SustainabilityA message from the President and CEO

In fiscal 2022, the TDK Group began advancing Value Creation 2023, the previous new Medium-Term Plan, which reached its final fiscal year in fiscal 2024.

When I first assumed the post of president in April 2022, the company was highly reliant on profit from small capacity batteries, For TDK to achieve a new growth stage (a “second chapter” of growth), I believed we needed to try to diversify our revenue sources, and we have thus focused on growth in three priority businesses: Strengthening our business in medium capacity batteries; growth of the sensor business; and regrowth of the passive components business. In my assessment, we have made a certain amount of progress in all three of these areas over the three years of the previous Medium-term Plan.

In the medium capacity battery business, the joint ventures we launched two years ago with CATL has now begun full-scale operations, and has begun solidifying the foundations for dramatic growth in the near future. Similarly, the passive components business has seen growth in multilayer ceramic chip capacitors (MLCCs) and inductors as new revenue sources. In the sensor business, TMR and MEMS sensors are beginning to take shape as contributors to overall profit.

As efforts to diversity revenue source progressed, as noted above, we were also able to more flexibly allocate capital in response to changing conditions in each business. In terms of cash flow, we were able to achieve one of our financial targets—positive free cash flow (FCF) after shareholder returns for the cumulative three-year period—despite a ¥ 110.0 billion advance payment to ensure the long-term stable supply of cobalt and other battery materials in the first fiscal year of the previous Medium-term Plan. This was in part due to an improvement in working capital and increased cash inflow from the sale of equipment to our joint ventures in medium-capacity batteries. With regards to capital investment, we ended up slightly above our cumulative three-year plan of ¥750.0 billion, at ¥785.6 billion, but in my estimation, this allowed us to make solid advance investments in businesses where growth can be expected.

While we have thus been able to advance restructuring in our business structure and continue to invest for the future, a number of issues (challenges) remain to be overcome if TDK is to become a more resilient enterprise. I think the most significant issues is improving profitability. Unfortunately, we failed to reach either of the two targets set out in the previous Medium-term Plan—operating profit of 12% and ROE of 14%. This was in part due to a sudden deceleration in the HDD market, which worsened profits in related businesses, but another major factor was that, over the three years of the plan, we did not make as much progress as expected in transforming magnets and other turnaround businesses. This is something we have reflected on in our new Medium-term Plan started in fiscal 2025, under which our policy will be to focus on executing proactive business portfolio management.

Before describing the new Medium-term Plan, I would like to talk about the background and intent behind our Long-term Vision, which was announced at the same time. In a word, our objective in formulating this Long-term Vision was to present to those both in and outside the company a concrete image of our vision for TDK over the next 10 years.

Over the past two years, the social and economic environment in which TDK does business has undergone dizzying changes that might best be described as an upheaval. These changes in conditions, taking place over short-term cycles, are likely to arise in the future as well, across a variety of fields. For TDK as a global company to target sustained growth in the midst of those changes, it is of course crucial that we work to develop and implement detailed, three-year Medium-term Plan. I have come to strongly believe that doing so is premised on taking a long-term view to determine what sort of future we should aim to achieve for ourselves, which in turn will require thinking about a roadmap for getting there for the company as a whole.

This is an issue that we have frequently discussed at our monthly Board of Directors meetings. Naturally, verifying and closely examining quarterly progress with our Medium-term Plan is an important management responsibility. Encouraged by our outside directors, however, who insisted the board should also spend time discussing how the entire Group will move ahead going forward, and set goals from a longer-term perspective, myself and the rest of management worked together through numerous discussions to clarify a vision for TDK. That became the Long-term Vision presented here.

Transformation, the word that forms the core of that vision, incorporates two meanings. One represents our desire to continue contributing to society as society itself continues to transform into the future. The other represents our commitment to continuing to transform ourselves to maintain those contributions. In the sense that we will continue to transform ourselves in order to contribute to society over the long term, this Long-term Vision might be seen as a resetting of our founder’s aspiration to “contribute to culture and industry through creativity,” as presented in our Corporate Motto, as a goal for the future.

The new Medium-term Plan, launched this spring, was formulated based on the question of what we need to accomplish now, backcasting from “TDK Transformation,” the Long-term Vision. The period of the new Medium-term Plan, as part of a ten-year span going forward, is positioned as a time to strengthen our business foundations as we move toward our envisioned future. I believe the new Medium-term Plan can be divided broadly into three key points.

The first is strengthening management focusing on cash flows. This is based on increasing operating cash flow captured from business activities, or “earning capability.” To date, the Group has responded to changes in business environment by making use of M&A opportunities while also flexibly rearranging its business portfolio to increase the earning capability of the Group as a whole. Our operating cash flow, which maintained a level of ¥100.0 billion on a moving average basis over the past three years, has improved to a current level of about ¥200.0 billion. Our goal under the new Medium-term Plan is to raise this level further, to ¥340.0 billion.

The second key point is to enhance business portfolio management (emphasazing ROIC). For about the past 20 years, TDK has engaged in financial management with an emphasis on cost of capital, using a proprietary index we call TDK Value Added (TVA). In fiscal 2022, we introduced the matrix for inclined allocation of capex, and have worked to optimize investment allocations by stratifying our approximately 80 cash-flow business units (CBUs) along two axes: BizROA (ROIC) and business potential. Further, starting with the term of the new Medium-term Plan, we will apply this two-axis map of investment allocation to our business portfolio management as well. For businesses falling below the minimum hurdle rate of 10%, we will move to quickly conduct appropriate monitoring, and swiftly execute measures aimed at a turnaround. At the same time, we plan to strengthen investment allocation in growth areas.

These measures are based on our reflecting on the fact that improvements to turnaround businesses did not progress as expected during the period of the previous Medium-term Plan, and I refer to them collectively as proactive business portfolio management. By engaging in proactive business portfolio management, including the transfer of individual business units to the best owner, we aim to achieve a company-wide ROIC of 8% or more and operating profit of 11% or more in fiscal 2027, the final fiscal year of the new Medium-term Plan.

The third theme of the new Medium-term Plan is strengthening "pre-financial capital." Pre-financial capital is TDK’s unique name for what is called non-financial capital. We view all initiatives related to technological capability, human capital, our customer base, organizational capability and so on as leading to the creation of financial value in the future, and thus I decided to refer to these as “pre-financial” rather than “non-financial.”

TDK’s founding began with ferrite, and thus we call the expanded range of products and technologies that have grown from that single element the Ferrite Tree. In that sense, the pre-financial activities as noted earlier can be said as equivalent to the roots of this tree. With these roots planted firmly in the ground, the tree can spread its branches and grow to even greater heights. To achieve the long-term vision we have established, we intend to further strengthen sharing within the company of an awareness of the importance of pre-financial capital, which forms the roots of our business activity, connecting that in turn to a new value creation process.

Of the various types of pre-financial capital, I place the greatest emphasis on people, because people are the root of value creation that supports sustained corporate growth. As I noted at the beginning, TDK’s strength lies not only in the diversity of its human resources, but in an organizational culture that allows us to maximize the hidden power of that diversity. Of our current workforce of approximately 100,000 team members, about 80% have joined us through M&A, and even in the case of an acquired company, we respect the culture they have developed. Our approach of proactively learning whatever we can from the other party now permeates our entire Group.

Underlying this approach is a culture of "functional equality" that has been handed down at TDK over the years. Based on the belief that there are no hierarchies among the functions and roles of the individual divisions, everyone, regardless of position, can respect one another on an equal footing, and can say what needs to be said. TDK has long valued this kind of organizational culture. We believe that the fusion that grows out of the meeting of different cultures and personalities is, in fact, what drives the creation of innovative technologies and products.

We have worked rigorously to create systems for taking full advantage of diversity in terms of Group governance as well. As of June 2024, half of our corporate officers consist of non-Japanese nationals. In addition, viewing Empowerment and Transparency as a basic policy, we have established Global Common Regulations as rules that every team member of the Group must follow and apply them to effective governance. At the same time, we have actively promoted empowerment to regional headquarters and core subsidiaries to ensure individuals can maximize their own personalities and abilities. By giving regional headquarters not only management functions but also marketing and R&D capabilities , we are working to evolve into an autonomous, decentralized organization capable of developing more dynamic strategies.

Among our initiatives aimed at further strengthening corporate governance, beginning in June 2024 our directors will be structured with a majority of outside directors. To ensure management has an even stronger understanding of the importance of pre-financial capital, we have added pre-financial indices, including CO2 emissions reductions and Team Member Engagement Survey scores to the indices linked to corporate officer remuneration.

One other factor I emphasize in pre-financial capital is “quality.” This is one reason why, since becoming president, I have continued to call on the entire group to put “Quality First.”

Quality in this case refers not only to product quality, but quality in a much broader sense, encompassing, for example, streamlining production or improving yield rates, strengthening marketing, or improving working environments and enhancing employee motivation. Since this “quality” is something that can be improved and enhanced through our own individual efforts, regardless of changes in external conditions, we can refer to it as our “own capabilities.” I treat these “own capabilities” as one more area of potential for growth.

For example, in fiscal 2024, the energy application products business saw net sales decline 4.4% year-on-year due to lower smartphone production and intensifying price competition, yet also saw a significant improvement in operating profit, which was up 32.7% year-on-year. This was due the automation of production at each site and the result of improved yield rates through the use of DX (an improvement in quality costs)—in short, achievements based on these “own capabilities.” Going forward, I think that if all of our business around the world were to reassess their own positions, they might discover any number of things they can or should do to improve their “own capabilities.”

To respond to the global rise in geopolitical risks, the Group is moving quickly to optimize its manufacturing sites and reform its supply chain, but those efforts come with a dilemma in the form of rising costs. I hope that by seeking to strengthen our “own capabilities,” we will be better able to absorb those cost increase, and maintain and improve our global cost competitiveness.