592) — — — — — (26) 3 — — — (15,592) (23) — 27,310 7,914 35,224 72,619 72,619 72,619 99,929 (820) 7,094 71,799 107,023 — — — — — — (26) 1 — — (26) 1 (15,592) (2,386) (17,978) 5 121 (15,491) — 5 89,701 87,315 89,822 71,824 As of March 31, 2017 . . . . . . . . . . ¥397,199 ¥147,879 ¥235,601 ¥(3,101) ¥76,686 ¥854,264 ¥161,802 ¥1,016,066 Equity attributable to owners of the parent Millions of yen Share capital Share premium Retained earnings Treasury shares Other components of equity Total Non- controlling interests Total equity As of April 1, 2017 . . . . . . . . . . . . . ¥397,199 ¥147,879 ¥235,601 ¥(3,101) ¥76,686 ¥854,264 ¥161,802 ¥1,016,066 Net profit . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (Note 18) . . . . . . . . . . . . . Comprehensive income . . . . . . . . Purchase of treasury shares (Note 18) . . . . . . . . . . . . . . . . . . . . Disposal of treasury shares (Note 18) . . . . . . . . . . . . . . . . . . . . Cash dividends (Note 19) . . . . . . . Put option, written over shares held by a non-controlling interest shareholder . . . . . . . . . . Changes in interests in subsidiaries (Note 11) . . . . . . . . . Total transactions with owners . . — — — — — — — — — — — — — (5) — 45,870 — 45,870 — — (15,592) (2,113) (7,057) — — — — — (271) 8 — — — (9,175) (15,592) (263) — 45,870 14,287 60,157 5,729 5,729 5,729 51,599 1,105 15,392 6,834 66,991 — — — — — — (271) 3 — — (271) 3 (15,592) (4,258) (19,850) (2,113) — (2,113) (7,057) 516 (6,541) (25,030) (3,742) (28,772) As of March 31, 2018 . . . . . . . . . . ¥397,199 ¥138,704 ¥265,879 ¥(3,364) ¥82,415 ¥880,833 ¥173,452 ¥1,054,285 57 NEC Corporation Integrated Report 2018Non-Financial Section NEC Corporation and Consolidated Subsidiaries For the years ended or at year-end of March 31, 2017 and 2018 CO2 emissions reduction by providing IT solutions . . . . . . . . . . . . . . Improvement in energy efficiency of products*1 . . . . . . . . . . . . Greenhouse gas emissions*2*3 17 35 % Scope 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . Scope 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 296 56 Thousand tons 282 Thousand tons Scope 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,410 5,820 Thousand tons Energy usage*3 Electricity . . . . . . . . . . . . . . . . . . . . . . . . . 5,708 5,685 Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fuel (heavy oil and kerosene) . . . . . . . 938 131 984 119 TJ*4 TJ TJ Water usage*3 . . . . . . . . . . . . . . . . . . . . . . 2,240 2,314 Thousand m3 Industrial waste*3 Emission volume (general waste + industrial waste) . . 26 42.6 Thousand tons Resource reuse rate . . . . . . . . . . . . . . . . 90.6 91.0 % 2017 2018 Units 2017 2018 Units 2,630 4,220 Thousand tons Number of employees by region Total . . . . . . . . . . . . . . . . 107,729 109,390 People Japan . . . . . . . . . . . . . . . . . . . . . . . . 80,478 79,642 People China/East Asia . . . . . . . . . . . . . . . . 5,329 4,739 People Asia Pacific . . . . . . . . . . . . . . . . . . . . 9,347 10,985 People EMEA . . . . . . . . . . . . . . . . . . . . . . . . 5,406 6,636 People North America . . . . . . . . . . . . . . . . . 2,819 2,710 People Latin America . . . . . . . . . . . . . . . . . 4,350 4,678 People Ratio of outside directors to all directors*5 . . . . . . . . . . . . . . . . . Number of female managers*5*6*8 (As of April 1 of each year) . . . . . . . . . . Ratio of female managers*5*6*8 (As of April 1 of each year) . . . . . . . . . . Ratio of employees with disabilities*5 (As of June 1 of each year) . . . . . . . . . . Number of people utilizing childcare leave*5*6*8 . . . . . . . . . . . Number of people utilizing nursing care leave*5*6*8 . . . . . . . . Average age of employees*5*6*8 . . Average length of employment*5*6*8 . . . . . . . . . . . . . Labor accidents and disasters*7*8 45.5 45.5 % 368 372 People 5.5 5.8 % 2.04*8 2.24 % 376 358 People 18 43.1 32 People 43.4 Years old 18.8 19.0 Years Frequency rate . . . . . . . . . . . . . . . . 0.18 0.3717 Severity rate . . . . . . . . . . . . . . . . . . 0.00 0.0019 *1 Comparison with products in the fiscal year ended March 31, 2014. *2 Greenhouse gas refers to CO2 (carbon dioxide), CH4 (methane), N2O (nitrous oxide), HFCs (hydrofluorocarbons), PFCs (perfluorocarbons), SF6 (sulphur hexafluoride), and NF3 (nitrogen trifluoride). Greenhouse gas emissions are calculated based on the following categories stated by the Greenhouse Gas Protocol (GHG Protocol). Scope 1: Direct GHG emissions from sources that are owned or controlled by the Company Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam Scope 3: Other indirect emissions covering corporate upstream and downstream processes not included in Scope 2 *3 External assurance received. The scope of assurance includes NEC Corporation and consolidated subsidiaries subject to environmental governance. *4 TJ: Terajoule *5 Scope: NEC Corporation *6 Excluding corporate officers, advisors, and non-permanent employees *7 Scope: NEC Corporation Frequency rate: Number of deaths and injuries due to industrial accidents divided by total working hours times one million Severity rate: Number of lost working days divided by total working hours times one thousand *8 Externally assured figures. 58 NEC Corporation Integrated Report 2018 Corporate Overview Company Name NEC Corporation Organization Chart Address 7-1, Shiba 5-chome, Minato-ku, Tokyo 108-8001, Japan Established July 17, 1899 Number of Employees 109,390 (NEC Corporation and consolidated subsidiaries) (As of March 31, 2018) Total Number of Shares Issued 260,473,263 shares (As of March 31, 2018) President Board Business Innovation Unit System Integration, Services & Engineering Operations Unit Global Business Unit Stock Exchange Listing Tokyo (Securities Code: 6701) Regional Headquarters (RHQs) Shareholder Register Administrator Sumitomo Mitsui Trust Bank, Limited 1-4-1, Marunouchi, Chiyoda-ku, Tokyo Classification of Shareholders (Shareholding Ratio) (As of March 31, 2018) Japanese Individuals and Others 27.16% Japanese Government and Local Government 0.00% Number of Shareholders: 176,576 Financial Institutions 30.19% Securities Companies 3.69% Other Corporations 3.52% Foreign Investors 35.44% Major Shareholders (Top 10) (As of March 31, 2018) Public Solutions Business Unit Branch Offices Public Infrastructure Business Unit Enterprise Business Unit Network Services Business Unit System Platform Business Unit Central Research Laboratories Corporate Staff Name of 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) Nomura International (Hong Kong) Limited - Unclaimed Client Account Bnymsanv As Agent / Clients Lux Ucits Non Treaty 1 Japan Trustee Services Bank, Ltd. (Trust Account No.9) Sumitomo Life Insurance Company NEC Employee Shareholding Association Japan Trustee Services Bank, Ltd. (Trust Account No.5) State Street Bank West Client - Treaty 505234 Japan Trustee Services Bank, Ltd. (Trust Account No.4) Note: The shareholding ratio is calculated by excluding the number of treasury stock (630,032 shares) 59 13,625 12,780 7,814 7,425 7,193 5,600 5,177 4,944 4,890 4,323 5.24 4.92 3.01 2.86 2.77 2.16 1.99 1.90 1.88 1.66 NEC Corporation Integrated Report 2018 Our History 1899 Nippon Electric Company, Limited is established 1974 The ACOS Series 77 mainframe computer family is announced 1928 NE-Type phototelegraphic equipment transmits scenes of Imperial Accession Ceremony of Emperor Hirohito between Kyoto to Tokyo 1954 Begins research into computers 1956 Produces first domestic-made XB switching system 1958 Develops fully transistorized NEAC-2201 computer 1964 Trans-Pacific TV broadcasts of the 18th Olympiad in Tokyo are successfully implemented using NEC-supplied ground facilities for satellite communications 1968 Develops 144-bit high-speed N-channel MOS (Metal Oxide Semiconductor) IC memory 1970 Produces Osumi experimental satellite 1971 The NS-100 fully automated postal sorting system is developed 1977 “C&C” or the integration of computer and communications technologies is first announced at INTELCOM ‘77 1979 The PC-8001 personal computer is announced 1985 The SX-2 supercomputer demonstrates the world’s fastest performance 1991 A unique graphite crystal is discovered and named “carbon-nanotubes” 2002 The Earth Simulator, the world’s fastest supercomputer system for resolving global environmental problems, is completed 2003 Constructs one of the world’s largest mission-critical systems, the i-mode gateway system “CiRCUS” 2008 Broadcasting transmitters provided to 110 countries in total 2010 Asteroid explorer “HAYABUSA” successfully returns to Earth 2014 Formulation of brand message “Orchestrating a brighter world” Ultra-compact radio communication system PASOLINK delivered to 150 countries in total 2016 Submarine cable installation reaches over 250,000 km, enough to circle the earth six times Biometric solutions adopted by 70 countries in total 60 NEC Corporation Integrated Report 2018Cautionary Statement with Respect to Forward-Looking Statements This material contains forward-looking statements regarding estimations, forecasts, targets and plans in relation to the results of operations, financial conditions and other overall management of the NEC Group (the “forward-looking statements"). The forward-looking statements are made based on information currently available to NEC and certain assumptions considered reasonable as of the date of this material. These determinations and assumptions are inherently subjective and uncertain. These forward-looking statements are not guarantees of future performance, and actual operating results may differ substantially due to a number of factors. The factors that may influence the operating results include, but are not limited to, the following: • Effects of economic conditions, volatility in the markets generally, and fluctuations in foreign currency exchange and interest rate • Trends and factors beyond the NEC Group's control and fluctuations in financial conditions and profits of the NEC Group that are caused by external factors • Risks arising from acquisitions, business combinations and reorganizations, including the possibility that the expected benefits cannot be realized or that the transactions may result in unanticipated adverse consequences • Developments in the NEC Group's alliances with strategic partners • Effects of expanding the NEC Group's global business • Risk that the NEC Group may fail to keep pace with rapid technological developments and changes in customer preferences • Risk that the NEC Group may lose sales due to problems with the production process or due to its failure to adapt to demand fluctuations • Defects in products and services • Shortcomings in material procurement and increases in delivery cost • Acquisition and protection of intellectual property rights necessary for the operation of business • Risk that intellectual property licenses owned by third parties cannot be obtained and/or are discontinued • Risk that the NEC Group may be exposed to unfavorable pricing environment due to intensified competition • Risk that a major customer changes investment targets, reduces capital investment and/or reduces the value of transactions with the NEC Group • Risk that the NEC Group may be unable to provide or facilitate payment arrangements (such as vendor financing) to its customers on terms acceptable to them or at all, or risk that the NEC Group's customers are unable to make payments on time, due to the customers' financial difficulties or otherwise • Risk that the NEC Group may experience a substantial loss of, or an inability to attract, talented personnel • Risk that the NEC Group's ability to access the commercial paper market or other debt markets are adversely affected due to a downgrade in its credit rating • Risk that the NEC Group may incur large costs and/or liabilities in relation to internal control, legal proceedings, laws and governmental policies, environmental laws and regulations, tax practice, information management, and human rights and working environment • Consequences of natural and fire disasters • Changes in methods, estimates and judgments that the NEC Group uses in applying its accounting policies • Risk that the NEC Group may incur liabilities and losses in relation to its retirement benefit obligations The forward-looking statements contained in this material are based on information that NEC possesses as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for NEC to predict these events or how they may affect the NEC Group. NEC does not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Trademarks • NEC is a registered trademark of NEC Corporation in Japan and other countries. • All other names may be trademarks of their respective owners. 61 NEC Corporation Integrated Report 2018The information contained in Integrated Report 2018 is also available on NEC’s website. NEC home page https://www.nec.com Sustainability https://www.nec.com/en/global/csr/ The above link offers further details of NEC’s approach to sustainable management based on ESG, “Sustainability Report 2018,” and related information. Division in Charge Sustainability Promotion Office, Corporate Communications Division Evaluation by External Parties (As of July 2018) FTSE4Good Index Series oekom Corporate Rating Euronext Vigeo World 120 Ethibel Pioneer & Excellence STOXX Global ESG Leaders Index Morningstar Socially Responsible Investment Index MSCI ESG Leaders Indexes THE INCLUSION OF NEC Corporation IN ANY MSCI INDEX, AND THE USE OF MSCI LOGOS, TRADEMARKS, SERVICE MARKS OR INDEX NAMES HEREIN, DO NOT CONSTITUTE A SPONSORSHIP, ENDORSEMENT OR PROMOTION OF NEC Corporation 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. Investor Relations https://www.nec.com/en/global/ir Posted on the NEC Investor Relations (IR) website are IR presentation materials and other documents, NEC’s financial position and business results, stock and bond information, and much more. NEC constantly strives to enhance the disclosure on this website. Division in Charge Investor Relations Office, Corporate Strategy Division Internet IR Excellence Award 2017 62 NEC Corporation Integrated Report 20187-1, Shiba 5-chome, Minato-ku, Tokyo 108-8001, Japan Telephone: +81-3-3454-1111 ISSN 0910-8229 ©NEC Corporation 2018 Printed in Japan 

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