Accelerating Growth of Musical Instruments Business November 26, 2010
Contents 1. Positioning of musical instruments business within Yamaha 2. Musical instruments market and Yamaha's position 3. Yamaha's business strategy Turning acoustic musical instruments business into profit Growth in Chinese and emerging markets 2
Positioning of Musical Instruments Business within Yamaha
Musical Instruments Segment Core Business Domain Focused on Musical Instruments, Music, and Audio" Musical instruments segment Products Musical instruments Professional audio equipment Audio products Services Music school Music software 4
Musical Instruments Segment Sales & Operating Income 600 Billions of yen Sales Lifestyle-Related Products Other than musical inst. Operating Profit 500 Musical Instruments 400 414.8 427.0 Billions of yen 300 309.0 30 25.0 200 20 18.5 100 276.3 10 6.8 0 FY2007.3 FY2008.3 FY2009.3 FY2010.3 FY2013.3 0 FY2007.3 FY2008.3 FY2009.3 FY2010.3 5.1 FY2013.3 The musical instruments segment accounted for 67% of sales and 75% of operating income for the period ended March 31, 2010. -10 5
Musical Instruments Market and Yamaha s Position
Size of Global Musical Instruments Market Estimated size of global market by product (unit: Billions of yen, at wholesale price) Piano 120 PA equipment 370 Market size: Approx. 1,010 billion Digital keyboard 130 Wind instruments 150 Guitar/Drum 240 Yamaha's share: 18% *Based on our own estimation. 7
Past Trend in Musical Instruments Market Trend in developed countries Trend in emerging countries Sign of recovery from demand contraction following economic crisis Increasingly low price Reduced public expenditure Cutbacks in capital expenditures by private sector Slow recovery in economy Steady increase in demand Small impact of economic crisis Growing BRICs market Increasing middle-income population in Asia Changes in distribution Increasing sales through web shops Reducing number of specialty shops, rise of volume retailers 8
Projection of Musical Instruments Market Growth (by product group) 1,400 1,200 1,000 Billions of yen 1,010 1,080 1,130 represents impact of exchange rate attributable to yen appreciation. Figures do not reflect the impact of exchange rate. PA equipment 800 Digital keyboard 600 Wind instruments 400 Guitar/Drum 200 Piano 0 FY2010.3 FY2013.3 5 years later US$ =93 Euro=131 US$ =87 Euro=112 Estimated growth for the next 5-year period: 11.2% (2.2% per annum) Estimated market size in 2015: 1,130 billion 9
Projection of Musical Instruments Market Growth (by region) 1,400 1,200 1,000 Billions of yen 1,010 1,080 1,130 represents impact of exchange rate attributable to yen appreciation. Figures do not reflect the impact of exchange rate. China 800 Asia Pacific 600 Europe 400 North America 200 Japan 0 FY2010.3 FY2013.3 5 years later US$ =93 Euro=131 US$ =87 Euro=112 China and Asia-Pacific countries will lead the growth, while Japan, U.S., Europe, and other developed countries will remain almost flat. 10
Market Environment Recognition and Yamaha Category Piano Digital keyboard Guitar/ Drum Wind instruments PA equipment Share (2010) 33% 49% 7% 20% 8% Market Condition and Outlook The world-largest Chinese market will grow further. Sales in developed countries will gradually decrease in the future. Yamaha has the No.1 position in the global market. Demand is increasing mainly in emerging market. The electronic keyboard market is dominated by a small number of Japanese companies, incl. Casio, Roland, and Korg. Yamaha has the largest share in the world. The market is stable in developed countries and expanding in emerging countries. Each product category is consisted of a few leading brands and many small-sized pure-play manufacturers. Yamaha aims to increase its share focusing on electric acoustic guitar. Stable market. Further growth is expected in emerging countries. Chinese manufacturers are growing fast. Yamaha has a leading position in various product categories. The market is growing further. Yamaha has been challenged by fierce competitors in each product category, but has advantage in terms of input devices (mixers) over them. 11
Market Size and Yamaha's Share by Product Group Piano Digital keyboard 2010 2013 2010 2013 33% 49% Yamaha Yamaha's share Other than Yamaha Guitar/Drum 2010 2013 7% Wind instruments 2010 2013 20% PA equipment 2010 2013 8% 0 100 200 300 400 Billions of yen Estimated 2010 market sizes and shares. Yamaha has a 23% share of the musical instruments market (excl. PA). 12
Yamaha's Business Strategy
Musical Instruments Business: Medium-Term Sales & Operating Income Targets Sales 350 300 250 (Billions of yen) 276.3 270.0 309.0 Operating income 40 30 200 150 18.5 20 100 50 5.1 7.0 10 0 FY2010.3 US$ =93 Euro=131 FY2011.3 US$ =87 Euro=112 FY2012.3 FY2013.3 US$ =90 Euro=127 Targeted sales growth for the next 3-year period: 12% Achieve operating income margin of 6% in 3 years and 10% or higher in the future. - 5 years later 0 14
Breakdown of Changes in Sales for Medium-Term Plan (unit: Billions of yen) Piano/ Digital piano 10.1 Guitar/ Drum Digital 6.4 keyboard 2.1 Wind inst. 3.5 PA equipment 10.6 309.0 China (+50%) 7.3 Asia Pacific (+21%) 8.8 N. America/ Europe/Japan (+8%) 16.6 276.3 +32.7 (+12%) FY2010.3 FY2013.3 By business domain By region 15
Turning Piano Business into Profit
Turning Piano Business into Profit Structural reform of Piano Division Review of operations and functions Review of operation volume Reduction in manufacturing cost Locally-sourced parts Review of wood procurement Premium pianos Prestige pianos Affordable pianos Pianos made in Indonesia Strengthening product competitiveness 17
Turning Piano Business into Profit Enhancing Operational Effectiveness Review of Piano Division functions Achieve equidistance between Piano Division and three factories. Transfer indirect functions (incl. product development) from Piano Division (HQ) to three factories. Piano Division should perform minimum-necessary functions. Enhance independence and operational efficiency of manufacturing bases. Piano Division Marketing SCM Development Designing Quality control Kakegawa Factory Production technology Administration Purchasing Hangzhou Factory (China) Jakarta Factory (Indonesia) 18
Turning Piano Business into Profit Enhancing Operational Effectiveness Review of Piano Division functions Achieve equidistance between Piano Division and three factories. Transfer indirect functions (incl. product development) from Piano Division (HQ) to three factories. Piano Division should perform minimum-necessary functions. Enhance independence and operational efficiency of manufacturing bases. 営 業 Marketing 営 業 SCM SCM SCM 開 発 品 質 設 Development 開 発 計 管 理 Designing 設 計 Piano Division Kakegawa prod 管 理 品 質 Quality prod factory Production管 理 Administration 購 買 管 理 control uctio technology 購 買 n Purchasing n 技 術 技 術 Indirect Function Kakega Kakegawa wa Factory factory Indirect Function Hangzhou Factory (China) Indirect Function シ ャカルタ Jakarta イント ネシア Factory (Indonesia) 19
Turning Piano Business into Profit Manufacturing Cost Reduction Kakegawa Factory Supply of knock down parts Overseas Factories (China/Indonesia) Reduce Reduce cost cost and and strengthen strengthen price price competitiveness competitiveness by by using using parts parts and and components components made made in in Chinese Chineseand and Indonesian Indonesian factories. factories. Increase Increase Kakegawa Kakegawa Factory's Factory's overseas overseas parts parts procurement procurement ratio ratio from from the the current current 3% 3% to to 15% 15% in in 3 years. years. Increase profitability Accelerate Accelerate in-house in-housemanufacturing and and local local procurement procurementof of parts parts Transfer Transfer wood wood processing processing (preprocess) (preprocess) to to the the two two overseas overseas factories factories Reduce cost by increasing productivity and local procurement ratio 20
Enhancing Product Competitiveness and Increasing Profitability of Kakegawa Factory Respond to polarizing demand for individual preferences-oriented and price-oriented Flagship model "CFX" Premium Piano series Development of new products with attributes inherited from CFX Prestige Piano series Use of low-cost parts made in overseas factories Affordable Piano CF series Grand Piano made in Kakegawa UP made in Kakegawa Upright Piano made in Kakegawa Premium piano Prestige Piano (GP) Prestige Piano (UP) Newly introduce low-end pianos to the market Affordable Piano 21
Turning Piano Business into Profitability Manufacturing Base Strategy 140,000 120,000 116,000 units 129,100 units 100,000 80,000 83,000 units 20,000 82,000 units 63,000 China 60,000 36,000 40,000 24,000 20,000 34,000 37,600 Indonesia 20,000 39,000 26,000 19,000 20,000 Kakegawa 0 FY2007.3 FY2010.3 FY2013.3 5 years later Partial review of the medium-term plan Change in the production volume at Kakegawa from 18,000 units to 20,000 units in March 2013. Increase the ratio of overseas production (primarily China) Keep the production volume of Kakegawa at 20,000 units 130,000 units in 5 years 22
Increasing Piano Business Profitability Improve the Operating Income by 5 billion from FY2010.3 to FY2013.3 Effect of consolidating Japanese Factories: 0.8 billion Logistics cost Energy cost Lowering Kakegawa's breakeven point: 2.6 billion Greater use of overseas manufactured parts Disposition of unprofitable models Improvement of productivity Effect of production increase: 1.6 billion Increase production in China/Indonesia (In-house manufacturing of parts at overseas factories) Increase production of high-grade GPs 23
Piano Business Numerical Targets FY2010.3 Result FY2013.3 Target Target for the 5 th year Sales (Billions of yen) 40.3 45.0 50 Operating income negative +0 Operating income margin 5% 24
Strengthening Profitability of Wind Instruments Business
Strengthening Profitability of Wind Instruments Business Implement manufacturing reform ahead of the original schedule Accelerate cost reduction efforts Consolidate domestic manufacturing bases (To be completed in FY03/2012) Transfer processes to overseas production bases Increase the number of material sources (Increase use of overseas materials) Increase market competitiveness & profitability Drastically boost sales in China Regain share in the U.S & European markets Introduce lower-cost models New Xiaoshan Factory 26
Wind Instruments Business Manufacturing Base Strategy 400 k (thousand) units 350 k units 400 k units 300 200 100 0 330 k units 23% 14% 63% 310 k units 38% 27% 35% 25% 34% Indonesia Woodwind instruments production base Full production of woodwind instrument parts China Brass instruments production base for all markets except for Japan Local material procurement functions Toyooka High value-added products Skill transfer 31% FY2007.3 FY2010.3 FY2013.3 5 years later Increase overseas production to achieve 400 k units/year in 5 years 27
Wind Instruments Business Numerical Targets FY2010.3 Results FY2013.3 Plan Target for the 5 th year Sales (Billion of yen) 31.0 34.5 36.0 Operating income margin 3% 10% >10% 28
Growth in Chinese Market
Musical Instruments Segment Sales Plan for China and Emerging Countries Billions of yen 90 85 80 70 60 52 57 68 Mature Market S. Korea, Taiwan, Australia, Singapore, etc. 50 40 30 20 10 Growth Market Russia, CIS, India, ASEAN, Latin America, Middle East, and Africa China 0 FY2010.3 FY2011.3 FY2013.3-5 years later Achieve a 30% growth in 3 years and a 60% growth in 5 years. 30
Chinese Musical Instruments Market Billions of RMB 14 12 12.0 PA equipment 10 9.8 Price range Domains covered by Yamaha B&O 8 6 4 2 7.0 Guitar/Drum Digital Keyboard Piano 0 FY2010.3 FY2013.3 FY2015.3 5 years later The market is led by piano products: As of 2010, 40% of the market is accounted for by piano products. Volume The market has a pyramid structure with a wide base. The bottom part is dominated by Chinese local manufacturer. 31
Growth Strategy: Promoting Market-Tailored Products Increase sales of musical instruments segment to 1.5 billion yuan in 3 years and 2.3 billion yuan in 5 years. Price range (1,000 RMB) 35-40 30-35 25-30 20-25 15-20 10-15 Number of pianos sold in retail market by price range Up to 2008, Yamaha lowest price was set at 20,000 yuan. In 2009, a 17,800 yuan model was introduced. Tianjin Factory (Digital musical instruments) Suzhou Factory (Electronic parts/av) Hangzhou Factory (Piano/Guitar) Xiaoshan Factory (Wind instruments) 5-10 The target price level for the next period will be 15,000 yuan. 10,000 units 0 2 4 6 8 10 12 There is a plan to introduce Chinaexclusive models by making use of local manufacturing bases. 32
Growth Strategy: Expansion of Sales Network March 2010 1,000 stores March 2013 1,500 stores 2010 2013 Piano 350 500 Wind instruments 170 260 Digital keyboard 250 500 Others 230 240 Total 1,000 1,500 In local cities, Yamaha aims to open a general musical instruments store as a starting point. In large cities, Yamaha will expand and upgrade specialty stores. 33
Yamaha in Growing Chinese Market Projection of market growth (number of units) (1,000 units) 2010 2013 5 years later Market Yamaha Piano Digital piano Portable keyboard Guitar Wind instruments (1,000 units) Piano Digital piano Portable keyboard Guitar 250 100 370 500 310 2010 32 22 112 13 280 140 460 670 370 2013 50 40 180 50 300 160 530 800 430 5 years later 65 60 300 100 Wind instruments 17 30 50 34
Growth in Other Emerging Countries
Sales Plan for Other Regions In the next 5 years, "emerging market" will account for 48% of total sales in the Asia-Pacific region. Billions of yen 60 50 40 30 20 10 +38% 48.3 41.2 39.7 21.8 15.6 17.4 54.8 25.8 8.3 9.0 10.8 10.8 15.7 15.1 15.3 17.9 Emerging market Medium-growth market Mature market 0 FY2010.3 FY2011.3 FY2013.3 5 years later 36
Sales Plan for Emerging Countries In emerging markets, achieve a growth rate of 40% in 3 years and 66% in 5 years. Billions of yen 30 25 +66% 25.8 3.2 Other developing markets 20 15 10 5 0 2.1 6.4 15.6 1.9 5.1 1.8 4.4 4.1 5.5 6.0 4.4 3.9 5.3 4.9 3.3 3.5 0.5 0.8 1.1 1.7 1.9 2.4 3.0 3.4 FY2010.3 FY2011.3 FY2013.3 Middle East/ Africa/CIS Brazil Indonesia India 5 years later Russia 37
Increasing Middle-Income Population Middle-income population is rising in rapidly-growing emerging countries. Upper-income population: 1-5% Middle-income population: 10-35% Increase sales by introducing low-priced products Local-taste models Low-priced keyboard CIS-compliant PA equipment Low-priced electric guitar FG/Nylon string guitar Low-priced digital piano 38
Yamaha's Presence in Emerging Markets Completion of operational base establishment in every emerging market Shift to the full profit-maximization phase Russia (2007) Dubai (1997) Russia and India: Establish operational bases and shift to the sales network expansion phase. S. Korea (2001) China (2002) India (2008) Taiwan (1996) Thailand (1989) Malaysia (1974) Singapore (1966) Indonesia (1990) Australia (1986) Mexico (1958) Panama (1975) Brazil (1973) Increase the number of sales base in emerging countries from 2,000 sites in 2010 to 3,400 in 2013 to 4,400 in 5 years. Strengthen music promotion activities by increasing the number of music school students from 130,000 in 2010 to 180,000 in 2013 to 200,000 in 5 years. Support various music activities for the youth. 39
Key Points of Strategies for China and Emerging Countries Wrap up Introduce strategic products to the expanding middle-income population Shift the primary target of product development from developed countries to China and emerging markets. Develop new piano models that target most selling price range in China. Low-price guitars and local-taste PKs for emerging countries Wind instruments that can compete with Chinese products Expand sales network Increase the number of people who play music, using Yamaha music schools Attract middle-income population by deploying the Yamaha Business Model 40
In this report, the figures forecast for the Company s future performance have been calculated on the basis of information currently available to Yamaha and the Yamaha Group. Forecasts are, therefore, subject to risks and uncertainties. Accordingly, actual performance may differ greatly from our predictions depending on changes in the economic conditions surrounding our business, demand trends, and the value of key currencies, such as the U.S. dollar and the euro.