Message from the President & COO
New Year’s Remarks from the President & COO
Reinventing Our Businesses and Practicing Our Principles of “Earn, Cut, Prevent”
To all the employees of ITOCHU Group and their families around the world, Happy New Year.
Looking Back at 2018
I would like first to look back at 2018.
As announced in May, our many achievements for fiscal 2018 included consolidated net profit in excess of ¥400 billion, a record high that prompted the upward revision of our fiscal 2019 target from ¥450 billion to ¥500 billion, and we also announced record high first half profit in November. We set other new records, too, including our highest ever per-share dividend, at ¥83, and share price, which hit ¥2,303 in October. Moreover, our major ratings were A’s across the board for the first time in 20 years. In short, 2018 was a year in which we firmly established our standing as a top trading company both in name and substance.
Furthermore, in May we unveiled our new Medium-Term Management Plan and embarked on the “Reinvention” of ITOCHU. We also took significant new initiatives, including making FamilyMart UNY a consolidated subsidiary, entering the automobile distributor and dealership business in Panama, advancing iron ore mine development in Australia, acquiring a stake in an oilfield in Iraq, investing in a Chinese electric vehicle company and a European car sharing start-up, and moving ahead with full-scale development of the energy storage system business. Finally, in order to eliminate future concerns, we acted decisively to record an impairment related to investment in CITIC.
I think that, overall, we were able to respond well to the expectations of the market, and that 2018, the 160th year since our founding, was a truly great year for ITOCHU.
Economic Environment in 2019
2019 marks the 161st anniversary of ITOCHU’s founding and the start of a new decade for the Company. I hope to maintain our momentum and continue setting new records, but the present economic environment is filled with uncertainty.
The U.S. economy still appears strong but is beginning to show signs of peaking. New housing starts are falling and existing home sales have been slowing. The Trump administration has become an unpredictable source of turbulence in the global economy.
The outlook for China is also quite concerning due to escalating trade friction with the United States. The Chinese government is pulling out all the stops to stimulate the domestic economy, including lowering taxes. I think these measures will keep the country’s growth rate above 6%, but I have even heard about the marked slowdown from our assignees there.
Concerns about the slowdowns in the United States and China have caused a decline in commodity demand, and the crude oil and pulp markets have fallen sharply in a short period of time. Although the Nikkei average also managed to hold at ¥20,000 at the end of the year, the plunge of over ¥1,000 at Christmas was significantly greater than that of the Lehman shock 10 years ago.
We must head into the new year understanding that 2019 will be a very different kind of year.
Challenge 1: Reinforce “Earn, Cut, Prevent” in Preparation for Economic Pullback
As we begin a new year, I would like to ask you to request three things today. My first request is that all of you wholeheartedly implement the principles of “Earn, Cut, Prevent,” especially “Cut” and “Prevent.”
In the face of significant economic uncertainty, it is always vital to be sure that we are indeed standing on solid ground and that we are perceptive and agile enough to promptly notice and respond to any issues. The “Earn, Cut, Prevent” business principles are fundamental in this regard.
First, to “Earn,” we must be highly sensitive to customer needs. This is, indeed, what helps us to sniff out changes in the business climate and quickly pick up on issues and -- what helps to drive growth. In 2019, I hope you will pay especially close attention to changes in customer needs and movements in markets. Those of you on the front lines of sales may get caught up in the daily tasks at hand, making it hard to notice such changes. That is where CFO and CAO departments come in, and I ask you, for your part, to fully exercise your abilities to spot signs of change that the sales staff might overlook.
Secondly, in regard to “Cut,” no matter how efficient a business may be, waste always eventually creeps in. In fact, more than 91% of ITOCHU’s operating companies are already profitable. However, I think that, when you closely examine them, you will find that there is still plenty of room for improvement. We must diligently cut it away, bit by bit. “Cut” is an ongoing, never ending practice.
As for “Prevent,” in our experience in the past, when the economy soured, it would give rise to underperforming debt, impairment losses on goodwill and stocks, losses on sales, and losses on business withdrawals. Once things take on a downward trajectory, there is a danger of slipping into a negative spiral. I therefore ask you to keep an even more watchful eye out in the course of normal management, for example, ensuring exacting credit management and gradually reducing large exposures. Furthermore, it is imperative to avoid overpaying for investments. It is also essential to avoid business plans that depend on strong and sustained growth; rather, we must carefully assess the economic outlook, and negotiate tenaciously. In some cases, we may have to pass on potential investments or wait for more opportune times in order to reduce future risk; this, too, is an aspect of “Prevent.”
In 2019, I ask you to assume that the economy will soon be pulling back, and begin dealing with this by reinforcing your “Earn, Cut, Prevent” efforts.
Challenge 2: Laying the Groundwork for the Future through “Reinvented Business”
My second request is to take on the New Year's challenge of working to realize the vision of a "Reinvented Business" outlined in the Medium-Term Management Plan.
Last year, I spoke about how the fourth industrial revolution and digital revolution are rapidly changing the world on many fronts. We have established the Business Innovation Unit within the Corporate Planning & Administration Division, and we are moving ahead with investment in start-ups and cross-divisional initiatives. These moves are significant, but the truth is that the world around us is moving ever faster. For example, Toyota, a traditional player, is partnering with SoftBank, an emergent contender, while in finance, the long-established Mizuho Bank is working with the young company LINE to create a new bank.
The emergent internet-based enterprises, which have enjoyed meteoric growth in recent years, now choose to partner with older non-cyber, or “real,” companies; and at the same time, the older companies aim to realize sustainable growth by working with emergent companies.
So, how can ITOCHU achieve growth going forward? ITOCHU’s strength lies in the distribution networks we have developed over the years, and this is something the aforementioned emergent companies do not possess. We also have human resources capable of driving these operations as well as strong ties with customers and partner companies based on mutual trust. Furthermore, ITOCHU possesses sophisticated capabilities in such fields as finance, IT, and logistics.
In the personal consumption sector, we are well positioned to utilize customer contact and purchasing data at FamilyMart stores. These precious assets will help us deliver new value that cannot be created by the internet-based companies. I ask our colleagues in this sector to step up collaboration with FamilyMart to enhance its product development capabilities and value chain, and to create profitable peripheral businesses in such fields as finance and insurance by utilizing these data.
In electric power business, I encourage our colleagues to gear up initiatives in energy storage system business and other electric power value chain components to seize new opportunities arising from market liberalization and the emergence of renewable energy. In the field of ICT and financial business, I urge our colleagues to step up investment in FinTech, AI, and IoT while pushing ahead with the commercialization of new businesses backed by these technologies.
Last year, I paid a visit to ZhiCheAuto Technology (Beijing) Co., Ltd. (Singulato), an investee of our Machinery Company. Even though their products appear to be automobiles, they function as totally new platforms, like smartphones, and are designed for future generations. Singulato vehicles are expected to serve as a model for EVs and could impact EVs sold on the Japanese market. In a related field,, ITOCHU’s investment in Dishangtie Car Rental (DST), a Chinese company handling the management of EV truck operations, was covered intensively on NHK’s Ohayou Nippon program.
Today, China is in the vanguard of the creation of new technologies and new business models. Although the U.S. administration has become wary of China, suspecting that it might seek to attain technological dominance, we nevertheless believe that the China region offers ITOCHU a great wealth of business opportunities.
As Chairman and CEO Okafuji said in message on “Reinvented Business” last year, our key to success is securing new business directions and channels. Undoubtedly, 2019 will be a pivotal year for our business reinvention initiatives. I urge you once again to make a point this year of raising the level of your awareness and curiosity and envisioning the future direction of the particular business for which you are responsible.
Challenge 3: Increase Profit from Overseas Businesses
My third and final request is that you seize growth opportunities overseas. From 2019, ITOCHU must increase profit from its overseas operations in addition to reinventing businesses. This is another key to achieving further growth.
Last year, I took business trips to China, Taiwan, the Middle and Near East, Africa, North America, and Russia. ITOCHU positions China and other areas in Asia as a priority market region, on par with North America in importance, and the growth of Africa and the promising potential of the resources and market of Russia also stand out. Among all of these, however, China is the most promising market and the one where ITOCHU can exercise its distinctive strengths. In the wake of Prime Minister Abe’s recent visit to that country, Japan-China relations are expected to reach a new stage. ITOCHU likewise must focus on China throughout 2019 as that is where the most significant growth opportunities for the Company lie.
As I have mentioned previously, China has become a new business powerhouse. Shenzhen is expected to outpace Silicon Valley in terms of innovation. Having entered close strategic partnerships with CITIC and CP, both of which have strengths in the local market, ITOCHU is better positioned in the country than other trading companies. In addition, the Group now has more than 1,000 Chinese-speaking employees, and many are being trained to develop new business in China. Analysts, investors and shareholders are now paying close attention to ITOCHU’s next move in China. Promising opportunities lie in such fields as consumer products, where FamilyMart is expected to play a key role; in finance and FinTech, where there are a number of strong Chinese companies; and in mobility, including EVs. Let’s all renew our commitment to working together to accelerate our business development efforts in China this year.
To briefly summarize my New Year’s Message, I request that you keep three things in mind. First, practice the principles of “Earn, Cut, Prevent.” Second, keep reinventing your respective businesses. And third, seize growth opportunities overseas, especially in China.
ITOCHU has always been ready to tackle new challenges. This can-do spirit dates back to Chubei Itoh, who started as an itinerant trader more than a century and a half ago, and it constitutes part of the DNA of ITOCHU. It is the spirit of ITOCHU as a merchant to spare no effort to meet the expectations of our shareholders, investors and customers.
In 2019, we celebrate the 161st anniversary of ITOCHU’s founding. Let us strive to solidify our earning power and work to achieve our target of \500 billion consolidated net profit and thereby realize a landmark accomplishment that will lay the foundation for the next 10 years. I would like to ask all of you to redouble your efforts this year to achieve this goal.
Lastly, I would like to close this New Year’s Message by sending best wishes to ITOCHU Group members around the world, their families, and others who support them, wishing them all good health and greater success in 2019.
Thank you very much.
President & Chief Operating Officer
January 4, 2019