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President Hiroyuki Maekawa’s Remarks on "K" Line’s 90th Anniversary [Apr.8, 2009]

Remarks on the Company’s 90th Anniversary
Hiroyuki Maekawa, President and CEO
 
Foreword
 
In the 90 years since our company was founded, we have been through the tremendous upheaval of a World War and its aftermath, the rapid and repeated appreciation of the Yen and the oil shocks of the 1970s, and then the collapse of the economic bubble, which shook the management foundation of the company. Despite the twists and turns of fate, we have managed to steer a course which has built Kawasaki Kisen Kaisha, Ltd. ("K" Line) into one of the five largest marine transport companies in the world, with sales surpassing ¥1 trillion every year since 2006 and ordinary income topping ¥100 billion in both 2004 and 2007. Furthermore, we have focused our efforts not only on profits, but also on building a very solid financial base for the corporate group. These accomplishments reflect the high levels of service that the company provides, the support we have received over the years from customers around the world, and the foresight, creativity and tremendous hard work of the company executives who preceded me. Finally, the dedication, care and attention to detail exercised by employees and support divisions have allowed the company to avoid any major accidents.
 
On this, the occasion of the company’s 90th Anniversary, I want to take the opportunity to thank every employee and executive in the "K" Line Group for the continuous effort and dedication that they have contributed to the company. I feel fortunate to be the president of the company on this momentous occasion and I am sure that they share my joy in reaching this milestone for "K" Line. Of course, 90 years is just a transition point on the way to 100, and in the broad sweep of history even the 100th Anniversary will simply be a temporary milestone in the company’s annals. This perspective is particularly important today, as we face an economic crisis that is described as a "once-in-a-century event". It will not necessarily be possible to apply the lessons that carried the company through the economic downturns that we have faced in the past. Nevertheless, it is often said that "wise men learn from history – foolish men learn from experience". Therefore, I would like to examine some of the lessons that we have learned over the past 20 years and discuss my determination to see this company through the current economic crisis. Furthermore, I want to discuss the course that "K" Line will chart as we move forward, towards the company’s 100th Anniversary.
 
A history of repeated restructuring and rationalization
 
"K" Line has a history of repeatedly making changes and improvements to rationalize its operations and upgrade the level of service, beginning with the "K Plan" – a medium-term management plan adopted in 1982. This was followed by the "New K Plan" in 1984, the emergency rationalization plan in 1987, and measures to improve the level of service in 1990. The frequency and urgency expressed in these plans should be suggestive of how shaky the management foundation of the company was in those years, and the biggest challenge was yet to come. In 1990 Japan’s economic bubble collapsed, and we entered the period now referred to as "the lost decade". "K" Line began an extended program aimed at improving both earnings and its financial base, starting with the "Target-10" Campaign in 1992, the "K Line Re-Engineering (KR) Program" in 1993, and "K.R. Phase II" Program in 1996. As the yen soared in value – to as high as ¥79 per dollar in April 1995 – the company faced a life-and-death struggle which forced us to improve the financial structure and re-evaluate the foundation of our business procedures, conduct a thorough cost-cutting program and shift our focus to international operations, in order to become competitive in international markets and to establish a stable foundation for earnings.
 
Restoring dividends for the first time in 15 years
 
These rationalization efforts helped the company to achieve an international level of cost competitiveness, cutting consolidated SG&A expenses by some ¥8.7 billion, from ¥60.2 billion in 1992 to ¥51.5 billion in 1997. Over this five-year period, ordinary income at the parent company improved from a mere ¥1.2 billion in 1992 to ¥10.2 billion in 1997, allowing us to restore dividends for the first time in 15 years. Although the management foundation was still not rock-solid, the launch of the "New K-21" plan in 1998 took "K" Line into the 21st century with very high expectations.
 
The 9/11 attacks and subsequent rebound
 
The "New K-21" plan succeeded in greatly improving the financial structure of our company. However, the panic triggered by the terrorist attacks of September 11, 2001 caused shipping rates for container vessel cargo shipments to plunge sharply, and earnings to drop off accordingly. In response, "K" Line introduced the "KV-Plan" aimed at creating a stable business base that is not severely affected by market fluctuations. Our "Cost-Slash 300" plan was then adopted, in which the company cut costs by ¥30.0 billion over the course of just three years, reduced interest-bearing debt and improved cash flow as part of an effort to solidify the financial structure. These efforts under the KV-Plan bore fruit, as company earnings rebounded and "K" Line posted its highest net profit in history in 2003.
 
Plotting a course towards sustainable growth
 
At this point, the company began to build a foundation for sustainable long-term growth and stable earnings, with the "K LINE Vision 2008" plan in 2004, "K LINE Vision 2008+" that commenced in 2006, then "K LINE Vision 100" commencing in 2008. In 2003 the company started to take advantage of growth in the Chinese economy, which was expanding at a double-digit pace. Favorable economic conditions there and throughout the world allowed the company to meet the targets initially set for 2008, under the "K LINE Vision 2008" plan, within the first two years of the plan – 2004 and 2005. On the other hand, a brisk increase in the price of crude oil coupled with global consolidation of the marine shipping industry, through mergers and acquisitions, brought significant changes in the general business environment. Therefore, the company revised its goals somewhat and introduced "K LINE Vision 2008+" plan. A continued rise in global marine transport shipping volume and a dramatic surge in dry bulk rates once again allowed "K" Line to meet the goals set for 2008 a year ahead of schedule. Accordingly, in April of 2008 the company embarked on its "K LINE Vision 100" management plan, whose underlying themes were "synergy for all and sustainable growth".
 
The global financial and economic crisis
 
In August 2007, a sub-prime loan crisis in the United States set in motion a financial collapse that would plunge financial markets throughout the world into turmoil. By the latter half of 2008, this was beginning to take its toll on the global economy. Without delay, "K" Line began to shift into a mode of urgency and taking active steps to prepare the corporate group for future challenges. Specifically, in December 2008 we created an "Emergency Task Force" with myself as the Task Force Manager and Vice President Eiichi Suzuki as Assistant Manager. Reporting to this task force are two newly-created organizational units – the Earnings Improvement and Cost-Cutting Section and the Risk-Related Planning Section – which will coordinate responses for the entire group.
 
Paradigm shift
 
The current situation is one of dramatic change; previously the global economy had been sailing along smoothly, but suddenly the basis for this growth has been shaken to the core. The illusion of buoyant demand, generated by overleveraged borrowing and excessive consumption, has crumbled. Growth in the US economy and a relatively weak yen, which were the underpinnings of "K" Line’s corporate earnings growth, have succumbed to reversals and faith in the US dollar as a benchmark currency is being shaken. For a company like "K" Line, whose earnings are primarily denominated in dollars, this is a time of dramatic reversal which may require changes in the company’s basic business structure. In the future, it appears that much of the impetus for economic growth worldwide will come from a variety of sources, including the newly industrialized economies, particularly in Asia, and the axis of financial power may shift to several different currencies. The world currently faces a large number of compounded challenges, including not only economic crisis but also global warming, energy issues, and concerns about food supply and global poverty – problems which will challenge our ability to develop peaceful, humanitarian solutions to ensure our mutual survival on this planet. We must successfully achieve peaceful international relations if economic growth is to remain healthy; and if we can create a society where people have an opportunity to better their lives, it will surely lead to increased global trade, and thus the benefit of continuing growth for marine transport companies such as "K" Line. Even after the global economy completes its correction and is back in line with more appropriate levels of demand, I believe that international marine transport will continue to be a growth industry. If we are able to ride out the current crisis, and address the problems in front of us, I think we can look forward to a promising future.
 
Conclusion
 
I believe that the most important challenge for this company, at present, is the need to train our work force and prepare them for the challenges of the future. We are currently in an era of dramatic change, and it is essential that we create an environment that prepares employees, giving them the keen awareness and practical skill to implement change and restructuring activities successfully. Our company currently employs some 870 people both on land and on our ships, including temporary workers, contract employees and shore staff. The "K" Line Group as a whole has 7,600 dedicated workers who communicate closely and contribute energetically to the company’s success. Every day these individuals apply themselves to the many challenges we face, without regard to past customs or taboos, and without fear of failure, with an attitude that exemplifies the "K" Line Spirit. In this way, we are charting our course towards the company’s 100th Anniversary, and beyond, following a true heading that will not be pushed off course regardless of the headwinds and currents. On this, the company’s 90th Anniversary, I want to thank you one and all, for your past, present and future contributions.

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