Social Value Maximizing Three Values - English Version - Asset Value Commercial Value INTRODUCTION TDK’s Sustainable Development Policy Founding Spirit Corporate Motto Contribute to culture and industry through creativity In 1935, Dr. Yogoro Kato at the Tokyo Institute of Technology received a visit from Kenzo Saito, who later founded TDK (initially Tokyo Denki Kagaku Kogyo K.K.). Dr. Kato expressed the opinion that “all of Japanese industry so far relies on borrowing from the West. Unless we use our own brain power, it cannot really be called Japanese industry. We need to apply Japanese creativity to develop our own industry.” During the visit, Dr. Kato showed Saito a magnetic material called “ferrite” that he had developed together with Dr. Takeshi Takei. The potential of this material at that point was still a total unknown. What is ferrite? A magnetic body sintered with metal oxide as the main component. The birth of this new material marked the beginning of a dra- matic evolution in electric and electronic technology on a worldwide scale. In 2009, the Institute of Electrical and Electronics Engineers designated ferrite as an IEEE Milestone, recognizing it as a development with significant impact on the advancement of industry and society. IEEE Milestone plaque Dr. Yogoro Kato (left) and Dr. Takeshi Takei Dr. Kato’s laboratory at the Tokyo Institute of Technology The world's first coils with ferrite cores Superheterodyne-type radio Realizing much better sound through the use of a ferrite Common black-and-white consumer TV set As consumer TV sets became extremely popular during the core formed the starting point of TDK’s contribution to high economic growth period, ferrite from TDK was exten- culture and industry. sively used as a core material for deflection yokes on cathode- ray tubes. The move toward bigger screens was also supported by improved performance of the deflection yoke cores. TDK, established by Kenzo Saito with the purpose of commercializing this origi- nal Japanese invention, was one of the original venture enterprises that came out of university research. In 1937, the Company was the first worldwide to successfully market ferrite cores for use as components in communication equipment. Following the turbulent times of WWII and its aftermath, Japan’s reconstruction entered a phase of high economic growth. TDK's products played an important role as the sound quality of radios and telephones improved and eventually television conquered the market. Saito’s stance with regard to technology was to ask what kind of improvement it could bring to the development of society. He always strove to create new value from the materials level on up. As an embodiment of this founding spirit, TDK has continued to reinvent itself and to bring forth innovations that respond to the true needs of society. TDK’s founder Kenzo Saito Ferrite cores in the early years Ferrite core catalog 01 TDK ANNUAL REPORT 2019���� INTRODUCTION A Stream of Innovations to Enhance Modern-Day Life Creating New Social Value with Technologies Cassette tapes triggered a revolution in personal music enjoyment, which became possible anytime, anywhere. Notebook-size computers, portable video cameras, cellular phones, and many other compact electronic devices that have flourished since the 1980s would not have been possible without this technology. Amazing advances in hard disk storage capacity changed the use of personal computers both for work and for game playing. Further breakthroughs are currently driving the evolution of cloud computing. The IoT, AI, robotics, and autonomous driving are just some of the developments that have brought the smart society of the future within close reach. Harnessing technologies that have been refined and perfected over the years, the age of a new level of convenience is about to begin. World’s first cassette tape designed for music The 1960s saw the birth of a standard for encapsulating mag- Fine multilayering technology breaks new ground In 1980, TDK became the first company worldwide to success- netic recording tape in a cassette shell. TDK played its part by fully realize a fine multilayering process for printing internal elec- Development of thin-film magnetic heads enables amazingly high recording density The thin-film magnetic heads that allow extremely high record- ing densities were developed by applying thin-film process tech- developing the world’s first cassette tape designed specifically trodes on a sheet of ferrite or similar and stacking them in an nology at the nanometer level. for music. alternating left/right pattern to create a multilayer chip inductor. Leap to new heights by providing market- needed solutions based on our electronic components business Our current Medium-Term Plan entitled “Value Creation 2020” comprises the creation of Social Value as a major aspect. By deliv- ering products that make meaningful contributions to overcoming important social challenges, we are also growing our business. Monozukuri Power Sustained by True Hands-On Expertise Five Core Technologies With a firm background in magnetics technology and ferrite, we are expand- ing the horizons of electronics through five core technologies. P.54 Materials technology Over 80 years of hands-on experience grants us an enormous competitive advantage. Process technology Nanometer-order control technology gives rise to dramatic innovations. Evaluation and simulation technology Highly accurate analysis down to the micro- structural level improves product functionality. Product design technology A wealth of expertise and know-how is reflected in products of true value. Production technology Advanced fabrication equipment developed and manufactured in-house lets us turn our Monozukuri (manufacturing excellence) approach into tangible form. 02 03 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019����������8�Value Creation ���� INTRODUCTION Self-Transformation toward the Creation of Social Value Even at a time when current products are going strong, we are always alert to the needs of the future. We harness our core competence such as materials technology and process technology to give shape to advanced con- cepts, and we are not afraid to reform our business structure and reinvent ourselves in a bold process of nonlin- ear evolution. This is how TDK is realizing sustainable development. Overseas sales ratio 57% 1995 92% 2019 Social demand Electrification of automobiles accelerates Social demand Cloud computing use spreads Social demand Smartphone use spreads and performance improves continuously Next-generation electronic components Nonlinear evolution ahead of demand from society INNOVATION Growth Growth Sowing Social demand Personal computer use spreads and storage capacity expands continuously Lithium polymer batteries Sensors and actuators High-frequency components Power supplies HDD magnetic heads Sowing Commoditization Social demand Cassette tape use spreads Commoditization Magnetic tapes Capacitors Social demand Electrical appliance use spreads Inductors Magnets 1935 1960 1961 1965 1970 1980 1986 1990 2000 2000 2001 2005 2007 2007 2008 2010 2011 2013 2015 2016 2017 2017 2018 2019 2020 2021 Corporate History Founded in Shiba-ku, Tokyo, with the goal of commercializing 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. Since then, 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 lithium polymer batteries. Acquires Lambda Power Group, the power supply business of Invensys plc. Acquires EPCOS (currently TDK Electronics), an electronic device manufacturer. Acquires Magnecomp, an HDD suspension manufacturer. 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. Ferrite tree TDK, which positions ferrite at its foundation, has created various Transformers Noise suppression filters Reactors Clamp filters Common mode filters kinds of products. Ferrite cores Inductors Chip beads 3-terminal filters Radio wave anechoic chambers Radio wave absorbers Noise suppression sheets Varistors Arresters Thin-film electronic components TMR sensors Gear tooth sensors Temperature sensors Current sensors HDD magnetic heads Biosensors Acceleration sensors Ultrasonic sensors Gyroscope sensors Inertial sensors Hall sensors Ceramic capacitors NTC/PTC thermistors Lithium polymer batteries On-board chargers Ferrite Ferrite magnets Neodymium magnets Film capacitors Bond magnets Aluminum electrolytic capacitors Electric double-layer capacitors (EDLC) Switching power supplies DC-DC converters for xEV MEMS microphones Pressure sensors Flash storages Flash memory controllers Film solar cells Piezo actuators Semiconductor embedded substrate (SESUB) modules Transparent conductive films PiezoHaptTM / PowerHapTM High-frequency components and modules 04 05 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 INTRODUCTION Looking toward Further Nonlinear Evolution While existing products such as passive components and lithium polymer batteries are performing well, TDK is currently actively pursuing a new business structure based on a long-term perspective, with a view toward upcoming changes in the fabric of society. Net sales by segment 2015 Net sales by segment 2019 Passive Components Magnetic Application Products Film Application Products Other Consolidated net sales ¥1,082.6 billion Consolidated operating income ¥72.5 billion Consolidated net sales ¥1,381.8 billion Consolidated operating income ¥107.8 billion Passive Components 31.4% (¥433.4 billion) Sensor Application Products 5.5% (¥76.5 billion) Magnetic Application Products 19.7% (¥272.8 billion) Energy Application Products 38.9% (¥537.5 billion) Other 4.5% (¥61.6 billion) A new world is coming with advances in the IoT and AI whereby everything will connect via the Internet and behave 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 autonomous driving vehicles to appear in the future. The IoT will accelerate the digitization of manufacturing and its conversion to a service. 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 for consumer products, but growth in demand for data centers Demand for modularization due to the further enhancement of smartphone functionality Strengths Sustainably Creating Social Value Different and difficult to imitate Materials and Process Technologies 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 techniques of controlling crystal particles at the atomic level, intellectual property, and other know-how makes them difficult to imitate overnight. Achieving our own Monozukuri Innovation Integrated Production Integrated production, where everything from materials development to the final product is handled in-house, allows TDK to improve its Monozukuri (manufacturing excellence) and increase productivity through the introduction of the IoT and robots. Our ability to control quality entirely in-house as well gives us a competitive advantage in areas where quality requirements are particularly high, including the automotive market. Foundation of management from a long-term perspective Customer Base TDK has built strong relationships with its customers in the automotive, ICT, industrial and energy, 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 expenditures. Innovation foundations and enhanced M&A success rates Strength of Diversity TDK has built relationships with the companies it has acquired based not on controlling them but on positioning them as equal partners and drawing out their strengths to the greatest degree possible. This strength of diversity raises the business portfolio shift success rate, promotes the creation of innovation, and serves as a basis for enhancing resiliency against climate change. Capturing business opportunities in global markets Global Business Base TDK’s global business base, with an overseas production ratio of 85.4% and an overseas sales ratio of 91.8%, not only effectively deepens relationships with customers worldwide and distributes risks but also serves as a competitive advantage that will allow us to capture business opportunities in the global IoT market. 06 07 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 INTRODUCTION TDK’s Value Cycle Based on the Medium-Term Plan “Value Creation 2020,” TDK will generate three types of “value” aimed at raising its corporate worth—Social Value, Commercial Value, and Asset Value—while serving society and growing its business in the wake of that progress. Social issues Technological evolution Environmental issues associated with population growth and urbanization, shortages of resources and water Deterioration of social infrastructure Population aging Workstyle innovation Decline in industry competitiveness Digital Transformation (DX) Expansion of digital markets Creation of massive platforms and concentration Development of AI and robotics markets Expansion of the sharing economy Energy Transformation (EX) Increase of energy efficiency Expansion of renewable energy Medium-term management targets of Value Creation 2020 • Operating income ratio: over 10% • ROE: over 14% 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 Medium-term management targets of Value Creation 2020 • Net sales: ¥1,650.0 billion Based on materials and process technologies and elec- tronic components, we provide solutions stemming from the concept of Kotozukuri (integrated solutions) and respond in a timely manner to societal demand. Three priority markets Automotive market ICT market Industrial and energy market Contribute to Culture and Industry through Creativity 08 09 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 INTRODUCTION Overview of TDK Automotive ICT Industrial and Energy 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, multilayer chip varistors, etc. Capacitors Film capacitors, aluminum electrolytic capacitors, etc. Inductive devices Transformers, EMC filters, etc. Other passive components Varistors, arresters, etc. Sensors Sensors (gear tooth, pressure, angle, current, temperature, etc.) Sensors Sensors (barometric pressure, gyroscope, acceleration, MEMS microphones, etc.) Sensors Sensors (pressure, gyroscope, acceleration, current, etc.) 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 ALPINE, Panasonic, AMOTEC (Korea), etc. Sensors Murata Manufacturing, ALPS ALPINE, TAIYO YUDEN, Bosch Sensortec (Germany), STMicroelectronics (Switzerland), Infineon (Germany), Asahi Kasei Microdevices, Allegro (U.S.), Shibaura Electronics, etc. Magnets Magnets for motors (cooling fan, door lock, etc.), magnets for xEV drive motors, etc. Recording devices HDD magnetic heads, HDD suspensions, etc. Magnets HDD magnets, etc. Power supplies DC-DC converters, on-board chargers Energy devices Lithium polymer batteries (for smartphones, tablet devices, notebook computers, wearable devices, game consoles, etc.) Power supplies POL converters Camera module actuators (VCM/OIS) Magnets Magnets for industrial equipment, etc. HDD magnetic heads* Seagate Technology (U.S.), Western Digital Technologies (U.S.) HDD suspensions NHK SPRING, etc. Magnets Shin-Etsu Chemical, Hitachi Metals, ZHONG KE SAN HUAN (China), etc. Energy devices Lithium polymer batteries (for drones, residential energy storage systems (ESSs)) Energy devices Samsung SDI (Korea), LG Chemical (Korea), Murata Manufacturing, Panasonic, BYD (China), etc. Power supplies Switching power supplies (AC-DC, DC-DC), bidirectional DC-DC converters, wireless power transfer systems Power supplies Delta Electronics (Taiwan), Artesyn Embedded Power (U.S.), MEAN WELL (Taiwan), XP Power (Singapore), Cosel, etc. Load ports, flip-chip bonders, flash memory application devices, anechoic chambers 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 A p p l i c a t i o n 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 E n e r g y A p p l i c a t i o n O t h e r * 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. 10 11 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 CONTENTS Annual Report 2019 Cautionary Statements with Respect to Forward-Looking Statements Annual Report 2019 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, understandings, and evalua- tions of the TDK Group in light of information currently available to it, and contain known and unknown risks, uncer- tainties, and other factors. The TDK Group therefore wishes to caution readers that, being subject to risks, uncertainties, and other factors, the TDK Group’s actual results, performance, 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 2019 except as provided for in applicable laws and ordinances. 14 22 26 37 INTRODUCTION To Our Stakeholders Consolidated Business Results Highlights Value Creation 2020 26 Summary of the Process Leading to Value Creation 2020 28 Medium-Term Plan “Value Creation 2020” 30 Progress of Value Creation 2020 32 Consolidated Results by Segment for Fiscal 2019 34 Message from the Corporate Officer of Finance & Accounting Riding the Mighty DX and EX Wave, TDK Aims to Sustainably Enhance Corporate Value 38 DX and EX Open Up Unlimited Market Possibilities 40 The Capability to Provide Social Value—DX 44 Sensor Business Formation and Strategy 46 The Capability to Provide Social Value—EX 48 Strategy in the Power Storage Sector 51 Framework for Enhancing Corporate Value and Sustainability 52 Ensuring Continued Success 54 Ongoing Improvements in Core Technologies 56 Monozukuri Innovation for Sustainable Development 58 Boosting Innovation with Four Pillars Worldwide 60 Corporate Governance 72 Sustainability CORPORATE INFORMATION Editorial Policy TDK emphasizes proactive and appropriate information disclosure and bilateral communications with various stakeholders for the sustainable enhancement of corporate value. Annual Report 2019 focuses on stories centered on the cycle of corporate value creation from Social Value, Commercial Value, and Asset Value while attempting to provide optimal information disclosure according to the information needs of each stakeholder including enhancement of online sustainability pages and other information in response to the need for comprehensive disclosure of environment, social, and governance (ESG) information. Comprehensiveness Sustainability Communication Book Sustainability Website Social Value Narrative Annual Report (Integrated Report) Asset Value Commercial Value Immediacy Investor Relations Website How the Public Sees Us • TDK receives Corporate Governance of the Year® 2018 “Winner Company” Prize 1 • TDK wins Prize for Excellence in 21st Nikkei Annual Report Awards 2018 • TDK named a Clarivate Analytics Derwent Top 100 Global Innovator 2018–19 2 • TDK’s Solid-State Battery ‘CeraCharge™’ wins 2018 Nikkei Superior Products and Services Award for Excellence • TDK selected for inclusion in the Ethibel EXCELLENCE by Ethibel Investment Register, and inclusion in ECPI Indices, ESG indices established by ECPI Global Ethical Equity 1 2 12 13 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 To Our Stakeholders Enhancing Social Value Leads to the Sustainable Growth of Both Society and TDK TDK is capturing the wave of social change brought about by DX (Digital Transformation) and EX (Energy Transformation) sustainably enhancing its corporate value guided by the corporate motto, “Contribute to culture and industry through creativity.” Shigenao Ishiguro President & CEO 14 15 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 To Our Stakeholders Create a framework for ensuring sustainability Future of TDK Suggested 80 Years Ago by Our Pioneering Forefathers to this challenge, I first asked the question, “How was TDK able to shape an 80-year history of growth?” Having been founded in 1935 with the objective of realizing industrial applications for the magnetic material ferrite, TDK brought ceramic capacitors to the market, eventually followed by various passive components, magnets, and other products. In this way, TDK contributed to the worldwide growth Since I became CEO in June 2016, I have been con- of the electronics industry. Proprietary magnetic sidering the question of what TDK needs to do to materials technology formed the basis for strong continue its sustained growth. Looking back over growth in such sectors as magnetic tapes and HDD the past three years, management efficiency has magnetic heads, while strategic M&As brought in Values that TDK should share on a global basis Our Value Criteria: “Can It Contribute to Society?” and “Can It Be Realized with Our Technology?” that was gained through the engagement with ferrite helped us enter the field of HDD magnetic heads, our materials technology, along with process technology for getting the most out of materials, formed a solid basis for establishing a wide portfo- lio of excellent products in a broad range of fields. As with these core technologies, the dedication to Monozukuri (manufacturing excellence) is a key value that dates back to our very beginnings and that will continue to enable sustainable and meaningful social contributions. The Medium-Term Plan “Value Creation 2020” P. 28 that was launched in May 2018 (covering improved steadily. Consolidated net sales reached new drivers of growth, including SAW filters and TDK’s founder, Kenzo Saito, was a true entrepre- the period from fiscal 2019 to 2021) reflects the new records every term, operating income passed other high-frequency components, as well as lith- neur driven by the desire to contribute to the value criteria of “Can it contribute to society?” and the ¥100 billion mark in fiscal 2019,* and return on ium polymer batteries. In recent years, the TDK of advancement of society. Inspired by the belief that “Can it be realized with our technology?” Starting equity (ROE) also moved close to 10%. In terms of the future has gradually taken shape, centered on “it will surely be useful to the world,” he tackled the from market-in-based Kotozukuri (integrated solu- financial performance, therefore, we have been able such pillars as passive components, lithium polymer potential of ferrite, which so far had not found any tions), Monozukuri makes it happen. With Kotozukuri to show solid growth each fiscal year. To realize batteries, and various types of sensors. However, use. In later years, he recalled, “A person can make and Monozukuri mutually reinforcing each other, we sustainability as a company, however, it is essential the process of incorporating new businesses often their business into a success by working with a intend to continue bringing high added value to the to flexibly adapt to internal and external changes in involves the withdrawal from other sectors and the strong sense of social values and with the dedica- world at large. the business environment and to build a framework utilization of proceeds from the sale of businesses. for continued growth. This is also the duty that For example, TDK sold its semiconductor subsidiary I have to our stakeholders. In looking for answers in the 1990s and applied the cash to an expansion of the HDD magnetic heads business. More recently, our aggressive investments in the sensor business took advantage of the funds from a carve-out of the high-frequency components business. And there are aspects that go beyond the use of funds. Expertise in coating technologies from the record- ing media business, which was shed in the 2000s, has found application in such products as lithium polymer batteries and functional films. By success- fully pursuing M&As while retreating from other sectors, TDK has kept transforming itself. While thinking about what should serve as a cri- terion in this transformation process, I found my answer in the very motto of our company. In that moment, I realized that the founder and the leaders that followed him shared the same sense of values that I also strongly believe in. * Operating income compared on a basis excluding the capital gains on the transfer of business to Qualcomm recorded in fiscal 2017 tion to never give up no matter what obstacles they may face.” This kind of management philosophy is expressed in our corporate motto “Contribute to culture and industry through creativity” and corpo- rate principles of “Vision,” “Courage,” and “Trust.” Making a contribution to the world through tech- nology has always been the driver of TDK’s actions. As TDK continues to move forward, I have come to the conclusion that the insights of the founder The driving force of sustained enhancement of corporate value Propelled forward by the Creation of Social Value from some 80 years ago still resonate: “Can it con- The Value Creation 2020 plan defines three components tribute to society?” and “Can it be realized with our of corporate value, namely, Social Value, Commercial technology?” For example, TDK so far has not been Value, and Asset Value. We are aiming to maximize widely engaged in the medical field, but the potential value by setting specific targets for each of these. for electronics-related solutions is ever expanding, As Social Value is considered to act as the driving ranging from prevention and treatment to health force for TDK’s sustainability, it is given top priority. management. If TDK can be of use in these areas, Contributing to a sustainable society in turn there is no reason why we should not aim to enhances Commercial Value and Asset Value and expand our business operations accordingly. thereby further reinforces the creation of Social As we move into the future, another important Value. A framework for continuously repeating yardstick is the question of whether we can apply this cycle is being established throughout the our accumulated core technologies to a given task. entire TDK Group. Just as the technological knowledge in magnetics 16 17 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 To Our Stakeholders In 2019, we formulated the Sustainability Vision, worsen, the need to establish a new kind of energy temperature and pressure sensors. This enables us Regarding Monozukuri too, the answer of whether which states that, through its innovative core tech- society that breaks away from that tradition has to offer integrated sensor solutions, including signal- we can grasp the business opportunities is “Yes.” In nologies and solutions, the TDK Group advances the become essential. Digital transformation (DX) and processing IC technology and software technology, markets where TDK will further increase its presence, development of a sustainable society and champi- energy transformation (EX) are two major trends for the automotive, ICT, and industrial and energy such as automobiles and medical equipment, any ons well-being for all people. This is taken to mean that would not exist without electronics. For TDK, markets. In the automotive market, in addition to defect in a product can potentially have very serious that TDK technologies should benefit people and these developments represent an enormous oppor- sensors, we offer DC-DC converters and other consequences and may severely damage TDK’s cor- enable them to build a healthy world for future tunity to contribute to markets with technologies power supply devices, neodymium magnets for porate value. Since about three years ago, TDK has generations. This is also what inspires us to work and solutions. In terms of DX, we can utilize digital drive motors, automotive-grade multilayer ceramic been pursuing Monozukuri Innovation that combines toward achieving the Sustainable Development data to optimize Monozukuri manufacturing, reduce chip capacitors (MLCC) for electronic control units the Industry 4.0 concept with its zero-defect product Goals (SDGs). P. 72 The Value Creation 2020 concept Advance of DX and EX opens up unlimited market possibilities Social Value Can Be Created in Any Market losses of energy and resources, and realize zero- defect product quality, thereby passing on value to society. In terms of EX, TDK’s expertise in electricity and magnetism helps improve energy conversion efficiency, which is highly significant for all aspects of daily life. Before us is a vast array of market scenarios through which we can contribute to solving social issues by leveraging the strengths of our original technologies and products. P. 38 The capability to provide Social Value Relying on Advanced Technological Power, Development Power, and Monozukuri Power If we ask whether TDK has the capability to grasp these business opportunities, the answer is “Yes.” TDK possesses a wide range of products and technologies to support DX, including its sensors, The progress of digital technology has influenced power supplies, and diverse electronic components business operations and lifestyles in a myriad of utilized in ICT equipment, as well as semiconductor (ECU), and many other products and technologies. quality policy. Under the slogan “Quality cannot be These make a significant contribution to xEV (HEV/ assured by final inspection,” we are implementing PHEV/EV), as well as to the spread of advanced quality control throughout all manufacturing pro- driving assistance systems (ADAS) and autonomous cesses, with the aim of creating production lines that driving. In Japan, the fifth-generation mobile com- do not permit any defective output. We are making munications system (5G) is slated to begin opera- sure that Arubeki-Sugata (ideal process) is a globally tion in 2020. Although we have carved out our SAW shared concept within the Company. To give concrete and BAW filter businesses, we still offer other high- shape to the concept at the forefront of manufactur- frequency components and many other products ing, in April 2017 we launched a model production and technologies relevant to the 5G market. line at the Inakura Factory East Site in Akita P. 40 Prefecture making extensive use of the IoT, AI, and As for EX, our expertise in materials technology robotics. This approach will be expanded globally with accumulated since the founding of the Company the aim of realizing location-independent production, has wide applications. Looking at the different sce- so that the same level of quality can be achieved narios where energy is being produced, we supply, regardless of physical location. for example, film solar cells as well as large neo- dymium magnets for wind power generators. Our AC-DC switching power supplies and DC-DC converters convert energy. As for efficient power distribution, TDK products and technologies again are a significant factor, for example, in wireless power transfer systems utilizing either electromag- netic induction or magnetic resonance. And lithium polymer batteries and other TDK products play an important role in the storage of energy. As a case in point, Amperex Technology Limited (ATL), acquired by TDK, is a dominant company and has a highly successful first-to-market track record in the lith- Creating the framework for continued success Building a Strong and Flexible Organization Encompassing Diversity and a Global Outlook ways. Dramatic progress in such areas as the IoT embedded substrates (SESUB), which contribute to ium polymer battery sector. We are laterally propa- Short-term risks are mainly due to external factors, and AI has altered the way information is created, the miniaturization and modularization of electronic gating this business model in the development of but in the medium and long term we must also con- transmitted, and processed, as well as transforming devices. In the area of non-optical sensors, for exam- mini cells for highly compact electronic and wear- sider risks within TDK itself. If we fall behind in the the industry and our world itself. Since the Industrial ple, we have a world-class lineup that includes able devices and in the manufacturing of power DX trend or become insensitive to the needs of the Revolution, people have enriched their lives through magnetic sensors based on magnetics technology, cells for drones, e-drives, and residential energy world, TDK will inevitably decline. Therefore, we the use of fossil fuels. But as such problems as gyroscope, acceleration, inertial, and ultrasonic storage systems. P. 46 have been promoting reforms to fundamentally global warming and the depletion of fossil fuels sensors realized with MEMS technology, and change TDK from the inside. 18 19 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 To Our Stakeholders Creating the framework for continued success Governance to Enable Speedy Decision-Making The TDK Group has some 140 consolidated subsid- iaries. In an age where dramatic changes are expected, increased speed of management is an essential concern. Rather than aiming for single centralized control, we believe that it is necessary to be an autonomous, decentralized organization. Rather than expecting companies acquired True to the slogan “Empowerment and transpar- through M&As to take on TDK’s culture, we respect ency,” I believe it is important to place trust in their cultures and ways of thinking and have left people who share our goals and principles, moti- management independence to each company. This vate them by delegating authority, and ensure has fostered our strength of diversity created by transparency for stakeholders without hiding human resources of many different nationalities. things from one another. We are promoting a global human resource strategy. With this in mind, we have implemented a In 2018, we established our Global Human reform of the management meeting at our head- Resources HQ in Munich, Germany, with Corporate quarters. P. 61 Previous meetings tended to Officer Andreas Keller as general manager. The have discussions along business division lines, and main aim here is to continue our respect for diver- the overall TDK perspective and management per- sity while merging the relative strengths of each spective were sometimes lacking. Therefore, we culture to create a strong organizational frame- have renewed the participation roster, aiming to work that can respond flexibly to changes in the enable healthy opinion exchanges between man- social climate. We are close to completing a human agement functions and business functions. The resource platform including global human resource name has been changed to Executive Committee eval uation standards, promotion of communication Meeting (ECM). Currently, we are discussing for strengthening cooperation, and systems to reports from each business unit from a multifac- discover and nurture excellent human resources eted, neutral, and companywide perspective, across the globe. The sharing of successful case taking such aspects as technology, quality assur- examples is also progressing. In the near future, ance, finance, and human resources into consider- we look forward to an environment where the ation. After having been thoroughly discussed at horizontal deployment of excellent human the ECM, issues are submitted to the Board of resources can be realized even more actively. Directors to enable focused discussions at an even higher level, thereby making it possible to arrive swiftly at decisions. With non-Japanese nationals representing more than 90% of our employees, the common language for the TDK Group is English. Therefore, the ECM and other important internal meetings are all conducted in English. The ECM is held several times per year not only in Japan but overseas as well, in order to bring the Group closer together and provide a morale boost to business Toward the realization of a sustainable society and enterprise sites worldwide. The headquarters function has also undergone structural reform. To allow Business Companies (BCs) and Business Groups (BGs), which are the main operators of our business, to directly interact with customers and devote their full power to delivering Kotozukuri solutions, authority has been Organizational Structure That Produces Tangible Results delegated and lateral connections have been put At present, there are concerns about the impact of into place to provide logistical support. The Global U.S.–China trade friction, Brexit, and other factors Headquarters supplies functions to BCs and BGs on the global economy. TDK’s outlook for fiscal covering technological development, human 2020 does not project major growth in areas in resources, legal support, among others acting as which it performed strongly in fiscal 2019, such an axis to promote global collaboration. The as lithium polymer batteries and such passive com- Regional Headquarters in China, America, and ponents as MLCC. However, we are steadily imple- Europe work closely with the Global Headquarters menting measures based on the Medium-Term while providing comprehensive functions that are Plan, aiming for record-high consolidated net sales tailored to each region. and operating income. We are also pursuing revenue With regard to development, the Global Head- improvements from sensors and magnets. At the quarters is responsible for developing materials same time, fiscal 2020 is designated as a pivot point and core technologies for the future, while the BCs for long-term growth measures, and we will be pur- and BGs concentrate on utilizing existing technolo- suing a policy of aggressive investments. gies to create products. This is designed to result in Unlimited possibilities lie ahead for the TDK an overall increase of development speed. With the Group, and we have a wealth of technological aim of accelerating product development speed capabilities and know-how to contribute. In order through hands-on experience of actual needs on- to sustainably create value, it is necessary to flexibly site around the world, over 100 development per- respond to changes in the business environment sonnel formerly affiliated with the Headquarters and to have an organizational structure that allows have been dispatched to BCs. for continued growth. I believe that we meet both Through this organizational reform, the delega- of these requirements. The results will become tion of authority has been steadily transitioning clearly apparent within the current “Value Creation from the Board of Directors to the executive side, 2020” period. Contributing to culture and industry and from the executive side to BCs and BGs, and through creativity, as our corporate motto envisions, tangible results can be seen in terms of speedier harks back to the founding of TDK and shapes our decision-making and increased collaboration. future path too. We will continue to evolve and do Monitoring at the Global Headquarters and our best to play our part in the realization of a Regional Headquarters has been strengthened, sustainable world. and efforts are also being made to further enhance transparency. As shown by the evaluation of the Board of Directors as well, I feel that the series of reforms has resulted in steady improvements in management. October 2019 Shigenao Ishiguro President & CEO 20 21 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ¥ 792,624 ¥ 862,492 ¥ 802,534 ¥ 841,847 ¥ 984,525 ¥1,082,560 ¥1,152,255 ¥1,178,257 ¥1,271,747 ¥1,381,806 Breakdown of operating income changes Billions of yen Millions of yen 989,348 1,061,203 1,073,024 1,158,004 1,268,437 Fiscal 2018 89.7 Consolidated Business Results Highlights Years ended March 31 Consolidated business highlights*1 Net sales (Overseas sales) Cost of sales Selling, general and administrative expenses Operating income Income before income taxes Income from continuing operations before income taxes Net income (loss) attributable to TDK Capital expenditures Depreciation and amortization Research and development Ratio of overseas production to net sales (%) 704,874 604,454 158,727 29,443 25,576 13,520 64,370 83,788 53,942 80.5 764,807 645,514 149,114 67,864 64,519 45,264 78,638 77,594 52,973 83.6 702,469 624,271 157,724 20,539 14,668 (2,454) 99,653 80,197 52,551 80.2 747,062 668,258 151,535 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 81.8 86.7 802,225 207,876 72,459 74,517 831,123 227,718 93,414 91,839 49,440 64,828 102,525 160,674 80,249 70,644 87.9 83,224 84,920 86.3 855,948 113,649 208,660 211,717 145,099 167,631 87,491 91,254 86.1 928,525 257,630 89,692 89,811 63,463 178,612 92,171 102,641 84.5 91,310 985,321 287,561 107,823 115,554 82,205 173,592 106,631 115,155 85.4 140,274 Changes in sales +39.4 Sales price reduction –19.1 Rationalization, cost reduction +21.5 Benefits from restructuring +1.4 SG&A expenses increase –26.5 Impairment loss – 4.7 One-time expenses related to M&A +5.5 Exchange rate fluctuation (U.S.$1.00 = ¥110.94) +0.6 Fiscal 2019 107.8 Net cash provided by operating activities 118,247 101,879 55,334 108,942 127,308 142,850 151,563 160,136 Net cash used in investing activities Net cash provided by (used in) financing activities (105,963) (38,369) (61,341) (31,860) (29,898) 12,929 (90,156) 4,395 (55,438) (56,118) (127,312) (140,585) (71,111) (246,099) (140,179) (35,243) 29,305 (37,753) 110,088 9,435 Cash and cash equivalents at end of period 132,984 129,091 167,015 213,687 250,848 265,104 285,468 330,388 279,624 289,175 Total assets TDK stockholders’ equity Working capital Number of shares issued (thousands) Per-share data 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 1,992,480 543,756 286,370 129,591 534,273 199,186 129,591 498,159 561,169 635,327 219,918 232,693 279,504 129,591 129,591 129,591 738,861 352,364 129,591 675,361 289,760 129,591 793,614 388,542 129,591 824,634 296,899 129,591 877,290 208,165 129,591 Breakdown of free cash flow Yen Billions of yen Net income (loss) attributable to TDK (basic) ¥104.82 ¥350.90 ¥(19.06) ¥ 9.50 ¥129.47 ¥392.78 ¥514.23 ¥1,150.16 ¥502.80 ¥651.02 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 (%) 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 6,947 160.00 24.6 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 20.2 7.1 7.8 3.6 91.8 20.8 7.8 9.7 4.2 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 99,693 102,883 104,781 90.7 90.7 90.7 CO2 emissions from production activities (t-CO2) 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 1,669,733 CO2 emissions reduction through products (t-CO2)*2 321,000 498,000 886,000 1,251,000 1,581,000 1,675,000 2,041,000 2,149,000 Net cash provided by operating activities 140.3 Capital expenditures –173.6 +3.9 Proceeds from sales of tangible and intangible assets +92.2 Proceeds from sale and maturity of short-term investments –87.6 Payment for purchase of short-term investments +0.4 –0.8 Proceeds from sale and maturity of securities Payment for purchase of securities +11.5 Proceeds from sale of business, net of cash transferred –2.5 Acquisition of subsidiaries, net of cash acquired +22.1 Proceeds from sale of investments in affiliates –4.9 Acquisition of investments in affiliates –0.8 Other-net +0.1 Free cash flow *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 business are separately presented as discontinued operations in the consolidated statements of operations for fiscal 2014. Also, reclassifications have been made to the consolidated statements of operations after fiscal 2010, to conform to the presentation used for fiscal 2014. However, overseas sales, depreciation and amortization, research and development, and ratio of overseas production to net sales include the amounts of discontinued operations. *2 Because the TDK Environmental Action 2020 Plan came into effect from fiscal 2011, the “CO2 emissions reduction through products (t-CO2)” figures are for fiscal 2012 onward. 22 23 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Consolidated Business Results Highlights Net sales / Overseas sales ratio Billions of yen 1,500 1,200 900 600 300 0 1,381.8 91.8 10 11 12 13 14 15 16 17 18 19 Operating income / Operating income ratio Billions of yen 250 200 150 100 50 0 107.8 7.8 10 11 12 13 14 15 16 17 18 19 % 25 20 15 10 5 0 (FY) % 100 80 60 40 20 0 (FY) ROE / ROA % 20 15 10 5 0 –5 Cash flows Billions of yen 200 100 0 –100 –200 –300 9.7 4.2 140.3 0.1 –140.2 10 11 12 13 14 15 16 17 18 19 (FY) 10 11 12 13 14 15 16 17 18 19 (FY) Net sales (left) Overseas sales ratio (right) Operating income (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 an increase in the number of parts used on automobiles in conjunction with the electrification of vehicles and increased production of HDDs for data centers, net sales were ¥1,381.8 billion, a record high, in fiscal 2019. Sales have increased over the past 12 years, particularly in Asia, and overseas sales accounted for 91.8% of total net sales in fiscal 2019. As a result of the structural reforms that were initiated in fiscal 2012, we were able to establish a firm earnings structure with a good balance among the major seg- ments. In fiscal 2017, capital gains of ¥144.4 billion were recorded in conjunction with the business tie-up with Qualcomm and the agreement to establish a joint venture. As a result, operating income in fiscal 2018 fell 57.0% year on year, to ¥89.7 billion. However, operating income in fiscal 2019 was up from the previous fiscal year, and the operating income ratio improved 0.7 percentage points. ROE and ROA were at low levels following the global economic downturn, but after structural reforms were implemented from fiscal 2012, both improved as a result of higher net income and other factors. Both indicators were up substantially as a result of special factors that resulted in reporting gains on the transfer of business to Qualcomm in fiscal 2017 and fell again in fiscal 2018 due to the counteraction to those factors, but they increased in fiscal 2019. The business transfer to Qualcomm in fiscal 2017 resulted in a significant improve- ment in free cash flow. Funds obtained as compensation for the business transfer are being utilized in new M&As in accordance with our growth strategy, and we are working to further strengthen our earnings structure. In fiscal 2018, free cash flow was negative ¥154.8 billion as a result of active capital expenditures, R&D, and M&As, but turned positive in fiscal 2019. Net income (loss) attributable to TDK Billions of yen Capital expenditures / Depreciation and amortization Billions of yen R&D Expenses / R&D Expenses to Net Sales Ratio Billions of yen 150 120 90 60 30 0 –30 82.2 200 150 100 50 0 173.6 106.6 120 100 80 60 40 20 0 115.2 8.3 Overseas Production Ratio % 100 80 60 40 20 0 % 10 8 6 4 2 0 85.4 10 11 12 13 14 15 16 17 18 19 (FY) 10 11 12 13 14 15 16 17 18 19 (FY) 10 11 12 13 14 15 16 17 18 19 (FY) 10 11 12 13 14 15 16 17 18 19 (FY) 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 elec- tronic components resulting from the global economic slowdown and the impact of the Great East Japan Earthquake. After structural reforms were implemented begin- ning in fiscal 2012, however, results gradually improved. As a result of the impact 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 net income in fiscal 2019 was up from the previous fiscal year. Under the three-year Medium-Term Plan covering the period from fiscal 2016 to fiscal 2018, TDK made ¥506.9 billion in capital expenditures. Under the current Medium-Term Plan, the first year of which was fiscal 2019, TDK is actively pursuing capital expenditures aimed at accelerating expansion of core businesses, strengthen- ing its overseas R&D bases, and accelerating Monozukuri Innovation and expects to invest a total of ¥500.0 billion over the three years. R&D expenses have continuously increased since fiscal 2012, and TDK invested ¥115.2 billion in R&D in fiscal 2019, a record high, so that it can respond to rapid technological innovation in electronics markets and maintain high competitiveness. Going forward, we will continue to actively invest in the development of new tech- nologies and further reinforce our R&D structures. Compared with fiscal 2010, the overseas production ratio in fiscal 2019 was up 4.9 percentage points, reaching 85.4%. TDK seeks to establish location-independent production systems and is working toward the ability to supply products with the same high quality from any location. TDK stockholders’ equity / Stockholders’ equity ratio Billions of yen Total assets Billions of yen 2,000 1,500 1,000 500 0 1,992.5 900 600 300 0 877.3 % 80 60 44.0 40 20 0 (As of the end of FY) Number of employees / Overseas employees ratio People 104,781 90.7 120,000 90,000 60,000 30,000 0 CO2 emissions from production activities Thousand t-CO2 2,000 1,500 1,000 500 0 % 100 80 60 40 20 0 1,670 10 11 12 13 14 15 16 17 18 19 (As of the end of FY) 10 11 12 13 14 15 16 17 18 19 (FY) 10 11 12 13 14 15 16 17 18 19 (As of the end of FY) 10 11 12 13 14 15 16 17 18 19 The trend of gradual growth has continued since fiscal 2011 due to increases in tangible fixed assets and investments. Total assets as of the end of fiscal 2019 increased 4.6% year on year, to ¥1,992.5 billion. The main positive factors were increases in tangible fixed assets of ¥57.5 billion, inventories of ¥19.4 billion, and cash and cash equivalents of ¥9.6 billion. TDK stockholders’ equity was up 6.4% year on year, to ¥877.3 billion, as of the end of fiscal 2019. Long-term debt was down ¥86.2 billion year on year and trade payables decreased ¥36.9 billion, and as a result, the stockholders’ equity ratio improved 0.7 percentage points year on year, to 44.0% 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 of employees reached 104,781 as of the end of fiscal 2019. In addition, the overseas employees ratio has been increasing and was 90.7% as of the end of fiscal 2019. TDK established the TDK Environmental Vision 2035 and is working to reduce envi- ronmental load from a life cycle perspective that covers all phases from the use of raw materials to the use and disposal of final products. We are aware that CO2 emis- sions 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 expenditures and creating energy management structures. TDK stockholders’ equity (left) Stockholders’ equity ratio (right) Number of employees (left) Overseas employees ratio (right) 24 25 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Value Creation 2020 Summary of the Process Leading to Value Creation 2020 M&As M&As Structural reform ATL Lithium polymer batteries EPCOS Electronic components, modules, and systems Business portfolio optimization Withdrawal from organic EL displays, linear tape- open (LTO*), Blu-ray, and other non-core businesses Lambda Power Group Power supplies for industrial equipment Operating income (loss) M&As Magnecomp HDD suspensions *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, business sites, and organizations 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, development of micro-size, high-function passive components Including ¥144.4 billion in gains on the transfer of business to Qualcomm. M&As M&As M&As Micronas Hall sensors ICsense ASIC design and development Chirp Ultrasonic sensors Hutchinson HDD suspensions InvenSense Acceleration sensors, gyroscope sensors Tronics MEMS inertial sensors 2005 2007 2008 2011 2016 2017 2018 FY Sowing seeds to grow with the expanding smartphone market In 2005, TDK acquired ATL of Hong Kong, an entity pos- Structural reforms for overcoming difficulties TDK was able to overcome difficulties including the swift decline in demand sessing original technology in lithium polymer batteries. that occurred in conjunction with the global financial crisis starting in 2008, Purchased in 2008 was EPCOS AG (currently TDK the Great East Japan Earthquake of 2011, flooding in Thailand and apprecia- Electronics AG, referred to as “EPCOS” and “TDK tion of the Japanese yen to peak at ¥75 to the US dollar. TDK implemented Electronics," respectively), which used its competency in sweeping structural reforms to shore up its earnings framework. As a result high-frequency components and module technologies to of decisive measures such as withdrawing from the recording media and forge a powerful presence in European automobile other non-core businesses, concentrating management resources in core and industrial equipment markets. Combining their units, consolidating domestic and overseas business sites, optimizing person- technologies with our own expertise in components nel and business sites, and other strategies, performance figures rapidly and production technologies, we strategically moved recovered starting in fiscal 2013. to tap into the expanding market for smartphones. Smartphone market trends (unit shipments) 20 100 million units Forecast 18 16 14 12 10 8 6 4 2 0 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 (CY) Data provided by Techno Systems Research Co., Ltd. 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 collaborating plants. These initiatives focused on restoring Monozukuri power through integrated production. Overseas, we acted to simplify complex supply chains. • Manufacturing base closings and business site concentration • Shift to in-house production processes • Fine tuning of supply chains ➝ Enhanced integrated production Akita Prefecture Honjo Inakura Fruits of structural reforms Reviewing the results of the previous Medium-Term Plan (fiscal 2016 to fiscal 2018), sales set record highs each term, with struc- tural reforms proving effective in strengthening the earnings struc- ture and operating income also gaining ground. TDK cultivated ATL’s lithium polymer batteries and EPCOS’s high-frequency compo- nents, riding the tailwind of the global expansion of the smartphone market. This stance was accompanied by solid efforts to address demand for component miniaturization and modularization to keep pace with the steady move to higher smartphone functionality, honing our underlying technologies to be ready for the next stage of evolution. New strategic positioning to meet the next stage of social needs Against the backdrop of redoubled demand for customization and modularization in the smartphone market, needs have grown for coordination of the various electronic components mounted in those products. To constantly supply customers with optimum solutions, TDK moved from traditional in-house self-sufficiency to cooperation 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 fiscal 2016 we pursued sensor-focused M&As as a means to field a wide-rang- ing arsenal of technologies, while solid growth investments were advanced to expand sales to the automotive market. Operating income ratio Future growth investments 2.6% Fiscal 2013 7.1% Fiscal 2018 ¥506.9 billion Sales to the automotive market ¥142.7 billion Fiscal 2013 ¥231.4 billion Fiscal 2018 ¥256.7 billion ¥188.0 billion ¥279.6 billion Capital expenditures R&D expenses Fiscal 2013 to fiscal 2015 Fiscal 2016 to fiscal 2018 26 27 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Value Creation 2020 Medium-Term Plan “Value Creation 2020” Based on the growth foundations that TDK has built until now, TDK is taking action in accordance with the Medium-Term Plan “Value Creation 2020” covering the three fiscal years from 2019 to 2021. Starting from Social Value, TDK is promoting Commercial Value and Asset Value to achieve business growth and create additional Social Value. Medium-Term Plan Basic Policy “Value Creation 2020” Leap to new heights by providing market-needed solutions based on our electronic components business TDK will use its core technologies including materials technology and process technology, the foundation of the Company’s growth since its establishment, to build a solid Monozukuri (manufacturing excellence) base and will actively cooperate with semiconductor partners, turnkey solution partners, and distribution partners to provide solutions derived from Kotozukuri (integrated solutions). TDK will achieve sustainable growth by linking customer needs and societal demand determined through the process of Kotozukuri with increasingly advanced Monozukuri. Customers Customers ICT ICT Automotive Automotive Industrial and Energy Industrial and 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 Social Value Aiming for a sustainable society and enterprise Starting point of value creation • 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. 72 Commercial Value Management targets in the medium term Financial returns created from Social Value Net sales Results (fiscal 2018): Target (fiscal 2021): CAGR: P. 30 ¥1,271.7 billion ¥1,650.0 billion 9% CAGR by segment Passive Components: 7% Sensor Application Products: 35% Magnetic Application Products: 2% Energy Application Products: 8% Asset Value Medium-term financial strategy Pursuit of capital efficiency to create additional Social Value • 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 debt. • We aim to steadily recover previous investments. • We will enhance companywide asset efficiency. • Steadily recover growth investments executed toward transforming business earnings structure • Execute further growth investments based on well-balanced capital allocation Well-balanced capital allocation • Growth investments • Shareholder returns • Repayment of interest-bearing debt Medium-term financial targets Capital efficiency • Operating income ratio: over 10% • ROE: over 14% P. 34–P. 36 Negative free cash flow Positive free cash flow Shareholder returns • Increase dividends stably through growth Financial soundness • TDK stockholders' equity ratio: of income per share • Target a 30% dividend payout ratio over 50% • Net cash 28 29 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Value Creation 2020 Progress of Value Creation 2020 Consolidated results for fiscal 2019 Consolidated net sales achieved a new record high for the and restructuring efforts. Selling, general and administrative sixth consecutive fiscal year and operating income reached expenses increased approximately ¥26.5 billion in conjunction the ¥100 billion level, a new record for income.* Income with the expansion of the lithium polymer battery and other before income taxes and net income attributable to TDK also businesses and reinforcement of development structures in set new records. the sensor business, and one-time expenses related to M&A, The market deteriorated sharply in the second half in which were used primarily for the acquisition of InvenSense, conjunction with the economic slowdown in China precipi- Inc. (“InvenSense”), were down ¥5.5 billion compared with the tated by trade friction between the U.S. and China. Orders previous fiscal year. As a result, operating income increased fell in the automotive, ICT, and industrial and energy mar- 20.2% year on year and the operating income ratio improved kets, which are priority markets. Despite this, sales of main 0.7 percentage points, to 7.8%. In conjunction with changes to products including lithium polymer batteries and capacitors U.S. generally accepted accounting principles relating to remained firm throughout the fiscal period, and as a result, retirement benefit expenses, results for the previous fiscal net sales were up 8.7% year on year. year were reclassified and ¥4.1 billion of retirement benefit In addition to effects from increased sales of lithium poly- expenses were recorded as non-operating expenses. Income mer batteries, capacitors, and other products, the product before income taxes was up 28.7% year on year, net income mixes for HDD magnetic heads and HDD suspensions attributable to TDK rose 29.4%, and net income per share improved, resulting in an increase in income of approximately attributable to TDK was ¥651.02, compared with ¥502.80 in ¥39.4 billion. Meanwhile, lower sales prices resulted in a the previous fiscal year. decrease in income of approximately ¥19.1 billion, but this * In fiscal 2017, operating income was ¥208.7 billion, but this included ¥144.4 billion in amount was covered through rationalization, cost reduction, one-time gains from the sale of business. Consolidated results for fiscal 2019 Billions of yen Fiscal 2018 full-year results Fiscal 2019 full-year results Year-on-year change Billions of yen % Net sales Operating income Operating income ratio Income before income taxes Net income attributable to TDK Earnings per share (Yen) Ex-rate U.S.$ (Yen) Euro (Yen) 1,271.7 89.7 7.1% 89.8 63.5 502.80 110.93 129.64 1,381.8 107.8 7.8% 115.6 82.2 651.02 110.94 128.48 110.1 18.1 +0.7 pt 25.8 18.7 — 8.7 20.2 — 28.7 29.4 — — Appreciated by 0.9% Ex-rate impact on net sales & operating income Net sales: Decreased by about ¥5.0 billion Operating income: Increased by about ¥0.6 billion Net sales by segment Billions of yen Operating income (loss) by segment Billions of yen 1,500 1,200 900 600 300 0 1,271.7 56.3 1,381.8 61.6 442.8 277.5 77.4 417.8 537.5 272.8 76.5 433.4 200 150 100 50 0 –50 –100 89.7 72.4 16.1 50.2 –18.6 –29.7 –0.7 107.8 91.0 17.0 58.4 –22.1 –29.8 –6.7 2018 年 3 月期通期実績 2018 2019 年 3 月期通期実績 2019 (FY) 2018 2019 (FY) Passive Components Magnetic Application Products Other Sensor Application Products Energy Application Products Passive Components Magnetic Application Products Other Sensor Application Products Energy Application Products Corporate and Elimination Net sales by market Automotive Billions of yen 253.7 231.4 ICT Billions of yen 809.8 236.5 716.3 237.9 478.5 573.3 Industrial and Energy Billions of yen 237.1 233.1 Others Billions of yen 87.0 85.1 2018 2019 (FY) 2018 2019 (FY) 2018 2019 (FY) 2018 2019 (FY) ICT (HDD magnetic heads and HDD suspensions) ICT Progress toward achieving the Value Creation 2020 targets Fiscal 2019 forecasts and results Progress toward achieving management targets Net sales Operating income Increasingly severe global economic slowdown 1,340.0 1,420.0 1,370.0 1,381.8 Increasingly severe global economic slowdown 120.0 110.0 107.8 100.0 9,000 6,000 3,000 0 ROE 7.8% 9.7% Over 14% 1,650.0 1,271.7 1,381.8 1,420.0 Over 10% 7.1% 7.8% 8.5% Announced in Apr. 2018 Announced in Oct. 2018 Announced in Jan. 2019 Results for fiscal 2019 Announced in Apr. 2018 Announced in Oct. 2018 Announced in Jan. 2019 Results for fiscal 2019 2018 2019 2020 target 2021 target (FY) Forecasts Results Net sales Operating income ratio Forecasts for fiscal 2020 Efforts will be made to increase net sales by 2.8% compared with fiscal 2019, for a seventh consecutive record high. We will also work to increase operating income by 11.3% to achieve another record. Planned dividends per share are to be increased by ¥10 in both the first and second halves for an annual increase of ¥20 and an annual dividend of ¥180. Consolidated results and dividends forecasts for fiscal 2020 Billions of yen Fiscal 2019 consolidated results Fiscal 2020 consolidated results forecasts Net sales Operating income Operating income ratio Income before income taxes Net income attributable to TDK Earnings per share (Yen) Dividends per share (Yen) Ex-rate U.S.$ (Yen) Euro (Yen) Capital expenditures Depreciation and amortization Research and development expenses 1,381.8 107.8 7.8% 115.6 82.2 651.02 1st half: 80 2nd half: 80 Annual: 160 110.94 128.48 173.6 106.6 115.2 1,420.0 120.0 8.5% 118.0 84.0 665.14 1st half: 90 2nd half: 90 Annual: 180 108.00 122.00 200.0 130.0 120.0 Year-on-year change Billions of yen 38.2 12.2 +0.7 pt 2.4 1.8 — — — — 26.4 23.4 4.8 % 2.8 11.3 — 2.1 2.2 — — 15.2 22.0 4.2 30 31 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Value Creation 2020 Consolidated Results by Segment for Fiscal 2019 Net sales ¥1,381.8 billion 39% 4% 13% 12% 7% 6% 20% Passive Components Segment Capacitors Inductive Devices Other Passive Components Sensor Application Products Segment Sensor Application Products 13% 12% 7% 6% Magnetic Application Products Segment Magnetic Application Products 20% Energy Application Products Segment Energy Application Products Other 39% 4% Operating income ¥107.8 billion 240 Billions of yen 180 120 60 0 –60 91.0 17.0 58.4 –22.1 –6.7 –29.8 Passive Components Segment Sensor Application Products Segment Magnetic Application Products Segment Energy Application Products Segment Other Corporate and Elimination ¥58.4 billion ¥–22.1 billion ¥17.0 billion ¥91.0 billion ¥–6.7 billion ¥–29.8 billion Passive Components Segment Sensor Application Products Segment Magnetic Application Products Segment Energy Application Products Segment Net sales Net sales Net sales Net sales ¥433.4 billion (up 3.7% year on year ) ¥76.5 billion (down 1.2% year on year ) Operating income ¥58.4 billion (up 16.3% year on year ) Operating loss ¥–22.1 billion ¥272.8 billion (down 1.7% year on year ) ¥537.5 billion (up 21.4% year on year ) Operating income Operating income ¥17.0 billion (up 5.6% year on year ) ¥91.0 billion (up 25.7% year on year ) Net sales were up 3.7% year on year, operating income increased Net sales were down 1.2% year on year and an operating loss of Net sales were down 1.7% year on year and operating income Net sales increased 21.4% year on year and operating income was 16.3%, and the operating income ratio improved 1.5 percentage ¥22.1 billion was reported as a result of approximately ¥5.4 billion was up 5.6%. HDD magnetic head sales volume was down approxi- up 25.7%. Sales of lithium polymer batteries were up substantially points, to 13.5%. Thus, profitability improved. In ceramic capacitors, in costs in relation to the acquisition of InvenSense and other fac- mately 8% year on year, but average sales prices increased in as a result of increased market share of sales to main customers sales of highly reliable products with redundant features were tors. Demand for home appliances in China fell, but sales in the conjunction with improvements in the product mix, including a in the Chinese smartphone market, and sales for mobile devices, strong in the automotive market and net sales increased. As a automotive market increased, resulting in higher sales of tempera- higher percentage of sales of nearline products, and as a result, including laptops and tablets, as well as non-mobile applications result of this as well as an improved product mix, higher production ture and pressure sensors. Operating loss expanded slightly as a sales were steady. Net sales of HDD suspensions were also nearly such as game consoles were also up, resulting in higher sales and efficiency, and other factors, profitability was up substantially, sup- result of increased expenses for development of pressure sensors flat as higher average sales prices in conjunction with an improved income. Despite a decline in demand in the second half for power porting income in the Passive Components segment. Sales of alu- and sales expansion. In magnetic sensors, sales of Hall sensors in micro-actuator sales ratio offset the decrease in sales volume. supplies for industrial equipment for use in semiconductor produc- minum electrolytic capacitors and film capacitors were flat. Sales of the automotive market were up, resulting in higher sales and The decline in HDD assembly sales volume was counteracted by tion equipment and robots, both net sales and operating income inductive devices increased, but operating income was down as a income. Sales of TMR sensors for smartphones were also up, higher sales of suspension application products, and overall, sales were generally flat compared with the previous fiscal year. result of production adjustments in the second half. Sales of high- resulting in improved profitability. With regard to MEMS sensors, frequency components were up as a result of increased sales in market introduction of new products was delayed and sales for the ICT market and other factors, but lower sales of piezoelectric smartphones and drones were down as a result of the impact of material components and circuit protection components in the the economic slowdown in China, and there was also lower demand ICT market and effects from decreased demand in the European for game consoles, resulting in a sharp decrease in sales. automotive market resulted in lower sales and income. Acquisition-related expenses were down ¥5.5 billion compared with the previous fiscal year, but development and other expenses were up, resulting in increased losses. levels remained the same as the previous fiscal year. Operating income increased due to contributions from higher average sales prices and improved profitability of suspension application prod- ucts. Sales of magnets were down due to lower demand for wind power generators and industrial equipment. With regard to ferrite magnets, approximately ¥4.7 billion in impairment losses for fixed assets were recorded, primarily as a result of delays in productivity improvements, and losses for magnets as a whole increased. Net sales Operating income / Operating income ratio Billions of yen Billions of yen 417.8 433.4 58.4 50.2 13.5 12.0 60 45 30 15 0 2018 2019 (FY) 2018 2019 Operating income (left) Operating income ratio (right) 500 400 300 200 100 0 32 Net sales Billions of yen 80 60 40 20 0 % 20 15 10 5 0 (FY) Operating loss Billions of yen 0 77.4 76.5 –10 –20 –30 –18.6 –22.1 Net sales Operating income / Operating income ratio Billions of yen Billions of yen 277.5 272.8 300 225 150 75 0 17.0 6.2 16.1 5.8 20 15 10 5 0 2018 2019 (FY) 2018 2019 (FY) 2018 2019 (FY) 2018 2019 Operating income (left) Operating income ratio (right) % 8 6 4 2 0 (FY) Net sales Billions of yen 600 537.5 450 442.8 300 150 0 Operating income / Operating income ratio Billions of yen 100 91.0 16.9 72.4 16.4 75 50 25 0 2018 2019 (FY) 2018 2019 Operating income (left) Operating income ratio (right) % 25 20 15 10 5 0 (FY) 33 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Value Creation 2020 Message from the Corporate Officer of Finance & Accounting We will endeavor to build the foundations of sustained growth through the pursuit of Asset Value and continuous growth investments. Tetsuji Yamanishi General Manager of Finance & Accounting HQ Senior Vice President Representative Director Financial position Billions of yen 483.0 520.3 386.5 334.1 323.3 329.7 Cash flows Billions of yen 160.1 52.4 –159.7 –190.6 140.3 0.1 89.0 91.3 –71.1 –154.8 –140.2 –246.1 2017 2018 2019 (As of the end of FY) 2017 2018 2019 (FY) Cash and cash equivalents Interest-bearing debt Net cash Net cash provided by operating activities Net cash used in investing activities Free cash flow Fiscal 2019 review In recent years, TDK has made large-scale investments Achieving the Value Creation 2020 targets Capital expenditures in fiscal 2020, including investment We made steady progress with improvements in Asset Value. exceeding operating cash flows in order to transform busi- ness structures. Under ”Value Creation 2020,“ Asset Value is positioned alongside Social Value and Commercial Value as a strategic pillar. We have set financial targets for an operating income ratio of over 10% and for ROE of over We will aim for stable, positive free cash flow. amounts that were postponed in fiscal 2019, are expected to be approximately ¥200 billion, which would be more than initially planned. But investments over the three years are expected to be approximately ¥500 billion, which would be in accordance with the plan. Planned research and develop- In fiscal 2019, the first year of the Medium-Term Plan 14% and are working to build structures that can generate We are planning for increases in net sales of 2.8% and oper- ment expenses for fiscal 2020 are approximately ¥120 bil- “Value Creation 2020” (covering the three years from fiscal stable returns commensurate with investments. We have ating income of 11.3% in fiscal 2020, and we expect to reach lion. Of that amount, 70%–80% will be allocated to R&D for 2019 to fiscal 2021), business was substantially affected also set a target of achieving a positive net cash flow by record highs as in fiscal 2019. expanding existing businesses, and the remainder will be in the second and third quarters by the economic slow- fiscal 2021. In fiscal 2019, the operating income ratio Substantial growth in passive components and lithium invested in R&D with a focus on materials technology and down in China precipitated by U.S.–China trade friction and improved by 0.7 percentage points, to 7.8%, and ROE polymer batteries, sales of which were strong in fiscal 2019, venture capital. The largest portion of R&D expenses in the global economic downturn. As a result, orders for improved by 1.9 percentage points, to 9.7%. Although free is not expected, but our plans are based on profit improve- existing businesses will be for sensors, followed by invest- commodity electronic components for automotive appli- cash flow was low, it did return to the black. ment in business segments facing issues, such as sensors ments in lithium polymer batteries. cations and HDD magnetic heads for data centers were Issues have become apparent in some businesses, but and magnets. With regard to sensors, we will seek a 30% A factor in free cash flow turning positive in fiscal 2019 down sharply. In addition, delays in introducing new fiscal 2019 was a year of steady progress in improving annual increase in net sales again by achieving an increase was a reduction in capital expenditures from the initially sensor products, higher development costs, and other fac- Asset Value, including supporting companywide profitabil- in well-balanced sales. In the magnet business, we plan to planned amount of approximately ¥210 billion to a little tors caused an increase in operating losses, and magnets ity by making strong businesses even stronger and increase profitability by responding accurately to market over ¥170 billion as a result of a careful examination of the posted impairment losses of approximately ¥4.7 billion. improving free cash flow. needs through improvements in production efficiency. While timing of investments in response to a rapid decline in However, sales of lithium polymer batteries, automotive * Comparison is made based on the exclusion of the gains on the sale of business to lithium polymer batteries grow into an even stronger busi- orders in the second half. Free cash flow is expected to MLCCs, and other products remained firm throughout the Qualcomm recorded in fiscal 2017. fiscal year and were able to offset these negative factors. Net sales set a new record for the sixth consecutive fiscal term, and operating income, income before income taxes, and net income all reached record highs.* ness and passive components achieve higher profits than remain positive in fiscal 2020 even when the one-time initially anticipated, component ratios are changing from gains of approximately ¥120 billion reported in conjunction those anticipated at the time of formulation of the Medium- with the carving out of the high-frequency components Term Plan, including longer-than-expected delays in business are excluded. In fiscal 2021 and thereafter, the improving sensor profits. Nevertheless, we believe it is fea- recovery of these investments will proceed, and we expect sible to achieve an operating income ratio of over 10% in to maintain stable positive cash flows and achieve net cash. fiscal 2021, which will be the final year of the plan. 34 35 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Value Creation 2020 Sustainable enhancement of Asset Value conjunction with investments. We will allocate the We will steadily achieve our targets and aim to reach to the next stage. remainder of profits as shareholder returns with a divi- dend payout ratio of 30%. With regard to shareholder return methods, we will investigate means of optimizing the total return ratio. Rather than simply aiming to improve capital efficiency, we see share buybacks as one option for achieving stable shareholder returns. We are also promoting the spread of “logic trees” to Until now, TDK has achieved growth by expanding the work sites. Instead of uniformly applying logic trees to all “ferrite tree.” P. 04 During the Value Creation 2020 businesses, we operate logic trees with features tailored period, TDK is promoting the recovery of prior investments to the circumstances of each Business Company and and is not thinking of making any new large-scale acquisi- Business Group. For example, we set operational key per- tions. In order to take advantage of growth opportunities formance indicators for businesses that maintain stable as DX and EX advance, however, it will be necessary to profit levels in order for them to achieve even higher levels invest in the further reinforcement of existing businesses of earnings power. As we expand undertakings to all busi- and to make investments to acquire technologies that TDK nesses, we are conducting operations with a focus on does not have. Accordingly, our fundamental policy is for expanding free cash flow in such high-growth businesses about half of the profits that the Company generates to be as lithium polymer batteries. We are expanding these ini- reinvested, up to the amount of depreciation expenses. tiatives on a global scale. Based on TVA (TDK Value Added), which compares capital We will steadily work toward achieving an ROE of over costs (weighted average capital costs multiplied by cost of 14%, a target set for Asset Value, through improved profit- invested capital) with returns, we will further reinforce ability, balanced capital allocation, practice of logic trees, investment valuation. Policy also calls for the TDK stock- and other methods discussed above. Under the next holders’ equity ratio to be maintained at about 50% in line Medium-Term Plan, we hope to achieve the hoped-for with assets, including goodwill, which expands in capital efficiency and transition to a major growth stage throughout the Group. Financial and operation logic tree Build a framework by which frontline policies lead to improvements in capital efficiency Corporate management target ROE over 14% Business ROA Cost of invested capital Individual business targets TVA Financial leverage Related accounts Policies Cost of sales Cost reductions Sales and marketing expenses Selling, general and administrative expenses Marketing Business efficiency improvements Accounts receivable Promotion of debt collection Inventories Inventory reduction Accounts payable Lengthened payment terms After-tax profits 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 Riding the Mighty DX and EX Wave, TDK Aims to Sustainably Enhance Corporate Value. 36 37 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Riding the Mighty DX and EX Wave, TDK Aims to Sustainably Enhance Corporate Value DX and EX Open Up Unlimited Market Possibilities The dual forces of Digital Transformation (DX) and Energy Transformation (EX) are creating a host of possibilities for TDK. 4,178 Energy Transformation Global primary energy supply volume Improving energy efficiency The current world population stands at about 7.7 billion, and is expected to surpass 10 billion by 2050.* As the consumption of energy rises along with the growth of the population, fossil fuels, which so far have been the main source of energy, are expected to be depleted, and the curbing of global warming has become a global issue. The use of renewable energy sources and higher energy effi- ciency therefore will be pressing concerns. * United Nations, World Population Prospects 2019 Demand for lithium polymer batteries, power supplies, generator magnets, etc., projected to rise Other renewables Solar Wind Nuclear Hydropower Natural gas Crude oil Coal 1800 1825 1850 1875 1900 1925 1950 1975 2000 2017 TWh 1,400.0 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0 (Year) Source: Based on BP, Statistical Review of World Energy 2017 Digital Transformation Worldwide IoT device trends and projections Billion units Global DX market showing rapid growth Investments in DX-related technologies and services are said to be expanding on a global scale at an average annual growth rate of 17%. The investment amount in 2022 is expected to reach some U.S.$2 trillion. In addition to conventional Internet-capable terminals such as personal computers and smartphones, the scope of network connectivity is getting much wider. The “connected car” brings IoT applications to automobiles and other means of transportation, and connectiv- ity drives the expansion of the digital healthcare market in the medical sector, as well as industrial, infrastructure, and logistics innovations such as the smart fac- tory and the smart city. The world will be networked as never before. Growing demand for sensors and passive components designed to be incorporated into a myriad of devices 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0 2014 2015 2016 2017 2018 2019 2020 2021 (Year) 38 TDK ANNUAL REPORT 2019 39 Source: Ministry of Internal Affairs and Communications, The 2019 White Paper on Information and Communications in Japan Military, space, aviation Medical Consumer Industry Communications Automobiles Computers DXEXTDK ANNUAL REPORT 2019 Riding the Mighty DX and EX Wave, TDK Aims to Sustainably Enhance Corporate Value The Capability to Provide Social Value INSIDE TDK Commands a Wide Range of Products and Technologies for DX With the rapid evolution of the Internet of Things (IoT), big data, artificial intelligence (AI), and robotics, along with the information and communication technology (ICT) behind these developments, DX is bringing dramatic changes to every aspect of people’s lives. TDK commands an impressive array of technologies that push the boundaries of electronic components. I N S I D E IoT devices TDK has the power to meet the pressing needs of the age, such as compatibility with the fifth- generation mobile communications system (5G) for smartphones, smaller dimensions, lower pro- files, and higher integration and modularization of IoT devices. TDK has developed sophisticated high-frequency components and worked together with IC manufacturers to realize semiconductor embedded substrate (SESUB) technology, which enables the design of highly competitive mod- ules with small dimensions and low profiles. The next generation of electronic components and modules with high added value is currently being created in our labs. We also contribute sensor solutions in the VR/AR domain. Through the integration of core technologies, we are working on bringing next-generation wearable solutions to consumers. SESUB Storing and supplying energy • Solid-state batteries • Film solar cells Sending and receiving radio waves • Chip antennas Capturing data • Temperature sensors • Chip varistors (electrostatic discharge protection components) • Inductors for near-field communication • Electric double-layer capacitors (EDLC) (NFC) circuits • Magnetic sheets for NFC • Pressure sensors • Motion sensors • Angle sensors • Wireless power transfer 40 Drones As major efforts are being made particularly in the development of com- mercial-use drones, the drone market worldwide is expected to rapidly expand further. But in order for drones to become actual flying robots, improved flight stability along with safety and reliability to prevent colli- sions and crashes are key issues. Sensors together with software develop- ment are the major factors in bringing about a true drone innovation. TDK has an extensive lineup of non-optical sensor products, and we are also globally building a diverse solution business by combining multiple sensors and supplementing sensing with software. Market trends in drone hardware Billions of yen 100 80 60 40 20 0 57.1 47.1 34.6 21.0 13.4 90.8 75.8 2016 2017 2018 2019 2020 2022 2024 (CY) Source: Impress Corporation, Drone Business Research Report 2019 Suppressing noise • Chip beads • Noise filters Realizing further compactness and efficiency • Semiconductor embedded substrates • Noise suppression sheets (SESUB) • Varistors (electrostatic discharge • Piezo haptic actuators protection components) • Transparent conductive films • Lens actuators 41 7-axis InvenSense sensor Generating and capturing sound • Beepers • MEMS microphones TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Riding the Mighty DX and EX Wave, TDK Aims to Sustainably Enhance Corporate Value In step with 5G Featuring ultra-high speed, large capacity, multiple simulta- neous connections, and ultra-low latency, the upcoming fifth generation mobile communication system (5G) is attracting attention as an infrastructure suited to the IoT society where everything is connected to the Internet. Because the millime- ter waves used by 5G are easily blocked by objects, it will be necessary to install a larger number of base stations for small cells. According to projections, the share of small cell base stations in the total base station count will be around 70% by the year 2023. Multi-antennas that support beam forming technology, a key aspect of 5G communications, will play an important role in such small cell base stations. TDK will be supplying so-called LTCC AiP devices, which are proprietary antenna in package (AiP) configurations developed by making full use of our know-how in low-temperature cofired ceramic (LTCC) technology accumulated over many years. In addition, we will provide a wide variety of other products and technical services that support 5G communication networks, including components for communication circuits, sensing applications, and noise suppression components, as well as batteries. In this way, we will be contributing to the new network standard. WITH Layered structure of LTCC device Scree-printed conductor pattern Dielectric ceramic sheet Capacitor layer Inductor layer Capacitor layer A circuit consisting of capacitors, inductors, and many other elements is printed on a dielectric sheet for multilayering, resulting in a drastic reduction in space requirements, even as compared with high-density mounting of components on a PCB. Global market for 5G base stations TDK products communication circuits ¥4,188.0 billion High-frequency components and modules Contribution to stable radio wave transmissions for 5G communications Inductors for NFC circuits Assurance of stable communication quality Inductors for high-frequency circuits Reduction in signal loss and improved performance of high-frequency circuits MEMS motion sensors Sensors for detecting various movements. Also have applications in 5G terminals TMR magnetic sensors Highly sensitive magnetic sensors to which HDD head technology is applied Noise suppression sheets Magnetic sheets to prevent device malfunctions caused by radiated noise Approx. 70% share related to small cell base stations Sensing ¥110.0 billion 2019 (Forecast) 2023 (Forecast) Source: Fuji Chimera Research Institute, Inc., Future Perspective of Core Technology to Realize 5G/High Speed Large Capacity Communication 2018 xEVs Pursuit of automotive-grade quality INSIDE TDK is supplying an enormous variety of components and products for automotive use, including passive components that connect the chips in engine control units (ECU) to the real world, thereby allowing the realization of electronic control. We also offer various types of sensors and parts for the power train, body, and for safety- and information-related tasks. This contributes to the electrification of the automobile and the spread of advanced driving assistance sys- tems (ADAS), and helps improve safety and convenience. To ensure the high reliability demanded of electronic com- ponents used in cars, where in certain situations even lives may be at stake, we implement a strict Monozukuri (manufacturing excellence) policy aimed at zero-defect product quality. Our multilayer ceramic chip capacitors (MLCC), inductors, and similar passive components are designed to withstand extreme temperatures, and all other components also provide an outstanding degree of resistance to vibrations and shocks and are able to handle high levels of heat and humidity. We also provide various products that contribute to the safety and comfort of xEV (HEV/PHEV/EV, etc.), which are becoming ever-more popular worldwide. Custom products from TDK for xEV DC-DC converters for xEV Temperature sensors for HVAC, motors, batteries, ATF Gate drive transformers for motor inverters Hall sensors/ embedded controllers High-accuracy TMR angle sensors/motion sensors DC link/EMI control film capacitors Rare-earth magnets for motors and generators, ferrite magnets 42 43 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Product Brand Marks Riding the Mighty DX and EX Wave, TDK Aims to Sustainably Enhance Corporate Value Product Brand Marks Sensor Business Formation and Strategy Product Brand Marks Through M&As, TDK has built up a world-class portfolio of non-optical sensors. We will also contribute to DX by providing comprehensive sensor solutions. Product Brand Marks Product Brand Marks Product Brand Marks Product Brand Marks Formation In addition to conventional products such as magnetic sensors and temperature sensors, we have expanded our lineup of non-optical sensors through aggressive acquisitions to meet major market needs. In addition, by incorporating IC design technology and software technology, we have realized a verti- cally integrated business model, ranging from the provision of materials to advanced composite sensor configurations that integrate multiple sensors and ICs. We have linked the three business groups “Temperature and Pressure Sensors,” “Magnetic Sensors”, and “MEMS Sensors” to create the Sensor Systems Business Company* for developing sensor solutions on a global basis. Product Brand Marks Product Brand Marks Product Brand Marks MEMS is a micromachining technol- ogy that creates fine sensors as well as movable mechanisms, etc., on sili- con substrates, utilizing similar man- ufacturing processes as those for semiconductor integrated circuits. Product Brand Marks Technological synergy Core technologies including materials technology Module technology Display ratios World-leading lineup of non-optical sensors Display ratios Product Brand Marks * Sensor Systems Business Company: Newly created entity that encompasses TDK's sensor divisions and sensor-related group companies Current sensors TMR sensors Magnetic Sensors Business Group Status Environment Motion Solutions Hall sensors Display ratios Magnetics technology Technological synergy Vertically integrated business model enables us to offer advanced solutions MEMS technology Acceleration sensors Gyroscope sensors Microphones Barometric pressure sensors Software technology Algorithm technology Technological synergy Inertial sensors Ultrasonic sensors MEMS Sensors Business Group IC technology ASIC design and development Sensor integration MEMS sensor platform Global expansion of solution business using high-level sensor fusion Temperature & Pressure Sensors Business Group Temperature sensors Pressure sensors Three Business Groups unified in the Sensor Systems Business Company create a strong sensor business formation W Position Humidity ≤ 1.2W Accelerometer ≤ 0.65W Microphone W ≤ 1.2W Display ratios ≤ 1.2W ≤ 1W ≤ 0.65W ≤ 1.2W Electronic ceramic technology ≤ 1.1W ≤ 1.2W ≤ 1W Packaging technology ≤ 1.2W ≤ 1.1W Angle Temperature Gyroscope Bio-sensing Current Pressure Gear speed IoT Display ratios Torque Inertial Location W ≤ 1.2W ≤ 0.65W ≤ 1.2W ≤ 1W ≤ 1.2W ≤ 1.1W W Display ratios ≤ 1.2W ≤ 0.65W Operation ≤ 1.2W Sensor solution (Kotozukuri) ≤ 1W ≤ 1.2W ASIC design ≤ 1.1W Sensor business strategy W ≤ 1.2W ≤ 0.65W Growth strategy TDK has devised a growth strategy for expanding the sensor business with a medium- to long-term perspective, and we are steadily turning strategy into reality. We will be progressively expanding sales of automotive sensors in a process of organic growth. Redundant sensor configura- tions combining TMR sensors (benefitting from HDD magnetic head technology) with Hall sensors, temperature and pressure sensors, acceleration sensors, gyroscope sensors, time-of-flight (ToF) sensors, and other MEMS sensors will be among the growth products. With regard to magnetic sensors in consumer applications including mobile and IoT devices, we are working to capture demand for product replacements with TMR sensors offering advantages such as high accuracy and low power consumption. For MEMS sensors such as microphones and ultrasonic sensors, we are developing new applications including smart speakers and fingerprint authentication. ≤ 1.2W W ≤ 1W ≤ 1.2W Bio MEMS sensors • Diagnostic ≤ 1.2W ≤ 1.1W Capacitive MEMS sensors • Acceleration • Gyroscope Automotive and Industrial Piezoresistive sensors • Pressure ≤ 0.65W MEMS ≤ 1.2W Gas sensors • CO/CO2 • MOx ≤ 1W NTC/PTC sensors • Temperature Ultrasonic sensors • Time-of-flight (ToF) • Fingerprint authentication • Gesture Capacitive MEMS sensors • Barometric pressure Capacitive/piezo- resistive sensors • MEMS microphone Hall sensors • Angle • Position • Gear tooth • Stroke ≤ 1.2W MR (GMR/TMR) sensors • Angle • Current • Geomagnetic • Position Mobile and IoT Strengthen business collaboration with ECO-partners Non-MEMS ≤ 1.1W 44 TDK ANNUAL REPORT 2019 TDK ANNUAL REPORT 2019 45 DX Riding the Mighty DX and EX Wave, TDK Aims to Sustainably Enhance Corporate Value The Capability to Provide Social Value TDK Contributes to EX with Power Electronics Technologies Based on Its Magnetics Expertise In the area of EX (Energy Transformation), the use of renewable energy is, of course, of great importance, but it is also essential to realize an infrastructure that minimizes the waste of energy. This applies to all major stages of EX, namely, the efficient generation, transmission, storage, and conversion of energy. TDK’s technologies are at work in all of these areas. Our portfolio includes film capacitors used for adjusting and stabilizing the frequency and voltage of the power grid, and which function as output filters for various power converters, switches for power grids, circuit breakers for substations, and capacitors for medical and industrial X-ray imaging equipment. Power film capacitors Ultra-high voltage ceramic capacitors TDK supplies a variety of rechargeable batteries rang- ing from low-profile batteries in small devices such as smartphones to massive high-capacity batteries found in wind and solar power generation systems. We are especially strong in the field of lithium poly- mer batteries for smart devices, and are working toward a further expansion of their application scope. We are also conducting world-leading research into surface-mount-type, solid-state batteries. Lithium polymer batteries TDK has conducted advanced technical research into wireless power transfer with not only the electromagnetic induction method but also the magnetic resonance method. In addition to smart devices, we are exploring the commercialization of medium- capacity wireless power supply systems for industrial logistics robots employing the magnetic resonance method suitable for automated guided vehicles (AGVs), as used in factories and warehouses. We are also working on wireless power transfer sys- tems for charging EVs. Wireless power transfer technology for EVs (top) Wireless power transfer for ICT equipment 46 Powerful neodymium magnets contribute to reduced energy requirements and power consumption in xEV drive motors, thereby improving fuel economy. Our large, high-performance neodymium magnets for wind power generators are also in demand in the renewable energy market. TDK’s firm solar cells are also notable as they produce electricity even with artificial light. Focusing on power supplies for industrial equip- ment, we provide AC-DC switching power sup- plies, DC-DC converters designed to minimize losses and optimize power supply conditions, and power supplies for battery charging. Neodymium magnets Film solar cells DC-DC converters/AC-DC switching power supplies High-frequency components from TDK are utilized for example in smart meters for transmitting power use information and other equipment supporting the smart grid. High-frequency components Our surge arresters that protect electronic networks in telecommunications systems and power systems from lightning and line abnormalities have gained a high market share. We also supply products for electromagnetic inter- ference protection. Over-voltage protection varistors/arrestors Various EMC countermeasure components/ anechoic chambers TDK commands a wide range of products and technologies for controlling electricity, such as ASIC technology and passive components for power conditioners that turn DC into AC. We have an extensive lineup of non-optical sensors. Aluminum electrolytic capacitors Temperature/pressure sensors, magnetic sensors, MEMS sensors 47 SupplyStorageTransmissionGenerationConversionProtectionConveyanceControlDetectionEXTDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Riding the Mighty DX and EX Wave, TDK Aims to Sustainably Enhance Corporate Value In Depth Strategy in the Power Storage Sector Lithium polymer batteries play a leading role in TDK’s energy business Lithium polymer batteries from ATL occupy the top share in the global market for rechargeable batteries of smartphones. Their Expansion into mini cell and power cell markets TDK is currently engaged in the lateral deployment of ATL’s successful first-to-market model. While deepening our penetration high quality and high reliability are universally recognized, and ATL is also renowned for its close integration of manufacturing, of the smartphone market and further strengthening our solid business foundation, we are also promoting application of the development, and sales, forming a flexible production framework that makes it possible to swiftly respond to customer needs. model to realize expansion into new areas. Previously, smartphones and other ICT devices were the main target markets for ATL, but the development of mini cells and One of the new targets is the mini cell market. The trend toward wearable devices is expected to spread further, and the General view of ATL’s Ningde Factory power cells is poised to further expand the product lineup beyond ICT devices. number of ultra-miniature IoT devices is bound to increase. We will be intensively promoting sales of rechargeable batteries that contribute to size and weight reductions. Another section of the market that we will be aiming for is power cells, where the focus will be on drones and e-drives as well as residential energy storage systems. Lithium polymer batteries, which are extensively used in smartphones and notebook PCs, were a breakthrough development in rechargeable batteries. They were successfully put into practi- cal use in 1991, featuring lithium com- pounds (such as lithium cobaltate) as the positive electrode and carbon (such as graphite) as the negative electrode. They provide excellent characteristics in terms of weight and volume energy density, low self-discharge, and long service life. 48 Energy density of various rechargeable batteries E n e r g y d e n s i t y b y v o u m e ( l W h / L ) 600 500 400 300 200 100 0 Smaller dimensions Demand projection of global energy storage (excluding xEV) Non-ICT, Industrial Lithium polymer battery Nickel-hydride battery Ni-Cd battery Lead-acid battery Lighter weight 50 100 150 200 250 Energy density by weight (Wh/kg) E-Drives ESS Power Tools Drones High-growth market Wearable, low-profile devices, etc. Low Capacity Low Voltage Note PCs Mobile Phones Tablets Stable market ICT High Capacity High Voltage 2021 2018 (MWh) Source: TDK research 49 EXTDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Riding the Mighty DX and EX Wave, TDK Aims to Sustainably Enhance Corporate Value TDK’s Energy Solutions World’s first solid-state battery that allows charge and discharge: CeraCharge™ We have developed the world’s first chip-type, solid-state battery called CeraCharge™, using ceramic electrolyte. By harnessing multilayering technology gained in our work with MLCCs, we successfully combined high energy density with small dimensions. Instead of the liquid electrolyte commonly used in batteries, a solid ceramic electrolyte is employed, thereby ensuring a high degree of safety without the risk of electrolyte leakage. In the future, the combination with energy harvesting technology will eliminate the need for battery replacement, which is expected to result in wide CeraCharge™ use in various IoT devices. Three Business Groups that carry TDK’s energy business TDK’s Energy Solutions Business Company is the command tower for three Business Groups: Power Systems Business Group, Energy Devices Business Group, and Energy Systems Business Group. TDK entered the energy business in 1974, when ferrite memory cores lost their competitiveness due to the advent of semiconductor memory. A successful business transformation of the electronics division was achieved with the move to switching power supplies. After the launch of xEVs in the 1990s, we developed a compact, lightweight, high- efficiency DC-DC converter for HEVs using power ferrite and magnetics technology. Subsequently, we acquired the lithium polymer battery manufacturer ATL in 2005, followed by the acquisition of the power supply operations of the Lambda Power Group, thereby achieving a full-scale entry into the energy business. In 2018, we formed the Energy Solutions Business Company to establish a strong organizational framework for navigating the turbulent EX waters. TDK’s energy-related technology development history and organizational structure 2005 Acquisition of Lambda Power Group 2008 TDK-Lambda established 1981 Electronics Division renamed to Power Supply Division 2005 Acquisition of ATL 1935 TDK founded 1974 Market release of switching power supply 1937 Market release of world’s first ferrite core 1999 Market release of DC-DC converter for HEV Energy Solutions Business Company 2018 Power Systems Business Group Main products AC-DC power supplies, DC-DC converters, wireless power transfer systems for industrial equipment, etc. Energy Devices Business Group Main products Lithium polymer batteries, etc. Energy Systems Business Group Main products Power supplies for xEVs, wireless power transfer systems, etc. Framework for Enhancing Corporate Value and Sustainability 50 51 EXTDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Ensuring Continued Success Staying on top of major trends such as DX and EX means that TDK is continuously enhancing its core technologies and Monozukuri skills while strengthening governance, structural reforms, and sustainability initiatives. Ongoing improvements in core technologies We are devoting intensive efforts to continu- ously strengthen our competency in the five core technologies, including materials technol- ogy, which has been a source of innovation since our inception. P.54 of Experience The world’s first coils with ferrite cores Realizing Monozukuri Innovation for sustainable development —The pursuit of Arubeki-Sugata TDK is realizing a Monozukuri Innovation that combines the Industry 4.0 concept with its zero-defect product quality policy. Arubeki-Sugata (ideal process) is a shared concept within the TDK Group as we engage in manufacturing Arubeki Sugata innovation at a global level. P.56 Boosting innovation with four pillars worldwide The TDK Group derives more than 90% of its net sales from overseas markets. Our extensive network is sus- tained by four R&D sites strategically positioned around the globe. We are increasingly delegating authority and pursuing research close to the actual area of demand, in order to deliver products that are perfectly matched to customer needs. Development efficiency is enhanced by sharing R&D results on a global basis. P.58 Overseas sales ratio 91.8% Four-pillar global development network Japan Europe China U.S.A. Persistently enhancing governance linked to strategy Having always been conscious of global standards and working to build a corporate governance system, we are further strengthening governance in line with our strategy to achieve sustainable growth. P.60 Aiming for Sustainability We are promoting initiatives for a human resource strategy that has shifted to harnessing the strength of our diversity, making a contribution to the hap- piness of people through technologies and prod- ucts, and aiming at sustainable growth of the Company and of society at large. P.72 52 53 Toward a happy futureDelegation of authority84 YearsTDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Ongoing Improvements in Core Technologies Since its inception, TDK has grown on the strength of five core technologies: materials technology based on ferrite; process 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 hone this core know-how with the aim of eliminating defects during the pro- duction 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.” Evaluation and simulation technology Initiating such as materials analysis, simulation of product structure, heat and magnetic fields, and noise measure- ments and countermeasures to raise product functions Materials technology Researching the properties of materials at the atomic level and developing original electronic components and devices to meet advanced needs Evaluation and analysis technology Conducting microstructure observa- Simulation technology Visualizing heat distribution released EMC countermeasure technology Protecting electronic equipment from from circuits, distribution of noise- external noise penetration, as well as tions, atom distribution visualization, causing magnetic fields, among others. controlling noise released by such and other advanced processes. equipment. Materials design technology Realizing required characteristics Powder control technology Improving materials’ characteristics Microstructure control technology Realizing required characteristics through the blending of main materials through crystal grain miniaturization through control of crystal grain internal and control of trace additives. and uniformity. composition and grain boundaries. Product design technology Integrating electronic components to realize high-performance, multiple-function electronic devices and optimum combination modules Process technology Creating high-performance and functional products with nanometer-order control technology Circuit technology Using optimum component Packaging technology Pursuing smaller size and selection, wiring, heat dissipa- higher performance with tion design, and other simula- component final assembly, tion to advance circuit designs. binding, sealing, advanced Semiconductor Embedded Substrate (SESUB) technology Embedding ICs, components, Low-temperature cofired ceramic (LTCC) technology Printing and laminating capacitors, inductors, and wiring, and other elements in numerous other elements on structural design, configura- substrate thickness to achieve dielectric sheets. tion design, and other expertise. modularization. Forming technology Adding binding agents to Sintering technology Sintering to solidify and material powder and forming harden with precision control Thick-film process technology Printing and multilayering Thin-film process technology Forming thin film to create small, slim and complex- of temperature and atmo- electrodes and other elements electrodes, coils, and head shaped products. sphere (gas components in to produce chip capacitors, elements to manufacture the furnace). chip inductors, and other lay- HDD magnetic heads and ered electronic components. 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 strength Equipment technology Realizing superb products from superb produc- tion equipment. Development of original engi- neering methods and in-house creation of production facilities are key TDK Monozukuri strengths. 54 55 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Monozukuri Innovation for Sustainable Development Akita Future Project Our drive during the 1990s to relocate production sites overseas resulted in some issues such as a decreased manufacturing capability, reduced efficiency due to movement between sites, and dispersion of core technologies. Since around 2016, we have been working on the Akita Future Project, which aims to restrengthen manufacturing power through integrated production, accumu- lating dispersed sites and technologies in Akita Prefecture where TDK was founded. The integration of sites for each core technology related to passive components minimizes movement between sites, thereby improving effi- ciency and the fluidity of human resources. Vertically divided business units centered on a product-oriented axis, along with horizontal deployment of core technologies, make it possible to quickly respond to market changes and speed up new product development. Before After Yurihonjo Akita Chokai Konoura Kisakata Ujo Iwaki Ouchi Honjo Yashima Inakura Akita (MCC) Kisakata (MCC) Yuzawa Kitakami Yuza Sakata Tsuruoka Yamagata Iida (Nagano) Akita Iwate Materials Winding Tsuruoka Akita, Yamagata, and Iwate prefectures Iwaki Ouchi Honjo Nikaho Kitakami Inakura Assembly Multilayer Thin-film Sakata Tsuruoka East Yamagata Iida (Nagano) Akita Iwate Industry 4.0 + Zero Defect The combination of Industry 4.0 with our zero-defect product quality con- cept is a major pillar of the Akita Future Project. In the future, electronics are bound to spread to every aspect of people’s daily lives. xEVs (including HEVs/PHEVs/EVs) are becoming more widespread, while autonomous driving technologies are being readied for practical introduction. In the health and wellness sector, remote diagnosis and other advanced tech- niques are showing high promise. These trends in areas where safety is crucial mean that the quality of electronic components is more important than ever. TDK’s “Industry 4.0 + Zero Defect” innovation of industrial pro- duction combines its drive to eliminate defective products with the Industry 4.0 concept. Sensing utilization Pressure Multilayering Process Product Relentless pursuit of conditions for realizing quality products Pursuit of Industry 4.0 + Zero Defect Next-generation Monozukuri is becoming a reality TDK’s quality policy is based on the realization that quality cannot be assured by final inspection. It must be built into the whole process, from product design to completion. A multitude of data about the respective production processes is therefore acquired and analyzed for quality management, in order to create a production line that does not permit defective output. In 2016, a model production line based on this approach was completed at our Honjo Factory East Site in Akita Prefecture for the fabrication of multilayer ceramic chip capacitors (MLCCs). The design concept of the line involves the utilization of the IoT, which makes it possible to autonomously detect pro- cess problems in real time, so that the line can be stopped if necessary, to prevent a defective product from reaching the next stage. After verifying the con- cept at the Honjo Factory East Site, it is to be applied to other existing production lines, with the ultimate aim of realizing location-independent production, so that the same quality level can be achieved at all our global sites regardless of physical location. The ideal form of a production process that does not allow defective output is an example of the Groupwide Arubeki-Sugata concept that is being disseminated to our sites around the world. TOPIC Honjo Factory East Site, Akita Prefecture Progressively realizing Arubeki-Sugata The Arubeki-Sugata movement arose out of self-motivated initiatives by employees involved in the thin-film coil manufacturing process at the Sakata Factory in Yamagata Prefecture, and it has since Inakura Factory East Site spread to all production sites. The Inakura Factory East Site in Akita Prefecture is our main ferrite core factory that consolidates all ferrite core manufacturing processes from other factories. After thoroughly analyzing losses in the production process and eliminating all factors that could negatively affect quality, the process of sintering ferrite granules and creating finished prod- ucts was automated. As a result, a line that formerly had a total length of 200 meters is now a mere five meters long, while production capacity has increased and lead time was significantly shortened. Furthermore, quality risks were successfully reduced. Another case in point is the Tsuruoka East Factory in Yamagata Prefecture where thin-film coils (inductors) are manufactured. Processes with inher- ent quality risks were automated and various other initiatives resulted not only in a reduction of quality risks but also an increase in productivity by 60%. Simply trying to improve yields and reduce costs while disregarding remaining quality risks is not the Arubeki-Sugata Management of zero-defect quality Optimization of facilities and human resources Quality control activities from the bottom up Material input Completion Rather than having to sort out defective products from the final output of a line, thorough quality management covers the entire process from materials selection to completion of the product. Line length 1/40 Lead time 1/10 Production capacity 4 times A manufacturing floor with a design that reflects Arubeki-Sugata insights proper way to improve manufacturing. Rather, the aim must be to thoroughly analyze the manu- facturing process to identify and remove all possible instances of quality risks. This is what the Arubeki-Sugata activities within the framework of TDK’s Monozukuri Innovation are designed to do. 56 57 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Boosting Innovation with Four Pillars Worldwide R&D for creating a stable future The Medium-Term Plan “Value Creation 2020” (from fiscal 2019 to Research and development expenses Millions of yen TOPIC fiscal 2021), which has seen a change in our business structure 120,000 through M&As, encompasses higher R&D expenses than the preced- ing Medium-Term Plan (from fiscal 2016 to fiscal 2018). We are 100,000 strengthening our foundation to realize strong organic growth. Our 80,000 foremost focus is on the area of sensors, where we plan to invest in creating solutions with high added value. With regard to lithium poly- mer batteries, investments are mainly focused on reinforcing the R&D activities of ATL. In addition to existing batteries for smart- 60,000 40,000 phones, development projects are targeting other fields as well, such 20,000 as mini cells and power cells. 115,155 102,641 91,254 84,920 Previous Medium-Term Plan Approx. ¥279 billion Current Medium-Term Plan 0 年3月期 2016 2017 2018 2019 (FY) Promoting development that leverages respective strengths of four global pillars The R&D activities of the TDK Group are organized in a structure encompassing four geographically different locations, to meet the needs of customers in the respective areas. The Technical Center in Japan is the core base of global research and develop- ment, working on core technologies such as materials technology, passive components, magnets, among others. R&D facilities in the United States, Europe, and China are targeting areas related to products that are strong in their respective regions. These facilities are also working on product development, applications, and system development. In addition, some regional head- quarters, which were newly established in an organizational reform, and the Technology and Intellectual Property HQ at the headquarters in Japan are collaborating globally to advance research and development beyond the framework of businesses and subsidiaries. Europe Passive components for industrial equipment, etc. China Japan Materials technology, passive components, Lithium polymer batteries magnets, TMR sensors, etc. U.S.A. Sensors, etc. Toward being first to market In research and development, we have been increasing the speed of development by relying on a framework focused on specific areas of expertise. The first-to-market principle aimed at being a leader in bringing advanced products to the customer requires that development, sales, and production are working in a closely linked arrangement, thereby accelerating the busi- ness cycle. In order to speedily offer Kotozukuri solutions matched to the actual needs of the market, we have relocated devel- opment personnel formerly affiliated with the headquarters to the Business Companies. Lateral deployment of ATL’s speedy development model ATL strongly dominates the market of lithium polymer batteries for smartphones. The secret behind this success is the unrivaled development speed of the company. ATL has gained the trust especially of customers who aim to bring products with leading-edge tech- nologies quickly to the market. By speeding up development, ATL has successfully set itself apart from its competitors. We are now actively engaged in laterally deploying this develop- ment model to the mini cell and power cell sectors as well, in order to create a wide portfolio that goes beyond smartphones. Lithium polymer battery First to market with switching power supplies TDK-Lambda, which holds the world’s top share in standardized power supplies for industrial equipment, is applying the new paradigm to technology develop- ment, moving strongly toward being first to market. In addition to using simula- tion and automated design procedures, the company has integrated its development and manufacturing departments, resulting in a drastic shortening of development times through designs with a focus on production efficiency. Convection cooling, 600W, AC-DC switching power supply with communication functions Speeding up R&D and management In sectors where we can rely on proprietary technologies to con- duct short- to medium-term business operations in existing mar- kets, we are realizing our strategies with Business Companies (BCs) and Business Groups (BGs). By contrast, technologies whose practical application is envisioned for five years or more in the future are the responsibility of the headquarters. When it comes to applying and diverting existing technologies to new markets, or making forays into completely new markets that require new technologies, TDK will select suitable measures such as M&As and the utilization of corporate venture capital. In this way, we will further perfect existing technologies, speed up the acquisition of new technologies, and accelerate the speed of man- New, disruptive, non-possessing technologies R&D M&As R&D CVC Headquarters’ initiative Growth strategy Competition strategy BCs/BGs M&As R&D N e w m a r k e t s i E x s t i n g m a r k e t s Possessing technologies agement itself. TOPIC A new corporate venture company: TDK Ventures Inc. With the intention of investing in early-stage venture companies, TDK has established a new corporate venture capital company called TDK Ventures Inc. as a wholly owned subsidiary in the U.S. The planned scale of investments for the time being is U.S.$50 million. Detecting trends in new technologies at an early stage, reinforcing the technology road map, and speeding up development are the targets that will greatly expand the possibilities of electronic components. 58 59 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Corporate Governance Persistently Enhancing Governance Linked to Strategy Corporate governance reforms TDK, which first embarked on globalization in the 1960s, remains constantly aware of global standards and has worked to strengthen its corporate governance systems. Today, TDK continues to consider measures needed to achieve long-term, sustainable improvement in corporate value. Factors behind strengthening of corporate governance • Some businesses will be affected by short-term market fluctuations. At the same time, they can take from several years to as long as a decade to see the results of investments in the form of 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 2002/6 Number of Directors reduced from 12 to seven First Outside Director invited to join the Board Compensation Advisory Committee launched (chaired by an Outside Director) Funding of Directors’ retirement bonuses suspended 2008/8 Nomination Advisory Committee launched (chaired by an Outside Director) 2015/5 First analysis and evaluation conducted of Board of Directors’ effectiveness, and an outline of the results publicized 2018/6 Makoto Sumita, formerly an Outside Director and Chairman of the Board, appointed Chairman & Director 2004/6 First non-Japanese Corporate Officer appointed 2009/6 Two non-Japanese Corporate Officers appointed One Outside Director added for a total of three 2016/6 TDK Basic Policy on Corporate Governance established From Outside Director to Chairman & Director of the Company Mr. Sumita, who was previously an outside director, has been appointed chairman & inside director. Through his experience as an outside member of the Audit & Supervisory Board since June 2011 and Outside Director since June 2013, he has a deep understanding of TDK’s man- agement, business portfolio, and so on. From the perspective also of an outside stakeholder, he endeavors to make decisions on important mat- ters and to supervise the performance of duties, as well as to strengthen corporate governance. Makoto Sumita Chairman & Director (present post) INNOTECH CORPORATION Reassessing Director composition and criteria for submissions to the Board The composition of Directors has been reassessed, narrowed down to those officers with an overview of the entire Company, a shift from the previous inclusion of the heads of the individual business divisions. At the same time, by changing submission criteria to focus on large-scale, companywide investment deals, the Board is achieving a deeper level of discussion and more rapid decision-making regarding important deals. Enhancing Executive Committee Meeting discussions With the authority delegated to it by the Board of Directors in conjunction with the reassessment of Board submission criteria, the Executive Committee Meeting is now able to engage in deeper discussions on management strategy and arrive at decisions quickly. Reassessing Group administrative structure A foundation for enhancing business efficiency within a global structure has been put in place via a reas- sessment of Group administrative systems by the individual business divisions, headquarters, and regional headquarters. Board of Directors Director composition: Included heads of individual business divisions Narrowed to officers with an overview of the entire Company Submission criteria: Overall business strategy Only companywide, large-scale investment deals Delegation of authority Executive Committee Meeting Objective of discussions focused on submissions to the Board Agenda items delegated to the committee are enacted immediately upon resolution Delegation of authority Business divisions Progress based on the results of primary evaluation by third-party evaluation institution in June 2018 1. Demonstrating appropriate supervision and advisory functions to steadily achieve the Medium-Term Plan In order to steadily achieve the Medium-Term Plan, the Board of Directors has carried out sufficient monitoring and verifica- tion by reviewing the progress status with Outside Directors and Outside Audit & Supervisory Board Members multiple times and in other ways. 2. Further strengthening the governance and compliance systems In order to strengthen the supervisory function in the global business system, the Group management system of each Business Division, Headquarters, and Regional Headquarters has been revised by reviewing the organization, job authority, and division of duties. It is recognized that the TDK Group’s governance and compliance systems are being established through these efforts. 3. Efficiency of operations of the Board of Directors It is thought that the efficiency of operations of the Board of Directors has been enhanced by improving the discussions at the Executive Committee Meeting, which is a meeting body prior to the Board of Directors, and revising the criteria for agenda items for discussion by the Board of Directors. Evaluation of the effectiveness by the Board of Directors Based on the primary evaluation by the third-party evaluation institution, the Board of Directors, after conducting deliberations several times, confirmed that the effectiveness of the Board of Directors and its Advisory Committee (Nomination Advisory Committee and Compensation Advisory Committee) were sufficiently secured. Also, the Board of Directors confirmed that it is continuously enhancing its effectiveness by making improvements based on the results of the Board of Directors’ evaluation in the previous fiscal year. Future issues (1) With regard to the Medium-Term Plan, sufficient discussions have been made from the process of formulation to the monitoring of the progress, and it is recognized that it is necessary to deepen discussions on longer-term issues in the future. (2) It is recognized as a future issue that the Nomination Advisory Committee will deepen discussions on the succession plan (CEO, Chairman of the Board, Directors and Audit & Supervisory Board Members, including Outside Directors and Outside Audit & Supervisory Board Members) and share basic ideas with the Board of Directors. 60 61 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Board of Directors’ View of a Continuously Evolving TDK We asked Makoto Sumita, Chairman & Director, and Kazumasa Yoshida, Outside Director, to discuss the evolution of TDK’s corporate governance and organization as linked to its growth strategy. of how its decision-making processes and organization need to evolve in order to create competitive products. Today, I think, they have created a framework that is comparable with that of any global company in the West, characterized particularly by an increased aware- ness of the kind of openness and transparency on which its overseas members place a premium. They have also developed a rapid cycle for reporting to the Board of Directors, engaging in transparent discussions, and then tying those discussions to solid execution through com- munication with employees around the world, who in turn offer progress reports to the Board. Mr. Yoshida, tell us how you came to take on an Outside Director position? Yoshida Since joining Intel Corporation, an American company, in 1984, I have consistently worked in the field of electronic components. I had been in touch with Mr. Sumita during my time at Intel, and he was the one who contacted me. As electronic components have become a key factor for innovation in hardware, TDK has built an extremely broad portfolio, generating a wide range of innovations. I thought the opportunity to become involved with TDK’s enormous potential was highly attractive, and in 2014, I gladly accepted the offer to join the Board. Sumita At the time, it was clear that the industry was moving toward further integration of passive components and semiconductors. Then-President Takehiro Kamigama came to me to ask if I knew of an executive familiar with semiconductors, so I recom- mended Mr. Yoshida, who had a deep understanding of the structure of the semiconductor market and who had also distinguished himself as a spokesperson for the industry. For TDK, I think his agreement to take the position was extremely well-timed. What is your perspective on the changes in governance at TDK since you took up your position? Sumita Over the past eight years, I have observed TDK from an outside perspective, and I think changes in governance began in earnest just in the past five years or so. Eight years ago, many Japanese companies had yet to acknowledge the importance of outside directors. As I recall, the kind of interaction we see today, where the business execution side actively Makoto Sumita Chairman & Director Kazumasa Yoshida Outside Director seeks advice from outside directors, was similarly lacking at TDK. As momentum grew for governance reforms, however, and companies began reevaluating the role of the outside director, TDK appointed one of its own outside directors as chairman, bringing the Company external leadership. These changes have entailed more than simple passive acceptance of out- side demands for a corporate governance code or other measures—it may be more correct to see them as having actively evolved to take the form needed to advance the company’s growth strategy. Yoshida As market conditions have undergone major changes, I get the impression that TDK has successfully transformed itself while remaining aware How are efforts progressing to enhance the opera- tional efficiency of the Board of Directors, an issue pointed out in the Board’s 2018 evaluation of effectiveness? Sumita We have asked that all important proposals go before the Board, and encourage Outside Directors and Outside Audit & Supervisory Board Members to offer their opinions from the perspective of their respective areas of expertise and engage in candid discussions. There is a trade-off between conducting more fulfilling discussions and efficiency, which we have resolved by having the Board focus on larger issues of direction, and by using Board meetings as a venue for monitoring progress. First, the Executive Committee Meeting (ECM), which takes place prior to the Board meetings, decided which issues should be discussed by the Board and reevaluated criteria for presenting those issues thereto. We greatly increased the monetary crite- ria for capital expenditures and other deals to be approved by the Board of Directors, which has led to a more careful assessment of the appropriateness and effectiveness of large-scale investments based on a close examination of their track record and outstanding issues. We also reevaluated the composition of our Directors. Directors who also serve as the heads of busi- ness divisions inevitably bring views that are biased in favor of their individual businesses. We thus limited membership of Directors to those in a position to offer a companywide perspective. Meanwhile, we worked to delegate authority by having the ECM, consisting pri- marily of the heads of business divisions, closely discuss business-related proposals and submit them to the Board. This is how progress was made in enhancing the efficiency of Board operations. Yoshida Responding to sudden changes in the market requires transforming how TDK does business, and the traditional decision-making processes need to change along with it. At previous Board meetings, the business execution side would explain its position using vast amounts of documentation. We made the process more efficient and more dynamic by intentionally focus- ing discussion on the issues. For instance, we conduct more active discussions by narrowing our focus to ques- tions such as what issues lie before us in preparing to achieve our vision for three years hence and whether TDK is capable of solving those issues—and if not, how it should go about acquiring those capabilities. Greater delegation of authority has led, I feel, to a dramatic increase in our decision-making speed. Business promotion systems also significantly reworked. Sumita The most significant aspect of our organiza- tional reforms was the establishment of regional headquarters. Having each region address its own financial, accounting, legal, hiring, and compliance issues, for example, greatly improves business effi- ciency. And having our Business Companies in each region share their issues leads to improved organiza- tional strength for TDK as a whole. Yoshida Offering proposals based on an integrated platform, rather than electronic components alone, greatly increases value for the customer. TDK is working to integrate a wide range of products, from passive 62 63 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability components to batteries and sensors, providing a common platform across a variety of different markets, including the automotive, ICT, and industrial and energy markets. Organizational reforms, which lead to encouraging lateral cooperation, can be seen as a step in that direction. Sumita Taking on the risk of entering new businesses is important. Still, if this effort to provide a common platform moves forward, I believe it is possible to achieve what President & CEO Shigenao Ishiguro calls Kotozukuri (integrated solutions), even as we work to integrate our existing businesses. TDK then has the potential to achieve a level of profitability not possible through the sale of indi- vidual products. As chairman of the Compensation Advisory Committee, Mr. Yoshida, how do you view TDK’s compensation system? Yoshida With performance and remuneration clearly linked and a Compensation Advisory Committee—comprising a majority of Outside Directors—that conducts transparent evaluations, I believe our compensation system is competitive. The next step for TDK, where employees overseas represent over 90% of total personnel, is to enhance the equitabil- ity and transparency of its compensation system not only at the headquarters but across the Group as a whole. While this will not be easily achieved, we are cur- rently working to correct gaps in the way evaluations and remuneration are handled between companies TDK has acquired and TDK’s management. If we can do that, we can enhance the mobility of our human resources, allowing personnel to move laterally between Group companies and ensuring an improvement in competi- tiveness for TDK as a whole. What about the succession plan? Sumita Until last year, I served as chairman of the Nomination Advisory Committee, and was involved in the nomination of President & CEO Ishiguro. I think TDK’s evaluation process—centered on its Outside Directors—is effective. That said, with globalization advancing to this point, we need to put in place a mech- anism by which our members overseas can also become leaders. TDK has already made progress in compensation- linked efforts, building a system that allows for side-by- side comparisons of ability and salary levels. To improve the quality of management at TDK, the Nomination Advisory Committee also proposed appointing non- Japanese and women as Outside Audit & Supervisory Board members; one of each was appointed at the end of June 2019. Going forward, TDK will continue to increase diversity in its Board of Directors. Yoshida The members of the Board of Directors are highly aware of issues regarding the succes- sion plan. A framework has been put in place over the last year, with Andreas Keller, Corporate Officer and General Manager of Human Resources HQ, in charge of conducting regular reviews. The Nomination Advisory Committee also takes a close look at the experience, performance, and career development desires of man- agement individuals overseas. How do you view the current Medium-Term Plan “Value Creation 2020?” Sumita I get the sense that, in the past, people felt that a failure to achieve a plan was unavoid- able in the event of changes in business conditions or other assumptions. Under Value Creation 2020, however, although business progress may vary from the original outlook due to sudden changes in the business environment, TDK has a much stronger commitment to its financial targets. Rather than revamping the Medium-Term Plan in any major way, it focuses instead on how to recover from setbacks and still hit its targets, as well as on how to expand those businesses with growth potential. Even as many companies predict a drop in income in fiscal 2020, TDK has presented a plan calling for increased income. This is indicative of TDK’s attitude that solid achievement of their business plan on a single-year basis is crucial to achieving their three- year plan. I think this has also enhanced their credibility in the market. What about sensors and magnets, where progress has fallen behind? Sumita Even the MLCC business, which is performing strongly today, posted long-term losses until a few years ago. By spending the time and funds to inno- vate production and by setting its sights on the automo- tive market, the business has been able to achieve high profit margins. TDK is looking at sensors and magnets with a similarly long-term strategy, but one that assumes that, in the short term, up-front investments will con- tinue. Expanded applications for magnets are seen as a certainty, but in terms of market structure, it is also a business in which it can be difficult to improve profit- ability. We are currently investing in the deployment of state-of-the-art equipment and automated inspection devices, while moving forward with innovations that will enable us to offer the market high-value-added prod- ucts with a variety of features and forms. We expect these efforts to contribute to companywide perfor- mance over the course of the next Medium-Term Plan. Yoshida Recognizing that TDK has a track record of taking the time to solve difficult issues is what enables the Board of Directors to make investment decisions. We are confident that sensors will become a core technology going forward and want to carefully cultivate that potential. The same goes for magnets— it may take time, but I think eventually that business will also generate solid earnings. Sumita In terms of the need to look 10 years ahead and view things over an extended time line, the same can be said of R&D. With a four-pillar global development structure now in place, TDK is currently working to leverage each site’s respective strengths, collaborating to conduct R&D. We are also developing a framework for open R&D utilizing both internal and external resources, but it will likely be a while before those efforts begin moving forward together. With Mr. Sumita as chairman of the Board, what perspective will you bring to backing TDK’s further evolution? Sumita For TDK to be successful both in Digital Transformation (DX) and Energy Transformation (EX), it will require not only moving forward with product development but also a dynamic transformation on the part of TDK itself. My understanding is that simultane- ously prompting innovation in these efforts will be an important role of the Board of Directors going forward. For instance, we currently use business ROA as a means of evaluating the profitability of a business, but by assessing our businesses in greater detail and present- ing a target figure for profitability, we believe the busi- ness divisions and those on the front lines will take it upon themselves to effect transformation. This is something we hope to discuss as we prepare for the next Medium-Term Plan. Finally, what message do you have for TDK? Yoshida Each time I visit the front lines, I am so impressed by and proud of how each employee takes responsibility for their work and faces the challenges they are given head-on. TDK presents a very clear story around attempting to discover the hidden potential of technology, backed by an equally clear-cut message from President & CEO Ishiguro and accompanied by action. I hope TDK’s employees will continue to work with confidence in their efforts to fur- ther TDK’s growth. As an Outside Director, I look forward to engaging in discussions of an even higher quality than before and to contribute to enhancing TDK’s corpo- rate value. Sumita I also believe that TDK’s strength lies in its frontline capabilities. It is the individuals work- ing at the Company’s plants and other sites the world over who support TDK through their creativity and inge- nuity. If the Board of Directors is able to recognize this, and bring a similar perspective to their efforts to create worker-friendly environments, I think those frontline capabilities can be leveraged to an even greater extent, in turn significantly expanding TDK’s own potential. With that understanding, and as someone who brings an out- side perspective to the role of Chairman & Director, I will encourage proactive interaction both inside and outside the Company. Thank you for your time today. 64 65 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Sustained Improvements Stressing Effectiveness Outside officers appointed with an emphasis on effectiveness compensation and policies on the appointment of outside officers. profitability relative to the cost of capital, financial condition, etc., Tokyo Stock Exchange, Inc. Designing of structures that emphasize increases in corporate value over the long term Points • 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 either (1) strategic shareholding for the development of its business or (2) maintenance and improvement of business relationships. As is working to increase the pace of decision-making and reinforce to cross-shareholdings, TDK verifies the rationality of continuous both monitoring and supervisory functions while designing struc- holding of such shares and the number of such shares, etc., stock by tures that place greater emphasis on raising corporate value than stock every year at Meetings of the Board of Directors, etc., based form in all areas, including the processes related to nomination and on the purpose of such shareholding, situation of transactions, The appointment of an Outside Director as Chairman & Director is and if the necessity to hold shares of a particular stock has one part of these efforts. A truly globalized organization The TDK Group is working to advance collaboration and resource decreased, TDK discusses and negotiates with the issuing company of the stock and promotes the reduction through sale, etc., of such shares. In exercising voting rights as to its cross-shareholdings, TDK determines to approve or disapprove with full respect for the issu- sharing among a variety of Business Companies and regions by ing company’s management policies, etc., and considering whether establishing some new regional headquarters, built around its the proposal is appropriate in light of the purpose of strategic Business Companies and Business Groups with cross-functional shareholding for the development of TDK’s business or mainte- cooperation centered on its global headquarters. nance and improvement of business relationships, whether the pro- Cross-shareholdings TDK’s basic policy regarding cross-shareholdings is to consistently issuing company’s social responsibilities, whether there is any act which may harm the trust of shareholders, etc. Also, TDK conducts enhance corporate value of the TDK Group through such sharehold- a dialogue with the issuing company regarding the content of the ings and TDK holds shares of other companies for the purpose of proposal, etc., as appropriate. posal can continuously increase the corporate value of TDK, the Highly transparent nominating system Points • 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 of TDK’s Directors, Audit & Supervisory Board Members, and Corporate Officers, and to transparency in the decision-making process . Nomination policies and procedures TDK established the Nomination Advisory Committee as an advisory & Supervisory Board Members, and Corporate Officers. The body to the Board of Directors. The committee is chaired by an Committee also deliberates on the independence of Outside Outside Director, and a majority of its members are also Outside Directors. Directors. It contributes to securing transparency in the decision- When nominating the CEO, the Committee formed an image of making process and reasonableness in the appointment of the ideal person suitable for the role of top executive and conducted Directors, Audit & Supervisory Board Members, and Corporate deliberations that also covered such issues as systems and the Officers by nominating candidates after deliberating on the term of office. An outside expert organization was also utilized and expected requirements regarding the nomination of Directors, Audit efforts were made to ensure objectivity. Points • 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 12 members, of whom six 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., established by the 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 independence, objectivity, and accountability functions of the Board of Directors in relation to the nomination and compensation of officers, majorities of the Nomination Advisory Committee and the Compensation Advisory Committee, which are advisory organizations to the Board of Directors, are independent Outside Directors and both committees are chaired by independent Outside Directors. Actively inviting Outside Officers Outside Officers 6 people Directors and Audit & Supervisory Board Members (As of the end of June 2019) Inside Officers 6 people 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. 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 concerning corporate management in the electronics industry. Outside Audit & Supervisory Board Members Reasons for nomination Jun Ishii Mr. Ishii has an abundance of experience and knowledge in group governance, risk management, etc., of an international electronics company. Douglas K. Freeman Mr. Freeman, as a lawyer, has specialized knowledge in law and an abundance of experience in international corporate legal affairs. Michiko Chiba Ms. Chiba, as a certified public accountant, has specialized knowledge in finance and accounting and an abundance of experience in audit. 66 67 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Remuneration system linked to medium- to long-term corporate value Diversity in response to globalization Points • The system was designed with an emphasis on linkage with short-term as well as medium- to long-term results . Points • Seven of 18 Corporate Officers (39%) are non-Japanese .* • TDK constantly pursues the formulation of a competitive remuneration system to secure diverse and excellent • TDK has established Human Resources HQ in Germany with aim of further utilization of global human resources. human resources. • 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 remuneration for Directors and Audit & Supervisory Board Members TDK designs its remuneration system for Directors and Audit & determination of individual compensation, the Compensation Supervisory Board Members with an emphasis on linkage with Advisory Committee, which is chaired by an independent Outside short-term as well as medium- to long-term results, and is also Director and of which more than half of the members are indepen- continuously pursuing the formulation of a competitive remunera- dent Outside Directors, examines the remuneration system and the tion system so that it can recruit diverse and excellent human level of remuneration pertaining to Directors and Corporate Officers resources, for the purpose of promoting as much as possible behav- and reports to the Board of Directors in order to preserve the trans- ior on the part of Directors and Corporate Officers geared toward parency of the remuneration decision-making process and help enhancing corporate results and stock value. With regard to the ensure that individual remuneration is reasonable. Results linkage system Factor Type of compensation Strategic purpose of compensation Method of calculation Short-term results link- age system Medium- to long-term results link- age system Results-linked bonus Stock-linked compensation stock options Intended to clarify the responsibility of Directors 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 recipients share the same advantage of a rising stock value of the Company and the same risk of it falling as shareholders. The introduction of such a system is intended to increase the ambition and morale of eligible Directors and Corporate Officers with respect to the enhancement of results and stock value. It is also intended to further strengthen the link between executive remuneration and medium- to long-term results and corporate value. In addition to consolidated financial results (operating income, ROE) in the relevant fiscal year, indicators are set for each division, and bonuses vary from 0% to 200% of base salary depending on the degree of attainment of targets. Some stock-linked compensation stock options have a results achievement condition attached to them. The results achievement condition takes consolidated results under the Medium-Term Plan (operating income, ROE) as an index, and varies the number of exer- cisable options between 0% and 100% of the number of options granted, depending on the degree of attainment of targets. TDK has established Corporate Stock Ownership Guidelines. TDK makes an effort to ensure that eligible Directors and Corporate Officers hold at least a certain number of shares in TDK pursuant to their rank, including stock-linked compensation stock options. Standard Allowance Compensation structure Linked indicators Fluctuation range Basic remuneration + Short-term incentive (Results-linked bonuses) + Operating income, ROE, targets of each division Medium- to long-term incentive (Stock-linked compensation stock options) Operating income, ROE Depending on the degree of achieve ment of operating income and ROE, division objectives, vary from 0% to 200% of base salary Depending on the degree of achievement of operating income and ROE, for the grant number, an exercisable percentage fluctu- ates between 0% and 100% Changes in total amount of remuneration for Directors and Audit & Supervisory Board Members Millions of yen Operating income ¥36.6 billion ¥72.5 billion ¥93.4 billion ¥208.7 billion* ¥89.7 billion ¥107.8 billion ROE 2.7% 7.2% 9.2% 19.8%* 7.8% 9.7% 27 58 42 311 27 58 40 335 27 58 51 27 58 45 367 377 29 58 42 477 24 58 46 314 Outside Audit & Supervisory Board Members Inside Audit & Supervisory Board Members Outside Directors Inside Directors 700 600 500 400 300 200 100 0 * Includes ¥144.4 billion in gains from business transfer to Qualcomm 2014 2015 2016 2017 2018 2019 (FY) Promoting diversity in management systems TDK began encouraging globalization at an early stage, appointing a non- Japanese person as a Corporate Officer in 2004 and promoting the global- ization of management by increasing the number of non-Japanese Corporate Officers since then. Today, more than 90% of sales and employ- ees are derived and based overseas, while 39% of the Company’s Corporate Officers are non-Japanese. In recent years, globalization has advanced as TDK implemented a number of M&As, and the globalization and diversifi- cation of management 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 2018. * As of the end of June 2019 Promoting diversity Non-Japanese Corporate Officers 7 people (As of the end of June 2019) Japanese Corporate Officers 11 people Executive Vice President Corporate Officer Corporate Officer Corporate Officer Joachim Zichlarz Chief Financial Officer of Electronic Components Business Company, and General Manager of Europe HQ Joachim Thiele Deputy General Manager of Electronic Components Sales & Marketing Group, and General Manager of Industrial & HA Group of Electronic Components Sales & Marketing Group Michael Pocsatko Deputy General Manager of Electronic Components Sales & Marketing Group, and General Manager of ICT Group of Electronic Components Sales & Marketing Group Hong Tian General Manager of Micro-actuator Solutions Business Group Corporate Officer Corporate Officer 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 Andreas Keller General Manager of Human Resources HQ Ji Bin Geng General Manager of Energy Devices Business Group of Energy Solutions Business Company 68 69 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Directors, Audit & Supervisory Board Members, and Corporate Officers (As of the end of June 2019) Directors Audit & Supervisory Board Members Corporate Officers Shigenao Ishiguro Representative Director President and CEO General Manager of Humidifier Countermeasures HQ Tetsuji Yamanishi Representative Director Chief Compliance Officer General Manager of Finance & Accounting HQ Makoto Sumita Chairman & Director Seiji Osaka Director General Manager of Corporate Strategy HQ Takakazu Momozuka Full-time Audit & Supervisory Board Member Satoru Sueki Full-time Audit & Supervisory Board Member Kazumasa Yoshida Outside Director Chairman of Compensation Advisory Committee Member of Nomination Advisory Committee Summary of career Born on Aug. 20, 1958 Oct. 1984 Entered Intel Corporation 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. Jun. 2013 Outside Director of CYBERDYNE, 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) Kazuhiko Ishimura Outside Director Member of Nomination Advisory Committee Member of Compensation Advisory Committee Summary of career Born on Sep. 18, 1954 Apr. 1979 Entered Asahi Glass Co., Ltd. (currently AGC 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) Jan. 2018 Jun. 2018 Chairman & Director of Asahi Glass Co., Ltd. (currently AGC Inc.) (present post) 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 Works Ltd. (currently Yokogawa Electric Corporation) Oct. 1999 Apr. 2001 Jun. 2001 Jul. 2002 Jul. 2005 Jun. 2011 Vice President (Officer) and General Manager of Finance & Business Planning, in charge of Corporate Marketing of said company Senior Vice President and General Manager of Finance & Business Planning of said company Director, Senior Vice President, and General Manager of Finance & Business Planning of said company Director, Executive Vice President, and General Manager of Finance & Business Planning of said company Director, Executive Vice President and General Manager of Management Administration Headquarters of said company 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 Jun. 2017 Jun. 2018 Outside Audit & Supervisory Board Member of Sojitz Corporation (present post) Resigned as Outside Audit & Supervisory Board Member of the Company Outside Director of the Company (present post) Jun Ishii Outside Audit & Supervisory Board Member Douglas K. Freeman Outside Audit & Supervisory Board Member Michiko Chiba Outside Audit & Supervisory Board Member Summary of career Born on May 23, 1966 Summary of career Born on Jun. 27, 1961 Apr. 1990 Entered Goldman Sachs Japan Co., Ltd. Apr. 1984 Entered Tokyo Metropolitan Government Apr. 1996 Registered as lawyer in Japan Joined Mitsui, Yasuda, Wani & Maeda Oct. 1989 Joined Showa Ota & Co. (currently Ernst & Young ShinNihon LLC) Summary of career Born on Mar. 24, 1956 Apr. 1979 Entered Matsushita Electric Industrial Co., Ltd. (currently Panasonic Corporation) Apr. 2007 Executive Officer of said company Apr. 2012 Managing Executive Officer of said company Jun. 1997 Joined Hamada Law Offices Sep. 2002 Registered as lawyer in New York, Jun. 2014 Managing Director of said company the United States of America Sep. 2002 Joined Sullivan & Cromwell LLP Sep. 2007 Principal of Law Offices of Douglas K. Freeman (present post) Feb. 2016 Outside Director of U-Shin Ltd. (present post) Apr. 2019 Professor of Keio University Law School (present post) Jun. 2019 Outside Audit & Supervisory Board Member of the Company (present post) Apr. 2015 Jun. 2017 In charge of Human Resources, General Affairs, Social Relations, Legal Affairs, Fair Business, Corporate Governance, Risk Management, Facility Management, Corporate Sport Promotion, and Executive Support Office; and Director, Risk & Governance Management Division of said company Director, Managing Executive Officer, Chief Risk Management Officer (CRO), and Chief Compliance Officer (CCO); in charge of Corporate Governance; Director, Risk & Governance Management Division; and in charge of General Affairs, Social Relations, Facility Management, and Executive Support Office of said company Apr. 2018 Director of said company (Retired in Jun. 2018) Jun. 2019 Outside Audit & Supervisory Board Member of the Company (present post) Mar. 1993 Registered as certified public accountant in Japan Jul. 2010 Senior Partner, Ernst & Young ShinNihon LLC Sep. 2016 Principal of Chiba Certified Public Accountant Office (present post) Jun. 2018 Outside Audit & Supervisory Board Member of CASIO COMPUTER CO., LTD. Mar. 2019 Outside Audit & Supervisory Jun. 2019 Board Member of DIC Corporation (present post) Outside Director, Audit & Supervisory Committee Member of CASIO COMPUTER CO., LTD. (present post) Outside Audit & Supervisory Board Member of the Company (present post) President and CEO Shigenao Ishiguro Executive Vice Presidents Seiji Osaka Joachim Zichlarz Senior Vice Presidents Atsuo Kobayashi Noboru Saito Tetsuji Yamanishi Mitsuru Nagata Corporate Officers Joachim Thiele Michael Pocsatko Hong Tian Albert Ong Dai Matsuoka Osamu Hikita Andreas Keller Shigeki Sato Fumio Sashida Hiroyuki Yashiro Ji Bin Geng 70 71 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Sustainability Basic Policy TDK Group Sustainability Vision As well as aiming to solve social problems through our business on the basis of our corporate philosophy, which is our fundamental stance, we have formulated a new TDK Group Sustainability Vision. This vision proclaims that by fully utilizing TDK’s proprietary core technologies and solutions, we will “advance the development of a sustainable society and promote the well-being for all people.” In the formulation of this vision, we again assorted the social environment surrounding us from a long-term perspective and studied the potential of the TDK Group’s strengths and resources. In the process, we heard the opinions of not only management but also external experts. Going forward, we will share this vision throughout the Group, put it into practice in our business, and consider and implement specific measures toward the realization of a happy society. In the Value Creation 2020 Medium-Term Plan, which kicked off in fiscal 2019, TDK aims for sustained business growth while creating three Values. The realization of Social Value, which is one of them, is closely related to the United Nations’ Sustainable Development Goals (SDGs). Technology for the well-being of all people The TDK Group strives to restore and protect the global environment while promoting respect for human rights. Through its innova- tive core technologies and solutions, the Group advances the development of sustainable soci- ety and champions well-being for all people. The TDK Group’s key CSR issues and the SDGs The TDK Group seeks to realize a sustainable society, identifying “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” as key issues guiding its CSR activities. TDK’s “Contribute to the world through technology” is based on its technologies and products and the external social environment, focusing on fields enabling maximized provided value through TDK’s key CSR issues and the SDGs TDK’s key CSR issues The SDGs that TDK focuses on Increasing positive impact 1. Contribute to the world through technology Collaboration with partners Minimizing negative impact 2. Develop human resources 3. Consider the societal and environmental impact of the supply chain 4. Develop and prosper in harmony with the global environment the SDGs. TDK has clarified social challenges behind the six SDGs below and contributes to the realization of an ideal society in which these challenges are solved through its technologies and products. TDK further implements initiatives toward “Develop human resources,” “Consider the societal and environmental impact of the supply chain,” and “Develop and prosper in harmony with the global environment,” thereby contributing to the various relevant SDGs. Contributing to the SDGs through technologies and products TDK contributes to realization of a happy future society through its technologies and products that address six SDGs: Good Health and Well-Being (SDG 3), Affordable and Clean Energy (SDG 7), Industry, Innovation, and Infrastructure (SDG 9), Sustainable Cities and Communities (SDG 11), Responsible Consumption and Production (SDG 12), and Climate Action (SDG 13). These SDGs represent areas in which we feel we can provide maximum value considering the potential of our technologies and products to contribute toward solutions to social issues facing us today. In our efforts to draw an ideal society where issues are successfully solved, TDK will further develop its technologies and products, thereby contributing toward solutions enabling the realization of a happy future society. The SDGs Social issues that TDK addresses An ideal society • Increasing health and welfare challenges facing • Ensuring universal availability of highly advanced an aging society • Sharply increasing medical expenses • An increase in people requiring nursing care with the transition to an aging society • Challenges in facilitating active lives and social medical technology • Maintaining a simple understanding of one’s own health • A comfortable lifestyle for nursing care patients • Supporting independent lives and social participation participation for the disabled for the disabled • Climate change from increased fossil fuel usage • Transitioning to renewable energy (Gasoline-powered cars EVs) • Use of highly efficient renewable energy • Fragile infrastructure of developing countries • Deteriorating infrastructure of advanced countries • Labor shortages • Explosive increase in amount of information (IoT, autonomous driving, etc.) • Strengthening the infrastructure base • Recreating a resilient infrastructure • Supplementing the labor shortages, enhancing productivity • Ensuring storage capacity • Realization of high-speed, high-capacity transmission • Increasing natural disasters accompanying climate change • Minimizing damage • Provision of basic life services without regional • Hypoactivity of local regions accompanying urban favoritism population concentration • Privacy and leakage of personal information • Traffic accidents • Ensuring security • Realizing “zero traffic accidents” • Environmental pollution from abandoned electronics • Exhaustion of resources • Monozukuri (manufacturing excellence) without hazardous materials • Curtailed usage of scarce resources • Resource recycling • A recycle-oriented society • A sharing economy • Climate change from increased fossil fuel usage • Transitioning to renewable energy (Gasoline-powered cars EVs) • Use of highly efficient renewable energy • Improved energy usage 72 73 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Toward the Stage of Utilizing the Strength of Our Diversity As a result of our advancement overseas, M&A, and other factors, TDK has cultivated a strength of diversity formed by diverse human resources from a wide range of regions. Now, TDK is embarking on a global human resource strategy to fully display that strength. Net sales (inside) / Number of employees (outside) Japan Asia, etc. Europe Americas 4.2% 15.9% 10.9% 16.0% 9.8% 9.9% 2009 (FY) 63.2% 70.1% Examples of acquired companies • 2005 ATL (Hong Kong) • 2007 Magnecomp (Thailand) • 2008 EPCOS (currently TDK Electronics, Germany) 3.8% 10.9% 8.0% 8.4% 9.5% 14.2% 2014 (FY) 67.9% 77.3% The strength of our diversity fostered by post-merger integration respecting equality TDK, which began the overseas expansion of its operations in the 1960s, has been actively promoting globalization against the background of such factors as the subsequent transfer by customers of their manufacturing sites to overseas locations. Since the turn of the century, with our eyes on future markets, TDK has been boldly carrying out a reform of its business structure through M&As. TDK’s post-merger integration policy of maintaining relations of equality rather than control and respecting corporate cultures has been hugely successful, and companies like ATL in Hong Kong and EPCOS (now TDK Electronics) in Germany have subsequently come to contrib- ute enormously to our revenues. In the background lies TDK’s thinking that since acquisition targets are companies with not only outstanding technologies but also excellent managers, human resources, strategies, and operations, the probability of success of an M&A increases if these aspects are respected and managers of the acquired company are delegated authority. 4.5% 9.3% 8.0% 8.2% 7.8% 12.1% 2019 (FY) Global Human Resource Strategy at the Stage of Fully Utilizing the Strength of Our Diversity 71.7% 78.3% Over 90% of TDK employees are outside of Japan Examples of acquired companies • 2016 Micronas (currently TDK-Micronas, Switzerland) • 2016 Hutchinson (U.S.) • 2016 Tronics (France) • 2017 ICsense (Belgium) • 2017 InvenSense (U.S.) Effectiveness of the strength of our diversity The TDK Group comprises affiliated business companies with not just multiple nationalities but also strengths in vari- ous domains, technologies, know-how, and so on. That is the essence of the strength of our diversity. For example, while TDK in Japan is strong in passive components, mag- nets, and magnetic technology, as well as materials technol- ogy, in which persistent development is conducted from a long-term perspective, TDK in the United States, centering on InvenSense, has strengths in MEMS sensors, software, and so on. In Europe, TDK Electronics (formerly EPCOS) and others are strong in industrial sensors and passive compo- nents, and in China, ATL, for example, has an extremely high level of competitiveness in lithium polymer batteries. We are building a business model that is best suited to each region and product characteristics and ensures exceptionally speedy business. Furthermore, this dispersion of regions and customers and our wide-ranging product portfolio lead to a high degree of resilience against risks of fluctuations in the market environment. Toward the stage of utilizing the strength of our diversity As a result of TDK’s efforts since 2016 to transform its busi- ness structure through M&As centering on sensors, the Company has expanded its business foundations to more than 30 countries and regions worldwide. In fiscal 2019, our overseas sales ratio was 91.8%, and our overseas employee ratio was 90.7%. In the future, in order to supply the best solutions through various technologies and products, it will be necessary for us to vitalize collaboration among regions and among Business Companies. Furthermore, if we can make effective use of the different strengths in the TDK Group, we will be able to further boost the competitiveness of TDK as a whole through the interaction of our fortes. On the basis of this approach, as we have been doing so far, TDK will con- tinue to forcefully promote a global human resource strategy aimed at enhancing the fluidity of human resources among Business Companies worldwide and discovering and nurtur- ing human resources beyond national borders, while also bolstering the strength of our diversity by maintaining the independence of affiliated companies. 74 75 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Andreas Keller Corporate Officer General Manager of Human Resources HQ Germany Human Resources HQ Munich Accelerating the advancement of a global human resource strategy Since 2018, TDK has been working on a large-scale reform of its human resource systems. This has been driven by the emergence of DX (Digital Transformation) and EX (Energy Transformation), two new mega trends that have led us to recognize that gathering human resources from around the world who are capable of staying ahead of technological developments, and fostering their skills appropriately, is an urgent task if we are to achieve our growth strategy going forward. Specifically, we have set out three core goals—developing the next generation of human resources, establishing an efficient global human resource platform, and improving communication— and have put in place measures and policies aimed at achieving those goals. One of our greatest suc- cesses to date has been our progress in measuring and visualizing the English and communication skills of individual employees across the Group as a whole, and in putting in place various systems in conjunction with transnational transfers of personnel. This has allowed for a more flexible exchange of human resources on a global scale, while making the process of participating in devel- opment programs required for advancement and promotion easier and more efficient. During the current Medium-Term Plan (covering the period from fiscal 2019 to fiscal 2021), we are primarily in the infrastructure-building stage, but we are also making steady progress with more concrete efforts, among them developing various Groupwide management development programs for management-level and high-potential employees. The main goal is to improve their management and leadership skills, which will help foster the development of the existing and next generation of strong leaders. Some of the development programs were created in collaboration with various state-of-the-art business schools around the world. For the next Medium-Term Plan (covering the period from fiscal 2022 to fiscal 2024), we will focus on extending these efforts further into the workplace while ensuring the results are carefully validated. Obviously, given our current business environment, the need for overwhelmingly rapid transfor- mation applies to human resource systems as well. In advancing these reforms, we selected individ- uals from among human resource professionals at Group companies worldwide to be responsible for specific areas, including evaluation, training, and hiring. Each of them leveraged their personal strengths and exhibited strong leadership in these efforts. As a result, it took us only about two years to implement reforms that would normally require four or five years to complete. This may be a perfect example of the strength of diversity, an ideal TDK upholds for the entire Company. This kind of global-scale strength of diversity has been demonstrated particularly in recent years as we have accelerated our M&A efforts, reinforcing our desire to further solidify this trend through our human resource system reforms. By doing so, we hope to help TDK make the leap to being recognized for its presence as a truly global company, and a leader among Japanese firms. Toward the stage of utilizing the strength of our diversity Appointing talented personnel regardless of nationality 1 Developing the next generation of human resources 2 Establishing an efficient global human resource platform 3 Improving communication Vitalizing communication throughout the TDK Group Unifying evaluation and compensation standards Global promotion of next-generation leader development programs Through M&As by TDK in recent years, diversification Territorial Career Development Program. This program, has advanced rapidly, and the strength of our diversity which began in fiscal 2019, aims to discover talented has been further bolstered. An issue for TDK from human resources around the world and to foster now on will be how to enhance this strength of diver- leaders capable of being active globally in a wide sity synergistically while also respecting diversity in range of areas. Selected employees from TDK’s four the Group. For this purpose, we are promoting a global regions worldwide participate in the nine-month pro- management program to develop next-generation gram with the aim of displaying their abilities in dif- leaders. TDK prepares and operates the best possible ferent areas and cultures. Various subprograms are programs for various career levels, such as young organized to enhance the participants’ management employees, mid-level managers, senior managers, capabilities, including the further upgrading of their and candidate corporate officers. work knowledge, improvement of their leadership The program for young employees is called the skills, and activation of communication. Toward the sustained improvement of corporate value Increased fluidity of human resources on a global scale Sharing of knowledge and strengthening of collaboration Globalization of governance 76 77 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Make It Attractive Envisioning a happy future society enabled by TDK’s distinctive tech- nologies and products TDK continues to pursue new potential and challenges in the hope that the application of its unique technologies and products will help create a happy future society. This enables the realization of Social Value, which is a part of TDK’s “Value Creation 2020” Medium-Term Plan and is a shared initiative among TDK Group companies. By utiliz- ing the Company's unique technological and product strength in seven markets, we will solve social issues and help bring about a happy future society. IoT The world’s smallest 7-axis sensor, which combines a 6-axis inertial sensor with a pressure sensor, embodies reliable sensing technologies that are not adversely affected even under harsh environmental conditions. This sensor is used in drones that carry out social missions such as transporting medical supplies in conflict regions, and providing reliable flight and accurate position information to support these drones performing critical tasks in diverse terrains around the world. Mobility We developed a motion sensor with seven sensors that is Wellness We created a compact biomagnetic sensor by integrating MR just 3 mm square—the industry’s smallest. In addition to element process technologies acquired from HDD magnetic providing data on acceleration and direction to guide vehicles heads with magnetic circuit design technologies. This makes to their destinations, they can safely guide vehicles to the it possible to perform biomagnetic field measurements side of the road in the event of an emergency. They support without the insertion of a device into the body, something autonomous driving technologies and hold substantial poten- that was not possible in the past. This sensor will be used in tial for the creation of a safe society with no traffic conges- devices that are more compact and cost less than earlier tion or traffic accidents. products to perform stress-free diagnoses for patients. Connections The drama of athletic competition will soon become more Energy Lightweight, compact, and high-reliability capacitors used in Robotics The MEMS microphone, which has a tiny membrane that can Experience VR and AR applications have enriched experiences in educa- exciting than ever. With 5G, viewers will be able to watch power electronics facilitate high-efficiency generation and detect sound, was developed by applying silicone MEMS tion and brought about significant progress and quality multiple broadcasts simultaneously and instantly express transmission of renewable energy and improve people’s technology. A robot equipped with the microphone can detect enhancement in learning by children. TDK’s ultrasonic sen- their excitement around the world. High-frequency compo- quality of life. Looking to the future, we are designing low- sounds and speakers at long distances, and when multiple sors can detect a device’s orientation, rotation, position, and nents with enhanced filtering functions and maximized total inductance capacitors suitable for high-switching frequen- microphones are used, a robot can identify where a sound or other information with high precision and determine accu- performance will simplify handling by customers. We are cies and will contribute to the creation of a sustainable voice is coming from. Such applications will help hearing- rately the movement of a hand in a virtual space. In addition, developing products for all 5G applications such as infrastructure, autonomous driving, and tele-medicine. 78 society through clean energy. impaired individuals and make it easier to call for help by persons who are unable to act during an emergency. VR systems that use these sensors are low cost, making it possible for more people to have interactive experiences. 79 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability The Environment Trends in TDK’s environmental activities From 2003 From 2006 From 2011 Until 2035 TDK Environmental Action 2010 Strengthening of EMS Addressing risk management and a recycling-oriented society TDK Environmental Action 2015 Implementation of environmental management Moving from image generation to management establishment TDK Environmental Action 2020 Environmental growth strategies Envisioning an era of product differentiation driven by envi- ronmental performance TDK Environmental Vision 2035 Environmental activities from a life cycle perspective Groupwide activities from a life cycle perspective Within TDK Environmental Vision 2035, the declaration is made to reduce the environmental load from a life cycle perspective. This represents an initiative not limited to measures at the manufacturing stage in factories and the use stage for customers, aspects outlined in the conven- tional TDK Environmental Action 2020 policy. To expand in this way, we deem it critical for all TDK Group employees to share the same vision and move forward with the same objectives in mind. The “revitalizing and protecting the global environment” expressed in this corporate vision refers to the skillful operation of our business hand in hand with the natural environment. Without that commitment, there will be no sustain- able development on the horizon. The entire Group shares an Arubeki-Sugata (ideal process) and undertakes voluntary initiatives in pursuit of that vision. Initiatives from a life cycle perspective and the concept of environmental load TDK conducts business on a global scale, and as a result, in order to reduce environmental impact, initiatives are needed that not only reduce our own environmental load but also cover the entire value chain. Presented here are the environmental considerations and main initiatives that TDK views from a life cycle perspective and an overview of environmental load. Investigations regarding environmental load are being conducted to establish criteria for the TDK Environmental Vision 2035. Trends in CO2 emissions from production activities* Environmental considerations TDK Environmental Vision 2035 TDK believes that, in order to realize the sustainable development of society, environmental activi- ties based on a long-term outlook are necessary. In the TDK Environmental Vision 2035, which commenced activities in fiscal 2017, toward the realization of our corporate vision, we see our Arubeki-Sugata (ideal process) in 2035 to be one of operating with an environmental load that does not disturb the natural cycle. Our target, therefore, is “to halve the CO2 emission basic-unit from a life cycle perspective by 2035.” This Environmental Vision is based on our recognition that it is the duty of a company to minimize the environmental load in business activities, revitalize the natural environment, and supply products that contribute to customers and society. Moreover, learning from the United Nations Framework Convention on Climate Change (COP 21) Paris Agreement, which seeks to curb global warming by achieving a balance between greenhouse gas emissions and absorption sources, we are pursuing the TDK ideal of acting to attain our Procurement Disposal Arubeki-Sugata. Production half Logistics FY2015 FY2026 FY2036 100 80 60 40 20 0 CO2 emissions basic-unit (FY2015 = 100) –30% –50% CO2 emissions cut in half Kt-CO2 2,400 1,800 1,200 600 0 FY2015 = 100 103.1 1,670 15 16 17 18 19 120 100 80 60 40 20 0 (FY) CO2 emissions (left) CO2 emissions basic-unit (right) Use CO half Trend in the reduction of CO2 CO half emissions through products* CO half kt-CO2 2,500 2,000 1,500 1,000 500 0 FY2015 = 100 2,149 134.6 15 16 17 18 19 200 150 100 50 0 (FY) 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. https://www.tdk.com/corp/en/sustainability/ sustainability_data/sus05900.htm Procurement Development and Manufacturing Logistics Use Disposal TDK is promoting green procurement and elimi- nating the use of restricted substances, while also taking mea- sures to reduce suppli- ers’ environmental impact. TDK is promoting envi- ronmentally conscious design through product assessments and reduc- ing environmental loads during manufacturing by cutting down on energy and resource use. TDK is working with cus- tomers to reduce envi- ronmental load on top of enhancing in-house logistical efficiencies. TDK is producing eco- friendly products to help customers reduce their environmental load, while promoting under- standing of the value of doing so. TDK is using recyclable materials and designing products for easy disas- sembly in consideration of the disposal of prod- ucts at the end of their lifetime. Life cycle CO2 emissions 22,444,000 t-CO2 (FY2019) Use 55.9% Procurement 35.5% Development and Manufacturing 7.4% Logistics 1.2% 80 81 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 Framework for Enhancing Corporate Value and Sustainability Society TDK’s supply chain responsibility TDK offers high-value-added solutions based on materials and components technologies. As globalization accelerates and we expand our target markets, we develop ongoing relationships with a wide range of customers and business partners. Some companies are buyers, as well as suppliers, for TDK in certain business areas. Responsible management of supply chains is coming under strict scrutiny with the strengthening of legal systems and inter- national industry initiatives. For example, the United Kingdom passed the Modern Slavery Act in March 2015, and the Electronic Industry Citizenship Coalition (EICC) changed its name to the Responsible Business Alliance (RBA) in October 2017. Because Important issues at each level of the supply chain these trends greatly affect TDK’s business environment, it is vital that we take suitable measures in our business supply chains. A shared understanding of social issues and common investigative practices is essential for the practical and effective imple- mentation of CSR in the supply chain. To bring improvements in efficiency to the entire supply chain, TDK is working with other organizations from the stage of formulating rules, cooperating with the industry as a whole, and proposing the standardization of investigative methods. Contribute to the world through technology Develop human resources Consider the societal and environmental impact of the supply chain Develop and prosper in harmony with the global environment Procurement Development Manufacturing Logistics Sales Develop new products through sus- tained research and development Create manufacturing process capable of reproduction without variation Ensure the quality of purchased products Promote global human resource training program Use CSR check sheets and implement CSR audits Carry out product assessments Promote global human resource training program Carry out conflict minerals survey Realize technological innovation Practice green procurement Create products contributing to the environment Perform product assessments Promote global human resource training program Hold innovative craftsmanship training Implement CSR self-checks and CSR self-audits by third party organizations Initiate CSR self-checks at manufacturing sites: 100% Reduce the environmental load of plants Toward zero defects Zero-defect quality begins in the first stage of development Zero-defect quality must be designed into our products and processes right from the start. It is our responsibility to our customers and to society as a whole that our customers’ products and applications function properly and safely for their entire life cycle. Zero-defect quality also means that we manufac- ture our products without wasting resources, whether we are talking about raw materials, semi-fin- ished and finished goods in our production, energy, or water. The result is a highly efficient production process that contributes to sustainability. In order to achieve zero-defect quality, we need not only an advanced quality management system but also, above all, well-trained and competent staff. That is why we implemented a compulsory train- ing program for all of our factories at TDK Electronics. We also need perfectly tuned and maintained pro- duction equipment. We are improving our manufacturing processes with Industry 4.0 methods by evaluating production data in real time and employing predictive maintenance to eliminate defect risks before they even occur. It is our standard practice to identify and assess such risks during product devel- opment. Thus, zero-defect quality begins in the first stage of development. Dr. Werner Pint Head of the Technology Quality Corporate Department TDK Electronics AG Ensure logistics quality Promote global human resource training program Reduce the environmental load in logistics Promote sales of products that solve environmental and social issues Ensure customer satisfaction Promote global human resource training program Respond appropriately to CSR surveys and other inquiries from customers Promote sales of products that contribute to the environment Think for yourself, devise improvements, and implement them through team cooperation As a first step, the risks in 392 operations were methodically identified, result- ing in a list of 1,702 problems. The Arubeki-Sugata (ideal process) for each prob- lem and risk was then examined and defined, and a manual to convey the information to the manufacturing floor in an easy-to-understand manner was created. The aim was a concise, memorable format, with slogans such as “no waste, no wobble, no worry.” For example, risks and losses associated with transfer operations were reduced (no waste), standardized work operations and work layouts were defined to eliminate unevenness (no wobble), and work flow lines were designed to enable natural movement without strain (no worry). Quality control activities have a particularly important role to play in this undertaking. As Tomomichi Hatakeyama, manager of Tsuruoka Higashi Factory, puts it, “Think for yourself, devise improvements, and implement them through team cooperation.” A wide range of measures has been implemented to that end. Staff recite the purpose of their own process daily, to foster a clear under- standing of the positioning of one’s work within the overall process sequence. Tools such as monitors and tablets are used for discussions and to allow checking operations via video at any time by anyone. Special areas created within the work area are set aside for meetings, allowing teams to get together and engage in close communication. “I believe it is only through the steady rep- etition of diligent actions that zero-defect product quality can be realized.” 82 Tomomichi Hatakeyama Tsuruoka Higashi Factory Manager TDK Shonai Corporation 83 TDK ANNUAL REPORT 2019TDK ANNUAL REPORT 2019 CORPORATE INFORMATION As of March 31, 2019 Corporate name TDK Corporation Principal shareholders (10 largest shareholders) 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 22,455 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) 104,781 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 About Our Website Investor Relations (IR) https://www.tdk.com/corp/en/ir/index.htm Securities Reports Quarterly Financial Statements Management Policy Sustainability https://www.tdk.com/corp/en/sustainability/index.htm 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) JPMC OPPENHEIMER JASDEC LENDING ACCOUNT Japan Trustee Services Bank, Ltd. (Trust account 9) JP MORGAN CHASE BANK 380055 STATE STREET BANK WEST CLIENT - TREATY 505234 Japan Trustee Services Bank, Ltd. (Trust account 5) JP MORGAN CHASE BANK 385151 Nippon Life Insurance Company Number of shares held (thousands of shares) Percentage of number of shares held in the total number of issued shares* (%) 26,573 21.04 15,197 12.03 3,381 2,853 2,356 2,231 2,224 2,052 1,852 1,640 2.68 2.26 1.87 1.77 1.76 1.62 1.47 1.30 Total 60,359 47.79 * Other than the above, the Company holds 3,302 thousand shares of treasury stock. Status by ownership 51.08% Japanese financial institutions Foreign institutions and individuals 33.99% 6.58% Japanese individuals, etc. 4.90% Japanese securities firms 2.55% Treasury stock 0.90% Japanese corporations Sustainability Communication Book CSR Activities Product Center https://product.tdk.com/info/en/products/index.html TDK’s stock price and volume Yen 15,000 10,000 5,000 0 Millions of shares 75 50 25 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 2017 2018 1 2 3 2019 Stock price (left) Volume (right) 84 TDK ANNUAL REPORT 2019 85 TDK ANNUAL REPORT 2019 TDK Corporation Nihonbashi Takashimaya Mitsui Building, 2-5-1 Nihonbashi, Chuo-ku, Tokyo 103-6128 https://www.tdk.com/corp/en/