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[ Financial Results of fiscal 2001 Performance Briefing ]On the recording media business

Jiro Iwasaki Executive Managing Director General Manager of Recording Media & Systems Business Group

Jiro Iwasaki
Executive Managing Director
General Manager of Recording Media & Systems Business Group

I am afraid that in fiscal 2001 the recording media & systems segment posted an unforeseen operating loss of ¥9 billion. Let me take this opportunity to explain the difficulties we have faced in this business.

As mentioned in the previous presentation, we implemented a restructuring initiative during fiscal 2001. Here are the results of that restructuring. The main element of the restructuring was existing media. Let me begin with audiotapes business. We have four production centers in Japan, the Americas, Europe and Asia. Market share is on the rise despite falling total demand. In light of the fact that these centers were not operating at 100%, we shut down our California Plant in the U.S. As a result, our European plant in Germany and Asian plant in Thailand are now at full operational capacity.

In videotapes business, domestically we stopped so-called "pancake" manufacturing at subsidiary Media Technology Corporation in Kofu, which had previously engaged in pre-stage operations. We continue to maintain our plant in Luxembourg because of its high levels of efficiency. We also stopped production at our underperforming post-stage assembly plant in Georgia, U.S. We are making up the shortfall in videotapes by purchasing them from other companies under OEM contracts and by other means.

In the CD-R business, we did have three integrated plants in Japan, Europe and the U.S., but we halted production at our Georgia Plant and Chikumagawa Plant. That leaves us with our highly efficient plant in Luxembourg. In this restructuring process, we reduced the total consolidated number of employees by 800 from 4,700, thereby maintaining a workforce of 3,900. This enabled us to cut fixed expenses by ¥7.9 billion. We are working to make operations profitable during the 2nd quarter of the current fiscal year.

In terms of the overall recording media business, let me talk about where we will focus our efforts. The volume of transmitted data and information is continuing to grow with alarming ferocity. And the transmission business is evolving and expanding at an equally startling pace. Some believe that this will lead to lower demand for applications for archiving, hard disks and backup tapes. My view is that the ratio of data stored may well decline, but the total volume will increase as the massive volume of data continues to expand.

We are confident that DVDs and TDK's DVR for use with a blue laser (DVR Blues) will become the mainstream in the media business in the future. We don't expect demand to taper off for datatapes for computer backup either. Total demand for DVR Blues is expected to reach 350 million disks by 2005. If so, we envisage one DVR Blue disk to be capable of storing 100 gigabytes of data. Global demand for computer tapes is estimated at 75 million by 2005, with each tape having a 300-gigabyte capacity.

We will focus on advanced optical media, data storage media, advanced optical recording systems and digital content, the latter provided through our investment in U.S. software development companies. We will nurture these four areas as future businesses. We see our business domain as being a solutions provider for recording and playable media. As such, our work in these four areas will also be key to providing solutions.

Advanced optical media covers MLCD-Rs (multilevel CD-Rs), DVDs and, in particular, DVR Blues. We have already begun producing MLCD-Rs in collaboration with drive manufacturers, and plan to start selling them in the 4th quarter of the current fiscal year.

Production of advanced optical recording systems was launched in fiscal 2001 in the U.S. We aggressively marketed these systems, and initially focused on drives for audio media applications. We feel the response has been good, and will position this area as a mainstay business, centered chiefly on drives with built-in advanced optical media.

Over the last two years, we have intensely concentrated efforts on data storage media. We feel that this area has made rapid progress. At present we have commercialized DDS 1, 2, 3 and 4 tapes, and Mammoth 1 and 2 tapes. Mammoth, which makes advanced metal evaporated tapes, is our main supplier. And they have already begun developing the Mammoth 3 tape.

As you know, LTO and SDLT tapes will continue to be the mainstream computer tapes for the time being. We will commercialize LTO tapes and launch operations for them in the first half of the current fiscal year. We've had a number of specific inquiries about these tapes from customers. Plans also call for commercializing SDLT tapes in the second half of fiscal 2002.

In digital content, during fiscal 2001 we launched three games. We aim to release around 10 games in the current fiscal year. These games will be for children and families.

In existing media categories, our mainstay products are audiotapes, videotapes and CD-Rs. But TDK itself didn't develop the industry format of these products; others did. TDK then mass produces them and uses its own distribution channels to mass merchandise them, and then sell them in large volume to the consumer market. It's true that we were drawn in by the fact that these models allowed for huge success temporarily in the past. But it's also true that we've developed these products completely on our own, with no joint development and no alliances.

Now, however, we will be focusing on the four business domains I mentioned earlier-advanced optical media, advanced optical recording systems, data storage media and digital content. The key for success (KFS) will vary depending on the domain. We won't be doing everything ourselves here. The Recording Media & Systems Business Group as a whole is acutely aware that we need to establish our new business models in line with these new domains.

Areas where we will see improvement in the current fiscal term are the ¥7.9 billion reduction in fixed expenses relating to existing products-audio, video, CD-Rs and MDs-and lower variable expenses. I believe we have become more cost efficient. We will further consider pursuing OEM and ODM through production alliances as we try to strike the optimal balance between TDK production and procurement from outside. The major keys will be strengthening our low-cost operations capabilities and managerial flexibility.

Our four new target areas will be defined by four initiatives: bolstering marketing; strengthening core technologies through concentration of resources; IP management; and strategic alliances.

Taking the first of these-bolstering marketing-we are confident in our capability to sell large volumes of our mainstay products to the consumer market. This conviction, however, is presently confined to our mainstay products. We are by no means powerful in combining our own technologies with marketing strengths to conceive new products and create new markets for them. The forthcoming launch of our optical drive business particularly highlights the need to bolster our marketing capabilities. Bolstering marketing will thus involve looking to markets that don't focus solely on the consumer, perceiving technological trends and developments at other companies, forging alliances and understanding the strengths of our competitors.

Let me talk briefly about what will comprise our core technologies from now on. In optical media, we have the technology to develop high-speed, high-density media. In particular I believe we are among the world's elite producers of DVR Blues. Current objectives also center upon MLCD-R technology. In data storage, only three companies worldwide produce evaporated datatapes. I also believe we are among the top three globally in thin-film coating technology. As such, we will channel our energies into optical technology, evaporated technology and thin-film coating technology with the view to cultivating them as powerful core technologies.

Moving on to IP management, in the era of existing media, we focused especially on acquiring patents. We have now renewed our policy regarding IP management. We will now view this area from the perspective of creating IP alliances that mutually complement TDK and its partners.

The final area is strategic alliances. This covers each of the other areas-marketing capabilities, core technologies and top-notch IP. We believe that strong alliances and partnerships cannot be formed without the best use of IP. Alliances will be formed for production cooperation, as well as creation of new licenser groups. The most important elements will be creating alliances that pave the way for new industry formats, or that complement such technologies. I will reiterate, however, that strong alliances will not be possible unless TDK as a whole is technologically robust. At present, various concrete initiatives are underway to build new strategic alliances.

I will give you the results from this Business Group. Existing media accounted for 75% of net sales. If current trends continue, existing media will comprise 40% of net sales by fiscal 2004, the final year of TDK's medium-term plan. The remaining 60% will be composed of products mainly from the new business domains I have mentioned. We have formulated our plans in this direction, and are currently moving forward with specific initiatives. This concludes my presentation. Thank you for your attention.