Industrials EQUITY RESEARCH JAPAN. Robotics Revolution: Pursuit of Improved Efficiency and Human Care. Japan Industrials 9 October 2014

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1 Japan Robotics Revolution: Pursuit of Improved Efficiency and Human Care Key Takeaway Robotics is a key global factory and process automation method. The industry is set to expand not only in the industrial but also in the service sector where we see issues coping with changes in the population structure globally. The Japanese government emphasizes the importance of robotics market expansion, and Japanese firms also act as key component suppliers to the industry globally. Growth prospects in China have also attracted major robot manufacturers. Japanese government's focus on robotics: The Japanese government considers expansion of the robotics market to be crucial for Japanese society in the future. In the Japan Revitalization Strategy (214 Revision) Japan s challenge for the future, the government aims to realize a new industrial revolution through robotics so that the issues Japan is likely to face in the future can be handled effectively. They target doubling the size of the industrial sector robotics market and expanding the services sector market by 2x from current levels by 22, followed by continued growth in the Japan market. Japanese companies act as major robot and key component suppliers globally as well. We see increasing demand for nursing services globally reflecting the acceleration of the aging society. However, issues have emerged such as the lack of nursing care related employees, the increased burden on nursing care related workers, increases in government spending on nursing care, the handling of the dignity of people who are receiving nursing care due to the declining demographics of working age people to support those over 65 years old, as well as the increase in nursing care expenses within GDP. EQUITY RESEARCH JAPAN Key end market in the industrial sector is China: The global robotics industry has seen long-term sustainable growth. IFR estimates that global multi purpose industrial robot shipments are set to grow by c.12% CAGR over the next three years, with key growth coming from China where the next three year growth rate is set at 25% by IFR. the China robotics market has the largest potential for growth in the long run in our view. Traditional markets should steadily grow, and emerging market growth may remain decent in the industrial robot market fostering factory automation. Japanese robotics manufacturers believe revenues from China are set to increase in major industries such as the auto and other general manufacturing sectors. We expect Chinese local robot manufacturers are also emerging and the local players' growth rate is estimated to surpass that of non-local giants based on IFR's assumptions. Beneficiaries in this growing industry: We think companies with robotics industry exposure should benefit from sustainable demand growth. Within our coverage, Fanuc is a leading industrial robot maker globally with strength in the US, and Nabtesco is a leading precision reduction gear manufacturer with a 6% market share. Both Kawasaki Heavy Industries and Sumitomo Heavy Industries have industrial robot exposure as well. We believe all these companies are likely to enjoy sustainable robot demand growth given they have decent shares in the industrial robot market globally. Stock market's focus: The 4 major robotics players globally include 2 Japanese manufacturers: Fanuc (6954 JP), Yaskawa Electric (656 JP). The key component suppliers are Nabtesco (6268 JP), Sumitomo Heavy Industries (632 JP) and Harmonic Drive Systems (6324 JP). We are seeing increasing interest from investors in the service robotics industry in Japan, in particular in nursing care robotics, and players in the sector include CYBERDYNE (7779 JP), Kikuchi Seisakusho (3444 JP), Daiwa House Industry (1925 JP), etc. We believe there will be more companies entering the industry, and we think the stock market should continue to pay close attention to the nursing care robotics industry in addition to general industrials. Yukihiro Kumagai * Equity Analyst ykumagai@jefferies.com Hongguang Zheng * Equity Associate hzheng@jefferies.com * Jefferies (Japan) Limited Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-us analysts on pages 54 to 57 of this report.

2 (' of units) Executive Summary Robotics market expansion has been a major industry focus, and we emphasize the new Japanese administration s efforts to expand the robotics market in Japan along with a global demand boost led by major emerging countries. Japanese companies have large market exposure globally in the robotics industry, and two of the four major industrial robot manufacturers are located in Japan. Japan is also trying to rapidly expand the services robot industry, and the government promotes robot market expansion in both the industrial and service sectors. Regarding general robot growth globally, China clearly is the fastest growing market globally, and major robot manufacturers are shifting their focus to the China market. Global industrial robot demand growth rate is estimated at 12% CAGR according to IFR (International Federation of Robotics) for the next three years. Attractive market growth The Japanese government set a robot introduction target in near future and the Japan robot market is now set to rapidly grow in both the industrial and service sectors by 22. In order to cope with the aging society in Japan, the government would like to expand the industrial robot market by 2x and the service robot market by 2x from current levels by 22. Industrial robot market shipments are expected to grow sustainably at a 12% CAGR over the coming 3 years according to IFR. Factory automation needs have been a major driver of demand growth, and we believe the continuing replacement cycle in traditional markets and new pent up demand in emerging markets should continue to create decent demand growth. IFR asserts global robot installation is expected to surpass 1,6, units in 216, compared to less than 2, in Service industry key growth driver in Japan The service industry is currently a key growth driver in the robot market in Japan. Due to the nature of the change in Japanese demographics, depending upon robotics technologies to support the elderly is inevitable, in our view. The government aims to expand service robotics by 2x by 22 from current levels, and we have begun to see various types of service robotics for the elderly being introduced. In 25, the number of productive age people required to support one elderly person is estimated to be only 1.2 from 2.8 in 28, so non-human labor is required to cope with the social issues that are highly likely to appear since the net birth rate in Japan is already negative. China is the fastest growing market globally China has been and probably is going to be the largest focus end market for major robot manufacturers in the industrial space. While overall industrial robot growth is expected to be 12%, growth in China is estimated at a 25% CAGR over the next three years. Japanese industrial robot makers have been shifting their focus to China and we think China has the largest growth potential for the time being. Chart 1: Global robot sales growth to continue % CAGR e 215e 216e 217e Source: Jefferies estimates, company data page 2 of 57

3 Next Generation Robotics Revolution Industrial robotics boom Government s focus In the Japan Revitalization Strategy (214 Revision) Japan s challenge for the future, the government aims to realize a new industrial revolution through robotics technologies. Japanese manufacturing companies are facing issues such as cost competition globally, and they are also facing the lack of productive age workers in the SME manufacturing sector, medical/welfare service sector and agriculture/construction industries. In an aging society, there are two key factors to monitor: improvement in logistics and securing the labour force. The government would like to improve productivity, improve corporates profitability, and increase wages by taking advantage of robotics technologies. The Japanese government established a robot revolution realization committee, and they set a 5 year plan as an action plan to execute detailed development plans. They are targeting doubling the robot market in the manufacturing sector by 22 through technology development, regulatory easing, and standardization. In the service sector, they would like to expand the market by 2x by 22. Through these efforts, the government is trying to improve productivity in various sectors (i.e. they would like production efficiency to improve by more than 2% every year). They are also contemplating hosting a Robot Olympics, along with the Tokyo Olympics in 22, and introducing universal designs of robot suits and other types of robotics in different fields. Growth potential remains large In 21, METI (Ministry of Economy, Trade and Industries) and NEDO (New Energy and Industrial Technology Development Organization) made assumptions to measure the future market size of the robotics industry. In 215, they estimate the industry will be worth 1.6tn and will continue to expand to 2.9tn in 22, 5.3tn in 225, and 9.7tn in 235. METI estimates the breakdown of tn in 235 as follows: manufacturing industry 2.7tn, robot technology product industry 1.5tn, agricultural/forestry/fisheries industry.5tn and services industry 4.9tn. The services industry is expected to lead the growth, while the manufacturing industry continues to show steady growth. In 211, the market size of the global industrial robot market excluding chip mounters was US$8,497mn, and Japanese companies shipments were 332.8bn (US$4,267mn: exchange rates are based on 211 data), so the Japanese share was 5.2%, according to METI. The industrial robot market growth has been driven by major Asian countries such as China and South Korea since the early 2s, with China growth at a 37% CAGR between 21 and 211, South Korea at a 21% CAGR, and the remaining Asian countries at a 21% CAGR. Going forward, growth is expected to be driven by Japan, China and North America. The major users of industrial robots are the automobile and electronics industries, followed by metals/machinery. In 211, China was the largest in the auto industry with 11,24 units, Germany was the second largest with 1,531 units, the US 8,426 units, and Japan 7,33 units. In the electronics industry, Korea accounted for the most globally at 13,224 units, and Japan came in second at 12,96 units in 211. page 3 of 57

4 (Units) (US $mn) Chart 2: Annual shipment value: Global market gradually expanding 9, 8, 7, 6, 5, 4, 3, 2, 1, Global Market of Industiral Robotics Japan Korea North America Germany Others Source: Jefferies, METI Chart 3: Industrial robot installments: Installments to show steady growth 2,5, Global robot operation 2,, 1,5, 1,, 5, E 217E Asia Americas Europe Africa Not Specified Source: Jefferies estimates, IFR Japan/Europe/Americas market Japan/Europe/Americas were the first to introduce robotics technology, so the relative growth rate compared to emerging markets is lower. In Japan, investments in robotics facilities for welding or painting are plateauing, but demand by new markets that use assembly and conveying robotics such as the food, toiletries and medical industries is expected to grow in our view. European market growth is slowing; however, we think investments in the auto industry are largely expected. On the other hand, European robotics makers seem to be shifting their focus to China and a major robotics manufacturer, ABB, has shifted its development center and headquarters to China. The Americas continues to see robotics demand expansion on the back of the need for automation and return-to-the-us efforts in the manufacturing industry. However, the growth velocity should remain low since the introduction has largely been done. Robotics introduction in the US auto market has been quite active, and steady growth is expected including in related industries. Asia market Although the China economic environment started to slow in late 212, the demand for industrial robotics has been rising rapidly reflecting increases in labor costs. In particular, the welding/painting robotics market has grown substantially since major European auto manufacturers such as Volkswagen and BMW made investments in China. Local Chinese auto manufacturers have also promoted factory automation utilizing industrial robots. One big concern/risk would be any action to avoid China risks as seen in late 212 page 4 of 57

5 reflecting the political and economic situation there, and that could potentially slow down the proactive introduction of industrial robots from non-local manufacturers. South Korea is another major country that has experienced decent robotics growth. The major industries in South Korea that use industrial robots are the auto, smartphone, tablet and FPD manufacturing industries. Factory automation in Asian countries has been in a steady growth phase and we expect the market to grow gradually reaching 31bn by 22 (Chart 4). Major growth in the Asia market comes from Assembly/Transfer robotics which should have an 11% CAGR by 22 in our view. The Assembly/Transfer type accounted for 33% of total demand as of 213, and we think it will go up to 45% of the total by 22. We believe the total market size should reach 31.6bn in 22, compared to 165.1bn in 211 and in 213. The China market should continue to be considered the largest potential market that can become the largest consumer of industrial robotics in the world, and penetration in the China market should be a major swing factor that will impact global market share in the long run. Major industrial robotics manufacturers are shifting production to China and they are likely to continue to do so going forward. Local manufacturers are also focusing on industrial robot development and the Chinese government asserts that they will focus on high-end manufacturing facilities between , including industrial robots. Chart 4: Growth Driver is to be Assembly/Transfer robotics in Asia CAGR by 22 (bn yen) Actual Actual Expected Estimate Estimate Estimate Welding/Painting Type % Ark Welding % Spot Welding % Painting % Actuator Type % Single Axis % Orthogonal % Electric Slider % Assembly/Transfer Type % Desk Type % Palletizing % Take-Out % Scala % Small Vertical Multi Joint % Small Vertical Multi Joint (Slim, Quick, Dual-arm type) % Parallel Link % Clean Transfer % Glass Substrates % Wafer Transfer % Total % Breakdown Welding/Painting Type 44% 53% 53% 51% 49% 41% Ark Welding 23% 24% 23% 23% 22% 18% Spot Welding 13% 21% 2% 2% 19% 16% Painting 8% 8% 9% 8% 7% 6% Actuator Type 3% 4% 3% 3% 3% 3% Single Axis 1% 1% 1% 1% 1% 1% Orthogonal 1% 1% 1% 1% 1% 1% Electric Slider 1% 1% 1% 1% 1% 1% Assembly/Transfer Type 29% 34% 33% 34% 36% 45% Desk Type 2% 2% 1% 1% 1% 1% Palletizing 3% 4% 4% 4% 5% 6% Take-Out 17% 19% 17% 18% 19% 25% SCARA 2% 2% 3% 3% 3% 3% Small Vertical Multi Joint 5% 6% 7% 7% 7% 6% Small Vertical Multi Joint (Slim, Quick, Dual-arm type) % % % % 1% 2% Parallel Link 1% 1% 1% 1% 1% 2% Clean Transfer 24% 1% 11% 12% 12% 11% Glass Substrates 21% 7% 9% 9% 9% 8% Wafer Transfer 3% 3% 2% 2% 2% 3% Total 1% 1% 1% 1% 1% 1% Source: Jefferies estimates, company data page 5 of 57

6 Thousand Units Robot market growth driven by Asia The global robotics market has been led by Asian countries, and in particular growth has been led by China and Korea (Chart 5). China saw 37% CAGR from 21 and 211, and Korea had 21% CAGR during the same period. Total robotics has seen an 8% CAGR. Sales growth will continue to be led by Asian countries; however, IFR expects it will be mainly China which should have an 11% CAGR from 211 to 215, followed by acceleration to 25% CAGR from 215 to 217. On the other hand, they estimate Korea will decline at a 1% CAGR in the same period. They assert Japan and North America should see decent growth at 6% CAGR and 7% CAGR, respectively. Total robotics sales growth is estimated at a 6% CAGR from 211 to 215, followed by accelerated growth at a 12% CAGR until 217, according to IFR. Chart 5: Growth driven by China (shipment figures) 35 Outlook of industrial robots sales E 217E Japan China Korea North America Germany Others Source: Jefferies, METI Chart 6: Global Robot Peers Share price as of 1/8/14 Code Company Name Rating Share Price P/E (x) P/B (x) ROE EV/EBITDA (x) Dividend Yield Dividend Payout Ratio (LC) FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 Domestic 712 JP Equity KAWASAKI HEAVY INDUSTRIES Hold % 11.8% 12.2% % 1.9% 2.2% 26.2% 26.4% 26.3% 632 JP Equity SUMITOMO HEAVY INDUSTRIES Hold % 7.4% 7.9% % 1.7% 1.7% 27.6% 27.9% 24.8% 6954 JP Equity FANUC CORP Hold 18, % 11.8% 12.2% % 1.3% 1.5% 3.% 3.% 3.% 6268 JP Equity NABTESCO CORP Hold 2, % 12.4% 12.6% % 1.7% 1.8% 3.6% 3.1% 28.2% 656 JP Equity YASKAWA ELECTRIC CORP NC 1, % 12.9% 12.6% % 1.1% 1.3% 18.5% 18.3% 18.6% 6481 JP Equity THK CO LTD Hold 2, % 7.9% 8.1% % 1.5% 1.5% 26.4% 25.8% 24.7% 6324 JP Equity HARMONIC DRIVE SYSTEMS INC NC 1, % 13.5% 13.2% % 1.% 1.1% 28.3% 28.% 28.2% 7779 JP Equity CYBERDYNE INC NC 3, % 9.8% 28.8% %.%.%.%.%.% 9735 JP Equity SECOM CO LTD NC 6, % 9.8% 9.7% % 2.% 2.2% 34.8% 34.9% 35.2% 1925 JP Equity DAIWA HOUSE INDUSTRY CO LTD NC 1, % 9.8% 9.5% % 2.6% 2.7% 29.6% 29.3% 29.4% Overseas ABBN VX Equity ABB LTD-REG NC CHF % 17.% 17.8% % 3.9% 4.2% 6.8% 54.8% 51.8% KU2 GR Equity KUKA AG NC % 16.8% 16.2% % 1.4% 1.5% 22.1% 23.7% 23.7% 324 CH Equity SIASUN ROBOT & AUTOMATION-A NC CHF % 19.9% 21.4% %.2%.3% 1.7% 1.5% 1.9% Source: Jefferies estimates, company data page 6 of 57

7 Chart 7: Global robot operation (cumulative installment figures) (Unit) 1985 End 199 End 1995 End 2 End 25 End 21 End 212 End CAGR (7 years) Asia 93, , ,82 447, ,652 52, , % Japan 93, 274,21 387,29 389, ,481 37,698 31,58-2.6% China 93 11,557 52,29 96, % India 7 1,69 4,855 7, % Malaysia 39 1,695 3,677 4, % Republic of Korea 3,2 18,149 37,988 61,576 11,8 138, % Singapore 2 1,389 3,275 5,37 5,463 3,685 5, % Taiwan 227 1,29 3,849 6,942 15,464 26,896 32, % Thailand 2,472 9,635 17, % Other Asia 9 2,417 3,2 3,937 3,949 6,49 7.4% Australia/NZ 1,43 1,84 2,833 4,938 7,66 8, % Americas 2,375 34,24 57,424 91, , ,785 27,17 5.4% North America (Canada, Mexico, US) 2, 34,9 56,945 89,88 139, , , % Brazil 1,23 2,672 5,721 7, % Other Americas , % Europe 24, ,59 13, , , ,142 38, % Austria 249 1,15 2,323 3,46 4,148 5,749 6, % Benelux (Belgium, Netherlands) 64 2,422 5,96 8,212 9,362 11,689 13,68 5.5% Czech Republic ,971 4,462 6, % Denmark ,414 2,661 4,234 4, % Finland ,398 2,647 4,159 4,611 4,311.5% France 4,15 8,35 13,276 2,674 3,236 34,495 33, % Germany 8,8 27,32 51,375 91, , , , % Hungary ,46 3, % Italy 4, 12,2 22,963 39,238 56,198 62,378 6,75 1.1% Norway ,12 1,19 3.3% Poland ,321 4, % Portugal ,9 1,542 2,28 2, % Romania % Russian Federation 64,24 1, 5, 5,49 1,58 1, % Slovakia ,87 2, % Slovenia ,32 1, % Spain 688 2,1 4,913 13,163 24,141 28,868 28, % Swenden 2,46 3,34 4,459 6,276 8,28 9,387 9, % Switzerland 29 1,51 2,672 3,742 3,732 4,417 5,1 4.3% UK 3,17 5,94 8,314 12,344 14,948 13,519 15,46.1% Other Europe 3, ,245 7,781 11,5 37.4% Africa ,232 2, % South Africa ,74 2, % Other Africa % Not Specified 4,172 16,79 Total 138,457 45,988 64,786 75,58 922,838 1,59,162 1,235, % Source: Jefferies, company data Major issues to be faced Because of the Oil Shock in the 197s, Japan started to see increasing demand for an improvement in productivity, and due to the required technology expansion of microprocessors and servo motors, programmable robotics were developed and penetrated manufacturing industry in Japan. Robotics became a commonplace capital good in the manufacturing industry due to AC servos, absolute encoding, the development of controller processors and highly improved reduction gears and other components. The expansion of the robotics industry was led by the auto industry, particularly for welding, which has been the most important usage until now. In the 199s, the robotics industry started to stall along with the collapse of the bubble economy in Japan. Manufacturing industry started to be more selective about introducing and investing in robotics and market growth slowed. Robot usage in clean processing such as LCDs, semiconductors, and electronic devices started to be visible at this time. In the late 2s, the industrial robotics industry started to see a growth phase, and in 25, multi joint robotics shipments reached their historical peak at 81, units at with rapid growth following the IT bubble. Growth came from the demand for shifting page 7 of 57

8 (Units) production locations to emerging countries such as China. Due to increased concerns over the Japanese hollowing out of industries, we are seeing more talk regarding the challenges for cell-production to cope with flexible production. Industrial robotics have existed for more than 3 years in Japan, and along with the macroeconomic situation, demand from society has been changing gradually. In the 198s, demand mainly came from the need for better robotics, in the 199s, enhancing robot utilization was sought, and in the 2s, solutions have been a major theme. The average service life is generally regarded as being 12 years; however, a UNECE/IFR study indicated that the average service life of industrial robots could be as long as 15 years. In 213, total robot stocks were calculated at 1,332,218 units, but with the 15 year assumptions it could in fact be 1,6, units. Globalization of robotics is the next theme Industrial robotics shipments were 95,551 units in 212 (worth 33.1bn), and direct exports amounted to 66,871 units (worth 179.2bn) out of total shipments. The exports accounted for 7% of total shipment units and 6% of total shipment value in 212. In terms of the number of shipments, it is close to record high levels. Major industrial robot makers are shifting their focus to overseas locations from both production and sales perspectives. Chart 8: Domestic robotics production has been steady in the long run 12, 1, CAGR 7% 8, 6, 4, 2, Sequence robots Playback robots Numerically controlled robots Intelligent robots Source: Jefferies, METI Auto is a key demand driver in the industrial robot market According to our auto parts analyst, Shinya Naruse, it is likely that global vehicle production will be led by increasing demand from emerging markets, and we forecast global vehicle production will grow at a CAGR of 4% over the period CY We expect Japanese car manufacturers production share to see a recovery. Japanese carmakers global market share has been sluggish in the past few years due to the following factors (which have subsided now): 1) unintentional acceleration problem for Toyota Motors in the US, 2) natural disasters (the east Japanese earthquake and floods in Thailand), 3) production cuts when the JPY was strong; and 4) the political dispute with China and boycott of Japanese branded products. Based on IFR s statistics, auto industry customers substantially increased investments in industrial robots globally, and about 69,4 new robots were installed in the auto industry in 213, a record high installation. The share of total supply was 39%, accounting for the largest portion of the overall industry. The installation of robots bottomed in 29 in the auto industry at 19,3 units and surged to 66,5 units in 212. page 8 of 57

9 (mn units) Chart 9: Global light vehicle production forecast (1) E 15E 16E 17E Japan ASEAN China India North America South America West Europe Others Source: Jefferies estimates, IHS Automotive, MarkLines, JAMA Chart 1: Global light vehicle production forecast (2) Source: Jefferies estimates, IHS Automotive, MarkLines, JAMA Note: Japan production includes medium & heavy-duty trucks. (mn) CY E 15E 16E 17E CAGR(13-17) Japan yoy -13% 18% -4% -3% -1% -3% -1% -2% ASEAN yoy -4% 43% 6% % 8% 6% 1% 6% China yoy 3% 6% 1% 7% 8% 7% 5% 7% India yoy 11% 4% 1% 5% 1% 1% 9% 8% North America yoy 1% 18% 5% 4% 2% 2% 2% 2% South America yoy 3% -1% 6% 4% 4% 4% 4% 4% West Europe yoy 4% -8% -4% 3% 3% 2% 2% 3% Others yoy 9% -3% -1% 5% 4% 3% 5% 4% Total yoy 3% 6% 3% 4% 4% 4% 4% 4% Chart 11: Main use of robots is in the automotive industry Automotive industry Electrical/electronics* Metal** Chemical, rubber and plastics Food Others Unspecified - 1, 2, 3, 4, 5, 6, 7, 8, (units) Source: Jefferies, IFR Note: * includes communication, computer and medical precision. ** includes metal products, basic metals and machinery industry. page 9 of 57

10 (tn Yen) Auto capex outlook Looking ahead, auto industry capex is set to rise. We have summarized auto industry capex history and outlook given the sector is the most critical to industrial robot growth globally. Globally, auto industry capex is expected to trend up steadily at high levels in the coming years. Consensus estimates show investments in both Japan and Europe are expected to stay high. Compared with the previous peak, before the financial crisis, the absolute value of global capex (JPY denominated basis) is already higher in 214, which should be followed by a slight increase in 215 and onwards. At the previous peak the overall capex value was slightly above 7tn, followed by a huge decline after the financial crisis to below 4tn. After bottoming in 21, we saw a steady recovery until 213, and 214 is likely to be a year with decent growth. We believe continued capex growth will be a major driver for the demand growth in industrial robots. In 214, the value is estimated at 7.8tn, followed by gradual increase, reaching 8.1tn in 216, according to Bloomberg consensus estimates. Based on Bloomberg consensus estimates, auto capex in Japan is estimated to remain largely flat in the next three years; however, the absolute value of investments is expected to remain at high levels. As for Europe, the value of investments is estimated to be close to EUR3bn, and capex by Volkswagen is estimated to grow over the next three years. According to Fourin, it appears Volkswagen will increase production capacity to 13.15mn units/year by 218 with a reasonable addition in Asia. The contribution to global capex value from the European region is large and Volkswagen accounts for a large portion of incremental investments in Europe. In the US, consensus estimates calls for growth to be steady, with a 1% CAGR from 213 to 217. Two major companies (GM and Ford) are both expected to see decent capex growth based on consensus estimates. The US market has seen decent trends in machine tool market orders, and although there are other industries that have reasonable investment prospects such as aerospace and electronics, auto capex growth should remain a major contributor in the overall US market given industrial robot exposure to the auto industry is high. China is clearly the most important market for industrial robot manufacturers; however, the incremental investment contributions by Chinese local manufacturers to overall capex from the auto industry seem low. Also, the street is estimating that the investments in the auto industry by local manufacturers will drop over the next three years. On the other hand, we believe investments from non-local manufacturers will continue to contribute to boost capex in China; hence, industrial robot manufacturers should benefit as well. Chart 12: Global auto industry capex e215e216e 4% 3% 2% 1% % -1% -2% -3% -4% -5% Capex (LHS) YoY (RHS) Source: Bloomberg, Jefferies Note: Overseas companies capex values are denominated in JPY in the chart. The values in the chart include key auto manufacturers in each region. page 1 of 57

11 (mn Yen) ($ mn) (mn RMB) (mn EUR) Chart 13: Japan auto industry capex Chart 14: China auto industry capex 3,5, 3% 35, 1% 3,, 2% 3, 8% 2,5, 2,, 1,5, 1,, 1% % -1% -2% -3% 25, 2, 15, 1, 6% 4% 2% % -2% 5, -4% 5, -4% e215e216e -5% e 215e 216e -6% Capex (LHS) YoY (RHS) Capex (LHS) YoY (RHS) Source: Bloomberg, Jefferies Note: Major 1 companies are used for calculation Source: Bloomberg, Jefferies Note: Major 6 companies are used for calculation Chart 15: US auto industry capex Chart 16: Europe auto industry capex 18, 16, 14, 12, 1, 8, 6, 4, 2, e 215e 216e 35% 3% 25% 2% 15% 1% 5% % -5% -1% -15% 3, 25, 2, 15, 1, 5, e 215e 216e 4% 3% 2% 1% % -1% -2% -3% -4% Capex (LHS) YoY (RHS) Capex (LHS) YoY (RHS) Source: Bloomberg, Jefferies Note: Major 2 companies are used for calculation Source: Bloomberg, Jefferies Note: Major 4 companies are used for calculation Major global competition Global big 4 and others Fanuc and Yaskawa Electric are two major players in Japan in the industrial robotics space. The global big 4 comprises the Japanese big 2 and the European big 2, ABB and KUKA. In addition to the global big 4 players, there are major robotics manufacturers in Japan and overseas which have exposure to various industries, such as KHI, Nachi-Fujikoshi, Mitsubishi Electric, Toshiba Machine, etc. The 4 major companies accounted for more than 8% of global robot shipments in 212, according to the Nikkei. The dominance by those 4 companies has not changed much over time, and we do not think there will be a significant change in market structure anytime soon. Fanuc has sustained its top global position in the multi-joint robot market. Chinese local manufacturers also have potential for growth given that similar trends could happen in the machine tool industry such as the emergence of Shenyang Machine Tool in China, which could potentially become a comparable competitor in the future. Japanese component manufacturers are trying to get into the Chinese market as well, and we believe Chinese local manufacturers will continue to increase industrial robot production in the long run at a faster pace than global robotics production. page 11 of 57

12 Chart 17: Major 4 account for more than 8% of total multi-joint robot market 212 Multi-joint Robot Share (Global) Others Kawasaki Heavy 1% Industries 8% Fanuc 27% KUKA 14% Yaskawa Electric 17% ABB 24% Source: Jefferies, Nikkei Chart 18: Global robot manufacturers by usage Purpose Japanese European Asian Arc Welding Fanuc Yaskawa Kobelco Daihen ABB KUKA Panasonic Spot Welding Fanuc Yaskawa KHI Nachi Fujikoshi ABB KUKA Comau Hyundai Heavy Painting Fanuc Yaskawa KHI ABB KUKA Staubli Palletizing Fanuc Yaskawa KHI Nachi Fujikoshi ABB KUKA Hyundai Heavy MELCO Fuji Yusoki Okura Glass Substrates Transfer Yaskawa Nachi Fujikoshi Nidec Sankyo Hirata Hyundai Heavy Wafer Transfer Yaskawa KHI Daihen Hirata Brooks Automation SCARA (Selective Compliance- MELCO Yamaha Motor Toshiba Machine Denso Wave Adept Technology Staubli Hiwin Assembly Robot Arm) Seiko Epson Orthogonal Yamaha Motor Denso Wave Toshiba Machine IAI Source: Jefferies, company data Table 1: European companies are entering China market which has the highest growth potential Company Production in China ABB ABB is the first amongst major robotics manufacturers that started production in China, and they position Shanghai as the central location for robot production, by centralizing development, sales and production resources. In China, they manufacture painting robotics, and they have been focusing on local procurement of major components in recent years. KUKA KUKA does final assembly to meet the delivery schedule. In order to cope with demand growth in China, they are planning to start to manufacture in China in 214, starting off with welding type robotics. Source: Jefferies, company data Table 2: Chinese local companies are increasing robotics development Company Efforts Siasun GSK ADTECH Sales and development of welding and transfer type multi joint robotics. In 211, they sold c. 25 units of robotics (mainly transfer type) CNC is their major product, and they also manufacture robotics which is an application of CNC. It has domestic share of 5% for CNCs, and China machine tool makers are the major customers. They are planning to build a large plant in Huanan area in China and are targeting 1, units/per. Established in 22, their main business is motion control business. They are known to be a SCARA robotics manufacturer. Bosin Their main product is single axis robotics, and they procure drive parts such as ball screws, belts, bearings from Chinese and Taiwanese makers. They are also proactive about expansion of robotics businesses (i.e. they developed drawing system that have image sensors built-in to ABB's vertical multi joint robotics) Source: Jefferies, company data page 12 of 57

13 (mn yen) Earnings comparison of 4 Major Global Players As mentioned above, the 4 major global players are Fanuc and Yaskawa Electric in Japan and KUKA and ABB in Europe. The four companies are said to dominate the industrial robot market in the industrial space. We compare revenue trends and Chart 19 shows a recovery after bottoming in FY29. Since ABB does not disclose their robotics segment revenues any longer, we compared the other three major companies. Chart 19: The Global Major 4 accounts for more than 8% of total multi-joint industrial robot demand 16, 14, 12, 1, 8, 6, 4, 2, FY25 FY26 FY27 FY28 FY29 FY21 FY211 FY212 FY213 Fanuc Yaskawa Electric KUKA Source: Jefferies, company data Note: Chart excludes ABB since they do not disclose robotics revenues Competitiveness of Japan Strength in manufacturing industry and sensing technology Japanese companies have strength in robotics used in manufacturing industry, while North America/Europe have strengths in different fields such as Ocean and nuclear power. We see strengths for North America in investigation related robotics, and welfare, agriculture and stock raising related robotics in Europe as shown in Table 3. Regarding element technologies, Japan has an edge in sensing and visionary recognition technologies. North America has strengths in many fields as shown in Table 4. Europe, on the other hand, is strong in transportation and remote control technologies. Table 3: Strength of robotics applications differ by region (Applications) Applications Japan US/Canada Europe * Manufacturing High Middle Middle Construction High Low Low Welfare Middle Middle High Medical Low Middle Low Nuclear Power Middle High High Counter Disaster Low Middle Middle Aerospace Middle High Middle Entertainment High High Low Bio Industry Low Middle Middle Agriculture Middle Middle High Home Use Low Low Low Service Middle Middle Middle Stock Raising Middle Middle High Ocean Middle High High Investigation Low High Low Source: Jefferies, company data * Only countries that have active robotics research page 13 of 57

14 (Units) Table 4: Strength of robotics applications differ in each region (Element Technologies) Element Technologies Japan US/Canada Europe * Transportation (Crawler) Middle Middle High Remote Control Middle High High Human Interface Middle High Middle Intelligent Control Technology Middle Middle Middle Sensing Technology High High Middle Visionary Recognition Technology High High Middle Source: Jefferies, company data * Only countries that have active robotics research Japan Market Steady production growth Historically, industrial robotics orders have gradually gone up over the past 2+ years at an 8% CAGR since 198. In 198, orders amounted to only c.2, units, and volumes have gradually increased. In 213, order volume reached close to 12, units. Global industrial automation demand has been steady and Japanese manufacturers have played an integral part in this growth since they have maintained high market penetration in the key components of robotics, as well as actual robots. Regarding shipments, exports have played an important role in raising the overall figures over the past 2+ years. In particular, export volumes have been rapidly increasing over the past 1 years. In 198, robotics shipments were mainly for domestic use, accounting for 94% of total use; however, in 213, 75% of total shipments were for exports, so the increase in export shipments has been highly visible. In fact, domestic shipments have been declining over the past 1 years, while exports continued to trend up. We believe Japanese robotics manufactures will need to continue focusing on overseas markets in order for them to benefit from global automation demand. Chart 2: Orders with steady growth in Japan 14, 12, 1, 8, 6, 4, 2, 14% 12% 1% 8% 6% 4% 2% % -2% -4% -6% Orders units (LHS) YoY (RHS) Source: Jefferies, Japan Robot Association page 14 of 57

15 (Units) (bn yen) Chart 21: Export growth has been a major driver in shipments in Japan 14, 12, 1, 8, 6, 4, 2, 8% 7% 6% 5% 4% 3% 2% 1% % Domestic (LHS) Export (LHS) Export Weight (RHS) Source: Jefferies, Japan Robot Association Market growth in Japan to be led by services As the government asserts, the robotics industry is a growing industry in Japan reflecting the birth rate and social systems in Japan. Current manufacturing sector robotics market value is estimated to be c. 66bn, according to METI, and they are targeting raising this figure to 1,256.4bn by 22 and 2,729.4bn by 235. In the services sector, the current market value is c. 6bn, and it is estimated to reach 1,24.1 by 22 and 4,956.8bn by 235, according to METI. Overall robotics market value is c. 86bn now, and it is estimated to continue to grow and reach 9,78bn in 235. The major growth driver would be the service sector. The manufacturing sector now accounts for 77% of total demand, while the service industry accounts for only 7% of the total. However, in 235, the manufacturing sector is estimated to account for 28% of total robotics market, while the services industry is estimated to be the largest at 51% of the total robotics industry, according to METI. Growth rates differ in each sector, and METI estimates the manufacturing sector will grow at a 5% CAGR from 215 to 235, while they estimate the services sector will have a 14% CAGR during the same time period. With continued growth in the Japan market, both robotics manufacturers and component manufacturers should continue to benefit in the long run. We are also seeing the emergence of service robot companies to reflect the sustainable demand growth. Chart 22: Services to have the largest growth with 14% CAGR until , 1, 8, 6, 4, 2, Current Manufacturing Robot Technology Agriculture/Forestry/Fishery Services Source: Jefferies, METI page 15 of 57

16 Table 5: Market outlook of Japanese robotics industry ( bn) Current Manufacturing 66 1,2 1,256 1,581 2,729 Robot Technology ,556 Agriculture/Forestry/Fishery Services ,24 2,646 4,957 Total 861 1,599 2,853 5,258 9,78 Breakdown Manufacturing 77% 63% 44% 3% 28% Robot Technology 16% 11% 16% 15% 16% Agriculture/Forestry/Fishery % 3% 4% 4% 5% Services 7% 23% 36% 5% 51% Total 1% 1% 1% 1% 1% Source: Jefferies, METI Introduction to construction space Construction companies are suffering from a shrinking labor force to inspect land and construction structures in Japan, so they are considering coping with the issues by introducing robotics into the Tokyo Olympics in 22, so that they can smoothly progress with their old infrastructure. In research for boring underground, Obayashi Corporation has developed robotics that can dig pipes underground. Human workers with experience in researching the foundations are currently doing the task, but robotics recognizes the hardness using sensors by automatically controlling the velocity of progression. Human workers remotely monitor the work, and the robotics do not require a human workforce to be there. Typically, one task of boring requires 4 people, but if robotics is utilized, only 2 people are required. A small number of people can be responsible for the project, and there will be lower risks to slow down projects. A project typically takes 2-3 weeks and costs 2mn to dig at 5 different locations; Obayashi Corporation expects there to be 3% cost reduction from introducing robotics. Shimizu Corporation has started to develop robotics that can move inside a tunnel at 4km/h and that can take photos of the inside walls analyzing the sizes of cracks with the camera equipped on the robotics. They are targeting putting this technology into practice by 217. If humans were used for the same task, it would typically take 4 people 2 hours per square kilometer; however, with the introduction of robotics, it is estimated to take 3 people only 3 hours. Penta-Ocean Construction developed remote control research equipment to do crack checkups on dams. The equipment takes pictures of cracks and recognizes flaws through the sound from hammers. By introducing the equipment, the company estimates it can cut total costs by 8%. They are planning to start testing this fiscal year and put the technology into practice within a few years. After the 22 Olympic Games, we expect large scale construction projects to decline, and the labor force in industry should fall. In 213, the labor force in the construction industry numbered 4.99mn workers, and 1/3 of the total labor force is over 55 years old. The Japan Federation of Construction Contractors estimates that labor force will decline by 1mn in 1 years. The introduction of robotics should lead to secure the skills of experienced workers. Incremental Earnings Impact on Robotics Manufacturers in Japan Majors to be beneficiaries We believe the major Japanese robotics manufacturers such as Fanuc and Yaskawa Electric will be beneficiaries of an expansion in industrial robot demand. As for Fanuc, robotics revenues account for c.3% of total revenues and roughly half of the robotics revenues come from the Americas, while Japan accounts for 1-15% of total robotics revenues. page 16 of 57

17 ( mn) Assuming that Fanuc s robotics revenues double in Japan, we estimate the impact on total robotics revenues would be +1-15%, and the impact on total revenues would be c.5%. We assume Fanuc s robotics segment OP margins are the lowest amongst their businesses at about 15-2%. Fanuc clearly has the largest margins in its FA (Numerical control equipment and servo motors) segment where revenue contribution is also the largest of all segments. Fanuc continues to rely on smartphone industry capex and their robodrill sales remain the key volatility factor for earnings. Fanuc introduced new robots, collaborative robots in Fanuc s new product exhibition held in April 214. The robot enables users to work closely with the robot. The robot is able to stop operations if any part of the equipment is touched by users to secure safety, it allows users to remove fences and manipulate the robot using a handling system attached to the edge of the robot. Also, the surface of the arms uses a soft material, so even if it hits users, it does not hurt them. In addition, Fanuc is recruiting full time employees in its robotics segment. Fanuc is looking for domestic robot sales personnel, export/order managers in the robotics market, and robot system engineers. We believe market demand for industrial robots is quite strong and Fanuc is increasing the number of employees, accordingly. Fanuc s robot production capacity is 5, units/month, or 6, units/year. Since total demand for robotics globally was 178,132 units in CY213, Fanuc s capacity is capable of manufacturing over 3% of total demand. Chart 23: Fanuc (6954 JP) earnings forecast table ( bn) Sales (YoY) OP (YoY) RP (YoY) NP (YoY) EPS ( ) BPS ( ) DPS ( ) FY3/ , FY3/ % % % % , FY3/ % % % % , FY3/ % % % % , FY3/ % % % % , FY3/15E % % % % 1,1.2 6, FY3/16E % % % % , FY3/17E % % % % , FY3/15 COE % % % % 946. NA NA FY3/15 Consensus % % % % , Source: Jefferies estimates, company data Chart 24: Fanuc s robotics revenues to continue to trend up 18, 16, 14, 12, 1, 8, 6, 4, 2, 6.% 5.% 4.% 3.% 2.% 1.%.% -1.% -2.% -3.% -4.% Robotics divisional sales (LHS) YoY (RHS) Source: Jefferies estimates, company data page 17 of 57

18 Fanuc s robotics scenario analysis We compare robotics segment revenue growth prospects in different scenarios and compare the impact on EPS growth for Fanuc under those scenarios. Since the sector is cyclical, it might be difficult to justify 12% secular growth over the next three years; however, we assume 12% growth over the next three years for Fanuc under the bull case, and we assume declining momentum under our bear case scenario. Under our bull case scenario, assuming incremental margins to be 2% for robotics, revenues are likely to surpass 2bn in FY3/17, and NP, would be 2.5% higher than in the current base scenario. On the other hand, under the base case scenario, with revenue growth slowing, the NP contribution would be.7% lower than the current base case scenario. We analyzed consolidated NP impact based on different growth outlooks as shown in Table 7. If Fanuc is able to sustain 12% revenue growth with margins being flat, then the robotics segment s NP contribution would be 1%; however, since Fanuc is a highly profitable company with ongoing automation efforts in its production lines, and if Fanuc can increase robotics margins to higher levels as in the table, the NP contribution would be higher, accordingly. With 2% and above margins, and even if robotics segment revenues remain flat, the overall NP contribution could be as much as 3.9%. The magnitude of the impact on incremental NP would be small since NC equipment (FA segment) and robodrills (robomachine segment) have higher margins and incremental impacts were assumed to be larger compared to robotics in our view. Table 6: Fanuc s three scenarios in the robotics segment Robotics revenues ( bn) FY3/14 FY3/15E FY3/16E FY3/17E Bull YoY 23.3% 12.% 12.% 12.% Base YoY 23.3% 8.9% 3.1% 3.% Bear YoY 23.3% 5.% 3.% 1.% OP value from robotics (Jefferies assumptions) Bull OP margin 16% 16% 16% Incremental margin 2% 2% 2% Base OP margin 15% 16% 16% Incremental margin 2% 2% 2% Bear OP margin 15% 15% 15% Incremental margin 2% 2% 2% Source: Jefferies estimates, company data page 18 of 57

19 (bn yen) Chart 25: Fanuc 3 cases for robotics revenue growth FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Bear Base Bull Source: Jefferies estimates, company data Table 7: Scenario analysis of Fanuc s robotics segment contribution to bottom line Robotics OP est. Revenue upside ( bn) -12% -9% -6% -3% % 3% 6% 9% 12% 8% % % Margin assumptions 15% % % % NP contribution est. (%) from Robotics Revenue upside -12% -9% -6% -3% % 3% 6% 9% 12% 8% -4.4% -4.3% -4.2% -4.% -3.9% -3.8% -3.7% -3.5% -3.4% 1% -3.3% -3.1% -2.9% -2.8% -2.6% -2.5% -2.3% -2.1% -2.% 13% -2.1% -1.9% -1.7% -1.5% -1.3% -1.1% -.9% -.7% -.5% Margin assumptions 15% -1.% -.7% -.5% -.2%.%.2%.5%.7% 1.% 18%.2%.5%.7% 1.% 1.3% 1.6% 1.9% 2.1% 2.4% 2% 1.3% 1.7% 2.% 2.3% 2.6% 2.9% 3.3% 3.6% 3.9% 23% 2.5% 2.8% 3.2% 3.6% 3.9% 4.3% 4.6% 5.% 5.4% Source: Jefferies estimates, company data Note: Base figures are FY3/15 robotics segment OP estimates Robotics related companies Reduction Gears: A reduction gear or a reduction drive is a mechanical device to shift rotational speed. Using gears, rotational speed is reduced and torque is generated. The torque generated is in proportion to the reduced ratio. If the rotational speed is reduced to ½, the obtained torque would be 2x. Nabtesco Nabtesco has the highest market share in the precision reduction gear industry for industrial robotics globally. They have a 6% market share in precision reduction gears used in joint sections of industrial robotics. Nabtesco is an essential manufacturer in the industrial robot market. They are well positioned in the industry, and we believe the company will continue to benefit from robotics industry growth over the next several decades. Precision reduction gears are used in industrial robots to bring about precise movements and torque control. Nabtesco has been engaged in this area for decades. Nabtesco s lightweight and compact precision reduction gears generate advantages in their high accuracy and rigidity, and the range of applications of their precision reduction gears is gradually expanding to fields such as machine tools, semiconductor production equipment and heliostats for solar thermal power generation. We think the company will continue to benefit from industrial robot demand growth globally, and since the product margins are high, the company s incremental profitability should continue to gradually rise in the long run. Precision reduction gear orders have recently been cyclically declining, as shown in Chart 27; however, we think any dips are page 19 of 57

20 (mn yen) Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 (YoY growth rate) to be considered buying opportunities as the company is extremely well positioned in a growing industry in the factory automation sector. Chart 26: Nabtesco (6268 JP) earnings forecast table ( bn) Sales (YoY) OP (YoY) RP (YoY) NP (YoY) EPS ( ) BPS ( ) DPS ( ) FY3/ FY3/ % % % % FY3/ % % % % FY3/ % % % % FY3/ % % % % , FY3/15E % % % % , FY3/16E % % % % , FY3/17E % % % % , FY3/15 COE % % % % NA 4. FY3/15 Consensus % % % % , Source: Jefferies estimates, company data Chart 27: Precision reduction gears are a core product for Nabtesco Precision reduction gear Source: Jefferies, company data Nabtesco s precision reduction gears are their core competence and long-term growth driver. Marginal profitability of the product is high and the company continues to invest in production capacity additions. Nabtesco is planning to invest in China, and they will increase overall production capacity of precision reduction gears. Since domestic plant capacity additions are quite difficult due to the lack of space, the company is increasing production capacity where there is the largest demand. Nabtesco currently has 6, units/year production capacity and they are planning to increase it to 7, units/year by adding 1, units/year capacity in China. They are planning to start China production in 216. Chart 28: Nabtesco's precision equipment segment revenues have shown decent growth 6, 5, 4, 3, 2, 1, 14% 12% 1% 8% 6% 4% 2% % -2% -4% -6% Precision Equipment segment revenues (LHS) YoY (RHS) Source: Jefferies estimates, company data page 2 of 57

21 ( mn) Nabtesco s precision reduction gear demand scenario analysis Similar to Fanuc, we also analysed the incremental earnings impact on Nabtesco s precision reduction gears for industrial robots in different scenarios. Based on our bull case scenario, with 12% growth in robotics related precision reduction gear demand and an increased weighting in the robot industry, the incremental NP impact would be 8.5% from current levels. On the other hand, if the robotics revenues weighting was assumed to decline by 12% and the segment revenue weighting were to remain at 8%, then incremental NP drops by6.5%. Different from Fanuc, since precision reduction gear contributions to overall profits are higher as it is one of their core growth products, the delta in the revenue base would likely impact incremental NP figures more than Fanuc s overall NP would be impacted. We assumed 12% growth for our bull case, 6% as base case, and 3% as bear case over the next three years in robotics related precision reduction gear sales in the precision equipment segment. We believe the profitability (OP margin) of the product can be c.2% with incremental margin assumptions of 4%. Chart 29: Nabtesco s three scenarios in robot related segment (precision equipment) Sales (bn yen) Current Sales Estimate 22, , 224, 231, 238, Precision Equipment 42,853 47, 49, 52, 55, Robot 34,282 37,6 39,2 41,6 44, Bull scenario (robot sales) 34, YoY 12% 12% 12% 12% Total sales , ,84 237, ,944 Base scenario (robot sales) 34, YoY 9.7% 4.3% 6.1% 5.8% Total sales , 224, 231, 238, Bear scenario 34, YoY 3.% 3.% 3.% 3.% Total sales , ,17 226, ,585 Source: Jefferies estimates, company data Chart 3: Nabtesco - three cases for precision equipment revenue growth 7, 6, 5, 4, 3, 2, 1, FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E Bear Base Bull Source: Jefferies estimates, company data page 21 of 57

22 Table 8: Scenario analysis of Nabtesco s robotics segment contribution to bottom line OP estimate Robot related revenue upside ( bn) -12.% -9.% -6.% -3.%.% 3.% 6.% 9.% 12.% 6% 5,8 6,1 6,4 6,7 7, 7,3 7,6 7,9 8,3 65% 5,7 6, 6,3 6,7 7, 7,4 7,7 8, 8,4 7% 5,6 5,9 6,3 6,7 7, 7,4 7,7 8,1 8,5 75% 5,5 5,9 6,2 6,6 7, 7,4 7,8 8,2 8,6 Robot weight 8% 5,4 5,8 6,2 6,6 7, 7,4 7,8 8,3 8,7 85% 5,3 5,7 6,1 6,6 7, 7,5 7,9 8,3 8,8 9% 5,2 5,6 6,1 6,6 7, 7,5 7,9 8,4 8,9 95% 5,1 5,6 6, 6,5 7, 7,5 8, 8,5 9, 1% 5, 5,5 6, 6,5 7, 7,5 8, 8,6 9,1 NP estimate Robot related revenue upside -12.% -9.% -6.% -3.%.% 3.% 6.% 9.% 12.% 6% -4.9% -3.7% -2.4% -1.2%.% 1.2% 2.4% 3.7% 5.3% 65% -5.3% -4.1% -2.8% -1.2%.% 1.6% 2.8% 4.1% 5.7% 7% -5.7% -4.5% -2.8% -1.2%.% 1.6% 2.8% 4.5% 6.1% 75% -6.1% -4.5% -3.2% -1.6%.% 1.6% 3.2% 4.9% 6.5% Robot weight 8% -6.5% -4.9% -3.2% -1.6%.% 1.6% 3.2% 5.3% 6.9% 85% -6.9% -5.3% -3.7% -1.6%.% 2.% 3.7% 5.3% 7.3% 9% -7.3% -5.7% -3.7% -1.6%.% 2.% 3.7% 5.7% 7.7% 95% -7.7% -5.7% -4.1% -2.%.% 2.% 4.1% 6.1% 8.1% 1% -8.1% -6.1% -4.1% -2.%.% 2.% 4.1% 6.5% 8.5% Source: Jefferies estimates, company data Yaskawa Electric As one of the leading robot manufacturers, Yaskawa Electric has a high market share in the industrial robot market. Since the initial shipment of MOTOMAN in 1977 in Japan, they reached total cumulative shipment of 28, units in September 213. They are strengthening their robot production/marketing structure and have renewed production lines. At its domestic plants, Yaskawa centralized robot production into three main locations. The first robot plant is capable of 1, units/month production and main robots manufactured are arc welding, handling, and assembling/transfer robots. The second robot plant is capable of manufacturing 5 units/month, and the plant is a clean robot plant established in 213. Major target industries for the robots are FPD/Semiconductor, bio medical, food, toiletries, etc. The third robot plant is capable of manufacturing 7 units/month, and its main products are spot welding, painting and palletizing robots. Yaskawa Electric established a plant in China where the production capacity is 25 units/month in FY3/14, and they are planning to increase it to 1, units/month in FY3/16. The company focuses on China as they believe the growth potential of the market is robust, and they want to GLOCALIZE management systems. Harmonic Drive Systems Harmonic Drive Systems manufactures precision reduction gears for smaller size robotics compared to Nabtesco s products. Harmonic Drive is also an equity affiliated company of Nabtesco since Nabtesco owns 2% of Harmonic Drive Systems. There are only a limited number of precision reduction gear manufacturers globally, and the market is largely dominated by those manufacturers only. Harmonic Drive Systems has a 3% market share globally in the precision reduction gear market, so together with Nabtesco, the Japanese companies have c.9% global market share in the reduction gear industry. Nabtesco s RV reduction gears and Sumitomo Heavy Industries Cycro Reduction gears are relatively larger sized with a greater number of components used, known as planetary gear mechanism, while Harmonic Drive s reduction gears are relatively smaller, and their products are typically used in the arm section of robotics or small size robotics which use less torque. In the European market, the three Japanese manufacturers basically dominate page 22 of 57

23 (mn yen) the market in the precision reduction gear industry for industrial robotics, and SPINEA, a Slovakian manufacturer, has a small share. High barriers to entry have been a major factor and reason why the industry is dominated by a certain number of competitors. Harmonic Drive s fundamental structure s original patent has been no longer effective since the 197s, so anybody can theoretically copy the same product; however, there are no effective competitors around yet. The company asserts it is only Harmonic Drive Systems that can commercially produce Harmonic Drive, that is the entry barrier comes from the production technology, not just the original patents. In addition, Harmonic Drive Systems have been enhancing product quality, and they have kept patents for upgraded products which prevent new entrants copying HarmonicDrive. They black boxed product development and manufacturing know-how, and competitors cannot easily imitate what Harmonic Drive Systems can make. Also, c.9% of the products are customized depending upon needs, and Harmonic can manufacture those products effectively. They also secure skilled labour to transfer their technologies to younger generations. Some manufactures have tried to copy their products; however, the product durability and production capabilities have not been enough to manufacture products with the same quality as Harmonic Drive Systems. Their production capacity is 4,-5, units/month, and they are now running at close to full capacity utilization due to smartphone related order surge. Harmonic Drive is used in various precise industries and products such as ASIMO, a humanoid robot by Honda, Airbus navigation system, Subaru Telescrope in Hawaii s Mauna Kea operated by the National Astronomical Observatory of Japan and the National Institutes of Natural Sciences, motion control of German Carl Zeiss neurosurgery system, Mars rover s motion control of cameras, etc. Chart 31: Reducer orders gradually trending up 6, 5, 4, 3, 2, 1, 35% 3% 25% 2% 15% 1% 5% % -5% -1% 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14FY3/15 Reducers Orders (YoY) Source: Jefferies, company data page 23 of 57

24 (mn yen) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Chart 32: Harmonic Drive Systems parent order value trends: Robotics related orders are trending up 8, 6, 4, 2, 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q FY3/6 FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14FY3/15 Semiconductor equipment Robotics Machine tools Others Flat panel display equipment Gearbox for motor manufactures Excavation system for the oil, etc. Source: Jefferies, company data Chart 33: YoY growth rate of Harmonic Drive Systems' parent orders 2% 15% 1% 5% % -5% -1% FY3/7 FY3/8 FY3/9 FY3/1 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 Semiconductor equipment Robotics Machine tools Flat panel display equipment Gearbox for motor manufactores Excavation system for the oil, etc. Others Source: Jefferies estimates, company data Chart 34: HarmonicDrive structure Source: Harmonic Drive Systems THK THK is a leading Linear Motion Guide (Actuator) manufacturer globally, and their products are used in the industrial robot industry. The main robots that use their products are 5-joint closed-link robots where THK s cross roller rings are used in the swing section to realize rigidity and speed. Arc welding robots also use cross roller rings in the rotary motion section of joints. SCARA robots use their LM guide systems to ensure accuracy of stroke movement and rotation, and double-arm robots use linear motion systems and cross roller rings that reduce the size of robots while increasing rigidity and speed. Although the incremental revenue impact from the industrial robot industry remains quite page 24 of 57

25 (JPYbn, USDmn, EURmn) Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 (RMBmn) small for THK, growth in robotics industry demand should benefit the company from a long-term perspective. Chart 35: THK s monthly orders by region Japan (LHS) US (LHS) Europe (LHS) China (RHS) Source: Jefferies, company data Human Assisting Robotics Trends in Nursing Care Robotics Nursing care service needs to be expanded in light of an aging society We are seeing an increasing demand for nursing services globally reflecting the acceleration of an aging society. However, there is an emergence of issues such as lack of nursing care related employees, the increased burden on nursing care related workers, an increased burden on government spending for nursing care, handling of the dignity of people who are receiving nursing care due to the declining number of working age staff that support those over 65 years old, and the increase in nursing care expenses within GDP. In the current environment, there are trends to develop and introduce nursing care robotics so that there will be improved efficiency in the nursing care industry, reduced burdens on nursing care personnel and costs, elimination of the lack of nursing care employees, promotion of independency of those being cared for in developed countries. In welfare oriented countries such as Northern European (Sweden, Denmark, etc.), government policies promote the introduction of nursing care robotics in nursing facilities and/or homes. In the US and South Korea, there are governmental policies to develop nursing care robotics in order to stimulate manufacturing industry as they value the nursing care robotics industry as a growing market. page 25 of 57

26 (# of people) Chart 36: Productive-age population ratio to drop in many countries Number of productive-age population to support one aged (over 65 years old) Source: Jefferies, DBJ, OECD Note: The numbers for Japan are slightly different from those in Chart 44 due to different sources; however, the general direction is the same. Increased demand in nursing care expenses in Japan According to the Ministry of Health, Labour and Welfare, the nationwide burden from nursing care expenses is estimated to be 19.8tn (3.2% of GDP) by 225, and the required number of employees is estimated to be mn, which compares to 8.4tn (1.8% of GDP) and 1.49mn employees in 212. In Japan, we have started to see various actions to develop nursing care robotics and put it into practice just as we saw in the 5-year robotic nursing care equipment development plan. Due to these actions, METI estimates the nursing robotics industry market will be worth over 4bn by 235. Chart 37: Nursing care expense weight of GDP to increase over time Weight of nursing care expenses in GDP 6.% 5.5% 5.% 4.% 3.6% 3.4% 4.5% 4.2% 4.% 3.% 2.% 1.% 2.4% 2.4% 2.1% 1.2% 1.6% 2.4%.% Sweden Denmark Norway Finland Japan OECD Avg Source: Jefferies, DBJ, OECD Robotics demand sustains decent growth in nursing care industry METI forecasts that the Japanese robotics market in the nursing/welfare industry will grow to over 4bn by 235 from the current 1bn. METI expects the market will gradually expand and in 215 it will have reached 17bn and 54bn in 22. By 225, the market is estimated to be 124bn before reaching 44bn in 215. METI forecasts a 17% CAGR over the 2 years after 215. The market growth largely comes from the acceleration of the aging society in Japan. page 26 of 57

27 (bn yen) Chart 38: Nursing care related robotics demand should continue to rise 5. Market Size of Nursing Care Robotics Current Independence Support Nursing Care Support Source: Jefferies, METI Table 9: Governmental actions with regards to nursing care robotics industry Institutions Contents Main activities METI, NEDO Life assistance robotics project Started in FY29. Research & development for 5 years until FY213. 6bn project. Research & develop life assistance robotics' safety measurement method and develop life assistance robotics with safety technologies. MHLW, The Association for Technical Aids Welfare equipment/nursing robotics practice support Started in FY211 and is still process with 83mn annual budget. In 213, advising support was carried out by professionals. Support development/nursing locations to put robotics activities into practice (advice from professionals and/or monitoring research budget provided in nursing facilities). Carry out experiment. MHLW, METI "Key areas in utilizing robotics technologies for nursing care" Determined in Dec 212. As key areas in nursing care robotics industry, they set (1) hoisting assistance, (2) transportation assistance, (3) egestion assistance, (4) help people with dementia. In Feb 214, they added bath support, and they set 5 areas as key areas. METI Nursing robotics equipment development/introduction project Started in FY213 with 2.39bn budget. FY214 budget estimated at 3bn. Prepare for an environment required for commercial viability such as support for the companies that develop nursing care robotics or safety/standard measurement settings. Japan Revitalization Strategy 5 year nursing care robotics development plan Determined in Jun 213. In order to prepare for the accelerated expansion of dissemination, they continue to develop highly helpful robotic equipment through competition. Determine the approval regulations and safety standards within a year. Seeds and needs matching to promote companies develop equipment. METI Source: Jefferies, DBJ Nursing care robotics purchase support project Started in FY214. The main purpose is to create a path for mass production of nursing care robotics. When nursing care providers purchase products, half of the costs are supported. Target to introduce over 1 facilities in Japan. Utilizing nursing care robotics, they intend to carry out large scale effectiveness testing. page 27 of 57

28 (mn people) (%) Development of Nursing Care Robotics in Japan and Globally Japan continues to see both venture and mega scale company mix In Japan, we see lots of companies participating in nursing care robotics, and large scale electric machinery makers or auto makers participate in the nursing care robotics industry, in addition to venture companies. On the other hand, in the US, Europe, South Korea and other countries, there is an accelerated development of nursing care robotics and it is common that these countries development is led by robotics manufacturers (specialists), venture companies, and academic institutions such as universities or research institutions. Population dynamics change In Japan, population dynamics are facing a severe challenge with an increase in the elderly population and a decrease in the working age population. Clearly, the population of over 65 years old has been increasing gradually over time, and we will likely see a declining younger population. The change in population structure is likely to cause issues with welfare for those who have difficulty staying healthy going forward. Assistance of those who have health issues may be required and human assisting robotics (nursing care robotics) demand is likely to surge in the long run in our view. In the mid-195s, people over 65 years old accounted for only c.5% of total population, and this gradually went up over time and in the mid-198s surpassed 1% for the first time. In 21, it is estimated to have surpassed 2%. Finally by 23, it is likely to surpass 3% according to United Nations estimates. The increase in the proportion of elderly population implies an increased need for a better social welfare system to support their daily lives. Chart 39: Proportion of people over 65 years old has been gradually increasing in Japan Population of over 65 years old in Japan (LHS) Weight of over 65 years old (RHS) Source: Jefferies, National Institute of Population and Social Security Research, United Nations In addition to an increase in the elderly, Japan is facing or going to face another population issue, which is the decline in the productive population. After peaking in the 199s, the productive population has been declining gradually, and we have not seen any recovery in this younger age group so far. The productive age demographic is expected to drop to roughly c.6mn levels from the current c.1mn levels as shown in Chart 4. Those who are supposed to support the society are likely to face difficulties were it not for certain measures such as human assisting equipment that can physically and mentally support those who are in need. page 28 of 57

29 (mn people) (%) Chart 4: The number of productive age people to drop over time Population of below 65 years old in Japan Population of over 65 years old in Japan Source: Jefferies, National Institute of Population and Social Security Research, United Nations Elderly population continues to rise In Japan, the proportion of the population over 65 years old is set to rise gradually going forward. In the 195s, it was well below 1%, and it has gone up gradually, reaching c.25% in 21. The rate is estimated to continue to go up to c.35% by 25, followed by a gradual decline. The increase in the elderly population should continue to be a long term issue in Japan from social welfare and GDP growth perspectives. Research indicates similar trends are expected in other major industrialized countries such as the US and Germany where the proportion of the elderly is estimated to trend in a similar manner to Japan s. Chart 41: The other industrialized countries are also facing increasing elderly populations Weight of over 65 years old population Japan US Germany Source: Jefferies, National Institute of Population and Social Security Research, United Nations Comparison with other industrialized countries Amongst major industrialized countries (Japan, the US and Germany as reference here), the population is estimated to grow only in the US which continues, while in Japan and Germany the absolute number will continue to drop in the next decades. The US population is estimated to grow from the current c.2 (index figure in Chart 42) to c.3 in 21, while Japan is estimated to drop from the current c. 15 to slightly above 1 in 21, according to the United Nations. The magnitude of decline in Germany seems not as large as in Japan; however, the population growth in Germany over the past half a century was also smaller compared to Japan. This indicates that Japan is likely to face the largest population decline delta amongst these three countries. page 29 of 57

30 (# of People) Chart 42: Population growth to be seen in the US only Index of population with 195= Japan US Germany Source: Jefferies, National Institute of Population and Social Security Research, United Nations Chart 43: Japan population in net decreasing phase 5, 4, 3, 2, 1, -1, -2, Natural population growth (absolute value) Source: Jefferies, National Institute of Population and Social Security Research, United Nations More productive age burdens As in Chart 44, productive-age people s burden to support the elderly population is set to go up over time, according to the National Institute of Population and Social Security Research. By 215, the number of productive age people to support one over 65-year-old person is estimated to be 2.3, and that is set to decline, eventually to 1.3 in 255. In half a century, basically one working-age person will be supporting one elderly person, so the burden is likely to go up. Even if we include year old people in the productive age range, the number of people that is required to support one over-7-year-old person is estimated at 3.6 in 215 and is expected to drop to 1.7 by 255. Nursing care support systems will continue to be required over the next several decades given the aging population is assumed to continue. page 3 of 57

31 Chart 44: Increased burden on productive age Productive Age years as Supporter years as Supporter How many people would support over below ages >= 65 >= 7 >= 75 >= 7 >= Source: Jefferies, National Institute of Population and Social Security Research page 31 of 57

32 Academic Commercial Academic Commercial Academic Commercial Commercial Chart 45: Major global nursing care robotics players Country/ Region Development Institutions Venture _ Foun d _ Company/ Institute Carnegie Mellon (CMU) Principal products Pearl Description The elderly's caring robot humanoid robot Develop/ sale Developing Nurse robot project Remarks two-wheel, uplift arm, web camera eye, liquid crystal MIT ubot-5 The elderly's caring robot Developing screen face CMU Hug Robot The elderly's livelihood support robot Developing Capable of message communication Georgia Tech Cody Assistance robot Developing Able to help with bath in bed CMU HERB Household livelihood support robot Developing HERB: Home Exploring Robot Butler MIT PAMM Walk rehabilitation robot Developing PAMM: Personal Aid for Monitoring and Mobility (MIT) 199 irobot Ava Assistance robot Developing RP-VITA, a joint development with InTouch Health has received FDA clearance and are in use at 6 hospitals. United States 1997 GeckoSystems CareBot Assistance robot Developing Developing the world's first care robot for the elderly Starting technology exchange and co-marketing with ZMP ExoHiker (UC Berkeley) 25 Ekso Bionics elegs Walk support robot Available for sale Holding 29 hubs(us(21), Spain(3), Norway(1), Italy(1), Denmark(1), German(1), South Africa(1)) In cooperation with UC Berkeley In 28, obtained a research grant from the Department of Defense In 212, Received FDA clearance and CE mark; Started to sell rehabilitation suits in US and EU In 214, created the world's first personalized 3Dbase-printed walk support robot with 3D Systems 26 Willow Garage PR2 ROS Livelihood support robot OS for robots Available for sale Aimed at popularization of open source based robots In 213, many employees have transferred to Suitable Technologies UK Univ. of Reading Hector Livelihood support robot Developing Origin from CompanionAble project GER Fraunhofer Institute Care-O-Bot Spain Humanoid robot Household livelihood support robot Developing Univ Carlos III de Madrid Asibot The elderly's livelihood support robot Developing Universidad Politecnica de Cataluna Wheelie robot equipped with an omni-directional arm Capable of drink serving Portable robot being able to help eating, drinking, teeth brushing Under demonstration experiments at national hospitals I-walker Walk support robot Developing Instructions following intelligent walker EU France (INRIA) 1985 Robosoft Kompai Humanoid robot The elderly's livelihood support robot Developing MOBISERV project(8 partners including health-care facilities, universities, institutes etc. from EU countries ) Household support for the elderly in a bad shape Indicating times for medicine, blood pressure measurement etc. and communicate with doctors 21 Eos Innovation E-one Surveillance sentry robot Developing 6cm height and 8kg weight Switzerland 1996 Hocoma ARMEO Rehabilitation robot Available for sale Sweden 24 Bestic Bestic Eating support robot Available for sale Holding affiliates in US, SG and Slovenia Having sales partners in 32 countries Conducting research with institutes in US, Orland and Switzerland In 21, received CE mark Bestic US, affiliate company in US 29 Giraffe-Tech Giraffe Surveillance sentry robot for the elderly Available for sale Transferred from Silicon Valley South Korea Center for Intelligent Robotics SILBOT Communication robot for the elderly Developing Under demonstrate experiment in Denmark. Already scheduled for installation in Denmark rehabilitation facility Israel 21 Argo Medical Tech ReWalk Walk support robot Available for sale Holding 3 institutions In 211, received FDA for hospital use in US, EU, Israel as rehabilitation robot FDA for personal use in US is under process. Available for personal use in EU and Israel In 213, started to cooperate with Yaskawa New Zealand 23 Rex Bionics Rex Walk support robot Available for sale On sale in New Zealand Developed the first robot leg to help people having ambulation difficulty Source: OECD "THE ROBOTICS INNOVATION CHALLENGE, June 212", robotics business review "Top22 Leading Companies for 213 Health Care Robotics", Jefferies page 32 of 57

33 (bn yen) Strength of nursing care robotics development in Japan In order to develop highly sophisticated robotics which utilize highly sophisticated technologies, it is important to have a decent mixture of sensing, driving and controlling/intelligence element technologies. Japan not only has these highly competitive technologies, but also it can utilize technologies developed in the auto or electronics industries. According to the Center for Research and Development Strategy Japan Science and Technology Agency, out of 65 different element technologies in electronics/information communication areas, Japan is ranked No.1 in 8 items. In fact, the number of patents for sensing and drive systems tends to be dominated by Japanese companies with market share of over 5% globally. For instance, PARO, a seal type therapeutic robot which is equipped with artificial intelligence and is approved in the US as medical equipment, is utilized in over 3 countries, and more than 3, PARO units are now in use. PARO is equipped with 2 sensors including optical and tactile sensors, and intelligent actuators are built into its neck, feet, and eyes. The actuators are exclusively developed for PARO and since the actuator motion is quiet, PARO is not usually recognized as robotic equipment, and it has a learning capability such as reacting to users voices. PARO uses components from 8 different manufacturers, and it uses highly sophisticated technologies used in the auto or electronics industries such as 6 layered high density print circuit boards which are manufactured in the production lines for luxury cars or hybrid vehicles. HAL, a robotic suit manufactured by CYBERDYNE, captures subtle signals that appear on the surface of skin when human beings are about to move their body parts and this is known as a vital electric sensor. HAL also is equipped with joint sensors that measures joint angles, ground reaction sensors that capture the gravity balance, a cybernic optional control system that moves as users will and a cyebernic independency control system that realizes human-like movements. The above two products already have CE certifications and are to be sold as medical equipment in EU countries. Germany even applies nursing care insurance or worker injuries insurance. HAL (for welfare use) was the first in the world that obtained ISO/DIS (an international safety standard for service robotics). Late in Feb 214, Panasonic s nursing care equipment received ISO13482 after it was officially released. Chart 46: Nursing care robotics growth is robust in Japan Current Independence Support Nursing Care Support Source: Jefferies, METI Robot Suit A Robot Suit is the first cyborg type robotics that supports users to improve/assist/develop body functions through actuators along with the will of the user. In Japan, it has been put into practice as a cutting edge technology that supports people. The research and development of the Robot Suit began in 1991, and after 2 years, Robot Suit HAL started to be utilized for welfare purposes in the spring of 21 in nursing care/welfare facilities in Japan. CYBERDYNE led the movement and they obtained quality management system, page 33 of 57

34 ISO 13485, which is required for companies that manufacture medical equipment, so they have started to expand their business as a medical equipment provider both inside/outside of Japan. The Robot Suit HAL started to be introduced in 21 for welfare purposes in domestic medical welfare facilities, and the number of facilities that introduced HAL has surpassed 17, and shipments reached 47 units. The medical purpose HAL received medical equipment certification in Europe in August 213, and it is already in use in Germany where public workers compensation is applied for the functional improvement of users brain/nerves/muscles. Spinal cord injury participants are also already using this equipment. CE certification as a treatment type robot medical equipment was marked for the first time in the world for HAL, and thanks to this certification, HAL is allowed to be shipped to European countries. On Feb 2 nd, 214, ISO 13482, an internationally standardized specification concerning the safety of life supporting robots, was released. The Japanese specification that NEDO was proposing was chosen for the specification. HAL for welfare purposes already received certification for ISO/DIS when it was only a proposal on Feb 27 th, 213. A major Japanese company moving into the industry? Toyota Motor will open up the development environment for service robotics within one year according to the Nikkan Industrial dated September 2 nd. They are delivering platform equipment by 215 and are planning to establish a development structure for applications by including outside skilled workers or users. It is important for them to assemble as much knowledge as possible in order to put multipurpose robotics into practice to meet the demand in industry, as seen in cloud sourcing. Softbank and Intel are also shifting to open source orientation in the service robotics industry and competition may intensify in platforms. Toyota Motor is planning to develop an advanced version of HSR, a life supporting robot and deliver it to research institutes, including university laboratories. The service robot for home use provides a wide range of functions such as cleaning, washing, etc. Toyota Motor developed HSR for elderly or disabled people who have difficulties moving their hands/legs so that the robot can pick up things or bring things from different locations. Recent talk in the stock market The following companies have received a lot of attention from the stock market YTD. We believe those companies will continue to benefit given the large growth potential in the human assisting robotics industry. CYBERDYNE (7779 JP, NC): CYBERDYNE Inc. was established in June, 24, in order to disseminate the research result of Professor Yoshiyuki Sankai, University of Tsukuba, for the benefit of the public interest. CYBERDYNE is not only materializing technology for practical use but also building up strong research and development systems to hear end users authentic voices and thus make a further leap. Consequently, CYBERDYNE will launch creative products. CYBERDYNE was listed on the Tokyo Stock Exchange (Mothers section) in March 214, and it has received a lot of attention from investors with expectations for increased demand for human assisting robotics, widely known as HAL (Hybrid Assistive Limb). HAL is the world s first cyborg-type robotic equipment, by which a wearer s bodily functions can be improved, supported and enhanced. By putting on HAL we can see a fusion of man, machine and information, according to CYBERDYNE. HAL assists a physically challenged person to move and enables him/her to exert greater motor energy than usual. HAL is also considered a system that accelerates the motor learning of cerebral nerves. As of June 214, there are 86 units of HAL (medical use) operating in 5 facilities in Europe. As for nursing welfare and life support areas, the number of HAL (welfare use) in operation was 356 units in 155 facilities in Japan including welfare facilities, hospitals, etc. HAL uses disposal electrodes called Vitrode manufactured by Nihon Kohden (6849 JP, NC). page 34 of 57

35 Table 1: List of local government projects around robot suit HAL Local government Projects Divisions / Departments In Charge Kanagawa Prefecture Promotion of expansion of nursing and medical robots Aging Society Division Industry Promotion Technology Division Kanagawa Welfare Service Association Kanagawa Prefecture Robot Town Sagami Aging Society Division Industry Promotion Division Okayama Prefecture Assessment of rehabilitation using robot suit HAL Medical Promotion Division, Department of Public Health and Welfare Okinawa Prefecture Promotion of creating health-care services using advanced welfare robotics technology Industrial Policy Division, Department of Commerce, Industry and Labor Niigata Prefecture Niigata Dream Project Industry Promotion Division Mie Prefecture Mie Life Innovation Promotion Center Diseases Control Division, Department of Health and Welfare Source: Jefferies, company data Harmonic Drive Systems (6324 JP, NC): Harmonic Drive Systems is a major supplier of precision reduction gears used in human assisting robotics. They sell their products to global human assisting robotics manufacturers and are known to be one of the names that have exposure to this growing nursing care robotics industry. Kikuchi Seisakusho (3444 JP, NC): Kikuchi Seisakusho manufactures Muscle Suits used to reduce burdens to the back of our body in the nursing care and logistics industries. Backache issues have been widespread in various industries such as nursing care, logistics, plant working places and agricultural environments as one of the major health issues globally. The muscle suits helps users carry around heavy objects through its supportive systems. Kikuchi Seisakusho believes revenue contributions from new businesses such as muscle suits or microfluidic devices are set to increase. In FY4/14, the overall revenue contribution was only 1.4% from new businesses, but the company guides for a 1% revenue contribution in FY4/15. That implies new business revenues would be up 687% YoY. The company also announced the introduction of nursing care robot production facilities in Fukushima Prefecture. Daiwa House Industry (1925 JP, NC): Daiwa House Industry is a major sales dealer of human assisting robotics in Japan. We visited their Human Care Business Promotion Department s Robotics Business Promotion Room in Tokyo. They sell various different types of nursing care robotics such as HAL, MOOGLE, POPO, PARO, MINELET, etc. The company expects overall revenues from the robotics business to be 35mn in FY3/15, and they continue to expand the business given the outlook for the need of these robotics in Japan is bright. Table 11: Major Japanese players in nursing care robotics industry Product Name Manufacturer Product Description PaperoR5 NEC Greet in different languages, and reply back to you. Recognize faces of 3 different people PALRO Fuji Soft Humanoid robotics equipped with artificial intelligence PARO Intelligent System/AIST (Sales dealers: Daiwa House, etc.) Motions similar to human being Network functions connecting to internet or cloud Seal type therapeutic robot Mental treatment oriented effects MySpoon Secom Support hand disabled to eat. The user can move food to his/her mouth by controlling the robotics. Rodem Tmsuk Universal vehicle. Without changing body direction, move between bed and toilet. HAL CYBERDYNE (Sales dealer: Daiwa House) Leg/walking support for those who are disabled. (Rhythm) Walking Honda Assistance Source: Jefferies, DBJ When people are to move, their brain transmits bioelectric signal to muscles, and skin surface sensors capture the signal. By moving the robotic arms along with the signals, it supports users to move. Through information sensor information, controlling computer drives motors and improves the timing of both legs' motion, leading to better/easier walking. page 35 of 57

36 Chart 47: Japan has a number of technological advantages in robotics Number of technologies where Japan has relative advantages US Europe Japan Koera Taiwan China Japan's strength: Memory, Measurement, Photonic Crystal, Super Computer, Quantum Information Security, Digital Image Compression Technologies/Multi-media Application Technologies, Sensing/Recognition, Actuator Source: Jefferies, company data Chart 48: US patent ownership share in robotics element technologies: Sensors Image sensor Encoder Force sensor Magnetic sensor Accelerometer sensor Gyro sensor % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% Japan US EU Korea Others Source: Intellectual Property Information Services, Jefferies Chart 49: US patent ownership share in robotics element technologies: Drive Systems Harmonic drive speed reducer Servo motor Brushless DC Motor % 2% 4% 6% 8% 1% Japan US EU Korea Others Source: Intellectual Property Information Services, Jefferies page 36 of 57

37 Chart 5: US patent ownership share in robotics element technologies: Intellectual Control Phonetic recognition Image recognition Artificial intelligence % 2% 4% 6% 8% 1% Japan US EU Korea Source: Intellectual Property Information Services, Jefferies Chart 51: US patent ownership share in robotics element technologies: Overall Robotics Control Robotics Overall % 2% 4% 6% 8% 1% Japan US EU Korea Source: Jefferies, company data Outlook on Japanese nursing care robotics industry The Development Bank of Japan (DBJ) asserts that it is important to develop robots that are practical and are well received by the end users by developing robotics as seen in Northern European countries like User Driven Innovation, so that Japan can expand its nursing robotics market industry and utilize the potential strength behind element technologies in the auto and electronics industries. It is essential to prepare for testing environments for actual experiments; however, there is friction against robotics industry and concerns on safety measures. The number of employees with enough knowledge is limited as well; thus, the number of facilities that understand and support these experiments is quite limited. On the other hand, in order to expand nursing care robotics development, it is essential to obtain the understanding/support of facility operators regarding the introduction of robotics, and it is required to proceed with standardization along with the support from government and other people regarding safety measures, price setting that is reasonable for users and support for introduction costs, visualization of the advantages for end users and nursing care employees in terms of economics, and preparation for education/training systems for their introduction. Due to the policies introduced by the government and autonomously, we are seeing support for experiments and the introduction of nursing care robotics, and we see page 37 of 57

38 attempts to secure testing environments for experiments partnering with robotics development corporations and nursing care/welfare facility operators. However, the number of these activities carried out is still quite limited. While North America and South Korea are proceeding with the development of nursing robotics assuming that they will go into global markets, it is important to determine a path for sales pipeline expansion in the US and European markets in addition to domestic expansion. It might be ideal to consider the open innovations as seen in Denmark or Sweden based on User Driven Innovations environment, and Japan might be able to expand its revenue pipeline into US and European markets. On the other hand, there are a few possible issues regarding the introduction of US/European made products into Japan market due to differences in the residential environment and culture. Then, DBJ advises that Design Driven Innovation will work because it monitors what Japanese users are in need of, and it can possibly recognize essential/imminent needs and factors, and it also should add innovative value to the product. Table 12: For the introduction of nursing care robotics, there are certain issues and required actions for them Propositions/Issues Required Actions Taken Since there are not enough testing environments for experiments in nursing care facilities, there are not enough robotics designs that are user friendly. Measurement method and information sharing has not taken place, so there are no visible advantages in terms of economics for employees and end users. Thus, there are no major incentives to introduce robotics from the facility side. No confirmation regarding safety measures of nursing care robotics is made. Lack of work force who can operate nursing care robotics in actual facilities. Expensive. Source: Jefferies, DBJ Provide experiment locations by cooperating with nursing homes, government and autonomously. Skilled labor development that can connect developers and users as promoter or coordinator. Establish measurement methods, and enhance information sharing. Introduce measurement system platforms utilizing IT. Set up safety measurements and laws related to nursing care robotics. Promote to obtain CE certification and ISOs. Prepare for the insurance systems in private sector. Foster skilled labor by providing career path systems in nursing care industry. Prepare for training related to nursing care robotics and establish training locations. Support introduction cost or set up a reasonable price. Expand insurance limits in nursing care robotics market. Trends in Regulations Global standardization of service robotics ISO/TC184/SC2 is one of the key regulation workings groups to watch. Ever since the first SC2 Frankfurt conference in May 1984, there has been 1 ISOs and 4 TRs issued until the international standardization of service robots began including the ones that were already abolished. In 25, reflecting the sign of effective practice of service robots, an advisory group was formed, and they had held 6 conferences by May 26 when they submitted the report to SC2. In the SC2 Paris conference in June 26, it was determined to start considering officially setting up internationally standardized measures on safety issues for personal care applications based on the advice from the advisory group. Simultaneously, an advisory group (AG1) was set up for the purpose of reporting to SC2 with research regarding standardization of the service robot industry. In order to carry out standardization processes in the service robot industry at SC2, the names and areas which had been specified for industrial usage were also changed to robot and robotic device and standardization of automatically controlled and reprogrammable manipulating robot and robotic device industry, respectively. At the SC2 Gaithersburg conference in June 27, AG1 recommended launching wording standardization processes to SC2, and SC2 revised industrial robot standard, ISO 8373, followed by a decision to set up wording standardization. Wording standardization began with a new project team at the Tokyo conference in November 27. As for the safety measures of medical robots, a joint working group was set up with ISO and IEC since medical machinery related people s participation was necessary in addition to robot industry exports. page 38 of 57

39 (units) After various discussions in the working group, at the San Francisco conference in January 213, a proposal and explanations were made regarding data statistics on injury (Germany), method of experiment (Japan), border line between service robot and medical robot (UK), guidelines of ISO (UK), etc. With various countries input, working items were determined for the Beijing conference in October 213. Three conferences were held in FY3/14: Bristol in June, Beijing in October, and San Sebastian in February 214. At the Bristol conference, detailed explanations were given for guidelines for ISO13482 and method of experiments. At the- Beijing conference, they deliberated the guidelines of ISO13482 and experiment method drafts, and discussed scheduling of standardization. At the San Sebastian conference, the same matters as the Beijing conference were deliberated. Voting closed in December 213, and FDIS13482 was approved, followed by a released of ISO13482 in February 214. Note: ISO is the International Organization for Standardization, TC is Technical Committee, SC is Sub Committee, TR is Technical Report, and FDIS is Final Draft International Standards. Explosive Growth in China Robotics To Become a Robot Empire China is the fastest growing market in the world with a decent long term outlook in industry The China robotics market has the largest potential for growth in the long run. METI and IFR are looking at the growth in the robotics industry in the next c.2 years with major growth in China. Japanese robotics manufacturers are considering increasing revenues from China market in key industries such as auto and other general manufacturing sectors. Chart 52: China robot shipments to show sustainable rapid growth 12, 1, +25% CAGR 8, 6, 4, 2, e 215e 216e 217e Source: Jefferies, IFR Depending upon the usage of robotics, different companies have strengths and high market share in China. In arc welding robotics, Japanese companies such as Daihen, Yaskawa Electric, Panasonic and Fanuc have higher market share than European companies such as ABB and KUKA. When it comes to spot welding robotics, European companies are relatively strong in the China market, and KUKA has the highest market share there, followed by Fanuc and ABB. In painting robotics, European manufacturer ABB is strong with the highest market share, while the 2 nd to 4 th players are Japanese. Assembling robotics are dominated by Japanese makers and Seiko Epson has the highest market share in China, followed by ABB and Fanuc. Lastly, regarding palletizing robotics, KUKA has the highest market share, followed by Japanese makers (refer to Chart 63). page 39 of 57

40 (units) China Industrial Robot Market First Look China biggest and fastest growing industrial robot market A great change emerged in the global industrial robot market. China, once the manual labour workshop of the world is exhibiting strong demand for industrial robots. In 213, China purchased c37, robots to surpass Japan as the top buyer of industrial robots. For the first time ever, China became the biggest industrial robotics market in the world in terms of annual sales. Since 179, industrial robots were sold last year globally, it indicates that China bought one in five robots sold. Chart 53: China is expanding its share in global supply of industrial robots Others 26% 21 China 12% Japan 18% Others 3% 213 China 2% Japan 15% Germany 12% Rep. of Korea 2% United States 12% Germany 1% Rep. of Korea 12% United States 13% Source: IFR, Jefferies China has become the fastest growing industrial robot market in the world. On the back of the remarkable economic growth and strong needs for manufacturing automation, the industrial robot market achieved a CAGR of 34% from 1999 to 28. Despite of its slowdown in 29 due to the world economic crisis, it accelerated again from 21. Over the last five years, supply of industrial robots increased at an impressive CAGR of 6%. Chart 54: Annual shipments of industrial robots in China 4, 35, 3, 25, +6% CAGR 2, 15, 1, +34% CAGR 5, Source: IFR, Jefferies Rising wage cost and workforce shortage boost industrial robot installations The working profile in China is changing dramatically as the country s manufacturing industries are facing rising labour costs. According to the World Bank, China s per capital GDP increased to $6,87 in 213, thus rising wages are becoming a heavy burden on factories. In Chart 55, we can see that the average wage of employed persons in manufacturing industry reached RMB46,431 in 213, roughly 2.5 times that of 26. On the other hand, China s one-child policy, which restricts the number of young dependants, has begun to show its impact on the flow of new entrants into the workforce. page 4 of 57