Feature: Thorough Enhancement of Our Earning Power

01 Forecast Expansion in the Global Automotive Industry

A Continuously Growing Global Automobile Market

The global automobile market is projected to continue expanding.

In emerging countries centered on Asia, demand is set to rise sharply on the back of population growth and rising incomes, while demand in advanced countries is likely to remain stable, supported mainly by replacement demand.

Global vehicle sales are projected to rise from around 85 million vehicles in 2013 to roughly 140 million in 2030, driven by growing demand in emerging countries. At the same time, the center of the automobile market is poised to shift from advanced countries to emerging countries, which will account for an estimated 70% of global sales.

Optimized Local Manufacturing in the Automotive Industry

As transport in emerging countries shifts to the automobile, consumers in those markets will mainly want low-priced models that also have generous equipment levels. That means automakers will need to reduce costs and boost efficiency even further to generate profits, not just increase output to satisfy growing demand.

Japanese automakers in particular need to make improvements to their operating structures, which are overly dependent on domestic production, making them vulnerable to fluctuations in exchange rates. Some companies have already made progress with building an optimum manufacturing framework by shifting production to low-cost locations close to consumer markets.

Automakers are increasingly choosing Thailand that has growing clusters of auto parts makers as a base to supply other markets in Asia; and Mexico and other countries that have free trade agreements (FTA) and economic partnership agreements (EPA) with a large number of partner nations and offer significant benefits for automakers exporting to the U.S. and Europe.

02 Track Record of Growth to Sumitomo Corporation's Automotive Business

Business Model Evolution

Sumitomo Corporation's automotive business has been operating for around 60 years, starting out in the 1950s as an exporter of buses to Myanmar. Through its vehicle trading operations, which were the starting point for the business, the automotive business has had access to market information in Japan and overseas and been able to identify automaker needs early on. As a result, we have been able to respond to changes in the business environment while operating a wide range of businesses in the automotive sector, from upstream areas (manufacturing businesses) through to downstream areas (automotive leasing and retail financing businesses).

In upstream areas, our role in trading automotive manufacturing equipment and materials and automotive components, including with European, U.S. and other automakers, opened up more business opportunities in areas related to vehicle manufacturing when Japanese automakers began actively shifting production overseas from the 1980s. This led to our direct involvement in manufacturing operations in support of automakers' manufacturing activities. Today, our automotive business stands out for its extensive involvement in manufacturing, operating numerous sites around the world from parts manufacturing right through to vehicle assembly.

In midstream areas, we moved into the vehicle distribution market through the establishment of a joint-venture sales company in the U.S. with an automaker in the 1970s, aiming to provide support to Japanese automakers that wanted to develop overseas markets. These vehicle distribution operations, which include vehicle trading, remain an important earnings pillar of the automotive business.

In downstream areas, we have built a presence in auto sales financing as part of efforts to build closer links with consumers in our retail operations. These financing operations are focused on Thailand, Indonesia and other markets in Asia where Japanese automakers have a strong position. These operations, together with our domestic auto leasing business, launched in 1980 have become a significant earnings pillar.

03 Expanding the Three Key Areas in Scope

Responding to changes in the operating environment, we have expanded our capabilities in a wide range of areas across the automotive industry. Going forward, we plan to channel corporate resources into promising growth businesses in three key areas—manufacturing, sales and distribution, and leasing and retail financing—in order to further expand and develop the automotive business.

Major Initiatives and Achievements of the Three Key Business Areas under BBBO2014

1) Manufacturing Business Area

Reinforcing overseas manufacturing operations, focusing on emerging countries, amid growing demand for cars

As automakers shifted production overseas, we have expanded production capacity at KIRIU Corporation, a specialist brake disc and drum maker that is an earnings pillar in our manufacturing operations. In response to growing demand in Asia, we boosted output in India in 2012 and in Thailand in 2013. Also, as part of ongoing efforts to expand our operations overseas, we plan to install extra capacity at the company's site in Mexico in 2014 amid strong demand from North America.

We are taking other steps to strengthen our manufacturing framework in Mexico, including a decision in 2014 to invest in the local operations of Hiroshima Aluminum Industry Co., Ltd., which has a strong presence in large casted aluminum components such as engine parts.

In vehicle manufacturing, Mazda de Mexico Vehicle Operation (MMVO), our local joint venture with Mazda, began full-scale operations in January 2014 with start of mass production of assembled automobiles for shipment to North America. Looking ahead, we plan to increase exports to Latin America and Europe and expand the range of vehicle models that we can assemble, including Toyota's compact models.

In Mexico, we are generating synergies across our automotive-related operations, with MMVO sourcing components from a number of our local affiliates as part of its vehicle manufacturing process. KIRIU Corporation and Hiroshima Aluminum Industry Co., Ltd. both supply MMVO with parts made at their Mexico sites, while HIROTEC MEXICO S.A. de C.V., a joint venture with HIROTEC Corporation, supplies vehicle body panels and exhaust systems. MMVO also uses steel materials supplied by our steel service center.

2) Sales and Distribution Business Area

Business expansion targeting growth markets such as Africa and the Middle East

In many emerging markets, vehicle sales and distribution operations are challenging due to unstable political situations and vulnerable economic conditions such as fluctuations in exchange rates and other factors. We have a presence in countries such as Turkey, the Ukraine and Nigeria, giving us extensive experience in managing country-specific business risks in overseas markets. Leveraging the knowledge, expertise and risk management capabilities we have built up through a long association with those countries, we will work to expand our vehicle sales and distribution business in emerging countries with growth potential. In 2013, we established service stations in Iraq and Myanmar to provide vehicle maintenance and repair services as part of efforts to strengthen servicing operations in tandem with vehicle sales.

Our involvement in these markets is not just about business. We also seek to contribute to their societies. Libya is one example of our approach. Since starting vehicle distribution there in 2010, we have run a human resource training program for young Libyans at our repair facilities. We will do our part to build a new Libya by offering much more than human resource training to young Libyans, who are key to the country's future.

3) Leasing and Retail Finance Business Area

Expanding the earnings base by developing the auto leasing business overseas and diversifying the retail financing business

In the auto leasing business Sumitomo Mitsui Auto Service Co., Ltd. owns and manages a fleet of around 570,000 vehicles, making it one of the leading companies in the auto leasing sector. Faced with a mature domestic market, the company is working to strengthen its earnings base by expanding operations overseas. This company moved into the Thai market in 2003, followed by Australia in 2013. To meet auto leasing needs worldwide, we plan to extend our reach into the Asia-Pacific region and other promising overseas markets with growth potential.

In Indonesia, P.T. Oto Multiartha (OTO) and P.T. Summit Oto Finance (SOF) provide loans for cars and motorcycles, respectively, driving growth in our automotive retail financing business. Both companies have branches across Indonesia, and their extensive networks and funding abilities are supporting growth in the number of loan contracts. Automotive retail financing operations in Indonesia are now a major earnings pillar for the automotive business. Sumitomo Corporation has been involved in automotive retail financing in Indonesia since 1996, before the 1997 Asian financial crisis. The country later faced several other economic crises, but we continued to provide reliable services despite the turmoil, helping us to build strong relationships with car dealers. This remains a key strength of our business in Indonesia today. We aim to continue expanding the business by providing loans and improving services that meet the needs of consumers in the fast-growing Indonesian market.

04 In Closing

We forecast continued growth in the automotive industry, supported by firm demand in advanced countries and growth in new demand in emerging countries.

Supported by our detailed knowledge of the business and the trust we have gained from customers, built up over the last 60 or so years, we will work to deliver further growth in order to become one of the leading earnings pillars of the Sumitomo Corporation Group in realizing our desired image of "What We Aim to Be" in 2019.