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As of September, 2017

By steadily advancing the restructuring, we will build the foundations for Nikon’s next 100 years. Kazuo Ushida President Representative Director

Q. How was the decision arrived at to discontinue the Medium-Term Management Plan Update and enter into a period of restructuring?

Nikon Corporation had continued to forge ahead with forward-looking growth strategies based on the Medium-Term Management Plan Update. The basic policy of this plan was to transform Nikon into a corporate entity that will grow by means of a six-business portfolio. However, the market contracted to a degree that exceeded our expectations while competition intensified, and we were unable to furnish an adequate response to either of these circumstances. As a result, profitability was diminished and growth business cultivation plans could not realize the intended results. We thus came to the conclusion that, on the current course, it would be impossible to achieve corporate value improvements that live up to the expectations of the market. Conditions were particularly dire in the Semiconductor Lithography Business, which suffered a deterioration of profitability, and in the Imaging Products Business, which saw its sales volumes fall as the market shrunk. It was clear that proceeding with the Medium-Term Management Plan Update would not enable us to fundamentally address these issues, and that deteriorations to our profit structure would be inevitable if we attempted such a course of action. For this reason, we chose to discontinue the Medium-Term Management Plan Update. The restructuring, announced in November 2016, entails us transitioning from strategies solely pursuing revenue growth to strategies focused on increasing profitability and improving corporate value. This move was a reflection of our judgment that we must implement preemptive restructuring now, while our financial base is still sound, to build the foundations for Nikon’s next 100 years.

The restructuring will represent an important transition period for the Nikon Group. Recognizing this fact, we devoted a significant amount of time to thoroughly examining this prospect before making the final decision. Two extraordinary Board of Directors meetings were held, making for a total of five meetings, including the regular meetings, during which we engaged in sufficient exchanges of opinion while also incorporating the views of external directors. In the end, it came down to a discussion with Senior Executive Vice President Masashi Oka, during which it was decided that we needed to go forward with the restructuring. Today, we are able to advance the restructuring with confidence and the complete support of the Board of Directors.

As one facet of the restructuring, we instituted a voluntary retirement program of approximately 1,000 employees in Japan. At the end of March, 2017, 1,143 such applicants retired. My responsibility for this regrettable outcome pains me as a manager. Accordingly, it is all the more important that the restructuring be completed successfully and that the foundations for the next 100 years be built so as not to let the sacrifice of these individuals go to waste.

Q. How have the restructuring measures progressed to date and what initiatives are planned for the future?

Since the start of the restructuring up until today, these measures have been progressing on schedule. In addition to the aforementioned voluntary retirement program, we reduced fixed costs through headcount rationalization and re-assignments of employees in the Semiconductor Lithography Business and the Imaging Products Business and at our headquarters. We also transitioned to manufacturing and sales structures that emphasize profitability and implemented an exhaustive review of costs to secure appropriate profit margins. In terms of development and production, we centralized the production and production technology functions of optical components into consolidated subsidiary Tochigi Nikon Corporation in February 2017. In this manner, organizations and processes were integrated to enhance production technologies for optical components, which are central to the competitiveness of Nikon products. Further consolidation was achieved through the April 2017 establishment of the Optical Engineering Division, which consolidated optical engineering functions that had previously been scattered throughout the different business units. These reforms have led to the construction of efficient development and manufacturing structures that will no doubt help us further hone Nikon’s greatest strength: its optical technologies.

In the fiscal year ending March 31, 2018, the restructuring moves on to Phase 2. The three management policies of Phase 2 will be to break-even in the Semiconductor Lithography Business, strengthen the profit structure of the Imaging Products Business, and initiate the full-scale enhancement of management DNA. Based on these policies, we will drastically revise cost structures and implement a new management process for business performance.

Q. What factors do you see as necessary for the restructuring to succeed?

After the announcement of the restructuring, we instituted an employee survey. The responses indicated a wave of approval for the restructuring and a strong commitment to changing through the restructuring. However, given that we have not announced growth strategies, some assumed that this meant that we would be shrinking through the restructuring. As such, there were survey responses expressing concern for what will become of the Nikon Group five or 10 years down the line. Although I do understand those feelings, I keep reiterating to employees the importance of focusing on the restructuring at hand. The lessons learned from our follies with the Medium-Term Management Plan Update will be incorporated into a new Medium-Term Management Plan that will begin in the fiscal year ending March 31, 2020. In this plan, we will put forth concrete and well-grounded growth strategies.

Return on equity (ROE)*1 has been positioned as the indicator to align management with the perspective of investors, whereas return on invested capital (ROIC)*2 has been placed as the principal indicator at the business unit level. Furthermore, ROIC has been factorized to set a key performance indicator (KPI)*3 that clarifies the goals of each work site. The success of the restructuring hinges on our ability to find means of explaining, in an easy-to-understand manner, management’s intent to work sites around the world.

Q. The Nikon Group has created a wide range of value over the 100 years since its founding. What type of value will the Group create over the next century? What are your thoughts with this regard, President Ushida?

Nikon celebrated the 100th anniversary of its foundation on July 25, 2017. Since our founding, we have continued to contribute to image cultures and to academic and industrial development with our opto-electronics and precision technologies while also providing products that open up new fields. Our ability to accomplish so much is thanks to the support of our customers, shareholders, investors, and business partners, for which I am incredibly grateful.

Nikon has accumulated superior technologies, knowledge, and experience over the course of its 100-year history. We will actively utilize such technologies, knowledge, and experience not only in existing business fields but also as we explore new fields in the future. Nikon is a company that changes society with light. It is therefore my goal to have Nikon become synonymous with light-related fields and to have its technologies used in all areas of society. At the moment, society is wrapped up in the fourth industrial revolution which is well known as industry 4.0. I am confident in the ability of Nikon to become a central player in this revolution by increasing its focus on light and supplying the types of products and services that only it can.

Right now, I see potential that could be realized through the merger of our light-related technologies with artificial intelligence (AI). Cameras, telescopes, and microscopes have previously been created based on the assumption of use by humans. However, today we are seeing the emergence of technologies that enable AI technologies to recognize patterns and make judgments based on images instead of human eyes. For example, we are working to provide an easy diagnosis solution. This solution will use retina images taken by the ultrawide field retinal imaging devices of our subsidiary Optos Plc, which will be evaluated using machine learning technologies, a form of AI, to determine whether or not diabetes-related eye diseases are present, judge the stage of these diseases, and offer advice. In this manner, if Nikon can combine its lenses and sensors, which function as eyes, with AI, which functions as a brain, the Company will be able to play a central role in the industries it serves. Moreover, I am convinced that the range of fields in which Nikon is involved will increase going forward.

Q. Could you please explain the new management vision that was established recently?

Nikon has formulated its new vision in conjunction with the 100th anniversary of its foundation. This vision embodies my own desire to emphasize more the potential of Nikon’s optical technology or, in other words, light. The potential of light will become broader going forward, and optical technology will no doubt come to be incorporated into various areas of society. In the midst of this trend, the Nikon Group will provide new value as it strives to continue contributing to people’s lives over the next 100 years.

We have also laid out our new qualities of mind to illustrate the mind-set that will be necessary in exploring new fields. Specifically, we have defined three commitments: “Curiosity” to cultivate fresh ideas, “Acceptance” to warmly embrace diverse ideas and delight in differences among people and cultures, and “Inspirational Power” to share our ideas with infectious enthusiasm to effect positive change in the world. Taking our vision and qualities of mind, we will seek to make Nikon the driving force behind industry 4.0 and shine light on the society of the future.

Q. What are the key initiatives for enhancing the Company’s corporate governance structure?

The enhancement of our corporate governance has been an ongoing process at Nikon. A large step forward was made when we transitioned to a company with an Audit and Supervisory Committee in June 2016. This step was taken to strengthen the supervisory function of the Board of Directors and to clarify executive responsibility and accelerate decision-making through the delegation of authority. Moreover, this move exemplified our strong commitment to the enhancement of corporate governance. This commitment reached our external directors; discussions by the Board of Directors are now more active than ever, and I feel that we have seen both qualitative and quantitative improvements to deliberations. The Board of Directors met five times when formulating the plan for the restructuring, and two of these meeting were extraordinary Board of Directors meetings. At these meetings, we were able to talk until a conclusion was reached and were also able to ask for various opinions. The opinions of the external directors, with their robust experience, are highly valued.

Going forward, we will seek to further clarify management’s supervisory and executive responsibilities while potentially increasing the portion of the Board of Directors represented by external directors in the future to strengthen monitoring functions. In this manner, we will strive to achieve the ideal structure for the Board.

Q. What is your outlook for the future beyond the restructuring? Also, do you have any messages for shareholders?

The restructuring we are engaged in at the moment will build the foundations for Nikon’s next 100 years. After the completion of the restructuring, we will seek to create new value based on a mind-set focused on making the greatest possible contribution to society. We will not limit ourselves to existing products and businesses in this quest, choosing rather to broaden our horizons. To this end, it will be important to explain to our stakeholders what Nikon is able to accomplish as a company and what assets it possesses. When stakeholders understand the solutions that can be provided using Nikon’s technologies and choose us as a partner in creating a better future, we will gain access to new possibilities.

In regard to the Company’s shareholder returns policy, we have moved away from our previous policy, which was to target a total return ratio of 30% and above. From the fiscal year ending March 31, 2018, our policy will be to target a dividend payout ratio of 40% and above in order to maintain stable shareholder returns and enhance these returns. Our policy of emphasizing a link between financial performance and shareholder returns will remain unchanged, and the total return ratio will continue to be used as a management indicator for overall shareholder returns going forward.

For the time being, our primary goal will be to complete the restructuring. Once this has been accomplished, we will formulate well-grounded growth strategies to transform into a corporate entity that consistently improves corporate value and is truly appealing to the stock market.

I would thus like to ask our stakeholders to continue to watch over Nikon as we carry out the restructuring. In return, I will spur the Nikon Group forward so that we may continue to report our smooth progress to you. Beyond the restructuring lies a stage in which the technologies, knowledge, and experience accumulated over Nikon’s 100-year history will come to create even greater amounts of new value.

I hope you will continue to support the Nikon Group as we move toward that stage.