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New Year's Greeting by NYK President Kudo - Making use of NYK's 3 I's (Integrity, Innovation, and Intensity) -

January 4, 2013

I would like to start off by wishing you a happy New Year and thanking you very much for your kind attention. I would now like to make a brief statement in opening our business for the year 2013.
Overview of the Economy
Looking back over the past year, 2012 was marked by changes in leaders and presidents in many of the world’s major countries. Elections were held in countries including: China, France, Japan, Russia, South Korea, and the U.S. It is believed that the political and economic leadership implemented by the new administrations of each country will have a significant impact on the global economy over the medium to long term.
It has been pointed out that China’s real GDP growth rate dropped to 7.4 percent year on year during the three-month period from July to September 2012, reflecting a deceleration in the economy. However, the annual double-digit growth rate that China had enjoyed up until then should actually be viewed as exceptional. Nevertheless, we still view the Chinese market as one for which stable growth can be expected in the future. Meanwhile, the ASEAN economy, which has approximately half the population and is one third of the economic scale of China, has continued to perform strongly. There have been moves to transfer some production bases from China to South East Asia in response to rising labor costs in China and the recent manifestation of the so-called China risk brought about by the territorial conflict over the Senkaku Islands.
In terms of the economies of the developed nations, it looks as though an immediate collapse of the financial system in Europe has been avoided with the European Central Bank’s announcement that it is prepared to make unlimited purchases of southern European government bonds. Yet, despite this and moves towards a unified system of banking supervision for the region, uncertainty remains.
Although there have been positive signs in the U.S. economy, such as strong automotive sales, a recovery in sales of homes and the “shale gas revolution,” the nation faces a threat of the so-called fiscal cliff, during which large-scale tax cuts could expire, meaning that at the very least there will be new challenges to face over the near term.
Since the outbreak of the Arab Spring, the Middle East has been plagued by confusion, with tensions between Iran and Israel being a particular cause for concern. The situation in the Middle East has a strong impact on global energy supply. We need to watch further developments closely.
Business Environment
Within this changing and complex global situation, the marine transportation and air cargo transportation businesses continue to struggle, facing a significant gap between supply and demand. Excluding Europe, marine transportation demand itself has outgrown levels before the global recession from September 2008 and is on the path to a gradual recovery in North America. Combined with solid growth in demand in Asia and natural resource-rich countries, marine transportation demand is growing on a global scale, but falling short of previous growth-rates. Accordingly, the cause of the gap between supply and demand we currently face, is an after effect of the fleet expansion which was made in response to the rapid growth in demand prior to the global recession. As a result, our business environment will continue to be particularly harsh until this significant gap is resolved. Although we managed to post a recurring profit of ¥13.0 billion for the first half, the entire Group will have to work together for the remainder of the second half to achieve our target for fiscal 2012 of ¥20.0 billion. As the New Year commences, I would like to refer in more detail to the current situation and future outlook, and highlight measures to be implemented in response, particularly for divisions that face major issues.
Global Logistics Business
Firstly, compared to other types of vessels, the supply and demand gap is largest within the containership business. According to NYK Research Group, 2013 will see the all-time highest number of new container vessel deliveries, with 280-plus vessels, representing 1.80 million TEUs. Of this, 100 large scale vessels over 8,000 TEU capacity will account for 1.10 million TEUs. If such vessel numbers were to be introduced on Asia–Europe routes only, it would result in an annual increase in space of 5.50 million TEUs. Since the current annual cargo movement between Asia and Europe is approximately 14.00 million TEUs, this potential growth rate is startling. Although the volume of vessel completion will significantly drop next year compared to this year, it will remain relatively high, mainly for large scale vessels. Accordingly, it is believed that it will take several years for the supply and demand gap to be eliminated. By laying up surplus vessels and increasing slow steaming operations in response to the existing significant gap, containership companies are managing to keep revenues and expenditures on an even level, avoiding the massive losses that were recorded during fiscal 2011. However, there are doubts as to whether it will be possible to overcome the substantial shipping supply pressure from this fiscal year. We are pleased therefore, that the correct decision following the global recession was taken giving an immediate shift to a light-asset business model by making changes to the vessel-type of new buildings from containerships to other that had already been ordered. In addition, with a shift to light-asset, we must also see the surplus of vessels as an opportunity. We must with speed and vigor fully leverage low charter rates of vessels with our strong contract logistics capabilities in logistics division, while expanding customers and trading volumes in the containership division and Yusen Logistics Co., Ltd. Once again, we need to remember, that the scale of our business is not measured in terms of physical assets such as vessels and space, but rather trading volume. Furthermore, what determines our competitiveness more than anything else is our cost base. What affects our cost levels more than anything else is the reduction of the 3 Ms: Muda, Mura, and Muri (Muda: non-value adding activities, Mura: unevenness in production or work activities, Muri: excessive burdens,). As stated above, the number of excess containerships, which could be said to be Muda, is just the initial cost level to be considered. In addition, it is essential for us to operate our core fleet without Muda, Mura, AND Muri. Furthermore, for the containership division, it is extremely important how efficiently the containers themselves can be managed without Muda, Mura, and Muri. This can have an even greater effect on cost reductions. If large volumes of outbound cargo are loaded for inland destinations with no return cargo, can it really be profitable considering the positioning costs of empty containers? Challenges such as these are likely to test our true human ability of innovation and intensity.
Bulk Shipping Business
Turning to the Bulk Shipping Business, while the supply and demand gap remains large, at the very least we have started to see signs of this reducing in the dry bulk carrier division. For example, newbuilt capesize bulk carriers, which from 2010 until 2012 were completed at a pace of over 200 per year, will drop to approximately 100 this year and approximately 40 in 2014.
Added to which, annual recycling of some 60 to 70 vessels and an expected increase of new cargo movements focused on the emerging countries employing 40 to 50 vessels, allows an optimist outlook from the second half of this year as the supply and demand gap gradually reduces. Currently NYK’s operational fleet of capesize bulk carriers is approximately 110. Of these, approximately 80 vessels were introduced on long-term contracts. The remaining 30 ships might be thought of as Muda given the current supply demand balance, although this is not a strictly accurate use of the phrase. However, if you remember that we only had some 30 vessels with long-term contracts at the beginning of 2000, when the operational fleet was approximately 30 to 40 vessels, we should focus on our success in building up long-term contracts for 80 vessels from 30 in ten years, rather than highlighting the increase in Muda. Fortunately, we will be able to redeliver vessels with high charter rates over the next few years. To ensure these ships without long-term contracts are not really Muda until we can redeliver them, we must work on accumulating long-term contracts by leveraging our fleet size, one of the largest in the world. On the other hand, for the Bulk Shipping Business as well, the biggest form of Muda is ballast voyages. Minimizing such ballast legs will have a large impact on our cost competitiveness. Consequently, please maintain your efforts to acquire cargoes to minimize ballast legs.
In addition, we cannot help thinking that, compared to the containership business, we have not sufficiently developed slow steaming operations in our overall Bulk Shipping Business. With the surplus of vessels, we have to be ever mindful that the insufficient slow steaming operation is Muda.
Technology, Safety, and Environmental Issues
This year a Japanese Parliament Bill for special legislation, lifting the ban on private sector armed guards from manning Japanese flagged ships, is to be submitted to the regular session of the Diet. This increases our hopes of governmental support for our own anti-piracy measures. We believe that the differentiation of the Group’s service quality relies upon the safe operation of vessels and aircraft as one of the most basic elements of all marine and air cargo transportation businesses. To provide the higher quality of customer service embodied in “More Than Shipping,” the Group needs to fully leverage its knowledge and technical skills that exceed those of its competitors, achieve CO2 and cost reduction targets through measures including fuel saving, and use these cost and waste saving aspects to improve our proposed capabilities in sales activities towards our customers.
Corporate Affairs and Compliance
To implement our “More Than Shipping” strategy, a supporting framework is required and it has been repeatedly said that the corporate division plays this important role. We must remember that the strengthened competitiveness of our corporate division through the thorough implementation of the 3M project aimed at the elimination of Muda, Mura, and Muri will have a significant impact on the competitiveness of our Group overall.
I must also mention compliance, which is of highest importance. Again, I would like to request that all within our company do their utmost to remain aware of Antitrust Laws and ensure compliance.
Fiscal 2013 is the final year for our “More Than Shipping 2013” plan. As the containership-centered gap between supply and demand becomes more pronounced with the stagnation of developed Western economies, we feel pride in the correctness of our decisions to make a shift to a light-asset business model in the containership division. Equally so for our strategy of expanding business focused on Asia and the other emerging countries through our competence in solution providing as conventional shipping with more added value. Despite the dim short term outlook for the marine transportation and air cargo transportation businesses, we do believe there is cause for optimism, as seen in the steady increase within the logistics business. We have one of the largest fleet sizes in the world and a wide variety of vessels, a varied business portfolio and a global network. The NYK Group can be assured of further growth if we are able to demonstrate our capabilities to eliminate the 3 Ms through integrity, innovation, and intensity and propose improvement to customers through the combination of our abundant knowledge and technical skills.
Allow me conclude this speech by offering my sincere wishes for the health and prosperity of you and your families.
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