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New Year's Speech by President Kudo

January 4, 2010

I wish you all a very Happy New Year! Hoping that all of you spent a joyful New Year holiday, I would like to take this occasion to say a few words at the outset of this year's business.

In retrospect, the worldwide recession, triggered by the financial crisis in autumn 2008, became increasingly severe, and kept nations busy implementing a series of countermeasures throughout the year. In the latter half of the year, large-scale economic stimulus and financial stabilization measures, carried out by a number of countries, were so successful that signs of recovery began to appear in not only Europe and the United States, but also in Japan as well. For the immediate future, however, a full-fledged economic recovery must wait.

 
Under these circumstances, how did the world's cargo traffic fare last year? Container cargo transport volume suffered a fall of 15 percent or so between Asia and Europe/the United States compared with the previous year, while air cargo transport volume also saw a decline of 15 percent. The possibility of such a downswing had been generally accepted, but the export shipments of new-car from Japan were almost halved from the previous year's level, far exceeding the earlier projected downturn.
 
Meanwhile, China had a difficult time under the impact of delayed economic recovery in Europe and the United States, with container cargo export from that country down 20 percent or so from the preceding year. Nevertheless, China has expeditiously implemented large-scale measures to stimulate domestic demand. China's iron ore imports, which have a major impact on the world's dry-bulk cargo ocean freight market, already surpassed the previous year's average level from February last year, fully returning to growth. To be frank, this belied an earlier forecast to the contrary, although it was a welcome development. As a result, the dry-bulk cargo ocean freight market fared well on the whole.
       
As you are already well aware, the urgent task of the Yosoro (Steady Ahead!) Project has been to thoroughly reduce fixed expenses for ship operations and deployment, such as fuel costs and port charges, by such measures as returning or scrapping surplus container vessels, car carrier vessels, airplanes, warehouses and trucks; and if returning or scrapping is impossible, to keep them out of operation. At the same time, we have fully proceeded with slow steaming of container and car carrier vessels.
 
As a consequence, our operating fleet taking into account of running vessels at economical speed, was scaled down drastically between January last year, when the Yosoro Project got under way, and January this year, with container vessels down from 115 vessels of 410,000 TEU to slightly over 90 vessels of about 350,000 TEU, and car carrier vessels down from 130 vessels to approximately 90 vessels. Meanwhile, two of our 10 airplanes have remained idled. In addition, superfluous warehouses and trucks, especially in Europe have been whittled down from 850,000 square meters to 760,000 square meters, and from 1,500 units to 1,100 units, respectively. At any rate, we must redouble these efforts to slim down surpluses and achieve the restoration of profits by all means during the second half of the current fiscal year.
 
Nonetheless, these surplus-reduction measures mentioned thus far do not suffice to restore profits, especially in the liner trade and air cargo transport. It is necessary to raise and return freight rates, which have plummeted sharply, to the proper level. To that end, the understanding of our customers is indispensable. Fortunately, our rate restoration efforts have started to score a measure of success since the summer of last year. Yet we must never forget that this was made possible by gaining the understanding of our customers through our own efforts.
 
Moreover, cargo traffic has rebounded since last summer, making it possible to reduce our deficits. Even so, the deficits still remain enormous. If things go on like this, there will be no change in the prospect that it will become difficult to maintain our liner trade and air cargo transport business.
 
For the present, therefore, while continuing our efforts to further reduce surpluses and pare down costs as well as to gain the understanding of our customers for raise freight rates, we must hasten the restructuring of our business toward turning our liner trade air cargo transport businesses into "sustainable" business models. This is one of the most important task for the second year of the Yosoro Project. Details of this task will be further studied and worked out, but its preliminary direction was presented during a review of our medium-term management plan in October last year.
 
We intend to restructure our business models to create a mainstay of two spheres—transport business by our own assets, container vessels and airplanes, and transport without our own assets using ocean and air freight forwardings —namely, "non-asset" and "asset" businesses.
 
Finished products and their component parts for their manufacturing and maintenance constitute principal transport items for liner trader and air cargo transport businesses. Since most of them are consumer goods, however, there are no long-term transport contracts with customers guaranteeing the freight rate level and the transportation volume, unlike the resources and energy transport. As a result, once the supply-demand situation becomes tight, freight rates shoot up; whereas once supply eases, freight rates plummet. That is, liner trade and air cargo transport businesses are characterized by an extremely high degree of volatility.?      
 
Liner trade and air cargo transport businesses also represent growth industries that expand its demands in proportion to an increase in the world's population. Nevertheless, the expansion of such businesses while leaving their great volatility intact poses a grave danger and that is what we experienced last year. Accordingly, I believe that emphasis should be placed on "non-asset" operations for the time being, in the course of our efforts to augment liner trade and air cargo transport businesses.
 
Nonetheless, this by no means rules out owning of container vessels and airplanes. Unless we possess such "hard assets," we lose our means of differentiating ourselves from our competitors by making the most of innovation and ingenuity. Nor is it possible to build up flexible and expeditious services desired by our customers. Let me cite one example. The recent recovery in the air cargo transport sector has been accompanied by a sharp rise in customer inquiries and contracts for charter flights. But a lack of adequate hardware will make it impossible to properly cope with such a demand.
 
Furthermore, because ocean transport is a growth industry from a medium- and long-term perspective, there is the strong possibility that the supply-demand balance will settle down to a proper level in the future, if operators learn enough from their recent bitter experiences and accept slow steaming as normal practice to deal with soaring fuel prices and environmental problems. We have no intention of completely losing the expected profit in such a case by having hard-asset.
 
The problem lies in having an excess of long-term fixed assets. We must exercise constant care to minimize our long-term fixed assets, overcome any deficiency in such assets through short-term lease and thereby maintain our downward flexibility at all times. The part of our container vessels fleet, which constitutes such long-term fixed assets, will be slimmed down to half the number of vessels and its total space capacity will be trimmed to two-thirds by 2015.
 
Now let’s turn our attention to how best to enlarge our freight forwarding division. NYK Group already includes two logistics companies—“NYK Logistics” as NYK’s logistics business and Yusen Air & Sea Service.
 
Main business of NYK Logistics is "contract logistics" business, such as warehousing, cargo collection/distribution for inland transport, customs clearance and consolidation/deconsolidation, and expansion of ocean freight forwarding business requires to increase handling volume by providing air freight forwarding service, which leads to their customers’ conveniences.
 
On the other hand, Yusen Air & Sea Service is engaged primarily in air freight forwarding business and lags in ocean freight forwarding business and contract logistics. Under such circumstances, they have recently received an increasing number of inquiries from their customers for those but they could not fully deal with those inquiries.
 
When viewed from the customers’ perspective, the sales activities of these two logistics companies in the same NYK Group involve not only different services—contract logistics business of NYK Logistics and air freight forwarding business of Yusen Air & Sea Service—but also identical services, namely, ocean freight forwarding business. This undoubtedly represents a business system ignoring our customers’ viewpoint.
 
Merging these two companies make it possible not only to eliminate overlapping sales system, but also to establish a structure capable of fully serving all logistics needs of customers—ocean/air freight forwarding and contract logistics businesses.
       
This is what lies behind our recent decision to explore the possibility of merging the two group companies. Nevertheless, the merger of the two companies will in no way represent a complete solution to all problems involved. That is, the merger will not prove to be truly effective until we foster logistic professionals fully versed in all aspects of ocean/air freight forwarding and contract logistics and thereby enhance our ability to help our customers solve their problems.
 
Rather, the newly formed structure will have to face a decisive test after the merger, and we should never forget to add the finishing touches. As part of our effort to that end, we began a vigorous exchange of personnel among our liner trade division, NYK Logistics and Yusen Air & Sea Service and etc. from last summer.
       
Meanwhile, another key pillar of the Yosoro Project is the offensive or preparations for the future offensive. In this respect as well, we pushed forward with our endeavors last year. As of January 1 this year, our backlog of newbuilding orders stood at about 190 vessels. About 140 of them, or the majority, are bulkers and energy transport vessels. On the strength of these bulkers on order, we are expanding long-term transport contracts with such overseas giants as major steel mills of China and India and mining companies of Brazil. Henceforth, we will continue to invest in the transport of resources for steel, electric power and energy-related industries on the basis of long-term contracts. Our backlog of newbuilding orders also includes a drillship, a contract for which we concluded last year. At present, moreover, we are making positive efforts to take part in other offshore business sectors as well.
 
However, in the midst of the global financial turmoil, it is necessary for us to maintain a solid financial structure if we are to keep making positive investments in those growth areas. Our capital increase at the end of last year also constituted part of our preparations for further growth.
 
Our past activities should be enough to convince you that the Yosoro Project, which got under way in January last year, has been making steady progress. In this year of putting finishing touches on this project, we have to "reinforce our business capacity," and on that basis, ponder the future portfolio for our company while expanding our business and exploring investment projects to secure appropriate returns in the future. This means the "making next mid-term management as a growth strategy," which is the most important and an extremely difficult challenge that we face in the current Yosoro Project. However, we must achieve this target with "Integrity, Innovation and Intensity."
 
I have so far discussed the activities related to our business divisions at great length. However, as I pointed out in my speech at last year's ceremony commemorating the anniversary of our company's founding, it is also an important task of the Yosoro Project to reinforce the competitive strength of the corporate division. Thanks to all of your efforts, the reduction of costs has made smooth headway in the corporate division as well. As I noted just now, we have also strengthened our financial structure.
 
This year, I would like to call for thorough and further study and verification of the best way to restructure our corporate division to create an entity that is easy to use and devoid of waste from the viewpoint of our customers—that is, from a viewpoint of business divisions that receive the service of the corporate division.
 
Valuable personnel to be shifted as a result of restructuring will be asked to play an active part in the business and in other divisions. By so doing, we must further invigorate our entire structure. Such realignment of talented manpower for more useful assignment should not be limited to the corporate division alone. It is also applicable to other business divisions.
 
Safe navigation continues to be the top-priority for our company. The ability to ensure navigational safety has become increasingly indispensable in joining and expanding energy transport and offshore business. Safe navigation is one of our company's strong suits differentiating us from our competitors. By fully demonstrating its ability, we will drive to expand further offshore business.
 
Moreover, coming up with the best way to cope with soaring fuel costs and curbing global warming are of vital importance for our company as well. In this respect, we are making steady progress in our efforts to differentiate ourselves from our competitors in both hardware and software, thanks to the "Integrity, Innovation and Intensity" of the members at our technical headquarters.
      
I have so far dealt with various tasks confronting the respective divisions this year. It goes without saying, however, that all NYK Group members need to enhance our “human ability” in order to successfully achieve those tasks. I would like to call upon each and every NYK Group members to do so by practicing the NYK Group Values of "Integrity, Innovation, and Intensity," and together tide each other over the current difficulties.
 
Let me conclude my New Year Greetings by offering my sincere wishes for the continuing health and prosperity of you and your families.
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