R E S T R I C T E D RETURN TO REPORTS DESK R e p o r t N o. T.O. 103 WITHIN FLE C ONE WEEK R1 U This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT ON JAPANESE INDUSTRIAL PROJECTS February 14, 1956 Department of Technical Operations CURRENCY EQUIVALENTS 1 US$ Y360 TA'BLE U? C,Ci1TT , '53 Page Summary I, Introduction 2 TT. Shipbuilding and ilarine Engines 2 III. Mitsubishi Shipbuilding & Engineering Co., Ltd. 4 IV. Ishikawaiima Heavy Industries Co., Ltd0 11 VI NTippori Steel Tube Co., Ltdo 17 VTI. Toyota 'Iotor Co., Ltd. 24 VITO Conclusions and Recomnendations 30 Appendices Table IL Table 2 Anmex A-1 - A-4 Mitsubishi Shipbuilding & Engineering no., Ltd. Annex 3-1 - B-5 Ishikawajira Heavy Industries Co., Ltd. Annex C-1 - C-9 iiippon Steel Tube Co., Ltd. Annex D-1 - D-5 Toyota lotor Co., Ltd. SUI:ILkRy 1. It is proposed that the Bank lend the Japanese Development Bank '8,1 million equivalent for relending to four irndustrial companies. The loan would ha7e a maturity of fifteen years and would be guaranteed by the Japanese Government. 2. The four companies wh'ich would benefit from the loan, and the amounts which would be relent to the:m are: TJS Eqauivalent ELitsubishi Shipbuilding & Engineering Co., Ltd. 1,500,0o0 Ishikawajima Heavy industries Co., Ltd. 1,650,000 Nippon Steel Tube Co., Ltd. 2,600,000 To;-rota Motor Co., Ltd. 2j350,000 8:100,,000 3. The Mitsubishi and the Ishikawa4ina companies are primarilyr producers of ships and marine engines, although they also produce other industrial equipment, Japan1s large shipbuilding industry has become an increasingly important factor in its export trade. The proposed loans would enable these companies to retool for more efficient production of diesel engines and superchargers. The tools, beirng multipuLrpose, could also be used for production of other engineering products. The two projects are aimed at cost reduction and product improvement rather than expansion of capacity. 4. The Nippon Steel Tube Co., Ltd. is the largest producer of pipes and tubes in Japan, and the nation's third largest steel producer, with an output of 500,000 tons of finished steel per year. The proposed loan wouild enable the company to install a new 120,000 ton seamless tube mil'l to replace two obsolet-e mills. The new mill wouald make possible production of a wider range of tubes of higher quality and at lower cost than presently possible. 5. The Tovota Co., Ltcl. makes cars, trucks and busses, producing over 20,000 units per year. The proposed loan wouold enable the company to modernize its truck and bus nrodiuction with consequent- quality improvement and cost reduction. 6. The fcur projects involve the im:lort of more than one hundred items of equipment, machines and machine tools of sizes or types which are not available in Japan. Competitive international bids have been obtained, where feasible, 7. The four companies which would benefit from the proposed iloan are well managed. With the exception of the Toyota Co., Ltd., all have relied heavily on debt financing to cover their increased working capital requirements and plant modernization and expansion expenditures in recent years. The companies are aware of the need to maintain or iri-.prove (as the case may be) their firancial structure, and all are prepared to furnish appropriate assurances to the Bank as to the financial policies they would follow to achieve the stated financial objectives. 8. The four projects which are individually appraised in this report form a suitable basis for a Bank loan of $8.1 million equivalent to the Japan Development Bank. -2- I. INTRODUCTION 9. The Japanese Government, through its Ministry of International Trade and Industry (MITI) applied to the Bank in the summer of 1954 for financial assistance for projects b- 12 companies in the steel and machinery industries. Field investi- gations were carried out in October and November 1954. 10. In October 1955, the Bank approved a loan to the Yawata Steel Company for $5,300,000 (T.O. 95-A). Projects of four other companies - one steel conipany and three companies in the machinery field - are the subject of the present report. The following table lists the companies and the amounts of the proposed loan: US E $ lvalent vitsubishi Shipbuilding & Engineering Co., Ltd. 1,500,000 Ishikawajima Heavy Industries Co., Ltd. 1,650,0 0 Nippon Steel Tube Go., Ltd. 2,600,000 Toyota Mtotor Co., Ltd. ) 570 Total .4g,l00,OOO 11. It is proposed that a single loan in the amount of $8,l00,000 equivalent be made to the Japan Development Bank, the Proceeds of which would be relent to the companies (beneficiary enterprises) listed above. The proposed loan would be guaranteed by the Japanese Government. 12. Under the proposed procedure, the Bank would rely, for project execution, on a covenant by the JDB rather than on covenants from the beneficiary enterprises themselves. However, these latter would, individually, make formal representations in letter form to the Bank concerning financial policies to be pursued. II. OHIPPVUI[D_ING A,ND MARM ET TGINTS 13. Japan has had a large shipbuilding capacity for decades. Pricr to World War II, naval shipyards formed a substantial part of the capacity and shipbuilding was mainly for national purposes. Japan's shipbuilding capacity was estimated in 1948 at 800,000 gross tons per annum. Present capacity is certainly larger than this, since the introduction of steel welding techniques has reduced the time for building ships assumed in the 1948 estimates. 14. It was only after the war, particularly after 1951, that shipbuilding for export became significant. In the 3-year period, 1949-1951 inclusive, exports amounted to 129,000 gross tons or 13%t of total completions. In the 1952-1954 period, exports climbed to 570,000 gross tons or almost 355 of total completions of over 16 million tons (see Table 1). - 3 - 15. In 1953, exports of shins amounted to * 34.5 billion ($.96 million) representing more than 5M, of Japanese machinery exports in that year or 7% of total exports. Ship exports fell off to Y 20.3 billion ($ 56 million) in 1954 but in view of the large backlog of orders (see Table 2) exports are certain to increase in 1955 and 1956. 16. Japan's own merchant fleet, wlhich totalled 6 million tons before the war had been reduced to less than 1 million tons oy 1945. This fleet is being rebuilt to enable the Japanese economy to reduce its foreign exchange expenditures for shipping services. Before the war, about 60% of Japan's foreign trade was carried in its own ships, as compared with aboub 40% at present. Further growth in the Japanese merchant fleet will be necessary, if the proportion of foreign trade carried in Japanese ships is to be maintained at present levels or increased. 17. The Korean boom enabled the Japanese shipbuilders to book substantial orders in 1952. However, new orders declined sharply in 1953. This tendency continued during the first half of 1954, partly because the Government reduced the size of the dornestic shipbuilding program (in line with a policy of budget restrictions), and such orders were not allocated to shipyards until late in the year. In order to stimulate export business the Government made available cheap credit for financing export orders and other inaducements. 18. Total new business booked for the year amounted to more than 630,000 tons (compared with about AS0,000 in 1953). lhe backlog of orders on April 1, 1955 exceeded 1 mlli^;on gross tons (see Table 2). ';ince April 1955 MITI has approved for export in seven months 91 additional ships with a gross tonnage of approximately 1,350,000,thus greatly adding to the backlog. 19 The ship engines and superchargers to be produced with the aid of the equipment to be financed partly by the proposed Bank loans, are of a higher quality than products presently produced and should contribute to lowering unit capital and operating costs per ton of cargo handled. The Yawata plate mill replacement project, previously approved for Bank lending, ghould help reduce the cost of plates, also a considerable factor in shipbuilding costs. It should be ermphasized that the main results to be derived from these projects lie in cost reduction and product improvement, ra-ther than expansion of capacity. For this reason, their probable contribution to the improvement of Japan's balance of payments position, while moderate, is not heavily dependent on a continuation of present boom conditions in Japanese and world shipbuilding. -4- III. TTQUBISUI SHT?TUJLDI T- & KIOIN 1C CO LTD A. The Company 20. Mitsubishi Shipbuilding & Engineering Co., Ltd. is the oldest and most important shipbuilding and merine engineering company in Japan. Since it was est- ablished in 1871, more than 400 vessels have been launched at the main shipyard in Nagasaki - from small coastal vessels to 45,000 ton oil tankers of the latest design, equipped with marine engines built at the company's own workshops. 21. Apart from their main shipyard at lagasaki, the compony operates fact- ories at Hiroshima and Shimonoseki producin- industrial machinery - chemical, mininp and steel-producing equipment, textile machinery and steel structures, as well as machine tools. At the !'agasaki -orks, boilers, steam turbines and diesel engines are produced besides a variety of other marine equipment. 22. The management of Titsubishi is capable and its technical staff exper- ienced, with many years of shipbuilding and industrial engineering activity. The comnany's research laboratories for marine engines compare not unfavorably with the best in Europe and U.S.A. The company has more than 16,000 employees (63% at NTagasaki), and relations betwieen tte labor uniorn and management have been reported as satisfactory. 23. Several license agreements rwith foreign firms for technical "know-how" have been renewed after the war - among others, with Escher !7yss Engineering in Switzerland for the manufacturin- rights of water and steam turbines} rith Combus- tion Engineering Inc. of U.S.A. for boilers and heaters, and wTith Cute Fioffnungs- hutte in Cermany for mining eouipment, etc. 24. In fiscal 1953, total sales of ships and industrial machinery reached X 22.4 billion (e>62 million), of which g 14 billion (64%) represented sales of ships. About one-fifth of the ships built were for foreign account. Though 1954 sales were about 12% less, this was due peLrtly to non-recurrinf factors, and 1955 sales should be substantially higher. Annex A-1 lists the actual sales for 1953 and 1954 by products with a sales forecast for the years 1955 to 1958. 25. PMitsubishits good reputation has earned the company substantial contracts from local and foreign customers in the nost-war period. Two new types of oil tankers, a 45,000 dwt. and a 22,000 dwt. developed by the company after the war, have in particular attracted attention in foreign shipping circles. The company has also obtained a big share in the Government's post-war shipbuilding program. 26. The company has currentlv under construction five tankers, seven cargo vessels and four miscellaneous vessels of a total 250,000 dw;t. Total orders on hand in November 1955 "ere 7 43,069 million (6ll9.6 million) with a combined ton- nage of 840,000 dwt. This represents an almost three year construction program and additional inquiries are currently being received. In viewr of the increasing obsolescence of the world fleet in the coming years, and the long delivery dates of western competitors, the company is confident that in the next yeer it will be -5- able to contract additional orders at more favorable terms T-ith even longer deli- very dates. 27. The recent trend to building larger and faster vessels has compelled manufacturers to make more noT,erful marine diesel engines. The sunercharging of the diesel engine, which increases its rating between 30 and 50%, is the natural way to achieve this objective. B. lJodernization Pro.ect 28. As early as 1924, Mitsubishi entered into a license agreement with Sulzer Brothers cf Switzerland for the rights to manufacture its type of diesel engine. Mlitsubishits technical staff later developed a single-acting two cycle diesel engine of their owTn desig'n known as the "PS" diesel en6ine, which has since been installed in a number of vessels with satisfactory results. By 1940 Dlitsub- ishi had started the development of a turbo-supercharger for their "D4S'1 diesel engine, which resulted in a nen, diesel engine, Type UEC, i-iith a maximum rating of 12,000 bhp. 29. Exhaustive shop tests of the engine were conducted and certain minor defects corrected. iafter a six day sea test, de'livery of the first commercial engine 1-Pes made to the buyer early in 1955. results of the sea test -wvere satis- factory. 30. In order to effect regular production of the sunercharger, which in them- selves are small hi. h-speed gas turbines, and to machine more economically the larger and heavier parts of the diesel engines, the company decided to re-tool their workshops. Out of the total number of 75 new machines and machine tools recuired, 17 heavy units wrill have to be imported at a cost of about 1,500,000 for which IBRD finiancing is sought. Q¢uotations have been obtained from a number of sunpliers on the basis of international innuiries. Suupliers from Cermany, Italy, Siitzerland and U.S.A. are likely to be the main recipients of contracts when awarded. 31. Apart from the 17 i.norted units, 58 smaller units will be obtained locally at a cost of I 93 million. X'ith v 89 million in addition for erection and other expenses, the total expenditures for the re-tooling program amount to Y 722 million (t2.0 million). A brreakdown of the estimated cost of imported equipment is riven in Annex A-2. 32. As most items of imported and domestic equipment can be delivered within 12 to 18 months after orders are placed, the re-tooling pros,ram should begin to have favorable effects on operations after 15-21 months. 33. The present machine tools of Mlitsubishi are mostly outdated end partlyj outworn as a result of the heavy burden on the equipment during the war. eiegular production of the turbo-supercharger and the economic machining of the heavier - 6 - parts of the bigger diesel engine can be achieved economically only by the use of the latest type of tools. 34. The new equipment, with the exception of a few specialized machines, can also be used for the production of other items, such as heavy parts of steam and water turbines, reduction gears, boilers, etc. and should improve their quality and reduce the cost of their manufacture. 35. lith the new equipment, IMitsubishi plans to produce eight supercharged diesel engines above 5,000 H.P. annually for the first years, vith a sales value of X 1,820 million per year (q5 million). Ihe estimated cost saving on the new engines alone is about Y 80 million per year. Since costs of other products should also be reduced, tlhe total savings should cempare favorably with the estimated in- vestment of about Y 720 million. C. Financial Aspects 36. Balance Sheet - A summary of the comnany's balance sheets as at Septem- ber 30, 1955 in comparison with the past two fiscal years is given in the following table (for details see Annex A-3): MTar.31 Mar.31 Sept.30 1954 1955 1955 (billion Yen) Current Assets 11.0 12.7 14e7 Sales Credits for longer than one year 0.4 l.8 2.8 Fixed A3sets (net) 6.0 5.9 6.0 Other Assets 0.6 .7 0o.8 1.30 21.1 24.3 Current Liabilities 7.6 9.0 11.3 Long-term Debt 1,6 2.9 3.2 Capital and Surplus 8.8 9.2 9.8 18.0 21.1 243 Current assets/Current Liabilities 1.4 14 1.3 Current Assets/Total Liabilities 1.2 1.0 1.0 Total Liabilities/Net Tlorth 1.1 1.3 1.5 -7- 37. The comnany is in a relatively sound position, as indicated by the ratios shown above. Since 1954 there has been a marked increase in current and other non- fixed assets, accompanied by a considerable increase in external liabilities. This ras due primarily to a recent expansion of installment credits in resnect to exports of textile machinery and sh4ps, the latt.er havinE become an important factor in the operations of tile flitsubishi comnany and of other shipbuilding companies. These credits cover betwleen 60% - 70,- of the sales value, enjoy governmental insurance for 90% of their total and are eligible for loans from the Japan Export Import Bank up to 80% at a preferential rate of 4J-%. The estimated effect of this credit ex- pansion on UitsubishiTs prospective financial position -;s further discussed in para. 47. 38. Earninrs Record and Forecast - Annex A-4 compares sales and nrofits in the fiscal years 1953 and 1954 and gives a forecast for 1955-1958. Both sales and profits fell in 1954, due to a lov,er volume of new shin completion and delay in delivery of a large volume of textile machinery for Yugoslavia arising from belated changes in specifications. Horever, a marked improvement has been recorded since, with actual sales totalling Y 12.0 billion in the first half of fiscal 1955, as compared to X 8.2 billion in the second half 1954. Orders for ner ships to date have reached 9 43.0 billion, reflecting the shipbuilding boorm referred to in para, 18 above. 39. Total sales in 1955 are estimated Ps v 25.2 billion, and are exDected to rise to Y 30.0 billion in 1957 and after. This represents increases of 13% and 34%o0 respectively over the 1953 level. However, because of current and anti- cinated further increases in the cost of steel and other raw m8terials, on the one hand, and firm sales prices under existinF sales contracts on the other, pro- fit margins ere exnected to decline from 10% in 1953 to less' than 7% in 1955/1957. On the other hand, as a result of the larger pronortion of expcrt sales in total turnover, considerable savings in income tax w'7ill be realized, resultinE in a net income, estimated by 1957 to exceed tLe 1953 level. 40. Cn the assumption that average net earnings during the next three years will approximate the 1953 level, it would appear that the company can cover present dividend requirements and have substartial undistributed profits as summarized in the following table, ,uThich also snoirs actual results for the last tvo fiscal years (million Yen). Actu Fiscal Years) iEstimated (Annual Avge) 1253 1254 1955/1957 Pre-tax Profits 1,443 954 1,050 plus: Increases in pre- profit reserves 1/ 185 229 213 less: Taxes 685 37 367 Net Profit(adjusted) 943 808 896 Bonuses 10 10 10 Dividends 392 336 336 Retained Earnings 541 462 550 1/ Bad Debt and Fetirement Reeserves - g - 41. The --ollovTing table indicates actual and estimated earninfs coverage of totRI. not interest charges 17 (in million yen): Ufet Profit plus Interest Total Times Interest Earned Pre-Tax Post Tax Interest Pre-Tax Post Tax 1953 1,763 1,078 320 5.5 3.4 1954 1,235 860 281 4.4 3.0 1955/57 1,381 1,014 331 4.2 3.1 Average p.a. (estimated) 42. Since the anticipated sales volume resultirng from nroduction of super- charged diesel engines is only about Y 1.8 billion, as compared to total annual estimated sales of Y 28 billion or more, the profit position of the company pro- bably will be affected more by changes in the general economic situation than by the degree of success attained b; this new project. The effects on overall sales and Drofits of neu! ships of the new engines cannot be closely appraised, but the general effect should be beneficial. The outlook for the company's overall opera- tions anpears favorable. 43. Financin of Investment Propram - On the assumption that retained earnings durine the three year period beginning April 1, 1955 wyould average v 550 million per year, and that depreciation accruals would be X 650 million per year, the annual funds available for gross new investments, i;nprovement of viorking capital or reduc- tion of debt, would average X 1.2 billion per yeer, or 3.6 billion in the next three years. This compares with total recuirements of Y 28.6 billion, of vwhich X 3.2 bil- lion represents nevw caDital investment (including Y 0.7 billion for the project under considerotion), X 7.6 billion additional vrorking capital, and X 17.8 billion matur4ng medium term debt. Net newr borrovwings required over the three years would amount to X 7.2 billion. The large increase in wTorking capital primarily reflects the anticinated expansion of installment credits under the company's present ship- building program. YEost of these credits wrill be financed from loans from the Export Import Bank of Japan, all of *rhich have been firmly committed. 1/ total interests payable, after deducting interests receivable (largely in respect to credits on sales of ships) 44. Total sources and uses o' funds over the three year period may be estimated as follows: (in billion yen) Fiscal Years 1955 1956 1957 Total Sources Undistributed Profit 0.5 0o6 0.6 1.7 Depreciation 0.6 0.6 0.7 1.9 New Borrowings IBRD 0.5 0.5 Other (medium term) 6.2 8.3 10.0 24a5 7.3 10.0 11.3 28.6 Uses Investment Program 1.7 0.9 0.6 3,2 M11aturing Debt (medium term) 3.3 5.6 8.9 17.8 Increase in 'orking Capital 2.3 3.5 1.8 7.6 7.3 10.0 11.3 28.6 45. The foregoing table does not take into account the renevral of short-term bank loans, which should not shoy: any material change over this period. Mlitsubishi is not expected to find difficulty in arranging the necessaryr local currency finan- cing. 46. The effect of the pronosed three year program on the company's position is shown in the following condensed nro forma balance sheet for March 31, 1958 as compared to March 31, 1955. Mar. 31 Mar. 31 1955 1958 (billion Yen) Current Assets (adjusted) 12.7 16.7 Sales Credits for longer than 1 yr. 1.8 8.0 Fixed Assets - net (adjusted) 5.9 7.21/ Other Assets .7 .8 Total assets 21.1 32.7 Current Liabilities (adjusted) 9.0 11.6 IBRD Loan - .52/ Other long and medium term debt 2.9 9.7 Net Worth 9.2 10.93/ Total Liabilities & Net Wv.orth 21.1 32.7 Current Assets/current Liabilities 1.4 1.4 Total Liabilities/Net "orth 1.3 2.0 1/ Estivated gross investment X 3.2 billion less estimated depreciation accruals X 1.9 billion. 2/ Amount sought from IBRD 3/ Retained earnings Y 1.7 billion. - 10 - 47. As a result of the comnany's exprnded ooeratirns, Jargely based on sales credits, there wlll be a sharp increase in total liabilities. The situation, how- ever, is expected t-- be on the way to improvement by '7arch 31, 1958, wvith the low- est point having been reached on September 30, 1957. This 1-ill be achieved largely by a planned restriction of installment credits under future sales contracts. 48. Financial Policies - The Mlitsubishi Company recognizes the importance of improving its financial positlon and intends to improve substantially the ratios for current assets/current liabiliuies and for total liabilities/net worth, as com- pared 1,rith those prevailine at present or estinate. 7 4 oarch 1958. Accordingly, the company is aware of the need to limit sharply/sa eseof ships on installment credits. Other measures may also be taken as and rhen deemed appropriate, includ- ing increased retained earnings, additional issues of share canital etc. The com- pany is confident that after the project has been comnleted, ranid progress towTards an imDrovement in its financial situation vTill be made. D. Term of Pronosed Loan 49. A twelve yrear loan, including a grace period of tr.o years, seems suitable for this project, corresDonding closely w;ith the estimated economic life of the equipment. E. Conclusions 50. The Mitsubishi ShiphuildinE & Engineering Co., Ltd. is a well-managed enterprise. Its project for the m,rnufacture of supercharged diesel engines appears sound and offers a suitable basis for Lank financing of about 'l.5 million. .. 11 - IV. ISHTKANTAJTI-A `HEAYY WI-TJSTRTES CO., LTD. A. The Company 51. Ishikawajima Heavy Industries Co., Ltd. was established, in 1889. The company operates three contiguous plants near Tokyo, including- a shaipyard for building coastal and ocean-going vessels up to 20,000 dwt. 52. Ishikawa aima's main products - steam turbines, boilers, conpresscrs, cranes, pumps, blowers, steel structures, etc., are well known for their cood quality. The companyr is the largest producer cf turbiries and cranes in Japan. 53 The company is well organized and imana ed, with a competent staff of engineers and technicians. 6,500 workmen are enployed in the tnree factories (6o, in the shiplyard and ship engine factories), and the company's policy has been, th.rough close cooperation with the labor union, to increase production per man-hour. Labor-management relations are good. 54. Before the war, Ishikawajima had manufacturing agreements with firms like Escher r'yss in Switzerland for marine steam turbines, and Clark Chapman Co. of England for boilers, etc. 55.O Aftber the war, new agreements were nemotiated with Aetna Standard Engineering Co. of U.S.A. for the manufactuiring rights of machinery for the iron and steel industry, with Foster Wheeler Corporation of U.S.A. for high pressure steam boiler and steam generating equipment, with Koering Co. (UJ.S.A.) for civil engineering equinment and finalThr wiith Joy PTf. (U.S.A.) for mining eqllipment. 56. In 1951, a modernization 'Drc-ram of the production facilities was started, and Y 2I billion (i;6.7 million) had been spent by Septemrber 30, 1955, mainly on new tools and machinery or dor,estic malke, but, also on some construction work. 57. Total sales in fiscal 1953 reached 9 9.8 billion (,27.3 million). About 10% of the products, mainly snips and steam, boilers, was eTxorted. Export sales fell off sharply in 195b, but rose to new hlighs in 1955. Annex B-1 shows the detail of product sales in the calendar -years l953-l9k54 and the first nine months of 195', and a company forecast of total sales for the fiscal years 1955, 1956 and 1957, as compared with resuLlts in recent fiscal years. 53. The following table shows orders, production, sales and backlogs in recent years and comirpany estimates of sales th-rough idarch 1958 (in billion yen): - 12 - Fiscal GTross Order Backlog Year Or,ders Production Sales End of Year 1951 6.2 L4.8 4.5 4t 1952 8.0 6e6 5.6 6e5 1953 10. 8 8.7 9.8 8.3 1954 15.4 h 88. 13.0 1955 (Q) 6.8 h46 4.7 L4.8 1955 (est.) 12.0 1956 (est.) 14.5 1957 (est.) 16.0 The 1955 and 1°56 estimates, which are based on orders already received, appear reasonable. The 1957 estimnate is founded on the lhope o' securing orders for several ships of larger size than those usually produced, and may be sonmewhat over-opt iTiistic. 59. The modernization and expansior of the Japanese indrstry, especially in steel, mining and power is crucial to eccnor,ic d.evelopment and should insure a good market for Ishikawajinmals products in the future. Many of the industrial machinery items (cranes, compressors, pumps, blo-wers, etc.) are also in demand in neighboring coum-n'ries and imiproverient of the companyts facilities should help imnrove its competitive position for such ,b-usiness. The new supercharger for diesel engines (see below) is also likely to be expor-table to these areas, for use in coastal vep-sels, for example. B. Ilodernization Project 60. The piost-war trend in marine steam turbine construction hlas led to a snarp increase in iunit sizes from., 7,000-8,Q,000 brake horsepower (bhp) a few years ago to 16,000 and 18,000 bh7. of today. the manufactur ng of such turbines, operating at hiigh temperatures and, s-_eecs, ital 'es it necessary for '-he coixpany 'to acounire additional machine tools of new anc modern design. 61. Based on its exuerience in producing steam turbines, Ishikawajinla started recently production of turbo-superchargers for small diesel engines up to 1,500 bhp. There is a growing domestic demiand for superchargers, and export possibilities as soon as their can be mrass produced at a reasonable cost. For th-is, special machine tools are required. 62. In the industrial field, the manufacturing of imodern cranes, blowers, pumps, etc., requires special rzachine tools, which the company does not possess, in order to i*prove accuracy and precision and to reduce costs, - :13 - 63. To re-equip its shops for these purposes, the com-pany plans to purchase new r.achine tools costing about ; 761 million (,2.1 millicn). 7shikawajima has requested IBRD financing for the importation of nine uinits at an estii'vated cost of ai1.65 million. The cost estimate is based on offers received from suppliers in various countries. Suppliers in United Kingdom, Germany, U.S.A., France and Switzerland are likely to be the ma-in recipients of contracts -,,hen aiaarded. Ilnits to be imported are listed in Annex B-2. 64. These nine units will be used in two sepa.rate plants of the company, one making marine engines, the other industrial machinery. In the niarine engine factory, five machines proposed for Bank financing will be used w-th Li'ie new domestically produced units and four rmnachines imported by the company outside of the proposed loan, tu make turbinos and turbine superchargers, The other four machines proposed for Banr.: financing will be used with 17 new Japanese made machines to produce p,-ips3 cranes, com-pressors and other Leavy industrial machinery. The total cost ol' the new equipment, other thanl that for which Bank financing is souight, is about r 207 million (h;575,000). 65. The re-tooling program will enable the company to imnprove the quality of its products, The increasing use of l-loy steel in machine parts has made the machini_ng of such parts through modern high-speed tools a necessity. The re-tooling should decrease the man-hours necessary for each operation, and reduce spoilage considerably. 66e Annex B-3 shows, as an examrple, the estimated cost savings to be deri-ved from the use of the new equipment 7or a turbo-suipercharger for the diesel engine and a 15,000 H.P, steam tul7bine. A 7.5$ reduction in cost is estimated for the steam turbine and 28" cost savings on the supercharger, the new tools making it possible to mass Troduce the supercharger at much lower cost. C. Financial Aspects 67. Balaice Sheet - Comparative balance sheets of the cormpany for recent years are shownl in detail in iinnex B-b. and in condensed for-mn below. Total assets (adjusted for subsequent asset revalualtions) have increased from i 4.6 billion in March 1952 to W 12.5 billion (i,35 million) byr Septenber 1955. Current assets which were slihtly ess than current liabilities at the earlier duate had increased from ' 2.7 billion to '.' 8.5 billion by Septer.mber l195. On t.iis date, current assets exceeded current Liabilities by an amount only slightly less than medium- term debts of ;i- 1.7 billion. - 14i - I.iar.31 iiTar.31 Iar.31 Mlar.31 Sept.30 1952 1953 1954 -1-955) 1955 - --- Billion Yen - Current Assets (as adjuste0) 2.6 4.4 5.5 5.2 7.4 Fixed Assets, net (as adjusted) 1.9 2e1 2.7 3.0 3.3 Other Assets 0.1 0.3 05 1,3 1.8 Total __ . 777 10.0 12.5 Current Liabilities (as adjusted) 7 U T 7 9 Medium-Term Debt 0.1 0,2 0.8 1.2 1.7 Capital and Suirplus (as adjusted) 17 2.1 2.9 3.7 3.9 Total .7 10.0 1vE2. Ratios (computed before rouinding) Currernt A.ssets/Current Liabilities 0.97 0.98 1.09 1.02 1,07 Current Assets/Total Liabilities 0,92 0,93 0.94 0.32 0.86 Total Liabilities/Net Worth 1,64 2.20 2.00 1.68 2.24 68. Earnings Record and Forecast - Annex B-S shows summary profit and loss statements of the comnpany f-or 1952-77, and company estimates for 1955-57. Sales, tax and net income figures are as follows (in million yen): Pre-tax Post-tax Fiscal Net Income Net Inceome Year Sales Amount % Sales Tax Amount % Sales 1952 5,644 394 7.0 205 189 3.4 1953 9,792 730 7.5 350 380 3.9 1951h 8,h47 413 4.9 109 304 3.6 1955 11,995 542 4.5 211 331 2.8 1956 14,500 884 6.1 385 499 3.5 1957 16,000 1,180 7.4 596 584 3.6 69. The company's earnings coverage of interest in recent years is shown in the following tabulation: Pre-tax Post-tax Coverage Fiscal Earnings Earnings Of Interest Year Plus Interest Plus Interest Interest Pre-tax Post-tax 1952 505 300 il1 4.6 2.7 1953 890 54o 160 5.6 3.4 1954 665 556 252 2.6 2.2 70. Pre-tax earnings coverage of interest are estinated at 2.7 in 1955 and about three times in 1956 and 1957. -15 0 71. Ir the fiscal years 1952 and 1953, the dividend pavments were about one-third of profits after taxes. In fiscal year 195a,, the divdend rate was reduced from 15 to 12` per annum but due to lower profits, the dividends amounted to slightly over 50% of such reduced profits. Projected dividends of 12% in 1955 and 15¸ in 1956 and 1957 are based on a payotut of umder 50% of anticipated profits. (See Annex B-5) 72. As in the case of Mitsubishi, the over-all profit position of the company will be affected more by changes in the general economic situation than by the degree of success attained by this new project. While the effects on over-all sales and profits of the economies to be realized from the new machines cannot be clo--ely estirrated, the realizable cost reduction should have a beneficial effect. The outlook for over-all sales and profits, however, appears favorable, although the company's estimates appear someewhat over-optimistic. 73. Financing of Investment Program - The company's financial plan is based upon the following estimated sources and uses of funds in the three year period ending M1arch 31, 1958- Fiscal Fiscal Fiscal Total Year Year Year Three 1955 1956 1957 Years Sources Met income after taxes 0/ 0.28 0.45 0.54 1q27 Depreciation accruals 0.32 0.37 0.45¸ 1114 Gross borrowings - IBRD 0.19 0.13 0.27 0.59 Local 4.o09 3.35 4.140 11.84 Reserve accruals 0.06 0.10 0!11 0.27 Total 174940 -7 - 1. 1- ITses Plant and equipment 1.11 0.66 0.43 2.20 Dividends 0.16 0.19 0.19 0.54 Loan repayments - local 2.77 3.31 3.35 9Q43 Increase in other assets 0.23 0.12 0.36 0.71 Increase in net current assets 0.S7 0.12 1,414 2.23 Lotal 4 4.10 _77 1$.11 1/ Ccmpany estimate hac been reduced by 0.114 billion. 74. It is anticipated that the comipany will have no difficulty in arranging local currency financing to carry out the above pro!ran. 75, The condensed pro forma balance sheets below show the prospective position of the company under tlis plan as of `1arch 31, 1958 in comparison with its position on Iarch 31, 1955 ( in billion yen): - 16 - Company Estimate Actual (adjusted) March 31, 1955 lfarch 31, 1958 Current Assets (adjusted) 5.25 8.20 Fixed Assets (net) 3.05 4.11 Other Assets 1 73 2.44 10.03 14-75 Current Liabilities (adjusted) 5.10 5.82 Miedium-term Debt (adjusted) 1.19 3.60 Long-term Debt (IBRD) _ o.59 Capital and Surplus 3.74 4.74 10.03 14.75 Current Assets/Current Liabilities 1.03 1.41 Total Liabilities/Net Worth 1.68 2.11 76. Financial Policies - The Ishikawajima Heawr Industries Co., Ltd. has expressed the intention to continLe to follow financial policies and to take such measures as may be appropriate to maintain a strong financial position. By retention of earnin,^;s and issuance of new capital stock, the company expects by Miarch 1959 to have reached a position where the ratio of current assets to current liabilities and the ratio of total liabilities to net worth would be about 1.5:1. To achieve this liabilities/net worth ratio will probably require raising about Y 1 billion from issues of new capital stock. The company has indicated that it will endeavour to improve these ratios still further in the following years. D. Term of Proposed Loan 77. A twelve year loan. including a grace period of two years, seems suitable for this project corresponding closely to the estimated economic life of the equipment. E. Conclusions 78. The Ishikawajima Heavy Industries Co., Ltd. is well-managed. Its project for the manufacture of superchargers for smaller diesel engines and for the modernization of its industrial machinery plant appears sound and offers a suitable basis for a Bank loan of about j million. - 17 - V. NIPPON STEEL TUBE CO.. LTD. A. The Company 79. Nippon Steel Tube Co., Ltd. was formed in 1912 for the purpose of pro- ducing steel tubes. One year later, it started the manufacture of Mannesmann seamless tubes. 80. In 1940, the company extended its activity into the shipbuilding industry and became an integrated steel plant through merger with Tsurumi Steel and Shipbuilding Company. It also produces ferro-alloyws, refractory bricks and chemicals, including fertilizer. The main steel plants are the Kawasaki and Tsuruni Works near Tokyo. The company has over 25,000 employees. 81. In 1954, the company produced 804,000 tons of pig iron, 994,000 tons of steel ingots and 569,000 tons of finished steel products, including the following (in thousand tons): Shapes 66 Bars 82 Plates 237 Sheets 61 Tube rounds (seamless) 83 Hoop and skelp 40 82. Total sales in the fiscal year ended March 31, 1955 were X 46.4 billion, of which 72% were steel products, 18% shipbuilding division sales and about 10% the other products mentioned earlier. Details of sales for recent years and estimates for fiscal 1954-1957 are contained in Annex C-1. 83. Nippon Steel Tube Co., Ltd. is the third largest steel producer in Japan, with a capable management and a well-trained technical staff. Its progressiveness is attested by the modernization of its plate mills and the erection of the first continuous butt-weld pipe mill in Japan. 84. Annex C-2 lists the present facilities of the Nippon steel Tube Co., Ltd. Since 1950, an extensive program of modernization has been under way. This program stressed cost-reduction rather than exransion. In consequence, three blast furnaces at Kawasaki and Tsurumi were modernized but the main emphasis was on rolling facili- ties. The new blooming mill helped reduce costs by making larger ingots available for rolling in existing section mills and in the new four-high plate mill, which replaced three old plate mills. A new hoop mill provides an economic supply of hoops to the new continuous butt-weld pipe mill which began operating late in 1954. The entire modernization program entailed a capital expenditure of over ' 21.8 billion in the five years ended March 31, 1955. - 18 - 85. The main facilities not appreciably modernized thus far have been the open hearth furnaces and two Mannesmann seamless tube mills erected in 1913 and 1918 with a total capacity of 114,000 tons. B. Proposed Project 86. The cumpany proposes to install a new Mannesmann type seamless tube mill with an annual capacity of 120,000 tons to rep'ace the two existing mills. The new mill would cost X 4.1 billion (tll.3 million equivalent) of which X 936 million ($2.6 million equivalent) would involve foreign exchange and for which IBPD financing is requested. C. Alvantages of the New Seamless Tube Mill 87. The general position of the Japanese steel industry was anlayzed in a recent report (T.0. 95-A) and no significant changes have since occurred to necessi- tate modification of the views set forth therein. The anticipated effect of the new investment is to reduce costs in this sector of the Japanese steel industry, thereby improving the competitive position of the company, both in the home market and in export markets. From the standpoint of the economy as a whole, the effect is to increase productivity through the reduction of material and labor requirements per ton of finished product. The direct economic benefits to Japan are a reduction in fuel requirements for each ton of product, an increase in labor productivity, an improvement in product quality and a wider range of product sizes. The increased quality and variety of finished products should help improve Japanese competitive position in world markets for these products. 88. By erecting the new mill, substantial cost savings can be effected, a more uniform product produced in longer lengths and at a substantially lower cost. Pipe up to 411 as compared with a present limit of 61 in diameter will be produced. A new piercer will reduce the number of passes through finishing operations from 6 to 2, by operating at higher speeds and making tubes with thinner walls. Product quality will be improved through treatment in a new rotary heating furnace which will replace three present stationary heating furnaces. Finished product yield from billets is expected to rise from 87% to 91%, while the amount of seconds and scrap would be reduced, Labor requirements are to be lessened by about 70%, by concentrating operations in one mill, improving the plant layout and materials handling and reducing the number of steps in the producing operation. 89. Before allowance for depreciation, the operating cost will be reduced by about 1 7,700 per ton ($21) primarily in labor, repairs, maintenance and other overhead costs and in increased yields of prime product. Average annual output is expected to be 84,000 tons per year (70% of prospective capacity) in line with average output for 1951-1953 inclusive. - 19 - 90. Depreciation may be estimated at 4 2,1g7 per ton ($6.07) based on depre- ciating 90%0 of the cost of the mill over 20 years at an output rate of 84,000 tons per year. Present depreciation cherges are low - 1 163 ($0.45) per ton - reflecting the obsolescence of the equipment to be replaced. After allowing for increased depreciation, the return on new investment is estimated at about 11% before profits taxes. Annex 0-3 contains a detailed comparison of the manufacturing cost in the present and new tube mills, on the assumption of similar unit costs for materials and labor. 91. In addition, it is anticipated that costs of ingots and billets will be further reduced by modernization of open hearth furnaces. Output of the new mill could, when market conditions warrant, be quickly increased about 25-30% by adding another piercer and a building extension at an added investment cost of about $1 million equivalent. D. Project Cost and Ecuinment Procurement 92. The total cost of construction and re-equipment for the seamless tube mill is estimated at v 4.1 billion, equivalent to ,11.3 million (see Annex C-5). Of this total, foreign exchange requirements would be $2.6 million, a breakdown of which is given in Annex C-4. The cost estimates are based on price quotations furnished by the potential suppliers, which have been selected on the basis of broad international inquiries. 93. The company estimates are that the tube mill can be placed in operation 21 months after orders have been placed. E. Competitive Position in Seamless Tube Market 94. Three firms produce all the seamless tubes in Japan. Nippon Steel Tube Co., Ltd., the oldest company in the field, with no modern mills, has accounted for 40% or more of the production and a somewhat smaller proportion of exports in recent years. With a wider line of products (see paras. 87-88) the company should be in a position to increase its share of domestic sales and improve its competitive position in the export market. 95. According to present plans, the modern seamless tube capacity in Japan after the renovation of the companyts tube mills and those of its leading competi- tor, Sumitomo Metal Industries, Ltd., will approximate 288,000 tons per year. This may be compared with an average production of 215,000 tons per year, in 1951-1953, which declined to 196,000 in 1954, and an anticipated future demand of perhaps 240,000. 96. It seems reasonable to assume that Nippon Steel Tube Co., Ltd. will be able to operate its new seamless tube mill at 70%-75% of capacity, a rate in line with that anticipated for industry as a whole. - 20 - F. Financial Asnects 97. Balanee Sheet - Total assets of the Nippon steel Tube Co., Ltd. in the three year period ended March 31, 1955, rose 2 24.2 billion from 43.0 to 67.2 billion (See Annex C-6). In this period, gross investment in fixed assets was 18.9 billion resulting in a net increase of 13.3 billion after depreciation write - offs of 5.6 billion. V 98. Because the increase in gross assets was accomplished mainly by borrowing, customary financial ratios show some deterioration during the period, especially those concerned with total liability coverage and the proportion of liabilities reprepe-ted by net worth. Comparative ratios as of the end of the fiscal years 1951 -2) and 1954 are shown below: Fiscal Fiscal Year Year .1951 .1954, Current Assets/Current Liabilities 1.38 1.23 Current Assets/Total Liabilities 1.11 0.84 Total Assets/Total Liabilities 1.66 1.49 Total Liabilities/Net Worth 1.50 2.04 99. Earnings Record and Forecast - After a period of severely curtailed operations immediately after the war, the Nippon Steel Tube Co., Ltd. since 1948 has been able gradually to restore its production capacity and to increase steadily output, which in 1954 reached an all time high of 994,000 metric tons. 100. A tabulation of the company's past earnings and forecast for the next four years is given in Annex C-7. The following is a summary thereof: Times Profit before Interest Earned Fiscal depreciation Depre- Income Net Before After Year / Interest & Tax ciation Interest Tax Income Tax - - - Billion Yen… Actual 1952 4.5 1.2 1.4 .9 1.0 2.36 1.72 1953 5.2 1.5 1.6 1.0 1.1 2.34 1.71 1954 5.4 2.1 1.5 .7 1.1 2.18 1.70 EstiTAted 1955 7.4 2.6 2.1 1.3 1.4 2.28 1.68 1956 7.6 2.5 2.3 1.3 1.5 2.19 1.63 1957 8.4 2.7 2.5 1.5 1.7 2.26 1.66 1958 8.7 3.0 2.5 1.5 1.7 2.26 1.66 1/ Fixed asset figures were adjusted for asset revaluations mrade after March 31, 1952, so that the changes indicated above are real changes exclusive of any write up due to revaluation. 2/ Fiscal year 1951 means the fiscal year starting April 1, 1951 and ending M4arch 31, of the following year. - 21 - 101. Despite the sharp price decline after the Korean boom, the company's profits have been satisfactory, showing an upward trend until 1953, when due to reductions in prices, a temporary drop in earnings was recorded. However, following the improvement in the world market, this trend was reversed in the latter part of 1954 and marked further improvements have been recorded since. 102. A substantial increase in earnings is anticipated for 1955/1958. This increase should result from the coming into full operation of new facilities other than the project including a new plate mill, hoop mill, and butt-weld pipe mill, and from the initial operation of the new seamless tube mill in the latter part of 1957. On the other hand, depreciation and interest charges will have also increased, reflecting the recent plant expansions and the company's growing indebtedness. In the fiscal years 1957-1958, the company expects its net income after taxes to reach the level of X 1.7 billion representing 2.26 and 1.66 times interest charges (before and after tax). 103. In 1954 the company distributed a dividend of 15% as against 20% in 1952 and 1953. 104. Financing the Project - Financing requirements and estimeted sources for the three year period beginning April 1, 1955 are sunmarized below (for details see Annex C-8): Billion Billion Requirements Yen Sources Yen Maturing Debt 14.8 Retained Earnings: Construction: Undistributed Profits 2.3 Pipe Mill Project 4.1 Depreciation 7Z8 10.1 Others 2,Z 11.3 Other Investments 0.9 New Borrowings: Increase in Working Capital 10.5 IBRD 0.9 Local 26.5 27.4 37.5 37.5 105. Total requirements over the three year period are estimated as 1 37.5 billion of which about 40% are needed for debt repayment, almost 33% for new capital investments, and the balance for additional working capital. The increase of 1 10.5 billion in working capital provides for a net increase in sales credits for terms longer than one year (mostly cn ships) of 1 2.4 billion to a maxiimm total of 1 3 billion. The increase also makes allowance for repayment of * 1.8 billion of short term special foreign exchange loans from the Government. 106. More than half the local borrowings will be required to meet funded debt maturities totalling * 14.8 billion during the three year reriod ending March 31, 1958. In addition there will be * 1.8 billion of maturities on foreign exchange loans plus the necessary roll over of bank loans and notes payable. - 22 - 1'07. Of the v 26.5 billion local borrowings, 5.0 billion are expected to be obtained from public offerings of debentures, the remaining 21.5 billion repre- senting loans from loc?l banks and financial institutions. Nippon Steel Tube Co., Ltd. should be able to raise these funds without further recourse to the Japan Development Bank. 108. Pro fo-ro MaBanc Sheet,-March 31. 1958 - Annex C-9 shows the companyts balance sheet as at March 31, 1955 in comparison with a pro forma balance sheet as at March 31, 1958, the latter based on the financial plan as shown in Annex C-8. 109. Comparison of the two balance sheets indicates some improvement during the three year period in the current ratio, and a small reduction of the ratios of net worth to liabilities and of total assets to total liabilities. On the other hand, the ratio of current assets to total liabilities remains virtually unchanged, reflecting the fact that the improvement in net worth is in a proportion approxi- mately equal to that of the increase in non-current assets. A comparison for the three years of the excess of total liabilities over current assets is shown in table below: March 31, March 31, 1955 1958 - - - - Million Yen - - Current Assets 37,810 48,590 Total Liabilities 4S.050 57.920 Excess of Liabilities over Current Assets 7 _0 ,O Current Assets/Total Liabilities o.84 0.84 110. Financial Policies - The management of the Nippon Steel Tube Co., Ltd. has indicated its intention to limit capital investments to the present program of improvements and replacements, and to postpone the starting of other major projects. These latter, including a medium size welded pipe mill and a hot and cold strip mill, would not be initiated until after March 31, 1958, unless sub- stantial funds are raised through sale of equity shares before that time. 1ll. The company intends, after March 31, 1958, to raise an additional 1 5.0 billion through the issue of new shares for financing its construction program. However, should market conditions be favorable, part of the contemplated new share capital may be raised even prior to this date. 112. kssurances would be furnished by Nippon Steel Tube Co., Ltd. that, if the proposed loan is granted, the company would undertake to conduct its affairs in such a manner that by IMlarch 31, 1958 its total liabilities would not exceed current assets by more than g 9.4 billion, and thereafter it would achieve a generally continuing reduction of this margin so that by Ma1rch 31, 1966 the entire margin would be eliminated. In step with the improvement in the current assets/total liabilities ratio, a gradual improvement in other financial ratios is also anticipated. - 23 - 113. In their com.bined effect all these undertakings should result in a significant and continuing improvement of the company's financial position and should reduce progressively the need for frequent debt refundings. Sufficient flexibility has been provided for under the arrangements as to the methods and timing of actions to be taken by the company in achieving the agreed financial targets. G. Term of_ Pro9ed Loan 114. The physical life of the equipment to be erected is estimated as 20 or more years. However, considering the possibLlities of technological development and obsolescence, it would appear desirable to limit the life of the loan to be granted by the JDB to the company to 15 years starting February 1956. A grace period of 24- years should suffice since the plant is scheduled to come into operatio at the end of 1957. H. Conclusions 115. The modernization of the seamless tube industry should improve Japan's competitive position in export markets and improve the quality of product available for the home market. The Nippon Steel Tube Co., Ltd., the third largest steel producer in Japan, has a capable and progressive management. The seamless tube mill project is an integral part of the companyts modernization program designed to increase operating efficiency and to reduce production costs. It is a sound project and offers a suitable basis for Bank financing. - 21h - VI. TOYOTA MOTOR C., LTD A. The Compaany 116. The Toyota Company, founded in 1937, is well managed, has a competent technical staff and operates a modern plant, well designed for mass production of vehicles on a scale compatible with the Japanese economy. Total employment exceeds 5,000. 117. Its products range from 5-ton trucks of 95 H.P. to small 4-cylinder cars of 25 H.P. (See Annex D-1 for Droduct spec.fications). Productive capacity is about 27,500 units per year; output in 1953 was about 15,500 units and in 1954 about 23,00( Total sales for the fiscal year ended M¢ay 31, 1953, were ; 12.9 billion ($36 million" They increased in the follow.!ing year to X 17.5 billion ($48.5 millirn) but dropped slightly in the fiscal year ended PMay 31, 1955 to s 16..9 billion ($47 million). About half the sales in 1954 were standard trucks and busses. In the ten months ended September 30, 1955 only 171 units were exported, practically all standard trucks, with a value of about X 100 million (1300,000) or about 1% of total sales. ll8. The company has no contracts or licensing agreements with foreign vehicle firms. It is closely affiliated with-the Toyota Loom W;orks, long established pro- ducers and exporters of textile machinery. The comDany sells its vehicles through a partially owned subsidiary, the Toyota Motor Sales Co., Ltd. 119. Annex D-2 shows Toyota's averege monthly prcduction in recent years and the company's forecasts of sales through May 31, 1958. Production of light vehicles is currently about twice as great as two years ago, but sales of standard trucks and busses have declined slightly as they are over-priced in comparison with competi- tive vehicles in both local and foreign markets. The company plans to reduce the prices of its vehicles gradually over the next fewT years as production costs are brought down by the modernization program. The company exDects thus to achieve larger sales volume enabling it to earn a greater total annual profit while main- taining about the same profit margin which has existed in 1954 and 1955. B. M.4odernization Program 120. The company has almost completed an investment progrrm to modernize and expand its facilities for the production of lipht vehicles from 1,300 per month at the end of 1954 to 2,000 per month early in 1957. The total cost of this pro- gram is about I 4.1 billion ($11.5 million). About 85% of this sum had been spent by May 31, 1955. No Bank finencing is sought on this account. - 25 - 121. Bank financing was originally requested to finance the total foreign exchange cost of a program for modernizing production capacity for standard size truck and bus chassis. At present the company is able to produce about 1,000 vehicles a month, but only at the cost of overtime work in bottle-neck departments. The modernization pl;n aims at a production of 1,000 units a month iw!ithout overtime work and at lorer unit costs. This program, which involves the purchase of 166 domestic machines and 53 imported machines is estimated to cost ; 3,590 million ($9.97 million) as follows: Equipment Equipment Corihmon Total Exclusive to to Standard Equipment Grand Standard Model and Light Model Expenditure Total Domestic Imported Domestic Imoorted Domestic ImDorted Million Yen 3,590 484 445 2,059 602 2,543 1,047 IMillion C, Equiv. 9.97 1.34 1.24 5.72 1.67 7.06 2.91 122. The company's management hrs indicated, in response to queries, that 41 of the 53 machines tc be irncrted are of highest priority. These wr7ould cost about $i:2,350,000 and financing is now7 sought in this amount. (See Axnnex D-3) 123. The company estimates that takinE account of the benefits of the moderniza- tion program and probable reductions in prices of purchased materials and parts the cost of standard trucks would be reduced by about 16% and that of light vehicles by about 11%. Assuming an output of 9,000 standard units per year (See Annex D-2), staff estimates of cost savinEs due solely to modernization program would be of the order of X 500 million per yeo.r, or about 14L% on the estimated investment. There would also be further savinEs in the cost of production of light vehicles, as some of the equipment is usable in the nroduction of parts for both trucks and passenger cars. C. Economic Aspects 124. Production of vehicles in Japan has growfn moderately in recent years, more slowly for larger size trucks than for light vehicles, as sholn in the fol- lowing table: Standard Small Size Trucks Size Passenger Total and Busses Trucks Cars Vehicles … - - - - 000 - … … _ . _ 1950 21.1 8.9 1.6 31.6 1951 25.9 8.4 3.4 37.7 1952 23.8 10.5 4.7 39.0 1953 27.7 11.7 7.0 46.4 1954 34.1 13.1 8.5 60.7 1st half 1954 (annual rate) 38.4 20.4 10.4 69.2 2nd half 1954 (annual rate) 29,8 15,3 6.6 52.2 1st half 1955 (annual rate) 26,4 19.4 12.4 58.2 - 26 - 125. Light vehicle capacity has been expanded in the past tero years and no Bank financing is sought for such programs nowij nearing completion. Standard trucks and busses (gasoline engined) are produced largely by two companies, Toyota and Nissan. Production has been primarily for the home market, with limited export success to date. Government representatives and officials of leading Japanese -notor companies indicate confidence in greatly expanded exports, if costs could be reduced to levels more closely corresponding to those of overseas comnetitors. 126. Available data indicate that export sales in markets Tzhere bilateral trading considerations are not predominant are unlikely to prove profitable even if the companies' o'in estimates of internal cost savings are fully realized. Some exports to markets where trade agreement or soft-currency advantages prevail for Japanese exports are, however, quite probable. Present total capacity for truck production appears adeauate to take care of the probable small rise in export sales. The major benefit of any modernization program in truck production would be to make possible reduction in truck Drices, thereby helping to reduce distribution costs in Japan. 127. Investment in tools and equipment would serve largely to increase indus- trial productivity in vehicle and parts plants through substantial cost savings, both in materials and labor time. Material savings would be largely in reduction of scrap and spoilage, through use of fewer modern machines with greater precision and closer tolerance limits than those now in use. D. Financial Aspects 128. Palance Sheets - Toyota's balance sheets for recent years are shown as Annex D-4 and below in condensed form. These balance sheets are adjusted only for revaluation of assets. The company's finances are unusually strong in comparison wiith most Japanese companies. t has had no short-term bank borrowings in the period shown. Net worth has consistently exceeded total liabilities and current assets have exceeded current liabilities by a wide margin in recent years. MQay 31 Mlay 31 May 31 MIay 31 1952 1953 1954 1955 …Billion Yen - - - - - - Current Assets 4.0 6.0 7.0 6.6 Fixed Assets, net 1.9 2.1 2.9 3.8 Other Assets 0.2 0.3 0.5 0.6 6.1 8.4 10.4 11.0 - = Current Liabilities 2.0 2.7 3.8 3.7 IMedium term debt 0.6 0.4 0.7 1.0 Capital and surplus 3.5 5.3 5.9 6.3 6.1 8.4 10.4 11.0 Current Assets/Current Liabilities 2.0 2.2 1.8 1.8 Current Assets/Total Liabilities 1.5 1.9 1.6 1.4 Net 7Yorth/Total Liabilities 1.3 1.7 1.3 1.3 - 27 - 129. The balance sheets indicate that during the past tlree years there has been a substantial increase in plant and equipment (about X 1.9 billion net), an increase of nearly X 1 billion in working canital, and an increase of X 0.4 billion in investments (mainly in other companies, some of which are affiliated). 130. Earning-s record and forecast - Income information is shol,n in Annex D-5 and in condensed form below. Company estimates of sales and profits for fiscal years 1955 through 1957 appear reasonable. Dividend payments at the rate of 20% on par value have averaeed less than 40% of net income in recent years. As the company has had no short-term and medium term debt of less than Y 1.1 billion, earn-ngs coverage of interest (after taxes) has exceeded five times in the past few years. A c t u a 1 Company Estimates Fiscal Years 1/ 1952 1953 19524 1955 126 1957 …Million Yen Sales 12,930 17,494 16,8286 16,804 18,077 19,552 Profits after taxes 788 956 742 908 884 873 (as % of sales) 6.1 5.5 4.4 5.4 4.9 4.5 (as % of equity) 23 18 12 14 13 12 Dividends 283 334 334 334 334 334 131. Financing of Investment Program - The company's financing plans for the program, 7rhichi are summarized below, indicate that in the three year period begin- ning June 1, 1955, the company will have to borrow! net about X 0.9 billion (X 2.4 billion gross) to carry out the full program. Funds made available by the IBRD through the JDB would be about equal to the net debt increase, consequently the company should have no difficulty in arranging the necessary local currency finan- cing necessary to refund the relatively small loan maturities as they fall due. Total Fiscal Year 192_ 1956 1957 Three Years -Billion Yen - - - Sources Net income after taxes 0.90 0.87 0.86 2.63 Depreciation accruals 0.71 0.73 0.92 2.36 Gross borrowings-local 0.85 0.41 0.29 1.55 -IBRD 0.06 0.31 0.48 0.85 Reserve accruals (increasing current liabilities) 0.16 0.10 0.10 0.36 Total 2.68 2.42 2.65 7.75 Uses Investment program 0.71 1.40 1.53 3.64 Dividends 0.33 0.33 0.34 1.00 Loan repayments - local 0.24 0.63 0.61 1.48 Increase current assets 1.30 0.01 0.12 1.43 Increase other assets 0.10 0.05 0.05 0.20 Total 2.68 2.42 2.65 7.75 1/ Fiscal year for this company covers period from June 1 of designated year to Mlay 31 of the follov,ing year. - 28 - 132. The condensed pro forma balance sheet belor! shows the prospective position of the company as of May 31, 1958 in comparison wvith its actual position on Mlay 31, 1955: Actual Company Estimate May 31. 1955 Ha 31. 1958 …Billion Yen … Current Assets 6.6 8.0 Fixed Assets, net 3.8 5.1 Other Assets 0.6 0.8 11.0 13.9 Current Liabilities 3.7 4.1 HlIedium-term Debt 1.0 1.1 Long-term Debt, IPRD - 0.8 Capital and surplus 6.3 7.9 11.0 13.9 Current Assets/Current Liabi'lities 1.8 1.9 Current Assets/Total Liabilities 1.4 1.3 Net Worth/Total Liabilities 1.3 1.3 133. There should be ample coverage of interest charges, which would amount to about Y 280 million per year, as profits after taxes plus interest are estimated to total over Y 1 billion per year. The company should be able to increase its present substantial margin of equity over total liabilities. The total of medium and long-term debt is not scheduled to exceed Y 1.9 billion in the three year period. This would be about X 1 billion less than present net working capital, and would be approxi-lately X 2 billion less than net working capital estimated for May 1958. 134. The requested IBRD loan of $2,350,000 (X 846 million equivalent) would meet the priority import needs of the company. Completion of the full program implies, however, that the company would later be able to secure from other sources the balance ($550,000) of the foreign exchange requirements. 135. After the three year period ending May 1958, during which the moderniza- tion Program is scheduled for completion, it is expected that canital expenditures would normally not exceed depreciation accruals and any excess plus retained earn- ings could be used to reduce debt or increase working capital. 136. Financial Policies - The Toyota company has assured the Bank that it intends to follow financial policies and to take such measures as may be approp- riate to maintain a strong financial position. It has stated that its policy would be to improve the ratio betreen current assets and current liabilities from its present position of 1.8 : 1, and to maintain a ratio of better than 1 to 1 between net worth and total liabilities, - 29 - E. rlermn of Pronosed Loan 137. A twtelve yeFr loan, including a Erace period of two years, seems suitable for this project corresponding closely to the estimated economic life of the equip- ment. F. Conclusions 138. The Toyota Motor Go., Ltd. is a well-managed enterprise. Its project for modernization of' facilities for producing trucks and busses aonlears soundly conceived and offers a suitable basis for Bank financing of about $2.35 million. - 30 - VII. COUCLUS1TOV1S AN3D IVCO.C -1'NATIONS 139. Each of the four beneficiary enterprises, whose projects are analyzed in the preceding sections of the report, is well-managed. i1k0. Their projects, when put into operation, shouild benefit the Japanese economy by improvin- its competitive position in export markets (especially in steel tubes and marine engineering products) and by making available better quality products at lower prices in the domestic markets (especially in trucks). The projects are also expected to benefit the individual enterprises through lower unit. costs and higher profits than those which would prevail if the projects were not brought into operation. 141. Their projects constitute a satisfactory basis for a loan to the Japan Development Bank of ','8.l million equivalent, to be relent to the conmpanies as follows: Share in Total Grace Corpany Proposed Loan Term Period (Years) (Years) Mitsubishi $ 1,500,000 12 2 Ishikawajima 1,650,000 12 2 Nippon Steel 2,600,000 15 2- Toyota 2,350M000 12 2 Total $ 8,100000 142. The loan to the JDB should be for a maturity of 15 years. It would be amnortized in accordance with a consolidated armortization schedule based on schedules prepared for each of the four companies in accordance with the foregoing table. Consequently, principal repayments after the twelfth year would be smaller than in the immediately preceding years. Compiled by Ship Bureau, Pinistry of Transportation June 1955 TABLE I Annual Steel Shipbuilding Output (Keel-laid, Launched and Completed) from 1949 to 1954 Fiscal Sear 1 9 4 9 1 9 5 0 1 9 5 11 9 5 2 1 I23__ 1 9 5 4 Grand Total -Gross Gross Gross Gross Gross Gross Gross % No. Tonnage No. Tonnage No. Tonnage lb. Tonnageonn.TToagageonnon- (G/T) Ocean-going 47 291,940 33 238,050 55 411,890 48 401,280 34 277,290 22 180,770 239 1,801,220 58.6 Domestic Others 140 14,551 100 11,881 64 9,750 155 31,149 235 56,626 262 62,233 956 186,190 6.2 Sub-total 187 306,491 133 249,931 119 421,640 203 432,429 269 333,916 284 243,003 1,195 1,987,410 64.8 Keel-laid Fxport 18 82,380 32 50,687 224 154,415 34 212,291 188 148,351 138 383,495 634 1,031,619 33.4 Naval / 5 2530 36 12,675 3 735 - - 2 700 8 39,270 54 55,910 1.8 Total 210 391,401 201 313,293 346 576,790 237 644,720 459 482,967 430 665,768 1,883 3,074,939 100 Ocean-going 28 105,190 40 263,690 69 384,040 51 401,560 36 316,840 26 220,730 250 1,692,050 61.6 Domestic Others 94 11,587 114 13,208 57 108,877 133 35,680 214 39,833 259 59,763 871 268,948 9.8 Launched Sub-total 122 116,777 154 276,898 126 492,917 184 i437,240 250 356,673 285 280,493 1,121 1,960,998 71.4 Export 20 40,800 21 77,640 16 32,471 38 253,075 131 161,138 128 204,555 354 769,679 28.0 Naval 1/ 5 2,530 10 3,865 29 9,545 - - - - 3 970 47 16,910 0.6 Total 147 160,107 185 358,401 171 534,933 222 690,315 381 517,811 416 486,018 1,522 2,747,587 100 Ocean-going 41 114,125 37 240,740 62 433,920 45 357,950 42 353,120 25 217,980 252 1,717,835 65.6 Domestic Others 104 16,393 127 25,975 57 8,035 140 18,173 204[ 53,406 260 60,934 892 182,916 7.0 Comple ted Sub-total 145 130,518 164 266,715 119 441,955 185 376,123 246 406,526 285 278,914 1,144 1,900,751 72.6 Export 16 10,500 23 98,240 210 20,110 47 164,953 136 257,511 101 149,843 533 701,157 26.8 Naval i/ 4 2,100 9 3,415 31 10,425 - - - - 3 970 47 16,910 0.6 Total 165 143,118 196 368,370 360 472,490 232 541,076 382 664,037 389 429,727 1,724 2,618,818 100 J Naval vessels mean patrol boats of Maritime Safety Agency, the Japanese Coast Guard. 2/ 8 naval vesseli for 1954 are composed of one 270 G/T Patrol-boat for Maritime Safety Agency and seven Japanese Defence Ships, totalling 39,000 G/T (Equivalent, in workload, to 7,800 tons displacemient), for Self-defence Agency. Tˇ.BLE 2 Steel Shipbtlilding Orders on Hand as of Apr. 1, 1955 IHumber Gross Tonnage Domrestic Ocean-going 20 149,860 Others 95 59,121 Sub-total 115 208,981 Export 126 x 833,110 Naval 7 39,000 (Equivalent, in workload., to 7,800 tons displacemnent) Grand Total 248 1,081,091 * 126 vessels for export, including !4 vessels, b.85,hoo G.T., of which the keels are not laid yet. 4pANNTX A-1 MITSUBISHI SHIBUILDINC A14UD ENGINTERIiJG CO. Sales, Actual and Estimated by Fiscal Years 2/ (In Million Yen) Shipbuilding Total New Vessels Repairs Machinery Actual 1953 22,358 12,190 1,E85 8,283 1954 19,492 9,927 2,228 7,337 Estimated 1955 25,200 12,700 1,700 lO,00 1956 28,000 20,300 1,700 6,000 1957 30,000 21,050 1,900 7,050 1958 30,000 21,050 1,900 7,050 2/ Fiscal year covers period from April 1 of designated year to Mlarch 31 of folloving. AJ T'iIX A-2 MITSUBISHI SHIPBUILDIiTC ED ENCNEERIUG CO, Foreini 'Exchanre Cost of the ProLect Cost in (-rounded) 1 Horizontal millihg, boring and drillinr machine 211,800 1 Radial drilling machine 56,LOO 2 Open-side planers 384,700 1 Vertical turret lathe 51,400 1 Copy-milling machine 107,800 1 Gear grinder 55,200 1 Radial drilling machine 43,300 1 Universal drilling machine 55,700 1 Horizontal milling & drilling machine 190,100 1 Cylindrical grinder 80,400 1 f;orm grinder 36,600 1 Internal grinder 55,800 1 Copy profile grinder 28,800 1 Blade nolishing machine 23,000 1 Profile grinder 17,500 1 Lay-out scribing machine 6,500 17 Items $ 1,405,000 Contingencies 95,000 Total $ 1,500,000 A IEL A-3 MITSUBISHI SHIPBUILDING AIND E1NGI1TEERIhiJ CO,C CO-PABiJTIVE BAT-kLIC.E SHEETS (adjusted) M4arch 31 March 31 September 30 , 1924 1955 1955 - - - --- million Yen - ASSETS Current Assets Cash 1,656 2,901 3,443 Securities 432 460 472 Receivables 4,546 5,304 5,760 Inventories 3,620 2,641 3,218 Prepaynents, etc. 696 2 1 826 Total Current Assets 10,950 12,668 14,719 Sales Credits for lonfer than one year 440 1,800 2,800 Investments 285 396 533 Fixed Assets (net) 4,098 5,728 5,694 Subsequent Revaluation 1,600 Construction Wfork in progress 300 206 295 Intangible fixed Assets 41 36 32 Deferred Charges 24 261 25 Total Assets 17,954 21,095 24,329 - LIABITITIES AND NET WCRTH Current Liabilities Notes and accounts payable 1,669 2,314 2,721 Short term loans 2,721 3,871 3, 496 Maturities of long term loans 951 1,500 3,637 ApproDriation for nast half year to tax dividends and bonuses 437 313 338 Other L82 1,027 1.142 Total Current Liabilities 7,601 9,025 11,334 Long Term Liabilities Bonds payable 826 790 770 Loans, long term IL5 2,048 2.466 Total long term liaibilities 1,571 2,838 3,236 Total -Lia'6ilities 9,172 11,863 14,570 Net Worth Capital paid in 2,800 2,800 2,800 Fevaluation Reserve 2,234 3,839 3,817 Subsequent revaluation 1,600 Surplus Reserves 911 1,139 1,257 Retirement & Bad Debt Reserves 2,076 1,305 1,707 Surplus unappronriated 161 1L 178 Total net vworth 9,232 9,759 Total Liabilities and Net l.orth 921095 Customers advances (excluded 'rom assets 5,298 7,326 7,995 and liabilities) 4NA- fVI7-TSUPISHI SHTEUIIP LDIJ' _ND RNCThEER1WA CO. Sur,pof nificant Income Data Fiscal Yers 195-958 (million yen) Actual _ E s t i m a t e d 19S3 1954 955 1956 127 12L8 Sales 22,358 19,493 25,200 28,000 30, 000 30,000 Operating Profit 2,332 1,710 1,690 1,810 2,030 2,030 Non-Operating Expenses(net) 890 756 740 810 830 830 Net Profit before Taxes 1,443 954 950 1,000 1,200 1,200 Profits Taxes 685 375 330 350 420 420 Net Income 758 579 620 650 780 780 Dividends 392 336 336 336 336 336 Bonuses 10 10 10 10 10 10 Undistributed Profits 356 233 274 304 434 434 M.emo: Depreciation 316 493 550 650 750 790 Retentions 672 726 824 954 1,184 1,124 Interest(net) I/ 320 328 333 265 396 400 Ratios: Opermtirng Profit as % of Sales 10.4 8.7 6.7 6.5 6.8 6.8 Net Income as % of Sales 3.4 3.0 2.5 2.3 2.6 2.6 l/Interests payable less interests receivable - lergely in respect to credits on sales of ships. AN.:'EX B-1 ISHIKk`IAJID%L HEAVY IDIUSTRIES CO., LTD. Sales in F.ecent and Comin Years Fiscal) (million yen) A c t u a 1 Comnany Estimates 195Q 1951 1952 1953 1954 1255 1956 1957 Gross Sales 2,229 2,537 5,644 9,792 8,447 11,995 14,500 16,000 Details of Sales: For Calendar Years 1953, 1954 and 1955 (nine months) (million yen) 9 months 1953 1254 1955 Shipbuilding, newi vessels 3,228 2,300 3,698 Shipbuilding, repair of vessels 540 860 584 Mlarine engines 1,192 396 521 Steel manufacturing equipment, pneumatics 389 1,873 613 'ransportation equipment, steel structure 1,875 3,043 1,876 Boille rs 359 636 1,003 Other Machineries 101 226 295 7,684 9,334 8,590 Total Export Value 800 371 3,661 % Export of Total Sales 10 4 43 ANLITEX -2 IST7TKAKIAJIYA flIAVY Tg'DUSTFIES CO. LTD Foreign Lxchanee Cost of the Project CIF Janan Cost in $ Turbine Department 1 Blade contour milling machine 53,000 1 Gear hobber, large size (already ordered) 217,000 1 Vertical Turning and boring mill machine 162,000 1 Horizontal Boring machnine 300,000 1 Pinion Fobbing machine 118,000 Industrial lVlachinerj- Department I Double housing planer 464,000 1 Bevel gear generator 129,000 1 Jig boring machine 59,000 1 liorm grinder 37,000 1,539,000 Unallocated 11,000 TOTAL t 1,650.0OO ANNLX_j= IS9HIKA:-AJI>A 'HEAVY INDUSTRIES CO.. LTD. Example of Production Cost !,eduction (Thousand yen) Prcsent Cost After Retoolin A. 15-000 H.P. Steam Turbine Material cost 43,300 40,900 ';Velding cost 6,100 5,400 Sub-contractors 6,000 2,900 Labor cost 22,100 17,500 Depreciation 3,100 6,400 Design and drawing 1,800 900 Other costs 1,400 1,400 General and selling expenses 6,100 5,700 Interest paid _ 2,000 Total Cost 89,900 83,100 SavLng 7.5% E. *Exhaust G~as Turbine Supercharger. Type.IEG-27 Material cost 281 281 Sub-contractors 54 54 Labor cost 497 249 Depreciation 67 60 lanufacturing expenses 51 20 General and selling expenses 64 51 Interest, paid _ 14 Total Cost 1,014 729 Saving28 ANNEX B-. ISHI-IKA"AJI1iA HEAVY INIDUSTRIES C(.. LTD. Bal nce Sheets in Recent Years (adjusted) (14illion Yen) MVkarch 31 March 31 March 31 March 31 Sept.30 195' j2 19L3 195L 1955 J1955 ASSETS Current Assets Cash 779 1,156 1,612 1,340 1,222 Keceivables 754 986 1,475 1,791 2,089 Inventoriesl 975 2,003 1,791 1,751 3,165 Prepayments 1;9 -221 59 366 .949 Total Current Assets 2,667 4,366 5,476 5,248 7,425 Fixed Assets 505 890 1,983 3,214 3,613 Less depreciation allow-!ance 105 -176 -4 -367 -51 Fixed Assets, net 400 714 1,8/43 2,847 3,095 Subsequent Levaluations 1,412 1,179 416 - - Construct ion pork in process _47 * 6 _A3 203 229 Fixed Assets, adjusted 1,859 2,089 2,672 3,050 3,324 Receivables, non-current 1,058 1,058 Investmrcnts 83 314 489 607 657 Patents and other rights - 21 30 26 24 Deferred Charges _: 1A 7L _ 74 18 TCTAL ASSETS 4,643 6,824 8,741 10,034 12,506 EXTERNAL LIABITITIES A7'ND YET 1:CRTIT Current Liabilities Notes and loans, short-term 1,081 1,610 2,170 2,426 2,797 Accounts 491 F89 948 964 1,144 Operat ng Reserves 5 +32 131 128 56 Otherl/ 1,120 2,C60 1,059 465 965 Current maturities,med-term lia- bilities 62 696 1.13977 Total Current Liabilities 2,759 4,483 5,004 5,116 6,939 Medium-term Liabilities Bonds 130 120 177 93 292 Loans - 637 1.091 1.42 Total JMedium-term Liabilities 130 2;3 814 1,184 1,716 TOTAL EXTERNAL LIABILITIES 2,889 4,656 5,818 6,300 8,655 Net Worth Capital, paid in 130 325 650 1,300 1,300 Revaluation surplus 1,516 1,5C5 1,494 1,479 1,476 Surplus, appropriated 49 2-1 687 863 993 Surplus, unappropriated _9 _ __9.2 92 82 TOTAL NET WORTH 1,754 2,128 2,923 3,734 3,851 TOTAL EXTERNAL LIABILITIES AND NET lYRTH A,643 6, 4 8,741 10,034 12,506 1/ After deducting from work in process and advances from customers the amounts shown 1,715 2,31 3,104 4,362 3,917 AMNEX B-5 SHII¸TAJWIA2 HVItY TIJIS TRI'S CO., LTD. Summary Profit and Loss Statemiients (by fiscal years) kNillion Yen) Actual Company Estimates E9 2 1953 1954 1E 1956 1957 Gross Sales 5,644 9,792 8,447 11,995 14,500 16,000 aperating Profit 740 1,234 657 753 1,084 1,380 Non-operating Revenue 102 156 264 234 240 240 Non-operating FExpense 448 660 508 445 440 440 (of which Interest & Discount) (111) (160) (252) (324) (320) (320) NTet Profit Before Taxes 394 730 413 542 884 1,180 Profits Taxes 205 350 109 211 385 596 Net Incorne 189 380 304 331 499 584 Dividend 46 130 156 156 195 195 Bonuses 4 6 4 4 4 4 Retained Profits 139 244 144 171 300 385 AN?NEX C-1 NIPPON 'TEEL TUBE CO.. ITD. SALE-S OC CTEEL P0CDUCTc BY MAJOR PRODUCTS Actua 1 E st ima t ed 19-5 19'53 19 .Jz5 195 … - - - - - - - Metric Tons - - Steel Division Pig Iron 91,800 164,100 97,000 111,000 100,000 101,000 Steel Products: Pipes 121,700 137,100 139,100 168,000 170,300 186,800 Heavy & Light Plates 185,500 171,200 195,500 360,000 360,00!? 360,000 Sheets 45,100 49,900 41,700) 68,000 67,200 67,200 Galvanized Iron Sheets 18,600 18,100 19,200) Other 278,4/0 318,100 311.200 2L.QOo 3o4,w 316,000 649,300 694,400 706,7001/ 891,000 901,500 930,000 Total Sales - - - - Million Yen- - - - - - Steel Division 39,219 42,438 37,463 47,032 47,452 48,851 Shipbuilding 7Jxl93 7,980 80959 12,000 12,00 12.000 46,412 50,418 46,422 59,032 59,452 60,851 1/ Tonnages estimated based on results for first half of fiscal year. ANNEX c-4 NIPPONT VTFEI, TUBE CO.. LTD. PRODUCTION FACILITILS. CAPACITY 1955 (Kavasaki and Tsururii Works) Annual Number Cajacity (metric tons) Blast furnaces 7 950,000 Coke oven batteries 4 410,000 Open hearth furnaces 19 700,000 Converters 5 450,000 Electric furnaces 2 56,000 Dlooming mill 3 660,000 Rolling mills: Section mills 4 810,000 Plate mills 3 720,000 Sheet mills 3 70,000 Galvanizing mills 2 36,000 Tube mills: Seamless tubes, medium size 2 114,000 large " 1 60,000 Butt-relded pipes (ner) 1 120,000 Electric-':-elded pipes 2 1CO,000 Hoop mill (nevr) 1 300,000 ANNEX (-3 NIPPCN STELEL T-UTE CC., LTD. PRODUCTION COSTS OF 41" SEALESS GAS PIPE Estimated P r e s e n t After Rcmodellinf Quantity Unit Cost Per Ton Quantity Unit Cost Per Ton Per Ton Prices* Total * Per Ton Prices* Total * Billet cost 1.154 29,000 33s466 1.089 29,000 31,523 Wages & Salaries 3,303 847 Fuel cost 930 375 Electricity 138 kwh 4.75 655 125 kwh 4.75 kwh 594 liWater 97 65 Handling & Transportation 769 719 Repair 620 220 Rolls 722 385 Testing 645 645 Others 3,806 ,l02 Sub-total 45.,013 37,475 Credit for by products 0.125 tons 17,000 -22125 0.054 tons 17,000 * 918 Sub-total 142,888 36,557 Price discount allcwed fcr disposal cf seconds 1,794 L57 Cost of' primes 44,682 37 ,c14 Depreciation 163 2,187 Manufacturing cost including depreciation 441,845 39,201 * Yen AiNNEX C- NIPPONT STEEL TUBE CO.. LTD. SEATHLESS TUBE ..ILL 1RCJECT E3TIMqATED FOREIGN EXCHA.NCE COST OF Ii'POPTED EQUIPIJENT U.S. $ A. Hot Mill Equipment Heating Facilities: Rotary Furnace $ 225,000 Re-heating Furnace 190,000 Sub total 415,000 Rolling Facilities: Piercer 200,000 1 Plug Till 170,000 Reeler 170,000 1/ rleducer 320,000 Straightener 218,000 Sub total 1.078.000 Total 1.493.000 B. Equipment for FinishinF MNill Cut-off machine 2 sets 104,000 Large Threading Machine 215,000 Small Threading Machine 123,000 Total 4442°00 C. Inspecting and Testing Eouipment Hydraulic Tube Tester 310,000 Coupling Screw-on Machine 107.000 Total 417,000 D. Other Equipment (Copying Lathe) 71,000 E. Unallocated 177.000 GRAND TOTAL $2,600,000 1/ Aetna Standard Engineering Co. - Includes service fee of $220,000 for preparation of drawings and bills of materials, supervision of manufacture of equipment produced in Japan, installation of all equipment, and training in proper operation of plant. AITNEX - -7 NIPPON STFEL TITBE L0,, STD. ESTIMATED TOTAL COST OF (SEATTESS TUBE MILL PROJECT lForeign Local Total Exchange Currency Cost - - - - - - - 000 $ - … - - - - Heating Facilities 415 445 860 Rolling Facilities 1,078 2,497 3,575 Finishing Facilities 442 558 1,000 Inspecting Equipment 417 444 861 Crane, machine tools, pumps, etc. 71 709 780 Steam, Air W;ater, Fuel Supply Equipment _ 447 447 Electric Power Supply Equipment - 1,200 1,200 Shop and Shop Office Building - 1,850 1,850 Mliscellaneous Tools and Spare Parts - 280 280 Contingencies 177 310 487 Total Cost 2,600 8,740 11,340 Yen equivalent (million) 936 2,546 4,082 AINEX C-6 N I PPC: S T TL'LL T?U2E CO.. LTD. SUM1'hRY BALA.TCE SHEETS (Million Yen) March 31, March 31, 1952 1955 (Rounded) Assets Current Assets 28,660 37,810 a/ Of which Inventories (15,230) (16,2790) Others (13,430) (21,020) Fixed Assets (net)b/ 13,940 27,260 Other Assets 370 2f110 Total Assets 42970 67,180 Liabilities Current Liabilities 20,780 30,210 Of wiihich Short-Term Loans (4,590) (10,250) Funded Debt 5,020 14,840 Capital Stock 1,000 5,000 Revaluation Reserve b/ 12,840 11,850 Surplus and Reserves 3. 5,280 Total Liabilities 42,970 67,180 a/ Adjusted for transfer of Z 2,080 million construction ex-penditures from current assets to fixed assets. b/ Includes Y 1,390 million of revaluation carried out in September 1954 on both dates. AI!T&11X C-7 NIPPON £TUL TUBF CO.. LTD. SUIR;IARY OF PROFIT ATD LOSS STA-IES3MENTS FISCAL YEA RS 1952 - 1958 (-I4illion Yen) A c t u a l E s t i m a_t e d 1952 1953 1954 1955 1956 1957 19-5 Sales 46,412 50,418 46,422 59,030 59,450 60,850 63,040i / Gross Profits before Depreciation, Interest 4,588 5,287 5,424 7,360 7,590 8,380 8,700J/ and Taxes Depreciation 1,194 1,482 2,094 2,600 2,500 2,690 3,030 Interest Charges 1,1435 1,620 1,529 2,090 2,320 2;520 2,50@/ Net Profit before Taxes 1,960 2,185 1,801 2,670 2,770 3,170 3,170 Profit Taxes 928 1,035 735 1,260 1,310 1,500 1,500 Net Income 1,032 1,150 1,066 1,1410 1,1t60 1,670 1,670 Dividends 474 650 750 750 750 750 1,200 Bonuses 10 10 8 10 10 10 10 IJndistributed Profits 548 490 308 650 700 910 460 Gross Profit % Sales 9.9 10.5 11.7 12.5 12.8 13.8 13.8 Depreciation % Sales 2.6 2.9 4.5 4.4 4.2 4.4 4.8 Interest Charges % Sales 3.1 3.2 3.3 3.5 3.9 4.1 3.9 Net Income % Sales 2.2 2.3 2.3 2.4 2.5 2.7 2.6 Times interest earned: Before tax 2.36 2.34 2.13 2.28 2.19 2.26 2.26 After tax 1.72 1.71 1.70 1.68 1.63 1.66 1.66 1/ IBRD estimate Fiscal year starts April 1 and ends March 31 of following year. ANBEX C-8 FINANCISAL PROCRAM 1955 - 1957 (Million Yen) Three Year 9_5 5 1926 19-27 Period I. Sources of Funds Undistributed Profit 648 702 910 2,260 Depreciation 2,600 2,506 2,692 7,798 3,248 3,208 3,602 10,058 New Borrowings IERD 392 498 - 890 Local 9,337 9,10 8,089 26,526 9,729 9,598 8,089 27,416 Total 12,977 12,806 11,691 37,474 II. ADplication of Funds Construction Pipe MtQill Project 583 1,818 1,679 4,080 Other Construction 2,708 2,638 1,824 7,170 Sub-total 3,291 4,456 3,503 11,250 Other Investments 299 300 300 899 Maturing Debt 4,139 4,350 6,326 14,815 Increase in Net Current Assets 1/ 4,875 3,895 1,744 10,514 12,604 13,001 11,873 37,478 III. Available Funds Surplus (shortfall)for year 373 (195) (182) (4) Available at beginning of year7,599 7,972 7,777 7,599 Available at end of year 7,972 7,777 7,595 7,595 1/ Allows for redemption of Y 1,812 million of foreign exchange loans but assumes refunding of all other short-term loans. ANTIX C-9 NIPPON FTEYL TMI'F CO.$ LTD. SUEEIARY BALAIJCLJ SH2ETS (Million Yen) Iarch 31, March 31, 1955 1958 .9 _ _ _ _ _ _ (Actual) (Pro Forma) Assets Current Assets 37,810 48,590 (including sales credits on terms for more than one year) 12 (580) (3,000) Fixed Assets (net) 27,260 31,040 Investments 2,080 2,980 Deferred Assets 30 50 Total Assets 67,180 82,660 Liabilities and Net Worth Current Liabilities 30,210 30,480 (Of which short-term loans) (10,250) (9,880) Funded Debt 14,840 27,440 (Of which IBRD) (-) (940) Total Liabilities h5,050 57,920 Net Worth: Capital 5,000 5,000 Reserves _/and Surplus 17,130 19,740 Total lNet ,Iorth 22,130 24,740 Total Liabilities and Net Worth 67;80 82,660 Ratios: Current Assets/Current Liabilities 1.23 1.59 Current Assets/Total Liabilities 0.84 o.84 Total Assets/Total Liabilities i.49 1.43 Net Worth/Total Liabilities and Net Worth 0.33 0.30 1/ Mlostly installment credits on ships for 1-5 years. For the purpose of financial ratio calculations, any amount in excess of v 3 billion would be considered a non-current asset. 2/ Including Bad Debt and all "Other Reserves", ANIE,X D -1 TOYOTA EYIOTOR COTANTY Somne Specifications of Its Products Standard Light Truck Truck Sedan Gross Weight 18,300 lbs. 5,690 lbs. 3,505 lbs. Maximum Payload 11,000 It 2,750 " 5 passengers Brake Horsepower 105 48 48 Piston Displacement 237 cu. in. 89 cu. in. 89 cu. in. Wheelbase 163 in. 98 in. 98 in. Length - Overall 277 in. 168 in. 168 in. Width - Overall 88 in. 52 in. 52 in. Cylinders 6 4 4 ANNEX D-2 TOYOTA IIOTOR COI-P'.XNY Production Data and Company's Estimates (Monthly Averages) Standard Vehicles Total Light For For Vehicles Vehicles Total Export Domestic Use Actual Dec. 1952 - iIay 1953 1,295 634 661 15 646 June 1953 - INov. 1953 1,274 645 629 25 604 Dec. 1953 - May 1954 2,062 1,131 931 38 393 June 1954 - Nov. 1954b 1,852 1,023 829 15 814 Dec. 1954 - HIay 1955 1,802 1,220 582 12 570 Company Estimates June 1955 - NIay,r 1956 2,000 1,350 650 50 600 June 1956 - May 1957 2,225 1,450 775 100 675 June 1957 - NIay 1958 2,510 1,650 860 150 710 kiTh,EX L-3 TOYO'TA MOTOR COMIANY ESTfiATEED CIF JAPAN COST IN $ 4 Copying lathes 83,000 2 Automatic lathes 45,000 1 Conomatic bar 45h000 1 Jig boring machine 34h,000 3 Gear shapers 40o,000 2 Gear shaving machines 40,000 2 Gleason # 7 revex roughers 50,000 2 Cylindrical grinders 54h000 1 Broach grinder 15,000 2 Forging rolls 65,0o0 1 Quenching press 17, 000 2 Gleason # 17 tester; # 19 lapper 40,000 1 Die sinker 165,000 1 Gleason # 22 hypoid rougher 38, 000 1 tt tt it it finisher 45,000 2 Hourglass generators # 6 33,000 1 Planer 130,000 1 Die block mill 80,000 1 Roller leveller 580,ooo 1 Carburetor test stand 46,o00 1 Micro-honing machine 38,000 1 Mult-o-matic lathe 120,000 1 Gear hobbing machine 120,000 2 Internal grinders 56,o0o 1 Die sinker 230,000 1 Jig boring machine 90,000 1 Forging press 240,000 1 Hydraulic press 200,000 Unallocated 133,000 Total $ 2,350,000 AITMEX D-4 TOYOTA rrOTOR CO., LTD. Balance Sheets for Recent Years (In IIillion Yen) hay 31 May 31 May 31 Ilay 31 1952 1953 195h 1955 ASSETS Current Assets 3,93h 6 oLh 7 017 6,603 Cash 711 T 1 1,096 Receivvables 590 1,716 2,818 2,910 Prepayments 310 643 595 531 Inventories 2,373 2,208 2,529 2,066 Investments 105 263 491 618 Met Plant & Equipment 1,951_/ 2,065 J 2,908 3,750 Deferred Assets 13 16 12 11 Total Assets 62053 8,388 10,428 10 982 LIABILTITIES & i'RJT ?O TH Current Tiabilities 1,994 2,674 3,787 3,670 (incl. operating reserves) (341) (h48) (701) (805) 1,edium-Term Debt 624 391 662 1,046 Net W;Jorth 3 h35 5,323 5,979 6 266 Capital Stock 41 1,672 ,672 Revaluation Reserve (adjusted) 1,947 1,959 1,939 1,928 Otiher Surplus 1,070 1,692 2,368 2,666 Total Liabilities & Net Worth 0,388 lo 42 1/ Adjusted for subsequent revaluation i 1,092 mil'ion. Al44X Ar- TOI'OTA - PROFIT AND LOSS STATME!,4Y.TS ACTUAL TO IMAY 1955, COMPANY ESTIMATES THEREAFTF? (Million Yen) A c t u a 1 * Company Estimates April 1951 June 1952 June 1953 Juine 1954 June 1955 June 1956 June 1957 to to to to to to to Period Covered IMiay 1952 Mqay 1953 Mlay 1954 Mbay 1955 May 1956 Iiay 1957 May 1958 No. of months 14 12 12 12 12 12 12 Sales 12,855 12,930 17,494 16,886 16,804 18,077 19,552 Profit on Sales 1,442 1,731 2,120 1,849 1,752 1,683 1,730 Non-operating Revenue 203 400 648 1,012 380 427 445 Non-operating Expense 484 660 1,048 1,444 474 491 572 Net Profit Before Taxes 1,161 1,471 1,720 1,417 1,658 1,619 1,603 Profit Taxes 520 683 764 675 750 735 730 Net Profit - 641 788 956 742 908 884 873 as % of Sales 5.0 6.1 5.5 4.4 5.4 4.9 4.5 Dividends 146 283 334 334 334 334 334 Bonus 9 10 10 10 10 10 10 Undistributed Profit 486 495 612 398 564 540 529 Dividends as % of Earnings 23 36 35 45 37 38 38 * Based on actual for first half of fiscal year and estimate for second half.