Kawasaki Debating Price Increases

Kawasaki Heavy Industries Ltd. President Tadaharu Ohashi says the company has experienced decreased sales of motorcycles in North America and Europe. No surprise, he says it’s because of consumers wary of the global financial crisis.

Ohashi also says a strengthening of the yen and rising raw materials prices may force the company to raise prices for its product. He offered his view of Kawasaki’s response to economic conditions during a recent Q&A session, edited for brevity and clarity:

Q: What will be the impact of the global financial crisis and the deterioration in the world economy on the management of KHI’s business activities?
Ohashi: It is still not transparent how much the financial crisis will impact the world economy as a whole. However, since overseas sales account for more than half of KHI’s sales, if the trend toward deterioration in the world economy continues for a prolonged period, this will have an adverse effect on our performance.

Q: Could you please describe in somewhat more detail what might be some of the effects of the downturn on KHI?
Ohashi: Our motorcycle, industrial robot, and certain other businesses are susceptible to the effects of the weakening of the world economy, and the markets for their products are shrinking. Nevertheless, looking at the Group as a whole, we have a sufficient backlog of orders as well as new projects, and we must make sure this work is carried out smoothly.

Q: What is the outlook for KHI’s performance for the full fiscal year ending March 31, 2009?
Ohashi: We are concerned about the adverse effects of the sharp appreciation of the yen and the rise in raw material prices as well as further deterioration in the real economy as a result of the global financial crisis. At the present time, we believe that, if we make the necessary effort, it will be possible for us to meet our management objectives.

Q: The yen has appreciated against both the U.S. dollar and the euro. What is your appraisal of the effects of these currency movements?
Ohashi: The effect will be greater in the next fiscal year and subsequently, but we also purchase significant amount of raw materials in dollars and euros, which will reduce our forex exposure. If the yen appreciates, we will take quick action to arrange for forward contracts, and, as an additional measure, we are considering increasing dollar-denominated costs by enhancing overseas procurement and production. We must also consider denominating more of our contracts in yen.

Q: What countermeasures will you be taking to deal with a rise in raw materials prices?
Ohashi: The first important countermeasure will be reducing costs, but raw materials prices today have risen to such a high level that cost-cutting efforts alone will not suffice. Therefore, we must consider passing the portion of raw material price increases that we cannot absorb through cost reductions on to our product prices. We believe that, while we feel apologetic to our customers, we must ask our customers to bear the higher costs that we have not been able to absorb even by making our strongest cost-reduction efforts. In addition, when we sign long-term contracts, we will do our best to include escalation clauses that will allow us to reflect higher raw material costs in our selling prices.