New Businesses as the Fourth Pillar

Establishing the Medium-Term Business Plan 2015 (Evolution 2015)

In April 2015, Obayashi Corporation started its new three-year plan, the Medium-Term Business Plan 2015 (Evolution 2015).

The previous Medium-Term Business Plan ’12 aimed to achieve further growth in the company’s core business areas of domestic construction and real estate development, while also diversifying the company’s earnings bases through strategic global expansion and cultivating new revenue streams. During the term of the plan, demand for domestic construction reached its highest level in recent years. While the company managed to achieve significant growth in both the number of construction orders received and net sales, rising construction costs and a shortage of skilled workers during the shift from a deflation economy to that of inflation meant that for some time it was difficult to secure profits in the building construction business. Nevertheless, performance generally grew steadily across the entire group. In addition, the company achieved results that contributed to its goal of diversifying its earnings bases. In the real estate development business, there was an increase in properties for lease, while the overseas construction business was broadened through M&As and similar measures. New revenue streams were also developed that focused on the renewable energy business. Under these circumstances, the group recorded consolidated net sales that topped the industry in both FY2014.3 and FY2015.3, and mostly achieved the quantitative goals outlined in the previous Medium-Term Business Plan.

In response, the company created Evolution 2015 as a way of allowing it to continue along the same path; in other words, to push forward with diversifying its earnings base by making “New Businesses” the fourth pillar of the company in addition to the existing three businesses of Building Construction, Civil Engineering, and Real Estate Development. Evolution 2015 set out the following three policies.

In terms of management goals, the plan placed importance on operating income as an indicator for enhancing earning power. About 45 billion yen (consolidated) was set to be posted on a stable basis during the term of the plan. As a way of establishing an earnings structure that can flexibly respond to market fluctuations, the plan aimed to increase the overseas share of consolidated net sales for the construction business to approximately 25 percent, and the ratio of operating income generated outside the domestic construction business to approximately 45 percent.

Expansion of the Engineering Business

To achieve the goal of expanding the engineering business outlined in the Medium-Term Business Plan 2015 (Evolution 2015), the company restructured the construction-related departments in the Technology and Engineering Divisions in April 2016. Up until that point, each department related to construction work for engineering-related facilities, such as production or environmental facilities, had been undertaking construction works by negotiating with each division in charge of its own respective field. All related tasks were integrated into the Engineering Construction Department, which had been reorganized out of the Manufacturing Facility Construction Technical Department, to strengthen competitiveness and earning capability.

The engineering business provides a high level of added value in a series of activities—from consulting during the planning stage to design, procurement, construction, commissioning, and adjustment. Launched in the 1980s, the company’s engineering business had expanded its operations from upstream to downstream projects, while also reviewing its focus areas in response to the changing needs of society and clients.

The engineering business is linked to the diversification of earnings bases outside of the framework of building construction and civil engineering. In a period of increasingly rapid changes, it became necessary to further strengthen and expand this business to achieve sustainable growth. To this end, the company built a project execution system that integrated processes from receiving orders for engineering works to their construction. It also worked on enhancing the expansion of business aimed at securing orders for engineering works undertaken in cooperation with local subsidiaries, in addition to improving earning capability by utilizing the company’s technology and expertise.

In the mid-2010s, the company particularly focused on four fields: soil environment, information technology, environmental facilities, and production facilities. In regard to the soil environment field, the company had been progressing with research and development of purification technologies for various types of soil pollutants since the late 1990s, and with the tightening of regulations due to the enactment of the Soil Contamination Countermeasures Act in 2003 and its revision in 2010, the company worked on investigations into and countermeasures against soil contamination, for which there was growing demand. Efforts were additionally made toward conserving the soil environment by newly establishing treatment and disposal facilities, as well as soil remediation and similar initiatives.

In the ICT field, the company gave assistance in a wide range of sectors, from the planning stage to the final handover, including in the installation of facility security systems, the creation of digitized medical records systems and other hospital information systems, and the introduction of the latest AV equipment aimed at schools and commercial facilities.

As for the environmental facilities field, the Feed-in-Tariff (FIT) system for renewable energy introduced in 2012 brought with it a sharp rise in investments in facilities for renewable energy. By taking a proactive approach, the company won contracts through EPC (Engineering, Procurement, and Construction) before other companies in the same industry.

In the production facilities field, the company was in charge of the basic planning, design, procurement, construction, operation, and maintenance of production facilities for products such as pharmaceuticals, electronic goods, and foods. To meet customer demand in terms of performance, cost, environment, and safety, the company provided high-value-added services that also encompassed facilities related to production, including production lines (process) and production support facilities (process support).

While the engineering business previously did not have many opportunities to take the overall lead in projects, the creation of the new project execution system saw the Engineering Division take charge as project manager for construction projects that required more specialized knowledge, such as for facilities related to production and energy generation. Taking on these projects would, in turn, create further added value. Further development and expansion of the engineering business was planned. At the same time, the business set out to accumulate new knowledge. The construction of the Otsuki Biomass Power Plant was the first project undertaken under the new system.

Enhancement of the Corporate Governance Framework

To remain a company that is trusted by wider society, it is important to build a solid system for business management, in addition to increasing transparency and soundness of management. In line with the principles of Japan’s Corporate Governance Code, which has been in force since June 2015, Obayashi Corporation has been making efforts to optimize management and make decisions promptly and in a transparent manner. By making improvements to ensure sustainable growth and increase corporate value, the company is aiming to further gain the trust of its stakeholders.

Performance-linked stock remuneration was introduced in June 2015 to reward directors and executive officers. A basic policy was created to decide the value of basic remuneration and stock remuneration packages that correspond with a person’s contribution to business performance, as a way of securing outstanding talent while also incentivizing directors to improve performance and increase corporate value. The company also created a basic policy to ensure that the remuneration of Audit & Supervisory Board Members was at the level required to secure outstanding talent, which would then allow corporate governance to function effectively.

In June 2015, the company also added a new Independent Director, creating an organization of two Independent Directors and three Independent Audit & Supervisory Board Members. From their respective positions independent of the company, the independent executives provide advice to improve management efficiency, supervise all aspects of management, and undertake management checks from an objective viewpoint. Through such activities, they play a significant role in ensuring fair, swift, and resolute decisions, along with transparency in management.

Commemorating the 125th Anniversary of the Company’s Founding and the Technology Research Institute’s 50th Anniversary

The company celebrated the 125th anniversary of its founding in January 2016. To commemorate the occasion, a Shinto ritual was carried out at Ikutama Shrine in Osaka City on October 19 to pray for the prosperity of Obayashi Corporation and its group companies, the health of company employees and their families, the safety of construction projects, and the prosperity of suppliers and subcontractors involved in these projects.

Moreover, to celebrate the 50th anniversary of the opening of the Technology Research Institute, the Obayashi Techno Fair 2016 was held under the theme of “Creating a Flexible Future” at three venues: the Shinagawa office (October 6 to 7), the Technology Research Institute (October 12 to 15), and Grand Front Osaka (November 1 to 2). At each venue, a variety of panels, videos, mock-ups and more introduced Obayashi Corporation’s vision for future society and the technology to help achieve that vision across four concepts: 1) resilient cities/safe and secure societies; 2) design to support an active life/comfortable, healthy, and active societies; 3) robotics construction/a harmonious society between people and science; and 4) sustainable energy/a sustainable environment and society. The fair’s eight-day run saw a total of approximately 5,800 visitors to the fair.

In 2015, a memorial event was held to mark the 100th anniversary of the passing of Obayashi Corporation’s founder, Yoshigoro Obayashi. As part of this commemoration, the company uploaded digitized versions of the Biography of Yoshigoro Obayashi (published in June 1940), A 70-Year Outline History of Obayashi Corporation (published in September 1961), and An 80-Year History of Obayashi Corporation (published in October 1972) to its website.