TDK Corp.
Annual Report 2018

Plain-text annual report

T D K C o r p o r a t i o n A n n u a l R e p o r t 2 0 1 8 L e ver ag ing t he Streng t h of O ur Diversity A N N U A L R E POR T 2018 English Version TDK Corporation Nihonbashi Takashimaya Mitsui Building, 2-5-1 Nihonbashi, Chuo-ku, Tokyo 103-6128 http://www.global.tdk.com/corp/en/index.htm C O N T E N T S 02 INTRODUCTION 14 Message from the President—To Our Stakeholders 22 Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On 24 TDK Overview 26 Summary of the Previous Medium-Term Plan 28 Management Environment 30 Medium-Term Plan “Value Creation 2020” 32 Message from the Corporate Officer of Corporate Planning 34 Message from the Corporate Officer of Finance & Accounting 36 Executing Growth Strategies 44 Synergies Behind the Sensor Business 46 Moving to Improve Sustainable Corporate Value 46 Global Human Resource Strategies Bolstered by Strength of Diversity 49 TDK’s Workstyle Innovation 50 The TDK Group’s Materiality 52 Optimization of the Value Chain 56 Consolidated Business Results Highlights 60 Overview of Business Conditions by Segment 62 Business Strategies 62 Passive Components Segment 64 Sensor Application Products Segment 66 Magnetic Application Products Segment 68 Energy Application Products Segment 70 Corporate Governance 70 Dialogue: TDK from Outside Perspectives 73 Strengthening Future-Oriented Governance 74 Sustained Improvements Stressing Effectiveness 78 Directors, Audit & Supervisory Board Members, and Corporate Officers 80 Corporate Information Editorial Policy Annual Report 2018 provides financial data, including information on business results, business and market- ing activities, the Medium-Term Plan, and related topics. In addition, it also contains general information on environmental (E), social (S), and governance (G) topics. For further information on financial topics not covered here, as well as on topics related to corporate social responsibility (CSR), and for product informa- tion, please visit the TDK website. Cautionary Statements with Respect to Forward-Looking Statements This report contains forward-looking statements, including projections, plans, policies, management strategies, targets, schedules, understandings, and evaluations about TDK and/or its Group companies (“the TDK Group”). These forward-looking statements are based on the current forecasts, estimates, assump- tions, plans, beliefs, and evaluations of the TDK Group in light of information currently available to it, and contain known and unknown risks, uncertainties, and other factors. The TDK Group therefore wishes to cau- tion readers that, being subject to risks, uncertainties, and other factors, the TDK Group’s actual results, per- formance, achievements, or financial positions could be materially different from any future results, perfor- mance, achievements, or financial positions expressed or implied by these forward-looking statements, and the TDK Group undertakes no obligation to publicly update or revise any forward-looking statements after the issue of Annual Report 2018 except as provided for in applicable laws and ordinances. Constantly Upholding Our Founding Spirit Corporate Motto Contribute to culture and industry through creativity Ferrite in the early years Annual Report 2018 01 Addressing future demand on a material levelToday’s TDK was founded in 1935 as Tokyo Denki Kagaku Kogyo K.K., with the goal of industrializing ferrite.Kenzo Saito, the Company’s first president, succeeded in commercializing ferrite, an unknown material at the time. Saito devoted his energy to examining technologies from the perspective of society’s future needs, pursuing the goal of creating value that does not yet exist in the world on a material level.This founding spirit is incorporated in the TDK Corporate Motto, and continues to be faithfully passed down today. INTR ODUC TIO N A Never-Changing TDK, an Ever-Changing TDK Since the invention of ferrite in 1930, 88 years ago, TDK has put the material to use in a constantly expanding range of ferrite products. Passive components and magnets that utilize TDK’s core technologies in ferrite-based materials and process technologies continue to be the foundation of Monozukuri (manufacturing excellence), for which TDK is known. We are constantly building upon this foundation and developing new innovations from the perspective of society’s future needs. Ultrasonic sensors Hall sensors Inertial sensors Semiconductor embedded substrate (SESUB) modules Acceleration sensors Gyroscope sensors Pressure sensors MEMS microphones Gear tooth sensors TMR sensors Thin-film elec- tronic components Current sensors Temperature sensors Biosensors High-frequency components/modules PiezoHaptTM / PowerHapTM Piezo actuators Flash storages Flash memory controllers Film solar cells Transparent conductive films On-board chargers A Never-Changing TDK Radio wave anechoic chambers Varistors HDD magnetic heads Radio wave absorbers Noise suppression sheets Rechargeable lithium polymer batteries An Ever-Changing TDK Switching power supplies DC-DC converters for xEV CORE TECHNOLOGY Materials Technology CORE TECHNOLOGY Process Technology We research the properties of materials at the atomic level and develop original electronic components and devices to meet advanced needs. Materials design technology Powder control technology Microstructure control technology We create high-performance and function products with nanometer-order control technology. Forming technology Sintering technology Thick-film process technology Thin-film process technology Arresters NTC/PTC thermistors Common mode filters 3-terminal filters Chip beads Noise suppression filters Clamp filters Transformers Reactors Inductors Ferrite cores Electric double-layer capacitors (EDLC) Aluminum electrolytic capacitors Film capacitors Ceramic capacitors Bond magnets Neodymium magnets Ferrite magnets Materials Technology A Never-Changing TDK Process Technology TDK, which positions ferrite as its foundation, has expanded the potential of innovation guided by the concept of “A Never-Changing TDK.” P.10–P.11 Five Core Technologies as the Foundations of Growth Ferrite Four Great World-Class Innovations by TDK 1935 INNOVATION 1 1968 INNOVATION 2 Ferrite The invention of ferrite by the Tokyo Institute of Technology and the commercial develop- ment of ferrite cores by TDK was recognized in 2009 by the Institute of Electrical and Electronics Engineers as an IEEE Milestone—a historic achievement that has made significant contributions to society and the global electronics industry. Music cassette tapes TDK developed the world’s first cassette tape for music in response to demand from consumers to enjoy music easily. Our top-notch magnetic material and coating technologies later became the foundation for various innovations. 1980 INNOVATION 3 Fine multilayering technology TDK developed the world’s first multilayer chip inductor by laminating a three-dimensional helical coil inside a chip. This technology has become the foundation for the miniaturization and weight reduction of electronic equipment. 1987 INNOVATION 4 Thin-film head technology TDK has contributed to the astonishing high recording density of hard disk drives (HDDs) by utilizing nano-level thin-film process technology. 02 TDK Corporation Annual Report 2018 03 INTR ODUC TIO N TDK Evolves Constantly Based on a Never-Changing TDK TDK has a solid foundation of passive components and ferrite-based products and core technologies, centering on materials and process technologies. While our core products continue to sell well, we are sowing seeds in anticipation of future demand from society based on a sustainable growth plan of nonlinear evolution that entails boldly replacing Social demand Electrification of automobiles accelerates Social demand Cloud computing Social demand Smartphone use spreads and performance improves continuously Next-generation electronic components our core businesses. Social demand Self-transformation ahead of demand from society New innovation Growth Social demand Personal computer use spreads and storage capacity expands continuously Batteries Sensors and actuators High-frequency components Power supplies HDD magnetic heads Growth Sowing Sowing Commoditization Commoditization Social demand Electrical appliance use spreads Inductors Cassette tape use spreads Magnets Magnetic tapes Capacitors An Ever-Changing TDK A Never-Changing TDK 1935 1960 1961 1965 1970 1980 1986 1990 2000 2000 2001 2005 2007 2008 2010 2011 2013 2015 2016 2017 2017 2018 2019 2020 2021 CORPORATE HISTORY Founded in Shiba-ku, Tokyo, with the goal of industrializing the world’s first ferrite core. TDK shares listed on the First Section of the Tokyo Stock Exchange. Establishes TDK Electronics Corporation, a local subsidiary in New York (with manufacturing and sales sites later established around the world). Acquires SAE Magnetics, a magnetic head manufacturer. Acquires Headway Technologies, a magnetic head manufacturer. Acquires ATL, a manufacturer and seller of rechargeable lithium polymer batteries. Acquires EPCOS, an electronic device manufacturer. Acquires Lambda Power Group, the power supply business of Invensys plc. Acquires Micronas, a developer and manufacturer of magnetic sensors. Acquires Hutchinson, an HDD suspension manufacturer. Acquires Tronics, a MEMS design and manufacturing company. Acquires ICsense, an Application Specific Integrated Circuit (ASIC) development and custom IC design company. Acquires InvenSense, a company with an extensive portfolio of MEMS and other sensor products. Self-Transformation Is the Driving Force behind TDK’s Growth TDK has transformed itself as a company in many ways, not merely in its business portfolio. We have achieved rapid globalization as a result of expanding our overseas sites to establish suitable production locations and by pursuing a dynamic M&A strategy. In addition, we continue to strengthen corporate governance—for example, by switching to global standards to match our global business structure— not in response to external demand, but to improve the chances of success of our strategies from a long- term perspective. Increasing Globalization Strengthening governance Growing in the automotive market Overseas production ratio 85% 2018 Overseas sales ratio 91% 2018 42% 1995 57% 1995 Number of Outside Officers (Directors and Audit & Supervisory Board Members) 5people 2018 Japanese Corporate Officers 11 people 1 person 2002 Non-Japanese Corporate Officers 6people (as of June 2018) Sales in the automotive market About ¥230.0 billion 2018 About ¥97.0 billion 2010 04 05 TDK CorporationAnnual Report 2018INTR ODUC TIO N To Answer the Needs of a New World Anticipating a transformation of social structures, TDK is breaking ground on another path of nonlinear evolution. Taking a long-term view, TDK has made many bold moves, including selling its high-frequency components business, which had been driving profitability, and focusing on M&As in the area of sensors. 2015 Consolidated net sales (external) ¥1,082.6 billion Consolidated operating income (internal) ¥72.5 billion New “nonlinear evolution” Passive Components Magnetic Application Products Film Application Products Other EXIT Sale of high-frequency components business and deepening of collabora- tion with Qualcomm TDK and Qualcomm established RF360 Holdings, a joint venture to supply high-frequency components, and the Company will complete the sale of all shares to Qualcomm in August 2019. The sale of the high-frequency compo- nents business, a driving force for earnings, is a manifesta- tion of TDK’s strong will to transformation itself with a view toward the future of society. TD K Qualcomm Main synergies from the collaboration • Technical cooperation on a wide range of cutting- edge technologies in next-generation mobile com- munications, IoT, and automotive-related fields including passive components, batteries, wireless power transfers, sensors, and MEMS • Enhanced reference design capabilities through Qualcomm INVEST Dynamic M&As focusing on sensors TDK has changed its business portfolio through acquisi- tions focusing on sensors and has developed a new growth foundation for the future. SENSOR March 2016 Micronas Hall sensors HDD October 2016 Hutchinson HDD suspensions SENSOR December 2016 Tronics MEMS inertial sensors SENSOR March 2017 ICsense ASIC design and development SENSOR May 2017 InvenSense Acceleration sensors, gyroscope sensors SENSOR February 2018 Chirp Ultrasonic sensors Establishing a Foothold for the Future 2018 Consolidated net sales ¥1,271.7 billion Consolidated operating income*2 ¥85.6 billion Passive Components*1 Net sales 32.9% (¥417.8 billion) Sensor Application Products*1 Net sales 6.1% (¥77.4 billion) Magnetic Application Products*1 Net sales 21.8% (¥277.5 billion) Energy Application Products*1 Net sales 34.8% (¥442.8 billion) Other*1 Net sales 4.4% (¥56.3 billion) *1 In accordance with segment reorganization in the first quarter of fiscal 2019, the Energy Application Products segment was newly established. Certain products of Other Passive Components in the Passive Components segment were classified into the Other segment, certain products of the Other segment were classified into Other Passive Components in the Passive Components segment, and certain products of the Sensor Application Products segment were reclassified into the Other segment. Sales in fiscal 2018 have also been reclassified to conform to the new segmentation. *2 To comply with the U.S. Financial Accounting Standards Board’s Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, we are revising our business results for fiscal 2018, which were reported on April 27, 2018—operating income, research and development expenses, cost of sales, and selling, general and administrative expenses (revised operating income: ¥85,633 million to ¥89,692 million; revised research and development expenses: ¥103,457 million to ¥102,641 million). The disclosure of revised cost of sales and selling, general and administrative expenses will be made at the announcement of financial results for fiscal 2019. The figures before adjustment are shown. Prospective demand for sensors worldwide (non-optical) by product U.S.$ millions % e g a l a v e r a w t h r a t e o f 8 u n A n g r o 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY 17 18 19 20 21 Microphone Temperature Ultrasonic (TDK estimates) Pressure Magnetic Inertial A new world is coming with advances in IoT and AI whereby everything will connect via the Internet, behave autonomously, and be upgraded autonomously. In such a world, we expect the following business opportunities to emerge in which we can make use of our core technologies. Numerous sensors will connect the real world and cyberspace; steady growth is expected in our target non-optical sensor market Demand will expand for small, large-capacity, high-reliability batteries supporting the autonomous operation of things The electrification of automobiles will advance further, with self-driving vehicles to appear in the future IoT will accelerate the digitization of manufacturing and conversion to services Renewable energy will spread rapidly In our existing businesses, the following changes in the business environment have been clearly observed. Shrinking of the HDD market due to the expanded use of SSDs, but growth in demand for data centers ( P.66–P.67 Magnetic Application Products Segment) Demand for modularization due to the further enhancement of smartphone functionality 06 Annual Report 2018 07 TDK CorporationINTR ODUC TIO N Transforming Our Business Model with a View Toward the Future TDK is proceeding to switch from a conventional business model involving production to order and single-item sales to a new business model. Going forward, we will be generating ideas from Kotozukuri (integrated solutions)—sensor solu- tions, power solutions, and package solutions—and convert- ing them into products through Monozukuri (manufacturing Conventional business model Customers Passive Components Sensors HDD Heads excellence), the foundation of our business. This approach Batteries Power Supplies Others is nothing less than a reexamination of the origins of TDK stated in the corporate motto, “contribute to culture and industry through creativity.” Trans- formation Customers Customers ICT ICT Automotive Automotive Industrial & Energy Industrial & Energy Turnkey Turnkey Solution Partners Solution Partners Kotozukuri Kotozukuri (Integrated Solutions) (Integrated Solutions) Distribution Distribution Partners Partners Solutions Components Processes Materials Package Package Solutions Solutions Sensor Sensor Solutions Solutions Power Power Solutions Solutions Semiconductor Semiconductor Partners Partners HDD Heads HDD Heads Passive Passive Components Components Batteries Batteries Magnets Magnets Monozukuri Monozukuri (Manufacturing Excellence) (Manufacturing Excellence) Thin-Film Thin-Film Processes Processes Coating Coating Processes Processes Powder Powder Mixing & Sintering Mixing & Sintering Processes Processes Precision Precision Machining Machining Processes Processes Semiconductor Semiconductor Materials Materials Organic Organic Materials Materials Magnetic Magnetic Materials Materials Piezoelectric Piezoelectric Materials Materials Multilayer Multilayer Processes Processes Dielectric Dielectric Materials Materials Competitive advantages supporting the sustainability of our business model Materials and Process Technologies Creating “black boxes” to prevent imitation Materials technology elicits raw materials suitable for the targeted properties in a product through advanced expertise in complex composition processes and control of additives. Process technology maximizes the properties of these materials while also expanding the scope of their application in products. Creating “black boxes” for tech- niques for controlling crystal particles at the atomic level, for intellectual property, and for other know-how makes them difficult to imitate overnight. Customer Base Enabling investment from a long-term perspective TDK has built strong relationships with its customers in the automotive, ICT, industrial & energy markets, and other markets. This allows us to more accurately forecast future changes in technology trends, and reduces the risks involved in making aggressive R&D and capital investments. Strength of Diversity A spirit of equality leading to M&A success TDK has built relationships with the companies it has acquired based not on controlling them but on positioning them as equal partners. This expertise in post-merger integration (PMI) is a powerful weapon in ensuring the success of our business portfolio. Global Business Base Overseas sales in excess of 90% TDK’s global business base, with 84.5% of production outside of Japan and 91.1% of sales generated overseas, is a competitive advantage that will allow us to capture business opportunities in the IoT market, which is expected to expand worldwide. Integrated Production A powerful competitive advantage in the age of IoT Integrated production, where everything from materials to the final product is handled in-house, allows TDK to improve its manufacturing excellence and increase productivity through the introduction of IoT and robots. Our ability to also control quality entirely in-house gives TDK a competitive advantage in areas where quality requirements are particularly high, including the automotive market. 08 09 0102030405 TDK CorporationAnnual Report 2018INTR ODUC TIO N Five Core Technologies as the Foundations of Growth Since its inception, TDK has grown on the strength of five core technologies: materials technology based on ferrite; pro- cess technology used to realize materials’ characteristics; evaluation and simulation technology to promote development designs; product design technology for merging electronic components into advanced and multiple functions; and production technology to support mass output. TDK continues to steadily polish this core know-how not to make defects during the production process. The goal is the Arubeki Sugata (ideal process) of Monozukuri through harmony between people and robots, moving to realize “Industry 4.0 + Zero Defect.” Materials Technology Researching the properties of materials at the atomic level and developing original electronic components and devices to meet advanced needs. Materials design technology Realizing required characteristics through main materials blending and trace additive control. Powder control technology Improving materials’ characteristics through crystal grain miniaturization and uniformity. Microstructure control technology Realizing required characteristics through control of crystal grain inter- nal composition and grain boundaries. Process Technology Creating high-performance and function products with nanometer-order control technology. Evaluation and Simulation Technology Initiating such as material analysis, simulation of product structure, heat and magnetic fields, and noise measurements and countermeasures to raise product functions. Evaluation and analysis technology Conducting microstructure observa- tions, atom distribution visualization, and other advanced processes. Simulation technology Visualizing heat distribution released from circuits, distribution of noise- causing magnetic fields, among others. EMC countermeasure technology Protecting electronic equipment from external noise penetration, as well as controlling noise released by such equipment. Product Design Technology Integrating electronic components to realize high-performance/multiple-function electronic devices and optimum combination modules. Circuit technology Using optimum component selection, wiring, radiant heat design, and other simulation to advance circuit designs. Packaging technology Pursuing smaller size and higher performance with component final assembly, binding, sealing, advanced structural design, configura- tion design, and other expertise. Semiconductor Embedded Substrate (SESUB) technology Embedding ICs, components, wiring, and other elements in substrate thickness to achieve modularization. Low temperature cofired ceramic (LTCC) technology Printing and laminating capacitors, inductors, and numerous other elements on dielectric sheets. Forming technology Adding binding agents to material powder and forming small, slim and complex-shaped products. Sintering technology Sintering to solidify and harden with precision con- trol of temperature and atmosphere (gas compo- nents in the furnace). Thick-film process technology Printing and multilayering electrodes and other ele- ments to produce chip capacitors, chip inductors, and other layered electronic components. Thin-film process technology Forming thin film to create electrodes, coils, and head elements to manufacture HDD magnetic heads and thin-film electronic components. Production Technology Stepping to further raise quality, cost, delivery, and service (QCDS) via speedy responses to market changes, together with increasing product capacity. Equipment technology Superb products emerge from superb production equipment. Development of original engineering methods and in- house creation of production facilities are key TDK Monozukuri strengths. 10 11 TDK CorporationAnnual Report 2018INTR ODUC TIO N The Impressive TDK Electronic Component Lineup Passive components We supply a wide range of passive components such as multilayer ceramic chip capacitors (MLCCs), for which over 1,000 units are used in high-end smartphones, inductors, piezo actuators, aluminum electrolytic capacitors, and other items. Ceramic capacitors Piezoelectric material components, circuit protection components Inductive devices Aluminum electrolytic capacitors, film capacitors Five Core Technologies Fertile resources to address diversified needs TDK contributes to society with a wide-ranging electronic component lineup created with core technologies and “Monozukuri power.” The list includes passive components indis- pensable for advanced functions in ICs and other active components; a broad selection of non-optical sensors; the core product of magnets since the Company’s foundation; HDD magnetic heads leading the world; batteries earn- ing global top-class shares for use in mobile devices; and other offerings. ICT Sensors TDK fields a top world-ranking array of non-optical sensors. The lineup includes magnetic, temperature, pressure, gas, microphone, gyro- scope, acceleration, barometric pressure, ultrasonic, and other sensor types. Power supplies Focused on industrial equipment models, the TDK power supply lineup spans AC-DC switching power supplies, DC-DC convert- ers, and storage battery chargers, along with models for use in xEVs as well. HDD magnetic heads TDK is the world’s only specialized manufac- turer of HDD magnetic heads. Thermal assisted magnetic recording (TAMR) and other cutting-edge technologies play key roles in the continuing quest to expand HDD memory capacity. Batteries Rechargeable lithium polymer batter- ies for smartphones and other smart devices from ATL have earned TDK the world’s leading position in this domain, with the mission to pioneer even more powerful models ongoing. Contributing to Society Behind the Scenes Magnets TDK magnets support energy and resource saving and higher efficiency in automobiles, infrastructure, industrial equipment, and other vital sectors. Automotive 12 13 Industrial & Energy TDK CorporationAnnual Report 2018To Our Stakeholders With its founding spirit as an immutable guidepost, TDK will achieve sustained improvement in corporate value. Under its new Medium-Term Plan, TDK will contribute to a more affluent society through electronics, offering solutions based on Kotozukuri (integrated solutions) and realized through Monozukuri (manufacturing excellence). A never-changing TDK, an ever-changing TDK electronics industry to this day. Throughout its long history, the Company has kept its focus on this kind of Monozukuri as the base for a never-changing TDK. About 88 years ago, a black substance was invented; Kenzo Saito continuously took on new challenges, this was the magnetic material ferrite, a product considering his own mission from the perspective of of research conducted by Dr. Yogoro Kato and Dr. society’s future needs. That management philosophy Takeshi Takei of the Tokyo Institute of Technology. is reflected in TDK’s corporate motto, “Contribute to Tokyo Denki Kagaku Kogyo K.K. (today’s TDK), culture and industry through creativity,” and in its founded in 1935 by Kenzo Saito, was the first to corporate principles of “Vision,” “Courage,” and commercialize this previously unknown material “Trust.” Having inherited this founding spirit, TDK with the development of its so-called “ferrite core.” has always been quick to respond to the future needs Since its pioneering appli- cation in wireless telecom- munications equipment in 1937, the uses of ferrite have expanded to include radio, television, micro- wave ovens, and more. Ferrite continues to play TDK has always focused on the future needs of society of society. Starting with the commercialization of ferrite, TDK’s electronic components, along with its four great world-class innovations, have been nurtured by uses beneficial to society, from the cas- a role as an essential magnetic material across a sette tapes that answered the desire to listen to music wide array of fields, from flat-screen televisions to on-the-go, to multilayer electronic components that components in automobiles, as they rely increasingly even today contribute to more compact electronic on electronics. As TDK’s core technologies, materials devices, to the HDD magnetic heads that supported technology that is derived from ferrite and the process the explosive expansion in memory capacity. technology that maximizes the properties of materials This ability to continue to anticipate society’s future have brought the world a variety of new products. From needs and translate those needs into products through ceramic capacitors, to passive components that have Monozukuri is what has allowed us to transform our continued to evolve through technical refinements, product portfolio before our mainstay products enter to magnets, they serve as the foundation of the a decline, leading to our sustainable growth. Shigenao Ishiguro President & CEO 14 15 TDK CorporationAnnual Report 2018To Our Stakeholders Self-transformation with an eye on the future services will require components to be more highly integrated and highly functional. These technical requirements will be taken to an even higher dimen- and a wide variety of other fields, is expected to communication module to send the collected data, quickly accelerate, and the efficient use of energy along with batteries, processing circuits, and soft- will become an issue. With rechargeable lithium ware, TDK could offer a solution in the form of a Going into the new millennium, TDK was confident sion in more compact IoT devices. Intelligent compo- polymer batteries from ATL, power supplies provided packaged, modularized product, thus greatly expand- that the spread of mobile phones and smartphones nents utilizing AI are also developing, going beyond by TDK-Lambda Corporation (TDK-Lambda), and the ing its business opportunities. What that will require pointed to one trend representing the future needs of automobiles and industrial equipment to play a role magnets built into generators and motors, TDK can is Kotozukuri that dovetails with a founding spirit society. In 2005, we acquired Amperex Technology throughout our daily lives, and representing the for- Limited (ATL), a manufacturer of rechargeable lith- mation of a new ecosystem for an industry structure ium polymer batteries. In 2008, we made our full- built around integrated circuits. scale entry into the high-frequency compo- nents business through our acquisition of EPCOS AG (EPCOS). Taking advantage of our proprietary fine process- ing, module, and other The right path was already in front of us It made sense, then, that TDK should ask how it can provide its custom- ers with timely solutions not by insisting on self- sufficiency, but by com- paring and adjusting its technology to that of the technologies, we went on to contribute to the global semiconductor manufacturers. These factors were contribute to resolving these issues across a wide range of fields. Conventional electronic components were a build- to-order industry, with products developed and manufactured according Contributing to society through Kotozukuri originating in an under- standing of society’s future needs. Under Value Creation 2020, its new Medium- Term Plan covering the period from fiscal 2019 through fiscal 2021, to customer specifications, and were essentially sold TDK will turn to its founding spirit as a guidepost in on an individual basis. Today, however, a succession offering a timely response to society’s requirements, of completely new services, products, and functions utilizing Monozukuri to realize solutions based on are being created that are not simply an extension of the Kotozukuri concept—sensor solutions, power spread of mobile devices. During our previous behind the management decision to carve out a por- existing offerings, and that take advantage of dramat- solutions, and package solutions—while continuing to Medium-Term Plan (from fiscal 2016 to fiscal 2018), tion of our high-frequency components business ically evolving technology. By, for instance, combin- follow a cycle that ties Kotozukuri to the further these smartphone components continued to deliver through a joint venture with Qualcomm Incorporated ing multiple sensors with different functions, a evolution of Monozukuri. strong earnings growth, but by then we had already (Qualcomm). begun turning our thoughts to the next thing that In the two years since I was appointed president in would represent the future needs of society. 2016, we have worked to build a new pillar for growth In smartphones, the anticipated start of commercial that would replace our high-frequency components; fifth-generation mobile communications system (5G) the right path, however, was already in front of us. Our founding spirit as a guidepost processing technologies, will ensure we can respond Improving corporate value through the pursuit of three types of value target of operating income ratio above 10% with an ROE of more than 14%. Plans call for capital invest- ments totaling ¥500 billion over three years, the Under Value Creation 2020, our new Medium-Term same level as the previous Medium-Term Plan. In Plan, we have broken down corporate value into three terms of operating income, we now see a clear trend components—Commercial Value (execution of growth toward profit growth in the Passive Components seg- In an advanced “smart” society created by IoT, where TDK has been active in pursuing M&A as a means and Social Value (enhancing enterprise value)—and industrial equipment markets, and in the Energy to advanced requirements for precision. strategy), Asset Value (improving asset efficiency), ment, where demand is strong in the automotive and everything around us—from electronic devices to of building a lineup of sensor technologies that offer automobiles and production equipment—is connected potential synergies with the magnetic sensors and through the internet and capable of exchanging infor- temperature and pressure sensors it has worked on mation and operating autonomously, I believe the until now. We have worked to expand our offerings in potential for electronic components will see limitless non-optical sensors, targeting companies that con- expansion. Among those components, sensors are tribute to the development of the MEMS sensor one area in which we are confident TDK can contrib- market, which is expected to see enormous growth ute to society by leveraging our core technologies. By going forward. have established targets and specific measures for each of these. The target set for Commercial Value calls for achieving net sales of ¥1.65 trillion in fiscal 2021, or growth of about Involving all employees in advancing strategy Application Products seg- ment, primarily batteries. The Sensor Application Products segment, which has reached a stage that requires a certain level of development investment in addition to acquisition- taking advantage of our materials technology, we can Power electronics is another area we have posi- 30% over fiscal 2018, and a compound annual related expenses, will also be developed into a busi- greatly improve quality and performance, and our tioned as a pillar of our business. Society’s shift growth rate (CAGR) of 9%. ness that will contribute to profit during the term of process technology, including thin-film and fine from fossil fuels to renewable energy, in automobiles Regarding Asset Value, we have established a this Medium-Term Plan. 16 17 TDK CorporationAnnual Report 2018 To Our Stakeholders To enhance the effectiveness of our strategy and quickly in the prototype development process and increase the likelihood of achieving the Plan’s tar- production. That kind of speed is a differentiating gets, we will design and manage a logic tree that component in advancing Kotozukuri and, through takes the three types of value down to the level of enhanced added value and an improved cash conver- specific measures for each business and work site. sion cycle, is also a factor affecting profitability. TDK We will place particular emphasis on business speed. will establish a “First-to-Market product ratio” as a The greatest reason ATL enjoys the support of so key performance indicator (KPI) and accelerate the many customers is its unrivaled ability to respond business cycle across all of its organizations. Providing solutions across a wide range of fields a wide range of fields in which we have determined we can make a contribution to society. To do that, all of our organizations—from TDK combination of Faraday Semi’s semiconductor with this so-called “battery componentization,” enabling TDK’s SESUB (Semiconductor Embedded Substrate) a complete solution on the substrate, we plan to seek packaging technology is one such example. We are its potential across all types of IoT devices. also first in the world to begin mass production of a * μPOL™: A DC-DC converter placed adjacent to the ASIC, FPGA, or other LSI. rechargeable solid-state battery. Taking advantage of Achieving growth across all segments sensors, ToF sensors, and other MEMS sensors. 1. Passive Components We anticipate enormous growth in sensors for con- sumer products, exceeding that for automotive sen- We will target a CAGR of 7%. We will offer customized, sors. In the magnetic sensor field, progress is being optimal solutions in GPUs, CPUs, power supplies, inter- made in replacing them with TMR sensors, which faces, and a broad range of other areas, pursuing the feature high accuracy and low power consumption. high reliability and large capacity required in automo- We will also move forward with development of new 2017 was a year in which we sensed a clear global Group operating companies and sales, our customer biles. For smartphones, we will achieve growth centered applications for microphones, ultrasonic sensors, and trend toward electric vehicles. As use of xEV spreads, contact point, to the front lines of Monozukuri and on ceramic passive components. We will expand appli- other MEMS sensors for use in smart speakers, fin- and in the evolutionary process from there to con- our R&D sites—will be joined organically and autono- cations for and our customer base in other fields as gerprint authentication, and other areas. nected cars and advanced driving assistance systems mously to create a stream of Kotozukuri architecture. well, with the goal of achieving stable growth. (ADAS), we believe the role of electronic components Essential to that effort will be open collaboration 3. Magnetic Application Products will expand further, serving as the interface between with partners having technology that TDK does not, 2. Sensor Application Products Rather than assuming any great growth in HDD mag- IC algorithms and the real world. Further, the trend is with a particular focus on close cooperation with IC In anticipation of reaching ¥200 billion in net sales, netic heads, our policy is to grow sales of power- toward society-altering, cutting-edge technologies to manufacturers. our plans call for steady growth in sensors for auto- related magnetic products, including magnets, while first be adopted in smartphones, before then being With Qualcomm, we are now working together on mobiles and for expanding sensors for consumer ensuring a CAGR of 2%. By providing technology to applied to automobiles and industrial equipment, high-frequency solutions across a wide range of products, achieving major growth with a target CAGR meet the needs of the high capacity storage age, we and we sense a similar progression taking place with wireless power sup- plies, biometric authenti- cation, and other technologies. In batter- ies, as well as in passive components—where we Creating a stream of Kotozukuri architecture areas, including next-gen- eration mobile communica- tions, IoT, and automotive-related fields. We are also engaged in a variety of joint development projects, including sensor reference design. In addi- of 35%. Through M&A activity since 2016, TDK has will contribute to the HDD industry as the only manu- acquired a world-class arsenal of technology in non- facturer specializing in HDD magnetic heads. We will optical sensors, including temperature and pressure also attempt to apply HDD suspension technology sensors, magnetic sensors, and MEMS sensors. This from Hutchinson Technology Incorporated will allow for a growth rate of about 10% per year as (Hutchinson) to areas such as the ICT market and we focus our target on the entire non-optical sensor medical field. Profitability in magnets has improved, market, which is expected to grow to US$12 billion with losses halved in fiscal 2018, and during the by 2021. current medium-term, we plan to shift toward a transferred a portion of our high-frequency compo- tion to IC manufacturers, we will work with IoT solu- We will steadily expand sales of automotive sen- structure that can generate profit. One particularly nents business—we do not plan to intentionally tion partners, and press forward in cooperating with sors through organic growth. TDK is currently consid- promising area is magnets for in-vehicle motors. reduce the ratio of products for smartphones. We will industries and organizations with which TDK may not ering development of a sensor that offers Leveraging our core technology to realize innovations continue to take on that market while keeping a close have had direct contact in the past. redundancy, combining tunnel magneto resistance in configuration and performance, we hope to con- eye on 5G and other future communication stan- In May 2018, TDK acquired Faraday Semi LLC (TMR) sensors that apply HDD magnetic head tech- tribute to maximizing motor and generator efficiency. dards. With the addition of other fields, including the (Faraday Semi), a venture company. The company’s industrial equipment and energy sector—where inno- Point of Load (POL) power semiconductor μPOL™*, vation, backed by Industry 4.0, is progressing—, among the world’s smallest, has enormous potential home appliances, and others, we will offer sensor as a solution for reducing power supply space, offer- solutions, power solutions, and package solutions. In ing greater system functionality, and shortening the medical sector, we hope to sow the seeds across design time. The power solution realized through the nology cultivated by TDK with Hall sensors. In addi- tion, since the temperature and pressure sensors installed in gasoline-powered vehicles will also be needed in xEVs, we expect demand to continue grow- ing. We will also expand applications for automotive use, including acceleration sensors, gyroscope 18 19 TDK CorporationAnnual Report 2018 To Our Stakeholders 4. Energy Application Products vehicles (AGVs), drones, and others. In power supply we are undertaking a fundamental review of detecting signs of potentially defective products. In Here, we will aim for stable growth with a CAGR of products, our efforts will center on TDK-Lambda, Monozukuri. We have already completed and are the common language of TDK, this activity has 8%. Rather than assuming major growth in batteries providing customized power supply solutions for working to test a model line that prevents defects become known as Arubeki Sugata, and is being uti- for smartphones, we will move forward with a hori- medical devices, robotics, and other uses through before they happen, by ensuring optimal coordination lized in front-line improvements at our sites around zontal deployment of ATL’s “First-to-Market” success vertical integration from materials to finished prod- between robots and human workers, using sensors to the world. model by expanding our applications and customer ucts. In automotive power supply, we will pursue monitor every step of the production process, and base. We will also push to develop the small cell smaller, lighter, and more highly efficient products market, including wearable devices, while also devel- while offering solutions through redundant, reliable oping the market for use in more high-powered design with an eye toward the full-scale expansion of devices such as e-scooters, automated guided the xEV market. Areas where refinements should continue for sustainable growth sustainable growth. As the globalization of TDK has progressed further through M&A in recent years, diversity management TDK has worked to strengthen its ability to develop has become an important issue. This is why, under the its own candidates for acquisition while gaining Human Resources HQ, we are pushing ahead with insight into each company’s technology and corpo- programs to discover and foster outstanding human rate culture. Rather than adapting these companies resources worldwide to serve as management candi- to TDK’s way of doing things following an acquisition, dates. With more than 90% of our personnel consist- we have respected their different approaches and ing of non-Japanese employees, we believe HQ cultures, handing them leadership over their own functions do not necessarily need to be located in businesses. Cultivating the strength of diversity by Japan, or led by Japanese managers. The aspirations embodied in Social Value emphasize that profit is not the goal, but the result of contributions to society. Social Value embodies my determination to return us to our founding spirit, I would like to close by talking about my aspirations which has something in common with this concept. for Social Value, the last of the three types of value The road we are to follow will not necessarily be an highlighted in our new Medium-Term Plan. When I easy one. A variety of competition exists in growth mar- joined TDK 36 years ago, our business in the auto- kets, and the megatrends bringing major changes to motive industry involved only very limited fields, such as car radios. Today, though, we have entered an era in which automo- biles cannot move without electronics. The things that electronic compo- Moving forward, encouraged by our founder’s beliefs the structure of industry make it impossible to clearly foresee the future of our business environment. Still, encouraged by the beliefs of our founder, we will not be led astray by these uncertainties, and allowing our varied human resources to maximize the We also will not compromise when it comes to nents can do to benefit society will likely expand will continue moving forward with our corporate potential of their individual capabilities has become refining Monozukuri, the foundation of our sustain- even further going forward. Advanced technology is motto “Contribute to culture and industry through the driver of nonlinear self-transformation. able growth. In the automotive field, where TDK Pushing forward with Kotozukuri will require bring- hopes to continue expanding its business, a single not merely for the select few. It can contribute to creativity.” resolving issues in ultra-aging society, and can enrich ing the approximately 140 companies of the TDK incidence of a product defect that leads to the loss the lives of even society’s most vulnerable. October 2018 Group together, heading in the same direction even as we reinforce the dynamism of diversity. While progress is already being made toward collaboration among Group companies in a variety of areas, includ- Moving forward with innovation aimed at true globalization of human life could threaten our very survival as a company. This is why we continue to press for- ward with Monozukuri Innovation, which com- bines Industry 4.0 con- cepts with a zero-defect ing product development and quality control, we approach to quality. For the past several years, our intend to introduce cross-functional cooperation as factories in Akita Prefecture, where TDK was founded, a means of further strengthening these organic link- have engaged in Monozukuri activities based on our ages. As part of that effort, Andreas Keller, our gen- concept of Arubeki Sugata (ideal process). At its most eral manager of the Human Resources HQ, is building basic, the Arubeki Sugata behind improved reliability a global human resource system. Going forward, should involve preventing defects during the produc- enhancing the mobility of our human resources glob- tion process, rather than the conventional approach ally will help further reinforce our base for long-term of sifting out defective products. With this in mind, Technology also has the power to solve issues on a global scale, including tightened energy supply and demand and global warming. Sustainable develop- ment goals (SDGs) and other worldwide trends President & CEO October 2018 President & CEO 20 21 TDK CorporationAnnual Report 2018Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On A n E v e r - C h a n g i n g T D K Automotive ICT Industrial & Energy Infinite Possibilities Pursuing automotive quality in reliability and energy efficiency, TDK will contribute Targeting the fifth-generation mobile communications system (5G) and beyond, Working to supply answers true to the concept of Kotozukuri (integrated solutions), By no means limited to the “Automotive,” “ICT,” and “Industrial & Energy” markets, to the electrification of automobiles and TDK will provide solutions including increased TDK will contribute to the solution of social issues TDK will steadily expand the infinite possibilities of the popularization of xEVs. component miniaturization and space saving and linked to industrial equipment and energy sectors. electronic components to a diverse range of domains. high-efficiency electric power management. A N e v e r - C h a n g i n g T D K 22 23 TDK CorporationAnnual Report 2018Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On TDK Overview In accordance with segment reorganization in the first quarter of fiscal 2019, the Energy Application Products segment was newly established. Certain prod- ucts of Other Passive Components in the Passive Components segment were classified into the Other segment, certain products of the Other segment were classified into Other Passive Components in the Passive Components segment, and certain products of the Sensor Application Products segment were reclassi- fied into the Other segment. Automotive ICT Industrial & Energy World shares of main products (TDK research) Capacitors Soft-termination multilayer ceramic chip capacitors, aluminum electrolytic capacitors, etc. Inductive devices SMD inductors with guaranteed high temperature rat- ings, common mode filters for automotive-use LAN, etc. Other passive components Piezo actuators Capacitors 3-terminal feed-through capacitors, etc. Inductive devices SMD inductors, thin-film common-mode filters, etc. Other passive components Ceramic high-frequency components, VCMs/OISs, multilayer chip varistors, etc. Competitors Capacitors: Murata Manufacturing, TAIYO YUDEN, SEMCO (Korea), Yageo (Taiwan), etc. Inductive devices: Murata Manufacturing, TAIYO YUDEN, SEMCO (Korea), Cyntec (Taiwan), etc. Other passive components: Murata Manufacturing, ALPS ELECTRIC, Panasonic, AMOTEC (Korea), etc. Capacitors Film capacitors, aluminum electrolytic capacitors, etc. Inductive devices Transformers, EMC filters, etc. Other passive components Varistors, arresters, etc. Capacitors Ceramic capacitors for automobiles Inductive devices Inductors Other passive components Ceramic high-frequency components Varistors Gas arresters Sensors Sensors (gear tooth, pressure, angle, current, temperature, etc.) Sensors Sensors (barometric pressure, gyroscope, acceleration, MEMS microphone, etc.) Sensors Sensors (pressure, gyroscope, acceleration, current, etc.) Sensors Temperature sensors (NTC thermistors) Other sensors: Currently undisclosed Competitors Murata Manufacturing, ALPS ELECTRIC, TAIYO YUDEN, Bosch (Germany), STMicroelectronics (Switzerland), Infineon (Germany), Asahi Kasei Microdevices, Allegro (USA), Shibaura Electronics, etc. Magnets Magnets for motors (cooling fan, door lock), magnets for xEV drive motors, etc. Recording devices HDD magnetic heads, HDD suspensions, etc. Magnets HDD magnets, etc. Competitors HDD magnetic heads*: Seagate Technology (USA), Western Digital Technologies (USA) HDD suspensions: NHK SPRING, etc. Magnets: Shin-Etsu Chemical, Hitachi Metals, ZHONG KE SAN HUAN (China), etc. Power supplies DC-DC converters, on-board chargers Energy devices Rechargeable lithium polymer batteries (for smart- phones, tablet devices, notebook computers, wearable devices, game consoles) Power supplies High current digital POL converters Competitors Energy devices: Samsung SDI (Korea), LG Chemical (Korea), Murata Manufacturing, Panasonic, Maxell, etc. Power supplies: XP Power (Singapore), MEAN WELL (Taiwan), Delta Electronics (Taiwan), Cosel, etc. Magnets Magnets for industrial equipment, etc. Recording devices HDD magnetic heads HDD suspensions Energy devices Rechargeable lithium polymer batteries (for drones, AGVs) Energy devices Rechargeable lithium polymer batteries Power supplies Bidirectional DC-DC converters, AC-DC power modules Power supplies Power supplies for industrial equipment P a s s i v e C o m p o n e n t s P r o d u c t s P r o d u c t s P r o d u c t s S e n s o r A p p l i c a t i o n M a g n e t i c A p p l i c a t i o n E n e r g y A p p l i c a t i o n 40–45% 20–25% 30–35% 30–35% 75–80% 30–35% 20–25% 55–60% 30–40% 15–20% * TDK is the world’s only specialized manufacturer of HDD magnetic heads. HDD magnetic head production is currently concentrated at three companies—TDK, Seagate Technology, and Western Digital Technologies. 24 25 TDK CorporationAnnual Report 2018 Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Summary of the Previous Medium-Term Plan Through fiscal 2015 Sowing seeds to grow with the expanding smartphone market In 2005, TDK acquired ATL of Hong Kong, an entity possessing origi- nal technology in rechargeable lithium polymer batteries. Purchased in 2008 was EPCOS, which used competence in high-frequency com- ponents and modules technologies to forge a powerful presence in European automobile and industrial equipment markets. Combining their technologies with our own expertise in components and produc- tion technologies, we strategically moved to tap into the expanding markets for cellphones, smartphones, and other products. Promoting large-scale structural reform The swift decline with the global financial crisis triggered by the September 2008 collapse of Lehman Brothers, the Great East Japan Earthquake of 2011, flooding in Thailand, appreciation of the Japanese yen to peak at ¥75 to the US dollar, and other devel- opments harshly impacted our business environment. Moving to shore up its earnings framework, TDK advanced sweeping struc- tural reforms from fiscal 2012. This included withdrawal from recording media and other non-core businesses, concentrating management resources in core units, consolidation of domestic and overseas business sites, optimizing personnel and business sites, and other strategies. Our performance figures shifted into a rapid recovery mode from fiscal 2013. Structural reforms to bolster integrated production In Japan, we closed aging passive component manufacturing bases and concentrated business sites while adopting in- house production processes previously outsourced to collab- orating plants. Overseas, we acted to simplify complex supply chains. These initiatives, focused on restoring Monozukuri power through “integrated production,” proved potent not only in lowering the group’s fixed costs, but also in cutting lead time and distribution costs. This laid the foundation for today’s Monozukuri Innovation concept known as Arubeki Sugata (ideal process). • Manufacturing base closings and business site concentration • Shift to in-house production processes • Fine tuning of supply chains Enhanced integrated production Akita Honjo Inakura M&A 2005 ATL Rechargeable lithium polymer batteries With its acquisition of ATL, TDK emerged as one of the leading corporate forces in the production of rechargeable lithium polymer batteries for use in smartphones and other mobile devices. 2007 2008 Lambda Power Group Power supplies for industrial equipment Magnecomp HDD suspensions EPCOS Full lineup of electronic components, mod- ules, and systems Riding the tailwind of the global smart- phone boom, EPCOS high-frequency components have been a pivotal driving force behind the growth of TDK revenues. Structural reform 2011 Business portfolio slimming Withdrawal from organic EL displays, Linear Tape-Open (LTO*), Blu-ray, and other non-core businesses Product-specific reassessment *LTO: Standard for computer-use magnetic tape Groupwide business efficiency improvements Promotion of domestic and overseas business site consolidation Sales of idle properties Optimization of personnel and business sites Simplification of organization and business processes Management resource concentration in growth sectors and core businesses Expansion of the thin-film components business utilizing magnetic and magnetic head technologies Strengthening of core technologies such as materials and process technologies, devel- opment of micro-size, high-function passive components Smartphone market trends (unit shipments) M&A Feature phones Smartphones (100 million units) Forecast 2016 Micronas Hall sensors 25 20 15 10 5 0 Year 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Hutchinson HDD suspensions Tronics MEMS inertial sensors 2017 ICsense ASIC design and development InvenSense Acceleration sensors, gyroscope sensors Source: IHS Technology Fiscal 2016 to fiscal 2018 Harvesting and fruits of structural reform Reviewing the results of the previous Medium-Term Plan (fiscal 2016 to fiscal 2018), sales set all-time record highs each term, with structural reforms proving effective in strengthening the earnings structure and operating income also gaining ground. TDK cultivated ATL’s rechargeable lithium polymer batteries and EPCOS’s high-frequency components, riding the tailwind of the global expansion of the smartphone market. This stance was accompanied by solid efforts to address demands for component miniatur- ization and modularization to keep pace with the steady move to higher smartphone function, polishing our underlying technol- ogy to be ready for the next stage of evolution. Operating income ratio Sales to the automotive market 2.6% 2013/3 6.7% 2018/3 ¥142.7 billion 2013/3 ¥231.4 billion 2018/3 New strategic positioning to meet the next stage of social needs Against the backdrop of redoubled demand for custom- ization and modularization in the smartphone market, needs have grown for coordination of the various elec- tronic components mounted in those products. To con- stantly supply customers with optimum solutions, TDK moved from traditional in-house self-sufficiency to coop- eration with IC manufacturers, transferring one portion of our high-frequency component business to Qualcomm. Similarly, in gearing up to meet the next stage of social needs, from 2016 we pursued sensor- focused M&A as a means to field a wide-ranging arsenal of technology, while solid growth investment was advanced to expand sales to the automotive market. Growth investment targeting the future Fiscal 2016 to fiscal 2018 Capital expenditures ¥506.9 billion R&D expenses ¥279.6 billion Fiscal 2013 to fiscal 2015 ¥256.7 billion ¥188.0 billion 26 27 TDK CorporationAnnual Report 2018Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Management Environment Within the Automotive, ICT, and Industrial & Energy markets targeted by TDK, major structural changes are unfolding Megatrend 1 to reflect today’s technological evolution. This trend is also instrumental in boosting innovation in terms of Industry 4.0 and other forms of Monozukuri. • Increased on-board use of electronic components powered by the evolution in advanced Market environment driving assistance systems (ADAS) and autonomous driving • Full-fledged surge in the xEV market • Greater demand for safety designs in-vehicle components Automotive • Slowed growth in markets of developed nations • Expanding demand in India and other emerging markets • Advances toward slimming and multiple and higher functions in mobile terminals ICT • Expanding modularization demands • Commercialization of fifth-generation mobile communications system (5G) • Expansion of “smart cities” in which “smart grids” (next-generation power distribution network) being built in various regions serve as energy infrastructure • Growing demand for wind power generation, solar power generation, and other renewable Industrial & Energy energy • Rising need for improved power generation efficiency Monozukuri • “Industry 4.0” and other production innovations utilizing cutting-edge technologies such as the IoT • Growing need for increased quality with increased mounting of electronic components in automobiles, medical devices, and other domains demanding high reliability • Surging labor costs in China • Projections for a steady decrease in Japan’s working-age population • Heightened role of companies in achieving sustainable development goals (SDGs) • Expanding interest in environmental, social, and governance (ESG) investment ESG 28 Full-fledged surge in the xEV market With tightened environmental regulations in major countries, the shift to xEV by major manufacturers, entries into the market by newly emerging makers, and lower costs sparked by technological advances and increased volume, the move toward electric vehicles is set to become irreversible. This trend is forecast to increase demand for passive components, sensors, on-board power supplies, motor-use magnets, and other components. Spread of electric vehicles (HV, PHEV, EV) Units 600,000 500,000 400,000 300,000 200,000 100,000 0 Year xEV unit expansion X Component unit expansion 14 15 16 17 18 19 20 25 30 HV PHEV EV Source: Sogo Planning Inc., 2017 Latest Trends in and Forecasts for Electric Vehicle-related Markets Megatrend 2 Global market forecast for in-vehicle motors by system area Million units 5,000 4,000 3,000 2,000 1,000 0 Year 16 17 (Forecast) 18 (Forecast) 19 (Forecast) 20 (Forecast) 25 (Forecast) Power train Chassis Body Next-generation automotive systems Note 1: Based on number of vehicles produced Note 2: Forecast figures for 2017 and beyond (as of March 2018) Source: Yano Research Institute Ltd., The latest trends and future prospects of on-vehicle motor market Global in-vehicle motors market scale Approx.4.470 billion units Approx.2.999 billion units Increase of approx.49% 2025 (Forecast) 2016 Note 1: Based on number of vehicles produced Note 2: Forecast figures for 2025 and beyond (as of March 2018) Source: Yano Research Institute Ltd., The latest trends and future prospects of on-vehicle motor market Megatrend 3 Dawning of the one-trillion-sensor age Sensor demand in the IoT society, in which all things will Expanding demand for safer and highly efficient rechargeable batteries come to be linked on the Internet, is estimated at several tril- The IoT age is forecast to generate demand for safer, smaller, lion units. and thinner batteries. Outlook for global sensor demand by market (non-optical) U.S.$ millions Forecast of worldwide demand for rechargeable batteries (non-ICT market) MWh 15,000 12,000 9,000 6,000 3,000 0 FY A v e r a g e a n n u a l g r o w t h r a t e o f 8 % 17 18 19 20 21 25,000 20,000 15,000 10,000 5,000 0 FY 18 19 20 21 22 23 Automotive (TDK estimates) IoT/Industrial equipment Mobile Power tools/Gardening tools Jump starters Cleaners (TDK estimates) UPS/ESS (compact) Others Drones Megatrend 4 Evolution of IC-focused ecosystems Along with the electrification of automobiles, higher functions in smart devices, and the move to smart capacity in various areas, the evolution of industrial ecosystems is advancing with the focus on semiconductor manufacturers as enterprises shouldering the burden of those core functions. Annual Report 2018 29 TDK CorporationManagement Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Medium-Term Plan “Value Creation 2020” Working from the future-focused growth foundation developed to date as a solid foothold, TDK has unveiled its newest three-year Medium-Term Plan, set to run from fiscal 2019 through fiscal 2021. This vision has been launched with the aim of forging sustainable improvements in corporate value. Commercial Value Management targets in the medium term: Sales by segment Medium-Term Plan Basic Policy “Value Creation 2020” Leap to new heights by providing market-needed solutions based on our electronic components business Based on the new Medium-Term Plan “Value Creation 2020,” TDK is aiming to generate three types of “value” aimed at raising its corporate worth—Commercial Value (execution of growth strategy), Asset Value (improving asset efficiency), and Social Value (enhancing enterprise value)—while serving society and growing its business in the wake of that progress. Toward this end, the essential focus will be firmly placed on the electronic components business that has excelled as the cornerstone of TDK growth since its foundation, while vigor- ously advancing collaboration with IC manufacturers and IoT solution partners as well. By combining the solutions stem- ming from the concept of Kotozukuri (integrated solutions) with our traditional Monozukuri (manufacturing excellence), we will supply the values sought by our customers. Customers Customers ICT ICT Automotive Automotive Industrial & Energy Industrial & Energy Turnkey Turnkey Solution Partners Solution Partners Kotozukuri Kotozukuri (Integrated Solutions) (Integrated Solutions) Distribution Distribution Partners Partners Package Package Solutions Solutions Sensor Sensor Solutions Solutions Power Power Solutions Solutions Semiconductor Semiconductor Partners Partners Solutions Components Processes Materials HDD Heads HDD Heads Passive Passive Components Components Batteries Batteries Magnets Magnets Monozukuri Monozukuri (Manufacturing Excellence) (Manufacturing Excellence) Thin-Film Thin-Film Processes Processes Coating Coating Processes Processes Powder Powder Mixing & Sintering Mixing & Sintering Processes Processes Precision Precision Machining Machining Processes Processes Semiconductor Semiconductor Materials Materials Organic Organic Materials Materials Magnetic Magnetic Materials Materials Piezoelectric Piezoelectric Materials Materials Net sales CAGR by segment Results (fiscal 2018): ¥1,271.7 billion Passive Components: 7% Target (fiscal 2021): ¥1,650.0 billion Sensor Application Products: 35% CAGR: 9% Magnetic Application Products: 2% Energy Application Products: 8% P.60–P.69 Overview of Business Conditions by Segment, Business Strategies Asset Value Medium-term financial strategy • To execute growth strategies and promote the improvement of our financial condition, we aim to achieve positive free cash flow while executing well-balanced capital allocation to investments, shareholder returns, and the reduction of interest-bearing debts. • Aiming for the steady recovery of previous investments • Pursuing the enhancement of Companywide asset efficiency • Steadily recover growth investments executed toward transforming business earnings structure • Execute further growth investments based on a well-balanced capital allocation Well-balanced capital allocation • Growth investments • Shareholder returns • Repayment of interest-bearing debt Negative free cash flow Positive free cash flow P.34–P.35 Message from the Corporate Officer of Finance & Accounting Capital efficiency • Operating income ratio: over 10% • ROE: over 14% Medium-term financial targets Shareholder returns • Increase dividends stably through growth of income per share • Target a 30% dividend payout ratio Financial soundness • Stockholders’ equity ratio over 50% • Net cash Multilayer Multilayer Processes Processes Dielectric Dielectric Materials Materials Social Value Aiming for a sustainable society and enterprise • TDK will realize greater happiness and well-being in society through cutting-edge technologies • TDK will effectively utilize finite resources • TDK will be a global and diversified enterprise P.46–P.55 Moving to Improve Sustainable Corporate Value 30 31 TDK CorporationAnnual Report 2018 Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Message from the Corporate Officer of Corporate Planning Integrating the TDK Group’s diverse management resources in an autonomous and organic manner and contributing to the innovative society unfolding before us Seiji Osaka General Manager of the Corporate Strategy HQ Executive Vice President Director Key point of Value Creation 2020 Autonomous and organic integration of management resources application products. As well through aggressive M&As in recent years, we have built an impressive lineup of sensor application products. TDK’s wide-ranging component technol- ogies will also be essential in continuing technological evolu- Ever since its foundation, TDK has cherished its corporate tions such as the IoT, fifth-generation mobile communications motto of “Contribute to culture and industry through creativ- system (5G), and renewable energy. ity.” On the basis of ferrite, we have developed various mate- Furthermore, TDK’s management resources, including our rial and component technologies. Even after eight decades, outstanding human resources, extend around the globe. The this great ferrite tree continues to grow. In addition, to key point of Value Creation 2020 is to autonomously and respond to the requirements of customers, rather than always organically integrate these resources and create a single going it alone, we have cooperated with partners around the mighty force that can supply timely solutions to customers. world and boldly engaged in mergers and acquisitions so as to obtain the technologies and management resources required. In the previous Medium-Term Plan period, because the smart- Logic tree toward the realization of Value Creation 2020 phone market was growing rapidly and the demand for modu- larization further increasing, we carved out part of our high-frequency components business to establish a joint All measures linked in consideration of each business’s characteristics enterprise with Qualcomm and embarked in technical cooper- TDK has 4 business companies, 20 business groups, and ation with them. numerous cash-flow business units. Each unit has a leader In our new Medium-Term Plan, Value Creation 2020, our with responsibility for invested capital and profit/loss and a main vision is to seize business opportunities in the xEV and team consisting of professional human resources. We have IoT markets through a combination of Kotozukuri (integrated built a logic tree of management strategy so as to autono- solutions) in cooperation with IC makers and a wide range of mously and organically integrate these units and realize our other partners and Monozukuri (manufacturing excellence) Medium-Term Plan. using TDK’s own outstanding material and process technologies. There are common reasons for the success of competitive TDK has the most wide-ranging product and technology products, such as passive components, rechargeable lithium portfolio in the electronic components industry. In the auto- polymer batteries, and HDD magnetic heads. These include motive field, for example, we have various passive components the fostering of distinctive core technologies, which are essen- for autonomous driving and electric vehicles, as well as mag- tial for business growth; the setting of strategic applications; netic application products such as magnets used in motors, the identification of priority customers and value-chain part- DC-DC converters, and on-board chargers and other energy ners; the building of a roadmap for product design; and efforts to synchronize product design and the manufacturing corporate principles proclaimed at the time of our founding in process in the best possible way. Since market structures and 1935 of “Vision,” “Courage,” and “Trust.” Throughout TDK’s competition factors differ by product and strategic business, history of eight decades, while constantly innovating our core the structure of the strategic logic tree will also differ for each businesses, we have maintained a venture spirit with our mul- business. We established Value Creation 2020 after clarifying tilateral businesses and global human resources acquired the direction of growth for each business (priority markets and through M&As and more, creating a positive chemical reac- technology differentiation) and repeating the task of checking tion. Our aim is to be a company that is aware of the future whether all work was being properly conducted in line with affluent society awaiting the electronic components business, this direction. We will share specific visions and key perfor- directly confronts the challenges of diverse customers, diffi- mance indicators among the teams as a whole and link their cult technologies, and fierce competition, and will continue to work so as to steadily realize our targets. grow and evolve even after 100 years. We have encapsulated these feelings in the words “Attracting Tomorrow*,” which we are using as a communication message to our stakeholders. * Attracting Tomorrow: TDK created this communication message in 2015, when the Company marked its 80th anniversary. It implies an attitude of making deliberate efforts ourselves to attract the future, rather than just waiting for the future to come. Inheritance and practice of founding spirit Aiming to be a company that will continue to grow even after 100 years It is said that when a company gets bigger, cracks begin to appear. TDK has grown into an enterprise with net sales of more than ¥1 trillion, but we will continue to cherish the Logic tree of management strategy “Value Creation 2020” Leap to new heights by providing market-needed solutions based on our electronic components business Commercial Value (Execute Growth Strategy) Asset Value (Improve Asset Efficiency) Social Value (Enhance Enterprise Value) Sales ¥1,650.0 billion Operating income ratio over 10% over 14% ROE ¥500.0 billion Capex (3 years) Contribute to society through sustainable business activities 32 33 TDK CorporationAnnual Report 2018 Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Message from the Corporate Officer of Finance & Accounting Strengthening the foundations of growth through the definite retrieval of growth investment and implementation of further growth investment by means of balanced capital distribution Tetsuji Yamanishi General Manager of Finance & Accounting HQ Senior Vice President Representative Director Fiscal 2018 review Base financial and capital strategy in Value Creation 2020 Building a foothold for the next stage based on support from existing businesses In fiscal 2018, using funds obtained from the partial transfer Reaping the benefits of completed investment and aggressively implementing growth investment of its high-frequency components business, TDK made efforts In fiscal 2018, cash outflow took precedence with a view to to change its business portfolio through M&As, mainly involv- the next Medium-Term Plan. As well as establishing a foot- ing sensor companies, and also implemented aggressive capi- hold for medium-term business growth and reaping the bene- tal investment toward the further growth of existing fits of investments made so far, it is necessary for us to businesses. Although TDK recorded losses due to the transfer continue aggressively implementing growth investment so as of its high-frequency components business, net sales regis- to respond to vigorous demand. Achieving a sound financial tered a record high for the fifth consecutive term. Operating condition is another important theme. The basic policy of our income declined 59.0% from fiscal 2017 to ¥85.6 billion*. financial and capital strategy is to aim to put our free cash However, when temporary profits and losses, including flow in the black by channeling cash equally to investments, ¥144.4 billion in transfer gains and ¥21.2 billion in struc- shareholder returns, and the reduction of interest-bearing tural reform expenses included in the previous term’s operat- debts. For this purpose, it is important to improve the capital ing income are subtracted, the figure still came to ¥85.5 efficiency of TDK as a whole. That is the reason why we iden- billion, showing that the operating income in fiscal 2018 was tified financial and capital strategy as our Asset Value, one of actually up over the previous term. Registering a real increase the three components in improving corporate value, in Value in operating income mainly through our existing businesses, Creation 2020. even when ¥10.9 billion spent on the acquisition of InvenSense, was a major achievement. However, our return on equity (ROE) and operating income ratio Projected scenario to put free cash flow in the black were only 7.8% and 6.7%, respectively, so the improvement of our earning capacity is still incomplete. In addition, although we have aimed to put our free cash flow in the black, because of Realizing a surplus through balanced capital distribution bringing forward capital investment in response to robust demand The operating income ratio of the Passive Components seg- and other factors, even when acquisition funds are subtracted, our ment in fiscal 2018 was almost the same as in fiscal 2017, free cash flow registered a deficit. As a result, stockholders’ equity when the transfer gains were excluded, signifying progress in ratio dropped 4.4 percentage points to 43.3%, which was lower the improvement of earning capacity. During the period of the than what we had imagined was necessary from the perspective of current Medium-Term Plan, demand for components in the achieving a sound financial condition. automotive market is expected to remain robust, so we can * To comply with the U.S. Financial Accounting Standards Board’s Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, we are revising our business results for fiscal 2018, which were reported on April 27, 2018—operating income, research and development expenses, cost of sales, and selling, general and administrative expenses (revised operating income: ¥85,633 million to ¥89,692 million; revised research and development expenses: ¥103,457 million to ¥102,641 million). The disclosure of revised cost of sales and selling, general and administrative expenses will be made at the announcement of financial results for fiscal 2019. The figures before adjustment are shown. look forward to continuing stable income. The operating Pursuit of Asset Value income ratio of the Energy Application Products segment in fiscal 2018 was 16.3%, which I think was higher than we expected. Over the medium term we expect to maintain a Enhancing efficiency in all business activities as well as investment level of about 15%. Regarding our HDD magnetic heads, Of the capital investment of about ¥500 billion, we expect to demand for personal computer HDDs is certainly going to channel about 40% to the bolstering of production capacity decline, but data center demand can be expected to increase to meet the increased quantitative demand for batteries. Our in a stable manner. Thus, for the Magnetic Application plan is to have the most investment in the first fiscal year of Products segment, we expect to secure an operating income the plan and then gradually reduce the amount in the second ratio of around 10%. The main focus is the Sensor Application and third years. In the case of batteries, investment has run Products segment. If we can realize a compound annual growth ahead in recent years, but at last this sector is beginning to rate (CAGR) of 35%, I believe we can expect an operating generate a positive free cash flow. About 30% of the remain- income ratio here of about 10%. This is our scenario for ing capital investment will go to passive components and achieving an operating income ratio in excess of 10%. about 20% to other businesses, including magnets. Regarding We expect depreciation and amortization to be ¥120–130 M&As, we will implement small-scale investments to supple- billion a year on average, and our net cash provided by operat- ment necessary technologies so as to respond to needs, but ing activities in the final fiscal year is expected to be about since we have established a foothold for business growth, we ¥100 billion. Regarding capital investment, we are planning to do not expect any large-scale investments. With regard to invest about ¥500 billion over the three years, which is the investments, we will endeavor to pursue efficiency more than same level as the previous Medium-Term Plan. Of this, we will ever before. Our policy is to further strengthen investment invest about ¥210 billion in fiscal 2019 and then around appraisal, such as earning capacity and cash acquisition ¥150 billion in each of the remaining two years. With this capability, based on the TDK Value Added (TVA) indicator scenario, we aim to register a surplus in our free cash flow in comparing earnings to cost of capital (weighted average cost the plan’s final fiscal year. of capital multiplied by invested capital). Based on this scenario, we will promote the improvement We will endeavor to improve the asset efficiency of TDK of our financial condition by reducing interest-bearing debts as a whole by not only raising business efficiency but also and achieving a stockholders’ equity ratio of 50% and a debt- accelerating the entire business cycle of sales and marketing, to-equity ratio* of about 0.3. We will also implement share- development, manufacturing, and headquarters functions. holder returns with the aim of achieving a dividend payout Our aim is to steadily execute measures through the operation ratio of 30%. of a logic tree connecting key performance indicators in busi- * The debt-to-equity ratio is one indicator used to measure the soundness of a company’s man- ness operations—such as asset turnover ratio and yield—and agement; it indicates the ratio of liabilities to funds. Financial and operation logic tree medium-term financial targets, and to achieve an ROE in excess of 14%. Build a framework by which front line policies lead to improvements in capital efficiency Corporate management targets ROE over 14% Business ROA Cost of invested capital Individual business targets TVA Financial Leverage After-tax profit Business assets Capital cost ratio Business assets P/L aspect Profitability assessment Operating income ratio 10% B/S aspect Assessment of business asset efficiency Capex (3 years) ¥500.0 billion C/F aspect Assessment of ability to acquire cash Related accounts Policies Cost of sales Cost reductions Sales and marketing expenses Selling, general and administrative expenses Accounts receivable Inventory Accounts payable Marketing Business efficiency improvements Encouraging debt collection Inventory reduction Shortened pay- ment terms 34 35 TDK CorporationAnnual Report 2018 Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Executing Growth Strategies Growing xEV Market TDK is targeting consolidated net sales of ¥1,650 billion in its new Medium-Term Plan. In order to achieve this goal, we are leveraging our advanced materials and process technologies and our product lineup of sophisticated electronic compo- nents to offer Kotozukuri solutions that solve the true needs of society in a timely manner. Solution What TDK delivers Meeting specific automotive needs Potential Growing xEV Market Expected xEV market size 2030 5-fold increase About million units Needs What electronic components must offer The category of xEV (which includes HEVs, PHEVs, and EVs) is poised to experience explosive growth on a global scale. The spread of advanced driving assistance systems (ADAS) is progressing, and the race toward practical implementation of autonomous driving is heating up. As a result of these developments, electronic components for use in xEV must possess the following qualities. 1. Reliability Because the malfunction or breakdown of an automotive component can lead to serious accidents with loss of life, the ratio of defective parts must be resolutely driven toward zero, and redundancy must be built in to guard against failure. This means that all com- ponents used in systems for automotive use must meet stringent performance require- ments. When used in combustion engines or electric motors as well as in other parts of the power train, high heat resistance and vibration resistance are absolutely essential. 2. Light weight and high efficiency In order to realize low power consumption, electronic components must become smaller, lighter, and more efficient. 3. Suitable for realizing new driving experiences Electronic control, networking, and other techniques not only serve to achieve more con- venience and higher levels of operability but are also expected to enable new kinds of driving experiences. 2016 About 2.6 million units Since entering the field of automotive electronic components, TDK has accumulated extensive know-how that enables it to provide products and solutions that are optimally suited to the requirements of xEVs. Reliability Pursuit of high-quality automotive components Electronic components for use in automobiles are critical for safety. To withstand the extreme environmental conditions in which they must operate, passive components such as multilayer ceramic chip capacitors (MLCCs) and inductors as well as all other components need to be highly resistant to vibrations and shocks and possess high levels of heat and humidity resistance. TDK is cur- rently engaged in Monozukuri Innovation aimed at achieving zero-defect quality. P.42 Monozukuri Innovation Improved energy efficiency Key aspects for widespread acceptance of xEVs are improved fuel economy and lower charging costs. TDK has successfully introduced more compact and efficient DC-DC converters and power supply units for on-board char- gers. Neodymium magnets from TDK contribute to make drive motors more efficient, and its TMR sensors enable more precise control for further enhanced efficiency. Through a variety of products, we are helping realize more energy-efficient driving. On-board charger Magnet Linking the algorithms of IC manufacturers to the real world Engine control units (ECUs) for use in cars often incorporate a GPU for handling three-dimensional image data as well as chips to process various information. Passive components serve to link such microprocessors to real-world conditions. In close cooperation with IC manufacturers, we are heightening demand for ECUs. Number of ECUs For power train, body, safety, multimedia applications, etc. Between 10 to as many as 50 In total, the electric and electronic equipment in a car is made up of as many as twenty to thirty thousand individual components, including some 3,000 or more multilayer ceramic chip capacitors. MLCCs Inductors Common mode filters 36 37 TDK CorporationAnnual Report 2018Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Executing Growth Strategies Sensors made possible by higher accuracy of materials technology Modern automobiles employ a large number of TDK sensors for power train, body, safety, and communication applications. Development of such high-performance sensors was made possible by improving the accuracy of our materials technology. Enhanced safety, increased driving comfort, better fuel economy, and reduced power consumption are the result. Advanced driving assistance systems (ADAS) rely on sophisticated sensing technology to provide accurate information about the vehicle as well as its surroundings. The industry’s largest lineup of non-optical sensors Magnetic sensors Ultrasonic sensors Humidity sensors Temperature sensors Pressure sensors Microphones Barometric pressure sensors Gyroscope sensors Acceleration sensors C OLUMN Wireless power transfer In addition to the electromagnetic induction method that is Haptics Harnessing haptic technology that utilizes vibrations has increasingly found in practical applications, TDK is working enabled us to create the PiezoHapt™ actuator and on systems for transferring power to moving objects using the magnetic resonance method. We understood the potential of PowerHap™ products with extremely fast response times. This will prove useful for navigation system displays, console this approach at an early stage and are promoting develop- switches, and other automotive applications. In the future, we ment aimed at practical realization. Once wireless power intend to expand the product range to growth markets includ- transfer has become a reality, making it possible, for example, ing home appliances and electronic equipment, robots and to safely recharge an xEV by simply parking it on a designated industrial equipment, medical devices, and more. space, significant changes in industrial and social infrastruc- ture are bound to happen. PiezoHaptTM PowerHapTM Potential 5G & Beyond Maximum transfer rate of 5G (Downlink logical value) 5G Gbps 20-fold increase Needs What electronic components must offer Commercial services using fifth-generation mobile communications system (5G) are expected to begin operation in Japan in 2019. This will be accompanied by another leap in smartphone performance and a growing number of IoT terminals. However, circuit complexity will also increase further, making space savings through component minia- turization as well as effective power management more important than ever. Realizing smaller dimensions and higher performance 5G & Beyond 4G 1 Gbps Solution What TDK delivers Advanced technology first implemented in smartphones tends to migrate to the automotive sector and other applications as well. While closely watching progress in the area of 5G and subsequent communication standards, TDK continues to push the techno- logical boundaries in the ICT market. Capturing demand stimulated by 5G SESUB technology We are actively engaged in further advancing the state of the art in a range of fields. This includes ceramic filters and other ceramic electronic components, the development of packaged modules in technical cooperation with IC manufacturers, and rechargeable lithium polymer batteries. We also expect IoT devices to further evolve toward smaller footprints, lower profiles, and higher integration. TDK’s involvement in this area is exem- plified by its semiconductor embedded substrate (SESUB) technology, which enables the creation of highly competitive modules with small size and low profile. The next generation of electronic components and modules is currently being created in our labs. SESUB Rather than simply mounting chips on a substrate, this unique technology enables three- dimensional embedding of chips whose thickness has been reduced to as little as 100 μm directly in the substrate. Ultra-compact power supply modules as well as Bluetooth and other similar modules created with this technology contribute to even thinner and smaller mobile devices. Further advances in integration density and application to a wide range of IoT devices are on the cards. Bluetooth module Power management unit MEMS technology MEMS microphone MEMS pressure sensor 38 39 TDK CorporationAnnual Report 2018Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Executing Growth Strategies Potential Industry 4.0 & Society 5.0 Needs What electronic components must offer Industry 4.0 is a concept for thorough innovation of industrial production that is being realized in various countries around the globe. In Japan, work is progressing on a system that integrates IoT, AI, robots, autonomous driving, and more in a high-level fusion of cyberspace and physical space. The aim of this so-called “Society 5.0” concept is to combine economic advancement with finding solutions for social issues, through cooperation by the public and private sectors. Sensors and other electronic components incorporated in a multitude of different objects must deliver unprecedented levels of durability and safety. Solution What TDK delivers Enriching society with state-of-the-art technology Industry 4.0 & Society 5.0 While forging ahead with production innovation, TDK is also engaged in efforts to improve energy efficiency, boost the spread of renewable energy, and reduce the burden of medical treatment and care providers, among others, through the supply of solutions based on the concept of Kotozukuri. Expanding market for consumer-use sensors Our extensive lineup includes magnetic sensors, MEMS sensors, advanced high-accuracy motion sensors with three-, six-, or nine-axis, and various other types. These sensors are being increasingly used not only in smartphones and other mobile devices but also in various other consumer product applications. Kotozukuri in the medical and nursing care field The fusion of sensor technology and software technology in wearable devices makes it possible to measure and store vital data, supporting Kotozukuri solutions in the fields of medicine and caregiving. In cooperation with TOKAI Corporation, a company known for its involvement in hospital and nursing care facilities, we are working to achieve the early realization of 24-hour remote monitoring. Another remote monitoring system to detect wandering of dementia patients is being developed in collaboration with the Oita University Faculty of Medicine. Wristband type wearable device Silmee™ W20 COLUMN Drones and TDK The use of industrial drones is expanding beyond agri- culture, logistics, surveying, and disaster countermea- sures to other fields as well, and further market growth is expected. TDK is contributing to the evolution of drones by supplying a seven-axis sensor (three-axis gyro- scope, three-axis acceleration, and barometric pressure) as well as batteries and other parts. Robotics and TDK In smart factories, multiple industrial robots are connected to the cloud to share data collected by sensors, enabling AI-based analysis for an enormous improve- ment in production efficiency. TDK is able to provide the various non-optical sensors required for this type of application. Furthermore, the robot joints use a large number of electric motors. TDK magnets for such motors also contribute to the evolution of robotics. Enhancing the power efficiency of things that drive the IoT society In 2025, it is expected that IT-related power consumption will account for about 15% of the world’s electricity consumption. Building energy systems with high efficiency and low power consumption is therefore crucial for the IoT society. TDK has its roots in a revolutionary magnetic material called ferrite, and developed magnetics expertise into one of its core technologies. Now, TDK has somewhat shifted its focus from traditional component sales to modular solutions that combine hardware and software aspects. We are offering a versatile lineup of power solutions, focused on the three areas of energy conversion, energy storage, and energy control. In all of these areas, we are able to provide high added value through sophisti- cated synergy. Energy conversion • Bidirectional converters • AC-DC/DC-DC converters • Magnets for drive and power generation applications Energy storage • Rechargeable lithium polymer batteries • Electric double layer capacitors (EDLCs) • Transformers for battery management systems • Battery management units Energy control • IGBT transformers • Various sensors (current sensors, temperature sensors, etc.) • SESUB technology 40 41 TDK CorporationAnnual Report 2018Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Executing Growth Strategies Monozukuri Innovation Post-Merger Integration (PMI) and Creating Synergies Strengthening the Monozukuri power that drives Kotozukuri solutions PMI expertise taken to the next level The Kotozukuri solutions offered by TDK are based on a thorough mastery of materials technology, process technology, and inte- grated production that results in highly competitive electronic components. In market sectors that are expected to see further growth, improved reliability is a major requirement. TDK is therefore pursuing Monozukuri Innovation that combines the Industry 4.0 concept with its zero-defect quality policy. Toward that end, the Akita Plant has come up with a special manufacturing concept on its own called Arubeki Sugata (ideal process) quality. If one relentlessly improves quality and reliability, the end result will be a production line that does not make defective products, which in effect is what the production process should be like. This is the aim of the drastic Monozukuri Innovation that we are implementing. Automation, the use of robots, and other measures all serve to achieve this goal. We are building a model line in which each process conforms to the Arubeki Sugata principle. After thorough testing and evaluation, this will be applied to existing lines. Arubeki Sugata has become the watchword of the TDK Group as we engage in Monozukuri Innovation at a global level. Arubeki Sugata Rather than having to sort out defective products from the final output of a line, thorough quality management covers the entire process from materi- als input to completion of the product. Management of zero-defect quality Optimization of facilities and human resources Quality control activities from the bottom up Honjo Factory East Site, Akita Prefecture C OLUMN Implementing a model line At the Honjo Factory East Site, which was completed in 2016, we are building a model line for MLCCs (multilayer ceramic chip capacitors) that pursues the zero-defect quality policy. In the multilayering process, which has a major effect on the quality of MLCCs, an enormous amount of data about facility operation status and the condition of the product is col- lected and matched to reference quality data. This results in a drastic improve- ment in quality conditions. The know- how obtained from this model line will be applied to other production pro- cesses as well. Sensing utilization Multilayering Product Process Pressure Relentless pursuit of quality product conditions Pursuit of Industry 4.0 + zero-defect quality In keeping with efforts to reform our business structure, we embarked on a full-scale M&A strategy. More than 10 years before the turn of the century, we made our first move by acquiring the magnetic heads manufacturer SAE Magnetics (H.K.) Ltd. in 1986. This was followed by the acquisition of Headway Technologies Inc. in 2000, another manufacturer in the same field. In 2005, we acquired the Lambda Power Group (now TDK-Lambda), a leader in industrial power supplies, and the rechargeable lithium polymer battery manufacturer ATL. In 2008, the passive component manufacturer EPCOS with a forte in high-frequency components became part of the TDK Group. These M&As provided a clear boost to our corporate value and have become the drivers for TDK’s evolution in recent years. In the electronic component sector, an acquisition or merger requires careful assess- ment of complex technological factors. As a result, we have accumulated extensive know-how in making our own judgments and decisions regarding target companies. When we determine that a business excels in regard to management, strategy, technology, and operation, we go ahead with the acquisition, but that does not mean that we try to impose the TDK way. Rather, we want to maintain the dynamism of the acquired company. This approach involves respect for various cultures and business philosophies. Leveraging our strength of diversity adds to the strength of Group companies. Rule 1 We take the initiative in selecting a target company. Rule 2 We do not try to impose the TDK way after acquisition. We Are Truly Thrilled! Behrooz Abdi General Manager MEMS Sensors Business Group Sensor Systems Business Company InvenSense, of which I am the CEO, is a pioneer in motion sensors. We began working on six- and nine-axis sensors ahead of the entire industry. Our broad portfolio is made possible by a solid grounding in microphone, inertial, pres- sure, and ultrasonic sensor technology. We have grown at a rapid pace, offering solutions for many consumer products including smartphones, drones, wearables, game consoles, virtual reality (VR) and augmented reality (AR) devices, inertial navigation systems, and image stabilization for cameras. Just as decision making in humans relies on a combination of sensory input for seeing, hearing, smelling, and touching, the future will require complex sensor combinations. InvenSense will blaze a path into this future together with TDK. InvenSense has the capability to create solutions on a single system chip that integrate MEMS sensors with firmware and proprietary algorithms. By merging this strength with TDK’s powerful materials technology and semiconductor embedded substrate (SESUB) technology, and by fusing the Group’s management resources, a highly unique business model has been created ( P.44–P.45 Synergies Behind the Sensor Business). Our access to mar- kets and our scope of activities have expanded, responding to increasing demand in the area of advanced driving assistance systems (ADAS), along with ICT, IoT, industrial equipment, and the automotive sector. We are truly thrilled by these developments. 42 43 TDK CorporationAnnual Report 2018Product Brand Marks Product Brand Marks Management Strategies: Guided by Its Unchanging Founding Spirit, TDK Continues to March On Synergies Behind the Sensor Business Product Brand Marks Bold M&A strategy dramatically expands the sensor portfolio. Impressive product lineup comprises all kinds of non-optical sensors. Product Brand Marks Product Brand Marks Product Brand Marks Product Brand Marks Product Brand Marks MEMS is a micromachining technology that creates fine sensors as well as movable mechanisms, etc., on silicon substrates, utilizing similar manufac- turing processes as those for semicon- ductor integrated circuits. MEMS technology Software technology Algorithm technology Acceleration sensors Inertial sensors Ultrasonic sensors IC technology Product Brand Marks Product Brand Marks Product Brand Marks Core technologies including materials technology Gyroscope sensors Microphones MEMS Sensors Business Group Module technology ASIC design and development Display ratios Display ratios Current sensors TMR sensors Magnetic Sensors Business Group Sensor integration MEMS sensor platform Global expansion of solution business using high-level sensor fusion W ≤ 1.2W ≤ 0.65W ≤ 1.2W W ≤ 1.2W ≤ 1W ≤ 0.65W ≤ 1.2W ≤ 1.2W ≤ 1.1W Display ratios Product Brand Marks Display ratios Hall sensors Magnetics technology Temperature & Pressure Sensors Business Group Temperature sensors ≤ 1W Pressure sensors Three business groups unified in the Sensor Systems Business Company* create ≤ 1.2W a strong sensor business formation ≤ 1.1W W ≤ 1.2W ≤ 0.65W Packaging technology ≤ 1.2W ≤ 1W ≤ 1.2W ≤ 1.1W Electronic ceramics technology * Sensor Systems Business Company: Newly created entity that encompasses the TDK sensor divisions and sensor-related Group companies Sensor Application Products segment targets a CAGR of 35% ≤ 1.2W W Addition of Hall sensors strengthens magnetic sensor technology ≤ 0.65W Display ratios TDK’s magnetic sensor technology comprising TMR and other similar sesors has been further strengthened by the addition of Hall sensors from Micronas, which have earned high acclaim in the automotive industry. Products that integrate TMR sensors and Hall sensors have also been devel- oped. Targeting the automotive and W industrial equipment markets, we are growing the business with a wide lineup of sensor solutions. ≤ 1.2W Temperature and pressure sensors drive electronic ceramics technology ≤ 0.65W Various MEMS sensors significantly expand the add-on portfolio ≤ 1.2W Temperature sensors with NTC therm- istors and pressure sensors utilizing ≤ 1W piezo-ceramic technology are just a few examples of the versatile product portfolio developed by TDK and EPCOS through advanced electronic ceramics technology. We are also pur- suing the technological synergy that arises from the integration of different sensors. Tangible results include the development of integrated tempera- ture/humidity/barometric pressure sensor modules made possible by MEMS technology. ≤ 1.2W ≤ 0.65W ≤ 1.2W The MEMS sensor product and tech- nology of the TDK Group received a significant boost by the addition of gyroscope sensors and acceleration sensors from InvenSense, a company with extensive design expertise, along with inertial sensors from Tronics and ultrasonic sensors from Chirp. The MEMS sensor platform suitable for advanced sensor fusion has also been strengthened. We are expanding our MEMS sensor solutions not only for the ICT market but also for the auto- motive market and others. ≤ 1.2W ≤ 1W Securing IC design technology indispensable for sensor systems ≤ 1.2W The integrated circuit chips that pro- cess the signals obtained through sensing are an indispensable part of any sensor system. The addition of ICsense, Europe’s premier Application Specific Integrated Circuit (ASIC) design company, to the TDK Group has further elevated our capability to pro- vide high-performance, high-value- added sensor products and solutions. ≤ 1.2W ≤ 1.1W ≤ 1W High-level sensor fusion powered by sophisticated software technology ≤ 1.1W In systems that comprise a large number of sensors, dedicated software makes it possible to realize integrated control of sensor-derived information, enhance functionality and expandabil- ity, and create new solutions along with intricate power management. InvenSense and other TDK Group companies possess the required soft- ware technology and expertise that forms the basis for high-level sensor fusion in the age of IoT. ≤ 1.1W 44 Annual Report 2018 45 Display ratios W ≤ 1.2W Technological synergyTechnological synergyTechnological synergy TDK CorporationInitiating a global HR strategies In fiscal 2019, TDK began the full-scale implementation of its global human resources strategy aimed at discovering and developing borderless global talent. To promote this initiative, the Human Resources HQ has been established in Munich, Germany. It is headed by TDK corporate officer and general manager Andreas Keller. With the Human Resources HQ located outside of Japan and with non-Japanese in top management roles, TDK is a rare example among Japanese companies. Due to aggressive M&A in recent years, there has been a sharp increase in the globalization of human resources and diversification of specializations in the TDK Group. Accompanying these developments, to ensure more objective personnel evaluations, we are establishing common global standards. We will promote the proper placement of talented people beyond the boundaries of country or division, carefully select management candidates, and work to further increase our strength of diversity. We are already working on establishing a consolidated human resource database and expanding the scope of its use, and will go all out to develop global leaders. G er many Andreas Keller Human Resources HQ: Munich TDK’s global HR strategies Establish the Human Resources HQ in Munich, Germany Build a consolidated global HR database Set common global standards for evaluating personnel Cultivate global leaders beyond boundaries of country or division Territorial career development program A territorial career development program is being implemented to find individuals within the Group who have strong, untapped capabilities, to train a new generation of candidates for all key positions, and to develop global leaders who will play an active role in a wide range of fields, thereby raising the management skills of the entire organization. Candidates will participate in the program five times a year in their region. During the program, practical issues will be addressed through group work with members gathered from various regions and divisions. Moving to Improve Sustainable Corporate Value Global Human Resource Strategies Bolstered by Strength of Diversity Strength of diversity built through TDK-style post-merger integration (PMI) Since the 1960s when the Company began expanding over- seas, TDK has led the movement toward globalization among Japanese companies. In the 2000s, we began pursuing the bold reform of our business structure through M&As. Starting with Hong Kong-based ATL in 2005 and Germany-based EPCOS in 2008, companies that have joined the TDK fold are significantly driving TDK’s earnings many years on. The secret to our integrative approach is to not control companies through capital but to delegate authority on an equal partner- ship basis. We take this approach because we understand that electronic components are a highly distinctive business field, and that every region has its own needs, business prac- tices, systems, and other unique characteristics. Because the corporate managers of the companies we have acquired are familiar with those specifics, we feel they are the ones best qualified to execute management strategies. Meanwhile, we concentrate on maximizing the corporate value of the TDK Group as a whole by creating synergies through the integra- tion of management resources such as materials technology, process technology, and the customer base. A culture that encourages and harnesses diverse value sys- tems to promote innovation is a hidden competitive advan- tage of TDK’s strength-of-diversity approach. Global Business Composition Over 90% of TDK employees are outside of Japan 8% 13% 5% 9% 9% 9% 2018 Net sales (internal)/ Number of employees (external) 69% 78% Japan Asia, etc. Europe Americas The growing need for an HR strategies adaptive to business globalization Since 2016, we have been aggressively pursuing an M&A strategy primarily in the area of sensors, and have been cre- ating a new business structure. TDK has expanded its busi- ness to more than 30 countries and regions around the world, and in fiscal 2018 the overseas sales ratio was 91.1% and the overseas employee ratio 90.7%. In order to provide optimal solutions to customers in a market that is becoming more globalized, we must further increase our strength of diversity while at the same time maximizing Group synergies by reaching beyond limitations imposed by time, geography, and culture. Against this backdrop, we feel the growing importance of further promoting management diversity, and discovering, developing, and utilizing human resources across international borders. 46 47 TDK CorporationAnnual Report 2018Moving to Improve Sustainable Corporate Value Global Human Resource Strategies Bolstered by Strength of Diversity Promoting a Global Human Resource Strategies to Realize the Strength of True Diversity TDK’s Workstyle Innovation Diversification of workstyles to suit various stages in life TDK introduced three schemes in October 2017 with the aim of enabling employees to choose workstyles suited to various stages in life and to continue working with peace of mind. The Spouse Domestic Transfer Accompaniment Scheme provides support to employees accompanying spouses who undergo a domestic transfer requiring a change of residence by, for example, investigating whether acceptance by a TDK site in the employee’s desired area is possible. The Spouse Overseas Transfer Leave Scheme enables employees wishing to accompany spouses who are transferred overseas to take a leave of up to three years. After the leave ends, in principle, the employee returns to the same workplace as before the leave. The Welcome Back Scheme (Former Employee Reemployment Scheme) assists the return to work as regular employees of former employees who have quit their jobs because of marriage, childbirth, child-raising, nursing care, spouse transfer, among other circumstances. Andreas Keller Corporate Officer General Manager of Human Resources HQ Introduction of schemes to diversify workstyles Domestic transfer of spouse Overseas transfer of spouse Childbirth, child-raising, nursing care Over 100,000 employees are playing an active role successors on a Groupwide basis to take over important in the TDK Group. Approximately 90% of those employ- positions. Under this policy, we will actively promote ees are based in countries other than Japan, with nearly interaction not only between our headquarters and 80% having joined the TDK Group through M&As. TDK Group companies but also between Group companies has a culture that values the individuality and working themselves. This interaction will not only be limited to approach of every new consolidated subsidiary that has technical positions, but will also extend to employees in joined the Group, without forcing these companies to charge of corporate functions such as legal or others, adopt a style similar to the Company. This cultural thereby giving all employees an opportunity to play an acceptance has been a major reason why each Group active role on a global scale. Our aim is to accelerate Company has been able to achieve growth as part of the this interaction through the Global Communication and TDK Group whilst leveraging its own individual strengths English Training program, as well as introducing a con- to the greatest possible extent. The true strength of sistent global mobility guideline. This is just the begin- the TDK Group’s diversity lies not only in the fact that ning of our strive and ambition to establish a global it possesses the technologies and capabilities of its human resources platform. subsidiaries, but rather in respecting the cultures of Since entering the TDK Group 18 years ago as a staff each individual Group company and offering motivation member at a local subsidiary, I have gained much experi- through the fostering of interaction between these com- ence at Group companies in various countries. As of panies. It also comes through sharing best practices 2018, I have been serving as a corporate officer at the that should be incorporated at our headquarters and company’s headquarters. Through this experience, I have at other Group companies. Furthermore, to promptly come to believe that providing our global employees, achieve the TDK Group’s goals, I believe it is imperative regardless of their Group company, with the opportunity that we promote our human resource strategies on a to play an active role on the global stage, and at the global basis under a shared vision. company’s headquarters, is a huge motivational factor. To realize further growth whilst leveraging the Going forward, whilst leveraging the individual charac- strength of true diversity, we will adhere to a policy of teristics of each Group company, we will promote our putting the best people in the best place at the best human resource strategies under the concept of One TDK, W o r k L e a v e R e e m p l o y m e n t Transfer Accompaniment Scheme If there is a TDK site near the spouse’s transfer location, the employee can request a transfer. Transfer Leave Scheme Childcare and Nursing Care Leave Scheme If the spouse is transferred overseas, the employee can take leave. Resignation Welcome Back Scheme (Former Employee Reemployment Scheme) If the employee is forced to resign, he/ she can return as a regular employee if certain conditions are met. Introduction of Second Career Scheme TDK has also introduced the Second Career Scheme, which, when an employee reaches mandatory retirement age, extends the employment contract to the age of 65. The aim of this scheme is to fulfill TDK’s social responsibility of responding to the revised Act Concerning Stabilization of Employment of Older Persons and to effectively utilize the knowledge, skills, and experience of elderly employees for the further growth of the Company. Toward the realization of work-life balance In April 2018, TDK introduced a Work-at-Home Scheme and a Super Flextime Scheme. The aim of these schemes is to support a work-life balance by providing employees who have child-raising and nursing-care responsibilities with opportuni- ties to work at home and by applying a flextime system that does not have any core time. By making use of these schemes, even more employees can improve their work-life balance. Unlike the usual flextime system, the Super Flextime Scheme does not set any core time. Employees can choose their working hours flexibly anytime from 6 a.m. to 10 p.m. Image of the Super Flextime Scheme Commuting Fixed working hours Break Fixed working hours Commuting possible time, thus actively cultivating through various thus bringing the entire Group together. By doing so, we Escort Commuting Fixed working hours Commuting Break Escort At-home work newly introduced management training programs will realize further growth of the TDK Group as a whole. At-home work Break At-home work Break At-home work 48 49 TDK CorporationAnnual Report 2018 Moving to Improve Sustainable Corporate Value The TDK Group’s Materiality TDK believes it is important to promote CSR activities that respond to changes among stakeholders and in the social and busi- ness environment surrounding the Group. Since fiscal 2014, TDK has promoted the study of materiality in accordance with the fourth edition of the Global Reporting Initiative guidelines (GRI-G4), and in fiscal 2016, we finalized our materiality*. With regard to the designated important CSR issues of “Contribute to the World through Technology,” “Develop Human Resources,” “Consider the Societal and Environmental Impact of the Supply Chain,” and “Develop and Prosper in Harmony with the Global Environment,” we are continuing to promote activities. * The details of the materiality finalization process may be viewed on the following website: http://www.global.tdk.com/corp/en/csr/csr_philosophy/csr02000.htm The materiality finalization process GRI-G4 made a revision from requiring comprehensive information disclosure to requiring information disclosure with the focus on materiality. The objective of this revision was to encourage companies to determine their reporting content purposefully by getting management to be more deeply involved in CSR. TDK held discussions with stakeholders outside the Company, imple- mented a dialogue with management, and finalized materiality through the following process. STEP 1 STEP 2 STEP 3 STEP 4 Identifying social issues We confirmed the daily communi- cations content with stakeholders and conducted simulations of various social issues in light of ISO26000 and other interna- tional standards relating to CSR. Prioritizing material issues from TDK’s own perspective Prioritization from stakeholders’ perspectives We prioritized the importance of the aforementioned identified social issues by “management strategies,” “impact of the Group’s business on society,” “degree of stakeholder interest,” and “responses to the current situation.” We studied on prioritization from stakeholders’ perspectives, reflecting the CSR Report review conducted by experts from Asia, Europe, and the U.S. as well as the exchanges of views with CSR experts. Finalization of materiality We reconsidered our areas of pri- ority from the perspectives of TDK and stakeholders and, after gaining approval from the Executive Committee, finalized the materiality of the TDK Group. Finalization of the materiality The prioritization in Steps 2 and 3 was conducted on the basis of 46 items chosen in consideration of items required by GRI-G4, and 19 material issues were identified. These issues were further sorted and classified and finally condensed into the following important themes for the promotion of activities going forward. After approval has been received from the Executive Committee, the competent departments in TDK’s headquarters are taking the initiative in setting key performance indicators in coordination with TDK Group companies in order to promote related activities. Important CSR Issues Important Themes Contribute to the World through Technology Contribution to regions and communities Develop Human Resources Consider the Societal and Environmental Impact of the Supply Chain Protection of water resources Addressing social issues by developing new kinds of products the world has not yet seen Pursue zero-defect quality Develop global human resources Cultivate a corporate culture that respects diversity Consider the work environment at manufacturing sites Consider the work environment of suppliers Response to conflict minerals H i g h I m p o r t a n c e f o r s t a k e h o l d e r s 50 Important CSR Issues Important Themes Main Points Contribute to the World through Technology Addressing social issues by developing new kinds of products the world has not yet seen TDK aims to solve social issues through unique technologi- cal development. Pursue zero-defect product quality On the basis of our high level of technology, we will pursue zero-defect quality through uniformly managed production processes from materials to manufacturing. Develop Human Resources Develop global human resources Toward the promotion of genuine globalization, we will strive to develop the human resources who will serve as its foundation. Cultivate a corporate culture that respects diversity In order to continue generating innovative creativity, we will build a tolerant corporate culture that respects the diversity of human resources. Consider the work environment at manufacturing sites In light of the latest requirements, we will gauge consider- ations for the labor environment at production sites, which we need as a supplier, and if necessary implement educa- tion and guidance toward improvement. Consider the work environment of suppliers In light of the latest requirements, we will gauge consider- ations for the labor environment of suppliers, which we need as a buyer, and if necessary implement education and guidance toward improvement. Response to conflict minerals We will execute our social responsibility as a midstream company appropriately through the continued implementa- tion of required efforts and an understanding of the latest requirements. Reduce environmental load throughout life cycle stages We will promote environmental activities on the basis of the TDK Environmental Vision 2035*. Creating a framework for gauging prod- uct contributions Through the setting of a framework for gauging product con- tributions in the industry, we will promote social under- standing of the level of TDK’s environmental contribution. Consider the Societal and Environmental Impact of the Supply Chain Develop and Prosper in Harmony with the Global Environment Develop and Prosper in Harmony with the Global Environment Reduce environmental load throughout life cycle stages Creating a framework for gauging product contributions Management Ensure corporate governance and compliance Management Ensure corporate governance and compliance Through the development of appropriate corporate gover- nance and thorough implementation of compliance, we will aim to enhance our corporate value. Business activities in consideration of biodiversity Supply of product information to consumers Protection of customer privacy Importance for the TDK Group High * For details of the goals and achievements of environmental activities, please see the following website: https://www.global.tdk.com/corp/en/csr/environmental_responsibility/csr03200.htm 51 TDK CorporationAnnual Report 2018 Moving to Improve Sustainable Corporate Value Optimization of the Value Chain Overall strategy Monozukuri Innovation Social factors Environmental factors Value Chain Procurement Development and design Manufacturing Logistics Sales Strategic Fit (Optimization of value chain to promote strategy) Stable procurement of magnetic materials Assurance of the quality of raw materials Procurement of rare-metal alternatives, etc. Overall value chain • Pursuit of integrated production from materials to finished products • Creation of “black boxes” in core domains to ensure firm control of technological advantage • Backflow of customer needs upstream • Enhancement of profitability by accelerating the business cycle across all processes Acceleration of the development cycle Development of demand areas through our global 4-pole network Concentration on strategic areas of development resources New product development based on long-term road map Fusion of intellectual property within Group Collaboration with IC manufacturers Management and utilization of intellectual property Development of products not using rare metals Pursuit of location free to realize uniform quality worldwide Pursuit of zero defects through source management Pursuit of production efficiency through utilization of IoT Reduction of inventories through shortening of lead times Assurance of logistics quality (contribution to “Just In Time”) Strengthened relations with customers Improvement of cash flows Effective utilization of information systems ESG Overall value chain • Development of human resources to promote Monozukuri Innovation • Development of global human resources • Cultivation of a corporate culture that respects diversity • Reduction of environmental load throughout lifecycle perspective • Creation of a framework for gauging product contributions Assurance of procured product quality Implementation of CSR check sheets/audits Green procurement Response to conflict minerals Consideration of work environment of suppliers Development of products contributing to the environment Product assessment Reduction of environment load at plants Improvement of energy efficiency Consideration of work environment at production sites Reduction of environmental load of logistics Strengthening of quality assurance setup Promotion of sales of products contributing to the environment CSR-compliant supplier ratio 91.2% Implementation of CSR self-checks at manufacturing sites 100% Reduction of CO2 emissions through products 2,041 thousand t-CO2 52 53 TDK CorporationAnnual Report 2018Moving to Improve Sustainable Corporate Value Optimization of the Value Chain FOCUS Strategic Fit FOC US ESG Reduction of procurement risk relating to magnetic materials and strengthening of materials technology For TDK, whose core technology is magnetics, the stable procurement of magnetic materials is an important issue in the promotion of medium- and long-term management strategy. In particular, the dysprosium added to neodymium magnets, which boast the strongest magnetic force, is a rare-earth element. As well as ensuring the stable supply of magnetic materials, TDK is making efforts to reduce busi- ness risks, such as the development of neodymium magnets that do not rely on rare-earth elements. We are also tack- ling the continuous evolution of materials technology. In July 2018, TDK concluded a capital and business tie-up con- tract with Toda Kogyo Corp. and agreed to turn it into an equity-method affiliated company. TDK’s active involvement in new mate- rial development based on Toda’s forte in magnetic materials and material synthesis technology will lead to a strengthening of the competitiveness of our electronic components. Neodymium magnets R&D at global sites with differing regional features TDK is tackling innovations utilizing its strength of diversity. For example, while TDK itself is strong in the development of materials technology and production technology, there are companies that are strong in the pursuit of state-of-the- art technology, companies that are strong in the develop- ment of applications, and companies that are strong in the development of environment-friendly products, especially in Europe, where environmental awareness is deep-rooted. Companies with expertise in different fields, due to national or regional characteristics or the like, are promoting R&D utilizing their respective strengths. Through mutually com- plementary development, we are endeavoring to enhance our competitiveness on a global scale. Acceleration of cycle time TDK is making efforts to accelerate the business cycle in all processes, including sales, manufacturing, and develop- ment. In addition to accelerating the supply of samples and improving development speed, we have set specific KPIs, such as the reduction of inventories, the shortening of production lead times, and the launch of products with top market shares, so as to strengthen our competitiveness and improve our earnings. Sales • Time taken to recover accounts receivable • Frequency of information network use, etc. Acceleration up of the business cycle through KPI target Development • Number of completed R&D themes management • Number of patents • Number of samples submitted to customers, etc. Manufacturing • Shortening of lead times • Review of manufacturing processes • Optimum inventory management, etc. TDK Environmental Vision 2035 At TDK, we believe that long-term environmental action plays a key role in the effort to achieve sustainable development in society. TDK Environmental Vision 2035, launched in fiscal 2016, sets the goal of “halving the CO2 emissions basic-unit in a life-cycle per- spective by 2035,” based on operating businesses with low enough environmental loads not to disturb natural cycles. This stance stems from the belief that minimizing the environmental load in business activities, and revitalizing the natural environment, is the duty of companies that supply products designed to contribute to its customers and the society. Moreover, modeled on the United Nations Climate Change Conference (COP 21) Paris Agreement, which seeks to curb global warming by achieving a balance between greenhouse gas emissions and absorption sources, TDK pursues the ideal cor- porate posture. Procurement Disposal FY2015 FY2026 FY2036 CO2 half Production Use 100 80 60 40 20 0 –30% –50% CO2 emissions cut in half Logistics CO2 emissions basic-unit (FY2015 = 100) Promotion of innovations utilizing TDK’s strength of diversity USA (San Jose) Many semiconductor and related companies are located in San Jose, which is near Silicon Valley. Here, TDK jointly implements surveys of state-of-the-art information and communications technology and product development. Germany (Munich) In a region where awareness of the environment and energy saving is strong, TDK implements technical surveys and development in such fields as automotive and industrial equipment. China (Shenzhen) Here, TDK develops technologies that can be deployed in all direc- tions, including the expanding automotive, ICT, and industrial equipment markets. Israel (Tel Aviv) There are many high-tech startups in Tel Aviv, which is the site of TDK-Lambda. Here, TDK implements surveys and development of new technologies. China (Shanghai) Here, TDK implements EMC sup- port, the proposal of optimum components, and other activities. Japan (Chiba) Here, TDK implements R&D on medium- to long-term themes (new materials, new manufactur- ing methods, new products, etc.). Major achievements Trends in CO2 Emissions from Production Activities (Global)* kt-CO2 FY2015 = 100 2,000 1,600 1,200 800 400 0 120 110.5 1,647 100 80 60 40 20 0 FY 14 15 16 17 18 CO2 emissions (left) CO2 emissions basic-unit (right) Trend in the Reduction of CO2 Emissions through Products* kt-CO2 FY2015 = 100 2,500 2,000 1,500 1,000 500 0 2,041 138.9 200 150 100 50 0 FY 14 15 16 17 18 CO2 emissions (left) CO2 emissions basic-unit (right) * A third-party review of the calculation method was performed. Please refer to the following website for more information. http://www.global.tdk.com/corp/en/csr/csr_data/ csr05900.htm 54 55 TDK CorporationAnnual Report 2018 Consolidated Business Results Highlights Years ended March 31 Consolidated Business Highlights*1 Net sales (Overseas sales) Cost of sales S elling, general and administra- tive expenses Operating income (loss) Income (loss) before income taxes Income (loss) from continuing operations before income taxes N et income (loss) attributable to TDK Capital expenditures Depreciation and amortization Research and development expenses R atio of overseas production to net sales (%) N et cash provided by operating activities 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ¥ 866,285 ¥ 727,400 ¥ 792,624 ¥ 862,492 ¥ 802,534 ¥ 841,847 ¥ 984,525 ¥1,082,560 ¥1,152,255 ¥1,178,257 ¥1,271,747 Breakdown of Operating Income Changes*3 Yen billions Yen millions 714,172 635,529 143,581 87,175 91,505 71,461 84,312 71,297 57,387 610,944 605,943 175,762 (54,305) (81,630) (63,160) 98,425 89,567 57,645 704,874 604,454 158,727 29,443 25,576 13,520 64,370 83,788 53,942 764,807 645,514 149,114 67,864 64,519 45,264 78,638 77,594 52,973 702,469 624,271 157,724 20,539 14,668 (2,454) 99,653 80,197 52,551 747,062 668,258 151,535 22,054 19,765 1,195 85,606 77,938 53,943 890,520 763,572 184,337 36,616 39,772 16,288 68,606 83,109 63,385 207,876 227,718 72,459 74,517 93,414 91,839 49,440 102,525 80,249 70,644 64,828 160,674 83,224 84,920 113,649 208,660 211,717 145,099 167,631 87,491 91,254 255,598*3 85,633*3 89,811 63,463 178,612 92,171 103,457*3 989,348 1,061,203 1,073,024 1,158,004 802,225 831,123 855,948 930,516*3 Fiscal 2017 208.7 70.1 74.0 80.5 83.6 80.2 81.8 86.7 87.9 86.3 86.1 84.5 –144.4 Gain on transfer +3.7 Changes in sales –32.3 Sales price reduction +34.0 Rationalization, cost reduction +4.3 Benefits from restructuring –3.7 SG&A expenses increase –10.9 One-time expenses related to M&A +20.1 Restructuring cost +6.1 Exchange rate fluctuation (U.S.$1.00 = ¥110.93) Net cash used in investing activities (141,892) (275,410) (105,963) 119,413 59,189 118,247 101,879 (61,341) 55,334 (29,898) 108,942 (90,156) 127,308 142,850 151,563 160,136 91,310 (55,438) (127,312) (140,585) (71,111) (246,099) N et cash provided by (used in) financing activities C ash and cash equivalents at end of period Total assets Stockholders’ equity Working capital Number of shares issued (thousands) Per Share Data N et income (loss) attributable to TDK (basic) Net assets Dividends Payout ratio (%) Key Financial Ratios Overseas sales ratio (%) SG&A ratio (%) Operating income ratio (%) ROE (%) ROA (%) Non-Financial Indicators Number of employees Overseas employees ratio (%) C O2 emissions in production activities (t-CO2) C O2 emissions reduction in manufacturing (t-CO2)*2 (75,941) 223,637 (38,369) (31,860) 12,929 4,395 (56,118) (35,243) 29,305 (37,753) 110,088 Fiscal 2018 85.6 166,105 935,533 716,577 300,859 129,591 165,705 132,984 129,091 167,015 213,687 250,848 265,104 285,468 330,388 279,624 1,101,036 1,091,458 1,060,853 1,072,829 1,169,575 1,239,553 1,404,253 1,450,564 1,664,333 1,905,209 554,218 281,536 129,591 543,756 286,370 129,591 534,273 199,186 129,591 498,159 219,918 129,591 561,169 232,693 129,591 635,327 279,504 129,591 738,861 352,364 129,591 675,361 289,760 129,591 793,614 388,542 129,591 824,634 296,899 129,591 ¥551.72 ¥(489.71) ¥104.82 ¥350.90 ¥(19.06) ¥ 9.50 ¥129.47 ¥392.78 ¥514.23 ¥1,150.16 ¥502.80 Yen 5,557 130.00 23.4 4,297 130.00 — 82.4 16.6 10.1 9.7 7.4 84.0 24.2 (7.5) (9.9) (6.2) 4,215 60.00 57.2 88.9 20.0 3.7 2.5 1.2 4,142 80.00 22.8 88.7 17.3 7.9 8.4 4.2 3,957 80.00 — 87.5 19.6 2.6 (0.5) (0.2) 4,461 70.00 737.2 88.7 18.0 2.6 0.2 0.1 5,050 70.00 54.1 90.5 18.7 3.7 2.7 1.4 5,865 90.00 22.9 5,355 120.00 23.3 6,289 120.00 10.4 6,532 130.00 25.9 91.4 19.2 6.7 7.2 3.7 92.1 19.8 8.1 9.2 4.5 91.1 9.7 17.7 19.8 9.3 91.1 20.1 6.7 7.8 3.6 60,212 82.8 66,429 84.1 80,590 87.2 87,809 88.5 79,175 87.4 79,863 88.2 83,581 89.1 88,076 89.8 91,648 90.3 99,693 90.7 102,883 90.7 926,695 909,747 878,303 1,095,462 1,109,926 1,102,989 1,190,458 1,269,086 1,474,119 1,463,396 1,647,096 321,000 498,000 886,000 1,251,000 1,581,000 1,675,000 2,041,000 Breakdown of Free Cash Flow Yen billions Net cash provided by operating activities 91.3 Capital expenditures –178.6 +9.1 Proceeds from sales of tangible and intangible assets Proceeds from sale and maturity of short- term investments Payment for pur- chase of short-term investments Proceeds from sale and matu- rity of securities +168.3 –156.6 +24.9 Payment for purchase of securities –1.2 Proceeds from sale of business, net of cash transferred +30.4 –141.5 Acquisition of subsidiaries, net of cash acquired Other–net ‒0.8 Free cash flow –154.8 *1 In accordance with the provisions of ASC No. 205-20, “Presentation of Financial Statements–Discontinued Operations,” operating results related to the data tape business and the blu-ray busi- ness are separately presented as discontinued operations in the consolidated statements of operations for the year ended March 31, 2014. Also, reclassifications are made to the consolidated statements of operations after the year ended March 31, 2010, to conform to the presentation used for the year ended March 31, 2014. *2 Because the TDK Environmental Action 2020 Plan came into effect from fiscal 2011, the “CO2 emissions through products (environmental contributions) (t-CO2)” figures are for fiscal 2012 onward. *3 To comply with the U.S. Financial Accounting Standards Board’s Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, we are revising our business results for fiscal 2018, which were reported on April 27, 2018—operating income, research and development expenses, cost of sales, and selling, general and administrative expenses (revised operating income: ¥85,633 million to ¥89,692 million; revised research and development expenses: ¥103,457 million to ¥102,641 million). The disclosure of revised cost of sales and selling, general and administrative expenses will be made at the announcement of financial results for fiscal 2019. The figures before adjustment are shown. 56 57 TDK CorporationAnnual Report 2018* To comply with the U.S. Financial Accounting Standards Board’s Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, we are revising our business results for fiscal 2018, which were reported on April 27, 2018—operating income, research and development expenses, cost of sales, and selling, general and administrative expenses (revised operating income: ¥85,633 million to ¥89,692 million; revised research and development expenses: ¥103,457 million to ¥102,641 million). The disclosure of revised cost of sales and selling, general and administrative expenses will be made at the announcement of financial results for fiscal 2019. The figures before adjustment are shown. Consolidated Business Results Highlights Net Sales / Overseas Sales Ratio Yen billions 1,400 1,200 1,000 800 600 400 200 0 1,271.7 91.1 % 100 75 50 25 0 Operating Income (Loss) / Operating Income Ratio* Yen billions 240 200 160 120 80 40 0 −40 −80 85.6 6.7 % 24 20 16 12 8 4 0 –4 –8 ROE / ROA % Cash Flows Yen billions 20 10 0 –10 –20 7.8 3.6 200 100 0 –100 –200 –300 91.3 –154.8 –246.1 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 Net sales (left) Overseas sales ratio (right) Operating income (loss) (left) Operating income ratio (right) ROE ROA Net cash provided by operating activities Net cash used in investing activities Free cash flow As a result of increases in the number of parts used on automobiles in conjunction with the electrification of vehicles and steady investment in semiconductors in the industrial equipment market, net sales were ¥1,271.7 billion, a record high, in fiscal 2018. Sales have increased over the past 11 years, particularly in the United States and Asia, and in fiscal 2018, sales outside Japan accounted for 91.1% of total net sales. As a result of the structural reforms that were initiated in fiscal 2012, an earnings structure with a good balance among the different segments has been firmly established. In fiscal 2017, capital gains of ¥144.4 billion were recorded in con- junction with the business tie-up with Qualcomm and the agreement to establish a joint venture, and as a result, operating income in fiscal 2018 was down 59.0% year on year, to ¥85.6 billion, but income was up in real terms due to higher income from existing businesses. ROE and ROA declined sharply in fiscal 2009 following the global economic downturn, but after structural reforms were implemented from fiscal 2012, both have improved as a result of higher net income and other factors. As a result of the counteraction to special factors that resulted in reporting gains on the transfer of business to Qualcomm in fiscal 2017, ROE was down 12.0 percentage points year on year to 7.8%, and ROA fell 5.7 percentage points, to 3.6%, in fiscal 2018. The business transfer to Qualcomm in fiscal 2017 resulted in a significant improvement in free cash flow. Funds obtained as compensation for the business transfer are being utilized in new M&A in accordance with our growth strategy, and we are working to further strengthen our earnings structure. In fiscal 2018, net cash used in investing activities increased substantially as we engaged in active capital investment, R&D, and M&A, and as a result, free cash flow was negative ¥154.8 billion. Net Income (Loss) Attributable to TDK Yen billions Capital Expenditures / Depreciation and Amortization Yen billions R&D Expenses / R&D Expenses to Net Sales Ratio* Yen billions 150 100 50 0 −50 −100 63.5 200 150 100 50 0 178.6 92.2 120 100 80 60 40 20 0 103.5 8.1 Overseas Production Ratio % 100 80 60 40 20 0 % 10 8 6 4 2 0 84.5 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 Capital expenditures Depreciation and amortization R&D expenses (left) R&D expenses to net sales ratio (right) Performance was sluggish from fiscal 2009 due in part to reduced demand for electronic components resulting from the global economic slowdown and the impact of the Great East Japan Earthquake. After structural reforms were imple- mented beginning in fiscal 2012, however, results drastically improved. As a result of effects from reporting gains from the transfer of business to Qualcomm in fiscal 2017, net income in fiscal 2018 fell 56.3% year on year, to ¥63.5 billion, but income was up in real terms due to higher income from existing businesses. Under the three-year Medium-Term Plan covering the period from fiscal 2016 to fiscal 2018, TDK made ¥506.9 billion in capital investment. TDK continues to actively pursue capital investments aimed at accelerating strategic growth product expansion, strengthening its overseas R&D base, accelerating existing core busi- ness expansion, and accelerating Monozukuri Innovation. R&D expenses have continuously increased since fiscal 2012, and TDK invested ¥103.5 billion in R&D in fiscal 2018, a record high, so that it can respond to rapid technological innovation in electronics markets and maintain high competi- tiveness. Going forward, we will continue to actively invest in the development of new technology and further reinforce our R&D structures. Compared with fiscal 2009, the overseas production ratio in fiscal 2018 was up 10.5 percentage points, reaching 84.5%. TDK seeks to establish location- independent production systems and is working to establish the ability to supply products with the same high quality from any location. Total Assets Yen billions Stockholders’ Equity / Stockholders’ Equity Ratio Yen billions 2,000 1,600 1,200 800 400 0 1,905.2 900 600 300 0 824.6 43.3 % 80 60 40 20 0 Number of Employees / Overseas Employees Ratio People 102,883 90.7 120,000 90,000 60,000 30,000 0 % 100 80 60 40 20 0 CO2 Emissions in Production Activities Thousand t-CO2 2,000 1,500 1,000 500 0 1,647 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 09 10 11 12 13 14 15 16 17 18 Stockholders’ equity (left) Stockholders’ equity ratio (right) Number of employees (left) Overseas employees ratio (right) Total assets as of the end of fiscal 2018 increased ¥240.9 billion. Liquidity on hand (cash and cash equivalents, short-term investments, and securities) decreased ¥63.2 billion year on year, but goodwill increased ¥96.8 billion, tangi- ble fixed assets increased ¥81.0 billion, inventories increased ¥53.0 billion, and net trade receivables were up ¥49.1 billion. The primary cause of the increase in goodwill was the acquisition of InvenSense. Stockholders’ equity was up 3.9% year on year, to ¥824.6 billion, as of the end of fiscal 2018. For active capital investment, R&D, and M&A, long-term debt was up ¥79.9 billion year on year, short-term debt increased ¥46.9 billion, and trade pay- ables increased ¥50.1 billion, and as a result, the stockholders’ equity ratio declined 4.4 percentage points year on year, to 43.3%. 58 TDK implemented personnel optimization measures as a part of the structural reforms conducted since fiscal 2012, but has been increasing the number of employees to raise competitiveness since fiscal 2016, the first year of the previous Medium-Term Plan, and the number reached 102,883 as of the end of fiscal 2018. In addition, the overseas employees ratio has been increasing and was 90.7% as of the end of fiscal 2018. TDK established the TDK Environmental Vision 2035 and is working to reduce environmental load from a lifecycle perspective that covers all phases from the use of raw materials to the use and disposal of final products. We are aware that CO2 emissions from energy consumption at production sites has a major environmental impact within TDK, and we are reducing energy use by implementing energy- saving measures through assessment at the time of capital investment and creating energy management structures. 59 TDK CorporationAnnual Report 2018 Overview of Business Conditions by Segment Note: Reporting segments were changed in fiscal 2019, but results for fiscal 2018 are reported based on the former segments. Net Sales by Product Segment ¥1,271.7billion Passive Components Segment Capacitors 12% Inductive Devices 12% Other Passive Components 10% Sensor Application Products Segment Sensor Application Products 6% Magnetic Application Products Segment Recording Devices 19% Other Magnetic Application Products 8% Film Application Products Segment Film Application Products 29% Other 4% Breakdown of Operating Income* ¥85.6billion Yen billions 150 100 50 0 –50 Passive Components ¥46.3 billion Sensor Application Products –¥19.4 billion Magnetic Application Products ¥20.9 billion Film Application Products ¥70.4 billion Other – ¥2.4 billion Corporate and Elimination –¥30.1 billion * To comply with the U.S. Financial Accounting Standards Board’s Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, we are revising our business results for fiscal 2018, which were reported on April 27, 2018—operating income, research and development expenses, cost of sales, and selling, general and administrative expenses (revised operating income: ¥85,633 million to ¥89,692 million; revised research and development expenses: ¥103,457 million to ¥102,641 million). The disclosure of revised cost of sales and selling, general and administrative expenses will be made at the announcement of financial results for fiscal 2019. The figures before adjust- ment are shown. Passive Components Segment Net Sales Operating Income ¥437,639 million (down 17.1% year on year ) ¥46,278 million (down 76.9% year on year ) In fiscal 2018, net sales were ¥437.6 billion, down 17.1% year on year, operating income was ¥46.3 billion, down 76.9%, and the oper- ating income ratio was 10.6%. Income fell due to effects in conjunc- tion with the transfer of a portion of the high-frequency components business and did not recover on an amount basis, but profitability was nearly flat. Demand remains strong in the automotive market, and sales of capacitors increased at a steady pace. Sales of MLCC components grew in particular due to highly reliable products with redundant features for automotive use, contributing significantly to higher profitability in the Passive Components segment overall. Net Sales Yen billions Operating Income / Operating Income Ratio Yen billions 600 400 200 0 FY 240 Includes ¥144.4 billion in business transfer gains associated with the establishment of a joint venture business with Qualcomm. 180 437.6 120 60 0 FY 10.6 46.3 17 18 17 18 % 40 30 20 10 0 Operating income (left) Operating income ratio (right) Sensor Application Products Segment Net Sales Operating Loss ¥77,578 million (up 81.0% year on year ) –¥19,381 million In fiscal 2018, net sales were ¥77.6 billion, up 1.8 times from the previous fiscal year, in part due to effects from the acquisition of InvenSense. Operating losses were ¥19.4 billion, which included ¥10.9 billion in expenses related to the InvenSense acquisition. Sales in the automotive and ICT markets were up sharply, with auto- motive sales accounting for a little under 50% of the total, the ICT market slightly over 20%, and the industrial and energy market just under 30%, achieving a well-balanced sales structure. Expansion of the product portfolio and customer base is proceeding through acquisitions. Net Sales Yen billions Operating Loss Yen billions 77.6 80 60 40 20 0 FY 17 18 0 –10 –20 –30 –40 –50 FY –19.4 Includes ¥10.9 billion in expenses related to the InvenSense acquisition. 17 18 60 Changes in Reporting Segments The previous four segments—Passive Components, Sensor Application Products, Magnetic Application Products, and Film Application Products—were changed into the following segments as of fiscal 2019: Passive Components, Sensor Application Products, Magnetic Application Products, and Energy Application Products, as well as Other, which includes products not included in these four reporting segments. P.62–P.69 Business Strategies Previous reporting segments (through fiscal 2018) Passive Components Sensor Application Products Magnetic Application Products Film Application Products + New reporting segments (starting in fiscal 2019) Passive Components Sensor Application Products Magnetic Application Products Energy Application Products + Other Other Power systems (from Magnetic Application Products) Energy devices (from Film Application Products) Energy systems (from Other) Magnetic Application Products Segment Net Sales ¥333,235 million (up 1.0% year on year ) Operating Income ¥20,877 million (up 115.1% year on year ) In fiscal 2018, net sales were ¥333.2 billion, up 1.0% year on year, operating income increased 2.2 times to ¥20.9 billion, and the oper- ating income ratio was 6.3%. When the structural reform expenses reported in the prior fiscal year are taken into account, the effective increase in income was ¥1.2 billion, or 6.1%. Average prices for HDD magnetic heads increased as a result of a favorable product mix, resulting in stable profitability even though the sales volume was down. Power supplies were able to respond to robust demand in the industrial equipment market, pushing both sales and income higher. As for magnets, sales of HDD magnets were down, but sales of mag- nets for industrial equipment and motors increased, resulting in a substantial decrease in losses despite lower sales revenues. Film Application Products Segment Net Sales ¥370,953 million (up 49.8% year on year ) Operating Income ¥70,384 million (up 70.8% year on year ) In fiscal 2018, net sales were ¥371.0 billion, up 1.5 times year on year, and operating income was ¥70.4 billion, up substantially by 1.7 times, and as a result, both net sales and operating income hit new record highs for the third consecutive year. The operating income ratio was 19.0%, and profitability was up sharply. In the smartphone market, demand fluctuated substantially throughout the year, but as a result of timely optimization of production capacity and reliable responses to market needs, sales increased. In addition, sales of products for applications other than smartphones increased steadily, and synergistic effects between higher volumes and increased produc- tivity pushed income up. Net Sales Yen billions Operating Income / Operating Income Ratio Yen billions % 400 300 200 100 0 FY 333.2 24 18 12 6 0 20.9 6.3 8 6 4 2 0 17 18 FY 17 18 Operating income (left) Operating income ratio (right) Net Sales Yen billions Operating Income / Operating Income Ratio Yen billions 400 300 200 100 0 FY 70.4 19.0 371 80 60 40 20 17 18 0 FY 17 18 % 25 20 15 10 5 0 Operating income (left) Operating income ratio (right) 61 TDK CorporationAnnual Report 2018Business Strategies Passive Components Segment Passive components support electronics society Electronic components include ICs, LSIs, and other active components, as well as capacitors, inductors, and other passive components that store, discharge, and consume electric power. Active components only function with help from passive components. On the circuit boards of mobile devices, electrical home appliances, office equipment, automobiles, robots, industrial equipment, and other devices, a wide variety of passive components are installed together with memories and CPUs consisting of an aggregation of many semiconductor devices. TDK’s passive components have their roots in a material called ferrite, originally invented in 1930 and certified as an IEEE Milestone in 2009. Ever since its beginnings, the Company has consistently blazed a path of innovation, making products smaller, lighter, and thinner and integrating them into modules, thereby contributing to the progress of electronic devices. The business strategy in Value Creation 2020 As electronic components are being incorporated in more and more equipment and devices, TDK is expanding its client base beyond the automotive and ICT markets, as well as widening the scope of applications, thereby creating a solid earnings base. P.42 Monozukuri We are also engaged in a program of Monozukuri Innovation ( Innovation), which implements forward-looking measures to meet the quality require- ments of today’s and tomorrow’s industry. In fiscal 2019, we expect net sales to grow by 3%–6%. Trends in the automotive market, such as the progress of xEVs, advanced driving assistance systems (ADAS), and autonomous driving, are expected to result in further expansion of the already strong demand for capacitors and inductors, which will be drivers of growth. Net Sales Target CAGR 7% Commercial Value Achieve steady and sustainable growth by expanding target markets and applications Refine automotive components Capture communications demand for 5G & Beyond Product development matched to automotive needs Develop optimal milli- meter-wave ceramic materials Reference activities for automotive ECUs Develop various LTCC- based products Monozukuri to enhance quality and reliability Upgrade and expand power-related components and propose new solutions High-reliability power inductors Wireless power transfer μPOL TM Develop all-solid-state rechargeable batteries Develop PZT applications PiezoHaptTM & PowerHapTM Medical & Hygienic Application Mount timely production responses to growing demand Invest in ramping up production Continue to drive Monozukuri Innovation Resin electrode terminal multilayer ceramic capacitors Ferrite—the origin of TDK and its passive components The magnetic material ferrite was invented in 1930 by Dr. Yogoro Kato and Dr. Takeshi Takei at the Tokyo Institute of Technology. TDK’s first president, Kenzo Saito, founded the Company in 1935 with the aim of pioneering the industrial application of ferrite, which is still an indispensable material in our modern age of electronics. Passive components for automotive applications Passive components intended for use in xEVs (HEVs/PHEVs/EVs) must be able to withstand extreme levels of vibrations, heat, shock, among other operating conditions, while maintaining complete reliability to guard against malfunction. TDK is continuing the development of such passive components that offer out- standing performance and meet the needs of automotive electrical equipment. Expanding applications of automotive components As cars increasingly rely on electric and electronic systems and xEVs become more widespread, the formation of eco-systems centered on semi- conductors is progressing. We will continue to strengthen reference activi- ties for automotive ECUs, whose numbers are expected to grow further. Furthermore, we will promote the development of products that meet auto- motive needs by offering customization and ensuring excellent reliability also under harsh operating conditions with vibrations, shocks, and high temperatures. Our portfolio of automotive-grade MLCCs is being further expanded, including resin electrode products with high vibration and bending stress resistance, and redundancy design products such as Mega Caps, as well as large-capacitance MLCCs that meet the needs of smaller size, higher voltage, and larger capacity in connection with higher func- tionality of ECUs for drive applications. Upgrading and expanding power-related components and devise new solutions Faraday Semi LLC (USA), which we acquired in May 2018, is a fast-grow- ing semiconductor developer specializing in power management solutions, including point-of-load (POL) type DC-DC converters. By combining Faraday Semi’s high-performance semiconductors with TDK’s advanced packaging technology SESUB and latest component technology using 3D mounting technology, we have created a POL product (μPOL™) that leads the industry in terms of small dimensions and high power density. This will enable us to offer ultra-compact power solutions for which demand is increasing in the global ICT, industrial equipment, and automotive markets. Mega Caps CA series realizes larger capacitance through horizontal linking SESUB module 62 63 A brief guide to passive componentsPassive Components19352018 TDK CorporationAnnual Report 2018 Business Strategies Sensor Application Products Segment Key IoT devices Sensors detect information and convert it into electric signals. There are sensors that concern our five senses, such as sight, hearing, and touch, as well as sensors for physical conditions, includ- ing temperature, humidity, barometric pressure, acceleration, and inertia. Other sensors can quantify such properties as magnetism and ultrasound that cannot be detected by human senses. Sensors fulfill crucial tasks in a myriad of electrical and electronic equipment including mobile devices, cars, and other products that we use in our daily life, providing unseen support for society. Further stimulated by the explosive growth of IoT devices, the annual production of sensors is expected to exceed one trillion units by the 2020s, with various sensor combinations being mounted from now. Harnessing its advanced technology to offer a vast and impressive lineup of non-optical sensors, TDK will play a leading role in the age of IoT. The business strategy in Value Creation 2020 The Sensor Systems Business Company was established by consolidating the sen- sor-related business activities of the TDK Group. We are cooperating with IC manu- facturers to develop modular products that integrate a combination of sensors. With the industry’s best non-optical sensor lineup, we are poised to capture the growing sensing needs. Our steadily expanding range of automotive sensors is centered on Hall sensors and TMR sensors, and we are also expanding MEMS sensor applica- tions for consumer use. In fiscal 2019 we expect an increase in net sales of 29%–32%, mainly in the areas of MEMS sensors, which are positioned as growth drivers, and magnetic sen- sors for the ICT market. Net Sales Target CAGR 35% Commercial Value Appropriately capture diversifying and growing sensing needs and expand this field into one of TDK’s future core businesses Steady expansion of automotive sensors Expansion of sensors for consumer applications Commence mass production of various TMR sensor projects (including redundancy design products) Develop higher-performance 6-axis sensors and expand customer base Develop higher-performance Hall sensors (2-axis/3-axis sensors) Develop new applications for temperature and pressure sensors Expand automotive applications of MEMS sensors (acceleration, gyroscope, ToF sensors) Expand consumer applications of TMR sensors (camera module actuators, e-Compass) Expand applications of MEMS sensors (microphones, fingerprint recognition, gas detection) Application of TMR elements as highly sensitive reading elements from HDD magnetic heads In 2015 we began full-scale production and market introduction of high-accuracy, high-sensitivity TMR sensors benefiting from HDD magnetic head technology. TMR sensor Toward a well-balanced customer portfolio Through a policy of strategic M&As implemented by TDK since 2016, we have created a world-leading lineup of non-optical sensors. Such steps as the acquisition of InvenSense have also given us access to the consumer market. Industrial and energy market Slightly under 30% Automotive market Slightly under 50% Net sales ratio by market (concept) ICT market Slightly over 20% Imaging Game consoles Wearables Drones Smart devices Home appliances Automotive products Expand customer base and applications in the automotive market through development of MEMS sensors, includ- ing 6-axis sensors from InvenSense Steadily expanding automotive sensors In the area of TMR sensors, where mass production began in 2015, we are engaged in projects for various applications, including electric power steering systems, wipers, clutch and gearbox positioning devices, and pedal and throttle valve opening detection. TMR sensors are combined with Hall sensors from Micronas to enhance redundancy, and Application Specific Integrated Circuits (ASICs) from ICsense serve to improve accuracy. By differentiating ourselves through such products, we are further expand- ing our customer base and range of applications. A large potential for growth exists for MEMS sensors, including gyroscope sensors, acceleration sensors, and microphones, as well as temperature and pressure sensors. As such concepts as ADAS and autonomous driving become a reality, the number of required sensors is bound to increase. Development of 6-axis sensors from InvenSense and other MEMS sensors that fully meet customer needs is making progress. Cultivating and expanding markets through Group synergies We are in a position to offer high-level solutions, creating products with high redun- dancy by integrating Micronas Hall sensors and TMR sensors, or fusing MEMS tech- nology and software expertise from Tronics and InvenSense with materials technology and thin-film technology from TDK. TDK’s long-standing relationships with customers are creating new opportunities for InvenSense products, moving beyond the con- sumer sector to the automotive and industrial equipment markets. The acquisition of ICsense, which develops ASICs for signal processing of sensing data, has enabled the vertical integration of our value chain from materials technology to sensor elements, signal processing, and software design. In 2018 we acquired Chirp, a pioneering company in the field of ultrasonic 3D sensing technology that holds high promise for a wide range of applications, including augmented reality (AR) and virtual reality (VR) devices. Our Sensor Systems Business Company brings together these companies under a single umbrella for offering Kotozukuri solutions. 64 65 A brief guide to sensorsSensor Application Products20152018 TDK CorporationAnnual Report 2018 Business Strategies Magnetic Application Products Segment Modern people would be helpless without them Magnets, which retain their magnetic force without any supply of energy, are fundamental to sustaining modern society. For example, automobiles are equipped with about 100 compact motors that use ferrite magnets. Powerful neodymium magnets are also used in xEV drive motors. Going forward, demand for high-performance magnets is expected to grow even further, includ- ing magnets for industrial equipment, robot motors, and power generators used in wind power generating systems. Since its founding, TDK has spent more than 80 years refining the magnetic materials technology that is part of its DNA and will contribute to society by continuing to refine that technology. The business strategy in Value Creation 2020 Net Sales Target CAGR 2% Although the use of HDDs in PCs is declining, data centers are expected to stimu- late further growth in demand for HDD magnetic heads. In this sector, TDK will con- tinue to enhance cost competitiveness and introduce leading-edge products with large capacity. By developing advanced technologies, such as thermal assisted mag- netic recording (TAMR), microwave assisted magnetic recording (MAMR), and dual stage actuators, TDK is contributing to the industry as the world’s only specialized magnetic head manufacturer. While continuing to reform our profit structure, we will pioneer needs for automotive applications by tackling new technological developments. In fiscal 2019 we expect net sales to decline by about 4%–7%. While sales quantities of HDD magnetic heads are seen to decline by about 6%, the application of HDD suspension technology developed by Hutchinson to new market sectors is expected to grow. We also anticipate sales of magnets to the automotive and indus- trial equipment and energy markets to remain firm. Commercial Value (HDD magnetic heads & HDD suspensions) Survive as the world’s only specialized magnetic head manufacturer by introducing technologies catering to the needs of the era of large-capacity storage Contribution to attaining higher density of HDDs Application of suspension technology TAMR MAMR Dual stage actuator Additive metal deposition components Commercial Value (Magnets) Restore growth and profitability by steadily capturing growing demand for motors and generators Achieve the design, prototyping, and mass production of magnets that optimize the efficiency of motors and generators (shape, magnetization, material) Implement Monozukuri Innovation to realize TDK’s Arubeki Sugata (ideal process) that will minimize losses Entering the magnetics business through ferrite application The ferrite magnet material FB1A, developed in 1959, set TDK on the path to refining magnetic technology for many years. TDK’s early ferrite magnet Pioneering the evolution of magnets for half a century TDK has been pursuing the evolution of magnets for over half a century, right up to the latest neodymium magnets and lanthanum- and cobalt-free ferrite magnets. Through the application of technology, we have produced various innovations, such as HDD magnetic heads. Contributing to further increasing storage density of HDDs Thermal assisted magnetic recording (TAMR) heads The evolution of HDDs toward higher storage densities was made possible by sophisticated miniaturization of the mag- netic heads. Conventional technology in this area has its limits, but a solution to the problem lies in TAMR heads. The thermal fluctuation of magnetic particles increases as the temperature rises, making magnetization reversal (rewriting) easier even with a weak magnetic field at the head. The TAMR technology utilizes this effect by irradiating the record- ing layer with a laser spot to instantly heat it up while per- forming magnetic recording. Microwave assisted magnetic recording (MAMR) heads A spin-torque oscillator (STO) incorporated in the head gen- erates a microwave field that is directed at the magnetic par- ticles on the recording layer of the hard disk platter while recording. This intensifies the magnetic fluctuation of mag- netic particles, which resembles the swinging motion of a spinning top, thereby facilitating magnetization reversal (rewriting) even with a weak magnetic field at the head. The advantage of this method lies in the fact that, unlike TAMR, there is no heating up of the recording layer. Dual stage actuator In addition to a swing scan around a pivot, the dual stage actuator uses a second swing structure located for instance on the suspension of the magnetic head. This greatly increases the positioning accuracy of the head. While the main actuator is driven as usual with a magnet and coil, the second swing structure employs a piezoelectric element that expands and contracts in response to a voltage. Innovation in HDD magnetic heads and suspension TAMR head and MAMR head TAMR head Reader Laser Writer Conventional perpendicular magnetic recording (PMR) head Reader Writer MAMR head Reader Writer Laser spot STO Dual stage actuator Conventional single stage actuator Milli dual stage actuator Micro dual stage actuator 66 67 A brief guide to magnetsMagnetic Application Products19592018 TDK CorporationAnnual Report 2018 Business Strategies Energy Application Products Segment TDK energy application products have great potential Lithium-ion rechargeable batteries are widely used in mobile devices. A special type of this kind of battery is the rechargeable lithium polymer battery, which uses a polymer electrolyte in gel form. In addition to offering compact dimensions and light weight, such batteries also provide a high degree of shape flexibility, which is advantageous for replacing the formerly rectangular batteries in notebook computers and smartphones. Another area where surging demand for such batteries is expected are IoT devices, which need to combine small size with high capacity. Furthermore, amid the progress of power saving in various fields, power supplies with smaller size, lighter weight, and higher efficiency will be required. TDK’s lineup covers a broad range of applications, including AC-DC and DC-DC converters, automotive inverters, and wireless power transfer systems. The business strategy in Value Creation 2020 With regard to batteries for mobile devices in the ICT market, we are further bolster- ing our position and stepping up development of products for wearable devices and drones by adapting successful models, and we are also exploring high-power markets, including e-scooters and automated guided vehicles (AGVs). As for power supply products, we will provide custom solutions with high added value through vertical integration extending from materials to in-house products, and we will strengthen our development efforts in the market for automotive and industrial equipment. Shifting focus from conventional stand-alone products to units that combine hardware and software gives TDK a unique advantage in delivering integrated power solutions with high added value. In fiscal 2019, we expect net sales to grow by about 8%–11%. We plan to expand production volume by about 15%, including production capacities for mini cell and high-power battery products. This will allow us to reliably meet demand in the smartphone market, and we are also actively pursuing new application venues. Net Sales Target CAGR 8% Commercial Value Provide high-efficiency, high-reliability power storage and power supply solutions through vertical integration of materials and components Batteries Power supply solutions Develop the mini cell market based on successes in the ICT market Address high-quality power supply solutions such as medical devices and robotics Apply materials technology and develop the power cell market based on collaboration with a strategic partner Expand programmable power supply and bidirectional power supply solutions Launch the EV power supply business targeting full-fledged expansion of the xEV market Pursue smaller, lighter, and higher-efficiency automotive power supplies Acquisition of ATL opened the way into the battery market In 2005 TDK acquired ATL, a Hong Kong-based manufacturer of rechargeable lithium polymer batteries. This paved the way for our full-scale entry into the energy sector. Moving toward power solutions ATL currently is one of the leading play- ers in the consumer-use battery market. The wide lineup of TDK products, from materials to energy devices and power supplies, enables vertical integration and provides a solid base for comprehensive power solutions. Solid-state battery CeraChargeTM allows charge/discharge CeraCharge™ is the world’s first SMD type all-ceramic solid-state battery that supports charging/discharging cycles. By harnessing layering technology gained in the area of multilayer ceramic chip capacitors (MLCCs), we have realized high energy density and small dimensions. Taking advantage of the high degree of safety, we will concentrate on developing dedicated products for IoT devices, wearable devices, energy harvesting sys- tems, and similar consumer equipment with low capacity requirements. Other Segment Main Product Portfolio Mechatronics (production equipment) TDK is supplying the market with the most advanced factory automation equipment, including flip-chip bonders that make use of mechatronics technology. Radio wave anechoic chamber Flash memory application devices High-performance antennas and automated measurement systems with dedicated soft- ware improve the efficiency of EMC mea- surements. TDK offers EMC solutions comprising highly accurate EMC measurement services to support effective noise counter- measures in electronic devices. TDK supplies solid state drives (SSDs) with proprietary memory control chips and CompactFlash cards for industrial use. 68 69 A brief guide to batteries and power suppliesEnergy Application Products20052018Others TDK CorporationAnnual Report 2018 Corporate Governance D I A L O G U E TDK from Outside Perspectives In June 2018, Makoto Sumita, whose former position was Outside Director and Chairman of the Board, assumed the post of Chairman & Director; at the same time, Kazunori Yagi, whose former position was Outside Audit & Supervisory Board Member, was named Outside Director and Chairman of the Board. We asked them to discuss openly and honestly about corporate governance. (Note that Mr. Sumita shared his thoughts from the position of a director with an outside perspective.) The governance reform trend Yagi: I also think it preferable that companies should avoid getting caught up with form in an attempt to Sumita: For many years, the management style at reach for unrealistic goals. It is better that they take one Japanese companies has focused on maintaining long- year at a time, remaining constantly aware of questions term employment and stable business growth. Looking of substance as they focus on business structure and back over the past quarter century, however, one comes fitness, and on responding to the posture of investors. across cases in which the failure of companies to let go From that standpoint, I think the revisions to the corpo- of unprofitable units had an impact on business. rate governance code made in June of 2018 are designed Companies are now introducing corporate governance to expose those companies whose efforts fail to involve codes with the goal of more clearly aiming management matters of substance and that make only a formal in the direction of profit growth, and I think develop- response. The problem of so-called “short-termism” ments in corporate initiatives that align with this objec- was one of the factors behind the current governance tive are a good thing. That said, I also believe that more reforms. While a long-term approach to management is discussion is needed about a concept for governance the ideal, talking only of far-off dreams can hardly be that takes individual corporate characteristics into called management, and even investors focused on account, rather than trying to identify a single, uniform long-term holdings expect some kind of results over the vision for governance practices. medium term. Corporate management also needs to E U G O L A I D Yagi: Corporate leaders are responsible for taking the long before the discussion about governance reached its wheel and applying the gas and the brakes. The role of current heights, and I think the Company has made outside directors is to monitor the suitability of manage- solid progress in improving its effectiveness. My under- ment’s driving, for example, when they may be going standing of the outstanding issues is similar to that of dangerously fast for a particular stretch of road. Mr. Sumita. Companies naturally take risks, so excessive braking at the threat of just any risk does not make sense. The question is how much risk the company should take; the business execution side has the experience and exper- tise to know how much risk is acceptable. My approach, Mr. Sumita’s appointment to Chairman & Director except in cases where an action could put the survival Yagi: It is extremely rare for an outside director to join a of the company at risk, is to try to understand the intent company as its chairman. I can imagine having a watch- of the action and advise them to give it a try if they insist. dog appointed to the business execution side must have Corporate governance at TDK come in for some criticism. But if one defines that out- sider status as someone having the perspective of exter- nal stakeholders, I believe that instead of delineating the role in terms of form, all directors should have that Sumita: TDK has implemented a number of forward- perspective. I think Mr. Sumita’s appointment as chair- thinking efforts to date, introducing a system of Outside man will, in terms of substance, effectively strengthen Directors in 2002 and increasing their number to three governance at TDK. He has extensive management in 2009. We continue to maintain a strong awareness of experience and knowledge of the Company’s business, the importance of governance. and he has observed TDK from an objective viewpoint At the same time, there are issues. On the Board, as an outside director. This appointment will free him of Outside Directors and Outside Audit & Supervisory Board the restrictions of being an “outsider” and allow him to Members participate in discussions, but the business work toward improving TDK’s corporate value. Still, execution side trends to spend a considerable amount of I think this was only possible because someone like time explaining things to us. This is reflective of a cor- Mr. Sumita happened to be available for the role just as porate culture that tolerates a diversity of opinion, and his predecessor Mr. Kamigama was resigning. careful explanations are always welcome. Still, some- Continuing in a similar vein going forward will likely be D I A L O G U E keep this middle term in mind. times the message can be conveyed more effectively more difficult. The role of outside directors Sumita: Efforts to strengthen governance in Japan are sometimes criticized as taking a biased interpretation that primarily centers on the use of outside directors to apply the brakes on corporate actions. I think this obser- vation is right on the mark. The true role of outside directors is in designating corporate leaders who have the mindset and character to take on bold challenges aimed at improving corporate value. If the outside direc- tors are able to recognize a certain amount of rationality in policies on the business execution side, they can pro- vide their full support without insisting on an excessive degree of certainty regarding future forecasts. Just as venture companies require supporters more than they need monitors, the role of outside directors will change according to the stage of a company’s development. And because objectives vary from one company to another, that role varies as well. Makoto Sumita Chairman & Director when the business execution side can say with confi- dence, “we know there are a variety of opinions, but you can leave this up to us.” This also makes for more effi- cient Board meetings. For a company to grow, it requires momentum, too. Yagi: TDK fostered a consensus around the importance of governance at a fairly early stage, and I think it can be considered on the forefront of governance in terms of both form and substance. How effective that governance is depends on whether a company’s nomination and compensation advisory committees are functioning substantively. The compen- sation advisory committee has contributed to raising the level of management remuneration in Japan, which was low by international standards, and in many cases has functioned substantively. At the same time, I suspect that many business leaders are resistant to the function of the nomination advisory committee, which may pre- vent them from appointing the successor they intended. TDK introduced its Compensation Advisory Committee (2002) and Nomination Advisory Committee (2008) Kazunori Yagi Outside Director, Chairman of the Board 70 71 TDK CorporationAnnual Report 2018Corporate Governance Value Creation 2020 resources are limited, and I hope to convey my view that TDK needs to narrow its focus as much as possible to Sumita: A considerable amount of time was apparently avoid getting involved in a war of attrition. spent on working out the details of this Medium-Term To offer a more unsparing opinion, looking at operating Plan. When it was first explained to me, I could sense cash flow growth and the balance between liabilities, the strength of the president’s aspirations. dividends, investments, and other factors indicates to The plan focuses not on top-line growth, but on simul- me that, to date, capital efficiency has been less than taneously developing Commercial Value, Asset Value, and stellar. TDK is one of the industry’s most diversified Social Value. Of these, the sensor business will be key to companies, with many possibilities for growth. achieving the plan for Commercial Value. Combining those possibilities will allow the Company to The inclusion of Asset Value is a statement of TDK’s offer customers a variety of solutions. Because the busi- intent to maintain financial discipline, balance its ness is not structured solely around specific products, investment of management resources, and narrow its fields, or customers, you have also been able to reduce focus where necessary. Business opportunities are risk. While this diversification makes more than enough expanding, not just in batteries and sensors but in all sense, it inevitably results in lower efficiency. Looking of our businesses. Commensurate investment is back at the past 10 years, in fact, the Company has con- required, so I think the skills of our financial executives sistently seen its asset turnover ratio fall. I believe that will be put to the test. At the same time, my honest for TDK, Asset Value is a particularly important issue. impression is that since the plan touches little on divi- dend policy, we will need to provide a little more expla- nation of our specific approach to shareholder returns. Hopes for TDK in the future Social Value is an indicator of our emphasis on ESG. Since our business now extends globally, and particu- Sumita: As a free and open collective of individual busi- larly since we now have locations in Europe, it is impor- ness companies and regional groups, TDK is working to tant that we bring this perspective to management. That improve and grow. Still, investors will not support us said, the use of the ESG framework is still in its infancy, unless we deliver results. I hope to see us become even and this represents a three-year issue. more fixated on delivering results. Yagi: I think communicating a corporate message Yagi: To date, TDK has succeeded by giving Group com- around ESG and the SDGs represents a step forward. I panies a great deal of discretionary power and allowing think their real effectiveness will come by taking them them to manage themselves. Still, because of the volume down to the business strategy and operational level, for of acquisitions in recent years, and the Company’s aim example, by clarifying a policy of ensuring components of establishing them as drivers of future growth, TDK is contribute to energy savings and by measuring results also at the stage where the emphasis needs to be on through KPIs. Group governance. The important challenge going for- In terms of management targets, you have set out an ward will be how well the Company can maintain its ambitious number, looking to double income within free-wheeling culture while creating a new management three years. In general, medium-term management approach. That is truly vital to the success of the plans have a term of about three years, but of course Medium-Term Plan. I hope to continue supporting that actual management does not end after three years— effort, offering the occasional “give it a try.” E U G O L A I D it continues as before. Since it is rare to start work on a business in a plan’s initial year and have it deliver results three years later, normally one would work toward achieving the current plan while also making prepara- tions for the next. While TDK also failed to meet its pre- vious Medium-Term Plan, it did lay a foundation for the future in anticipation of the current plan, centered on the sensor business. This is why the current plan is being launched with adequate preparation. Still, the sensor market is by no means a blue ocean and, as an Outside Director, it is something I would like to pay par- ticularly close attention to. Further, while I understand that possibilities are opening up in all directions, Strengthening Future-Oriented Governance TDK, which first embarked on globalization in the 1960s and has successfully grown since then, remains con- stantly aware of global standards, and has worked to strengthen its corporate governance systems. Backed by changes in its business structure, today TDK continues to consider measures needed to achieve long-term, sustainable improvement in corporate value. Factors behind strengthening of corporate governance • Particularly in consumer-use components in the ICT field, performance will be affected by short-term market fluctuations. At the same time, it can take from several years to as long as a decade to see the results of investment in R&D expenses, and management decisions need to be based on a medium- to long-term perspective. • As a global company, ensuring business moves forward smoothly requires a governance structure that is also compatible with the standards of countries in Europe and the Americas. • With non-Japanese employees representing in excess of 90% of the workforce on a consolidated basis, TDK needs to consider further globalization at the officer level. History of corporate governance reforms Evaluation of effectiveness 2002/6 Number of Directors reduced from 12 to 7 First Outside Director invited to join the Board Compensation Advisory Committee launched (chaired by an Outside Director) Funding of Directors’ retirement bonuses suspended 2004/6 First non-Japanese Corporate Officer appointed 2008/8 2009/6 2015/5 2016/6 2018/6 Nomination Advisory Committee launched (chaired by an Outside Director) 2 non-Japanese Corporate Officers appointed; one Outside Director added for a total of 3 First analysis and evaluation conducted of Board of Directors’ effectiveness, and an outline of the results publicized TDK Basic Policy on Corporate Governance established Makoto Sumita, formerly an Outside Director and Chairman of the Board, appointed Chairman & Director Outstanding issues following the June 2017 evaluation of effectiveness • Ongoing validation of TDK’s medium- to long- term growth strategy • Management that balances the dynamism and governance of Group companies June 2018 evaluation of effectiveness The medium- to long-term growth strategy, which was considered the issue to be addressed on a continuous basis in the Board of Directors’ evalu- ation for fiscal 2017, was intensively deliberated and verified on several occasions at Meetings of the Board of Directors and the results of the dis- cussions were reflected in the final Medium- Term Plan. With respect to issues to be addressed in the future, the Board of Directors recognized that, in order to steadily implement the new Medium- Term Plan, it would be important to properly demonstrate the supervisory and advisory func- tions on a continuous basis, further strengthen the corporate governance and compliance sys- tems, including sharing in a timely manner important matters with the Board of Directors as well as responding to global business deploy- ment, and further enhance the operational effi- ciency of the Board of Directors. 72 73 TDK CorporationAnnual Report 2018 Corporate Governance Sustained Improvements Stressing Effectiveness Outside officers appointed with an emphasis on effectiveness Designing structures that emphasize increases in corporate value over the long term P O I N T S • TDK has pursued an optimal balance between monitoring-type governance (separation of management execution and supervisory functions) and management-type governance (Directors also serve as Corporate Officers). • TDK appointed an Outside Director as Chairman & Director. Emphasis on effectiveness over form TDK has put inside directors in charge of non-business divisions and is working to increase the pace of decision-making and reinforce both monitoring and supervisory functions while designing structures that place greater emphasis on raising corporate value than form in all areas, including the processes related to nomination and compensation and policies on the appointment of outside officers. The appointment of an Outside Director as Chairman & Director is one part of these efforts. From Outside Director to Chairman & Director of the Company Mr. Sumita was appointed an Outside Audit & Supervisory Board Member in June 2011, served as an Outside Director starting in June 2013, and was recently appointed Chairman & Director. He has become well acquainted with the Company’s management, business details, and so on through performance of his duties and was appointed with the expectation that he will reinforce decision-making on material matters, supervision of the performance of duties, and corporate governance from the perspective of an outside stakeholder. Makoto Sumita Chairman & Director (present post) INNOTECH CORPORATION Highly transparent nominating system P O I N T S • TDK established the Nomination Advisory Committee, chaired by an Outside Director and comprising a majority of Outside Directors. • The Committee contributes to ensuring the appropriateness of nominations for TDK’s Directors, Audit & Supervisory Board Members, and Corporate Officers, and transparency in the decision-making process. Nomination policies and procedures TDK established the Nomination Advisory Committee as an advi- sory body to the Board of Directors. The committee is chaired by an Outside Director, and a majority of its members are also Outside Directors. It contributes to securing transparency in the decision-making process and reasonableness in the appointment of Directors, Audit & Supervisory Board Members, and Corporate Officers by nominating candidates after deliberating on the expected requirements regarding nomination of Directors, Audit & Supervisory Board Members, and Corporate Officers. The Committee also deliberates on the independence of Outside Directors. When nominating the CEO, the Committee formed an image of the ideal person suitable for the role of top executive and con- ducted deliberations that also covered such issues as systems and the term of office. An outside expert organization was also utilized, and efforts were made to ensure objectivity. P O I N T S • TDK has established “items to be verified regarding independence” to ensure the independence of Outside Directors and Outside Audit & Supervisory Board Members. • Outside Directors have a deep understanding of technology and knowledge of global management. • Outside Audit & Supervisory Board Members comprise professionals from important and diverse fields of expertise, including finance, legal affairs, internal controls, risk management, and others. One-third or more of the Directors is independent Outside Directors The Board of Directors, comprising Directors and Audit & Supervisory Board Members, has a total of 11 members, of whom five are outside officers. To secure the independence of the Outside Directors and Outside Audit & Supervisory Board Members recruited to the board, TDK established “items to be verified regarding independence” by making reference to Article 436-2 (Securing Independent Director(s)/Auditor(s)) of the Securities Listing Regulations and Section III, 5(3)-2 of the Guidelines Concerning Listed Company Compliance, etc., estab- lished by the Tokyo Stock Exchange, Inc. The basic policy is that one-third or more of the Directors shall be independent Outside Directors. Currently, three of seven directors are independent Outside Directors, and an independent Outside Director is chairman of the Board. To reinforce the inde- pendence, objectivity, and accountability functions of the Board of Directors in relation to the nomination and compensation of officers, majorities of the Nominating Advisory Committee and Outside Officers 5people the Compensation Advisory Committee, which are advisory orga- nizations to the Board of Directors, are independent Outside Directors and both committees are chaired by independent Outside Directors. Actively inviting Outside Officers Directors and Audit & Supervisory Board Members (As of the end of June 2018) Inside Officers 6people Reasons for nomination of Outside Directors and Outside Audit & Supervisory Board Members Outside Directors Reasons for nomination Kazumasa Yoshida Kazuhiko Ishimura Kazunori Yagi Mr. Yoshida has an abundance of experience and knowledge concerning the management of companies related to the electronics industry, global business, and consumer business as well as a broad perspective. Mr. Ishimura has an abundance of experience and advanced, specialized knowledge regarding business management as well as a broad perspective. Mr. Yagi has extensive knowledge related to finance and accounting, as well as an abundance of experience and knowledge con- cerning corporate management in the electronics industry. Outside Audit & Supervisory Board Members Reasons for nomination Toru Ishiguro Kiyoshi Fujimura Mr. Ishiguro has specialized knowledge regarding the law as an attorney, specialized knowledge regarding corporate governance and internal control, and considerable insight in such areas. Mr. Fujimura has extensive knowledge related to finance and accounting, as well as an abundance of experience and knowledge concerning corporate management of a general trading company. Outside Directors with extensive practical experience Persons recruited as independent Outside Directors have extensive practical experience relating to corporate management or a high level of financial knowledge and are able to provide advice from an independent perspective with regard to general management for enhancing the Company’s corporate value. Kazumasa Yoshida Former Representative Director and President Intel K.K. Kazuhiko Ishimura Chairman & Director (present post) AGC Inc. Kazunori Yagi Former Director, Executive Vice President and General Manager of Management Administration Headquarters Yokogawa Electric Corporation 74 75 TDK CorporationAnnual Report 2018Corporate Governance Remuneration system linked to medium- to long-term corporate value P O I N T S Diversity in response to globalization P O I N T S • The system was designed with an emphasis on linkage with short-term as well as medium- to long-term results. • Six of 17 Corporate Officers (35%) are non-Japanese*. • TDK constantly pursues the formulation of a competitive remuneration system to secure diverse and excellent human resources. • Human Resources HQ was established in Germany to promote further globalization. • TDK aims to set remuneration at levels enabling the maintenance of competitiveness compared with other companies of similar scale, mainly in the same business category. Design and determination process of the remuneration for Directors and Audit & Supervisory Board Members the determination of individual compensation, the Compensation TDK designs its remuneration system for Directors and Audit & Advisory Committee, which is chaired by an independent Outside Supervisory Board Members with an emphasis on linkage with Director and of which more than half of the members are indepen- short-term as well as medium- to long-term results, and is also dent Outside Directors, examines the remuneration system and the continuously pursuing the formulation of a competitive remunera- level of remuneration pertaining to Directors and Corporate Officers tion system so that it can recruit diverse and exceptional human and reports to the Board of Directors in order to preserve the trans- resources, for the purpose of promoting as much as possible parency of the remuneration decision-making process and help behavior on the part of Directors and Corporate Officers geared ensure that individual remuneration is reasonable. toward enhancing corporate results and stock value. With regard to Results Linkage System Factor Type of compensation Strategic purpose of compensation Method of calculation Short-term results linkage system Medium- to long-term results linkage system Results-linked bonus Intended to clarify the responsibility of Directors Stock-linked compensation stock options and Corporate Officers to achieve consolidated financial results in each fiscal year and to increase motivation for raising short-term financial results. A system for raising corporate value from a medium- to long-term perspective and for Directors and Corporate Officers to share with shareholders not only the benefits of rising share prices but also the risks of falling share prices. In addition to consolidated financial results (operating income, ROE) in the relevant fiscal year, indicators are set for each divi- sion, and bonuses vary from 0% to 200% of base salary depend- ing on the degree of attainment of targets. The exercise of a portion of stock options (stock-linked compen- sation) is conditioned on achieving certain financial results. For the conditions, consolidated financial results (operating income, ROE) under the Medium-Term Plan are set as indicators, and the number of options that can be exercised ranging from 0% to 100% of the options granted depends on the degree of achieve- ment of those indicators. TDK established the Corporate Stock Ownership Guidelines and encourages officers to hold at least a certain number of shares (including stock options) set according to the officer’s rank. Standard Allowance Compensation structure Linked indicators Fluctuation range Basic remuneration ＋ Short-term incentive (Results-linked bonuses) ＋ Medium- to long-term incentive (Stock-linked compensation stock options) Operating income, ROE, target of each division Depending on the degree of achieve- ment of operating income and ROE, department objectives, vary from 0% to 200% with respect to the standard allowance Operating income, ROE Depending on the degree of achievement of operating income and ROE, for the grant number, an exercisable percentage fluctu- ates within the range from 0% to 100% Changes in total amount of remuneration for Directors and Audit & Supervisory Board Members Yen millions Operating income ROE ¥36.6 billion ¥72.5 billion ¥93.4 billion ¥208.7 billion* ¥85.6 billion 2.7% 7.2% 9.2% 19.8%* 7.8% 27 58 42 311 27 58 40 335 27 58 51 367 27 58 45 377 29 58 42 477 Outside Audit & Supervisory Board Members Inside Audit & Supervisory Board Members Outside Directors Inside Directors 700 600 500 400 300 200 100 0 * Including ¥144.4 billion in business transfer gains associated with the establishment of the joint venture business with Qualcomm. FY2014 FY2015 FY2016 FY2017 FY2018 Promoting diversity in management systems TDK began encouraging globalization at an early stage, appointing a non-Japanese as Corporate Officer in 2004 and promoting the globalization of management by increasing the number of non- Japanese Corporate Officers since then. Today, more than 90% of sales and employees are overseas, while 35% of the Company’s Corporate Officers are non-Japanese. In recent years, globalization has advanced as TDK implemented a number of mergers and acquisitions, and the globalization and diversification of manage- ment structures is an important issue. We will continue to recruit outstanding human resources from around the world under the Human Resources HQ established in Germany in 2017. * As of the end of June 2018 Promoting diversity Non-Japanese Corporate Officers 6people 2018 Japanese Corporate Officers 11people (As of the end of June 2018) Executive Vice President Joachim Zichlarz Chief Financial Officer of Electronic Components Business Company, and General Manager of Europe HQ Corporate Officer Joachim Thiele Deputy General Manager of Electronic Components Sales & Marketing Group, and General Manager of Industrial & HA Group of Electronic Components Sales & Marketing Group Corporate Officer Michael Pocsatko Deputy General Manager of Electronic Components Sales & Marketing Group, and General Manager of ICT Group of Electronic Components Sales & Marketing Group Corporate Officer Hong Tian General Manager of Micro-actuator Solutions Business Group Corporate Officer Albert Ong Chief Executive Officer of Magnetic Heads Business Company, and General Manager of HDD Components Business Group of Magnetic Heads Business Company Corporate Officer Andreas Keller General Manager of Human Resources HQ 76 77 TDK CorporationAnnual Report 2018　　 Corporate Governance Directors, Audit & Supervisory Board Members, and Corporate Officers (As of the end of June 2018) Directors Audit & Supervisory Board Members Corporate Officers Shigenao Ishiguro Representative Director President and CEO General Manager of Humidifier Countermeasures HQ Tetsuji Yamanishi Representative Director General Manager of Finance & Accounting HQ Makoto Sumita Director Chairman Seiji Osaka Director General Manager of Corporate Strategy HQ In charge of Human Resources Junji Yoneyama Full-Time Audit & Supervisory Board Member Osamu Yotsui Full-Time Audit & Supervisory Board Member Kazumasa Yoshida Outside Director Chairman of Compensation Advisory Committee Member of Nomination Advisory Committee Kazuhiko Ishimura Outside Director Member of Nomination Advisory Committee Member of Compensation Advisory Committee Summary of career Born on Aug. 20, 1958 Summary of career Born on Sep. 18, 1954 Oct. 1984 Entered Intel Corporation Apr. 1979 Entered AGC Inc. Oct. 1999 Manager of Technology/OEM Alliance Business Strategy of Enterprise Service Group of said company Mar. 2000 General Manager of Communication Product Group of Intel K.K. May 2002 General Manager of Intel Architecture Business of said company Jun. 2003 Representative Director and President of said company Dec. 2004 Vice President of Sales and Marketing Group of Intel Corporation Jun. 2012 Outside Director of Onkyo Corporation (present post) Feb. 2013 Outside Director of Gibson Brands, Inc. Jan. 2006 Executive Officer and GM of Kansai Plant of said company Jan. 2007 Senior Executive Officer & GM of Electronics & Energy General Division of said company Mar. 2008 President & COO & Representative Director of said company Jan. 2010 President & CEO & Representative Director of said company Jan. 2015 Chairman & Representative Director of said company Jun. 2015 Outside Director of the Company (present post) Jun. 2017 Outside Director of IHI Corporation (present post) Jun. 2013 Outside Director of CYBERDYNE Inc. (present post) Jan. 2018 Chairman & Director of AGC Inc. (present post) Oct. 2013 Advisor of Intel K.K. Jun. 2014 Outside Director of the Company (present post) Jun. 2015 Outside Director of Mamezou Holdings Co., Ltd. (present post) Jul. 2016 Outside Director of FreeBit Co., Ltd. (present post) Jun. 2018 Outside Director of Nomura Holdings, Inc. (present post) Kazunori Yagi Outside Director Chairman of the Board Chairman of Nomination Advisory Committee Member of Compensation Advisory Committee Summary of career Born on Apr. 1, 1949 Apr. 1972 Entered Yokogawa Electric Corporation Oct. 1999 Vice President (Officer) and General Manager of Finance & Business Planning, in charge of Corporate Marketing of said company Apr. 2001 Senior Vice President and General Manager of Finance & Business Planning of said company Jun. 2001 Director, Senior Vice President and General Manager of Finance & Business Planning of said company Jul. 2002 Director, Executive Vice President and General Manager of Finance & Business Planning of said company Jul. 2005 Director, Executive Vice President and General Manager of Management Administration Headquarters of said company Jun. 2011 Advisor to said company, Outside Audit & Supervisory Board Member of Yokogawa Bridge Holdings Corporation (present post) Jun. 2012 Outside Director of JSR Corporation Jun. 2013 Outside Audit & Supervisory Board Member of the Company Mar. 2014 Outside Director of OYO Corporation (present post) Jun. 2017 Outside Audit & Supervisory Board Member of Sojitz Corporation (present post) Jun. 2018 Outside Director of the Company (present post) Toru Ishiguro Outside Audit & Supervisory Board Member Kiyoshi Fujimura Outside Audit & Supervisory Board Member Summary of career Born on Jun. 19, 1954 Summary of career Born on Nov. 3, 1949 Apr. 1980 Registered as lawyer in Japan Apr. 1972 Entered Mitsubishi Corporation Joined Hamada & Matsumoto Apr. 1984 Registered as lawyer in New York, the United States of America Jan. 1985 Partner of Hamada & Matsumoto Sep. 1987 Resident Partner of the London office of Hamada & Matsumoto Jun. 2000 Outside Corporate Auditor of Monex Securities Ltd. Dec. 2002 Partner of Mori Hamada & Matsumoto (present post) Jun. 2015 Outside Audit & Supervisory Board Member of the Company (present post) Jul. 2015 Outside Director of Daiwa Asset Management Co. Ltd. (present post) Jul. 2016 Director of Japan Investor Protection Fund (present post) Jun. 2017 Director of Japan Exchange Regulation (present post) Feb. 2002 Member of the Board, President and CEO of Mitsubishi Corporation Financial & Management Services (Japan) Ltd. Jun. 2003 Senior Corporate Auditor of Mitsubishi Corporation Jun. 2007 Senior Vice President of said company, CIO & CISO and Senior Assistant to person in charge of Work Restructuring & Internal Control System Apr. 2008 Executive Vice President of said company, CIO, Work Restructuring & Internal Control System Jun. 2008 Member of the Board, Executive Vice President of said company, CIO, Work Restructuring & Internal Control System Apr. 2009 Member of the Board, Executive Vice President of said company, Work Restructuring & Internal Control System, IT Service Business Development, CIO Apr. 2010 Member of the Board, Executive Vice President of said company, Audit & Internal Control System Jun. 2012 Adviser of said company, Outside Corporate Auditor of AJINOMOTO CO., INC. Jun. 2015 Outside Audit & Supervisory Board Member of the Company (present post) Jun. 2018 Outside Director of Takasago Thermal Engineering Co., Ltd. (present post) President and CEO Shigenao Ishiguro Senior Executive Vice President Hiroyuki Uemura Executive Vice Presidents Atsuo Kobayashi Seiji Osaka Joachim Zichlarz Senior Vice Presidents Noboru Saito Tetsuji Yamanishi Mitsuru Nagata Corporate Officers Takakazu Momozuka Joachim Thiele Satoru Sueki Michael Pocsatko Hong Tian Albert Ong Dai Matsuoka Osamu Hikita Andreas Keller 78 79 TDK CorporationAnnual Report 2018Corporate Information TDK Corporation and Consolidated Subsidiaries (U.S. GAAP) As of March 31, 2018 Corporate Name TDK Corporation Corporate Headquarters Nihonbashi Takashimaya Mitsui Building, 2-5-1 Nihonbashi, Chuo-ku, Tokyo 103-6128 Date of Establishment December 7, 1935 Authorized Number of Shares 480,000,000 shares Number of Shares Issued 129,590,659 shares Number of Shareholders 21,565 Common Stock ¥32,641,976,312 Securities Traded Tokyo Stock Exchange (Listed on the 1st Section in October 1961) Securities Code 6762 Number of Employees (Consolidated) 102,883 Transfer Agent Sumitomo Mitsui Trust Bank, Limited 1-4-1, Marunouchi, Chiyoda-ku, Tokyo 100-8233 Independent Registered Public Accounting Firm KPMG AZSA LLC (the Japan member firm of KPMG International) ADR Information Type Level 1 with sponsorship ADR Ratio 1 common stock = 1 ADR Ticker Symbol TTDKY CUSIP 872351408 Depositary Bank Citibank, N.A. Shareholder Services P.O. Box 43077 Providence, Rhode Island 02940-3077 U.S.A. Tel: 1-877-248-4237 CITI-ADR (toll free) Tel: 1-816-843-4281 (out of U.S.) Fax: 1-201-324-3284 URL: http://www.citi.com/adr E-mail: citibank@shareholders-online.com Principal Shareholders (10 largest shareholders) Name of shareholder The Master Trust Bank of Japan, Ltd. (Trust account) Japan Trustee Services Bank, Ltd. (Trust account) Trust & Custody Services Bank, Ltd. (Securities investment trust account) STATE STREET BANK WEST CLIENT - TREATY 505234 Japan Trustee Services Bank, Ltd. (Trust account 5) JPMC OPPENHEIMER JASDEC LENDING ACCOUNT STATE STREET BANK AND TRUST COMPANY 505001 Nippon Life Insurance Company Japan Trustee Services Bank, Ltd. (Trust account 7) Japan Trustee Services Bank, Ltd. (Trust account 9) Number of shares held (thousands of shares) Percentage of number of shares held in the total number of issued shares (%) 24,086 14,404 3,437 2,355 1,999 1,839 1,797 1,640 1,634 1,626 19.08 11.41 2.72 1.87 1.58 1.46 1.42 1.30 1.29 1.29 Total 54,817 43.42 Note: Other than the above, the Company holds 3,346 thousand shares of treasury stock. Status by Ownership TDK Stock Price and Volume Yen Millions of shares Japanese Financial Institutions 48.56% Foreign Institutions and Individuals 38.58% 6.72% 2.73% 2.58% 0.82% Japanese Individuals, etc. Japanese Securities Firms Treasury Stock Japanese Corporations 12,000 9,000 6,000 3,000 0 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2016 2017 1 2 3 2018 Stock price (left) Volume (right) About Our Website Financial Information http://www.global.tdk.com/corp/en/ir/index.htm Non-Financial Information http://www.global.tdk.com/corp/en/csr/index.htm Product Information and Services https://product.tdk.com/info/en/index.html Investor Relations (IR) Securities Reports Quarterly Financial Statements Operational Risks CSR REPORT 2018 CSR Activities TDK Product Center 80 81 TDK CorporationAnnual Report 2018 

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