Advantest : Strategy

Overview

Strategy

Sustainability

Information

Strategy

Integrated Annual Report 2021

16

CEO Message

Advantest's first mid-term management plan (MTP1), a three-year plan that started in fiscal 2018, ended with strong results that exceeded targets across all metrics. We faced risks during the period that dwarfed our initial expectations, such as the intensification of US-China friction and the spread of Covid-19. How- ever, these risks spurred changes in markets, which were vigorously embraced, bringing new opportunities for companies, and encouraging them to take on new challenges. In April this year, we launched our second mid-term management plan (MTP2). We anticipate that demand for semiconductors will continue to grow in the medium to long term. I believe we have entered a phase where the true value of our company as a global leader and advocate of our corporate philosophy (Purpose & Mission), "enabling leading-edge technologies," is being put to the test.

Higher, Stronger.

The Promise of Further Growth

Representative Director, President and CEO

Overview

Strategy

Sustainability

Information

FY2020 Results

Orders

Record high

Sales

Record high

Operating Margin

¥330.6B

¥312.8B

22.6%

Net Income

Record high

ROE

EPS

¥69.8B

27.3%

¥354

Key management

FY2015-17

MTP1 Targets

MTP1 Actual

MTP2 Targets

(FY2018-20

(FY2018-20

(FY2021-23

Grand Design

matrics

Average

Average)

Average)

Average)

350~380

> 400

Sales

(¥B)

175.1

250

290.4

Operating

(%)

9

17

22

23~25

Margin

Net Income

(¥B)

13

--

60.1

62~70

ROE

(%)

12

18

29

20

EPS

(¥)

74

170

309

320~370

Strong performance in the MTP1 period puts us ahead of schedule with respect to the goals of our Grand Design

At the conclusion of the MTP1 period, results exceeded the targets we had set for all 4 metrics (sales, operating margin, net income, ROE, and EPS). This performance greatly exceeded our initial expecta- tions, but in terms of medium- to long-term trends in the semiconductor market, it was in line with the scenario set forth in our Grand Design. I believe these trends simply developed sooner than expected. Our Grand Design, announced in April 2018, foresaw that a "data explosion" would lead the semiconductor market into a new growth phase in the future. This "data explosion" accompanies the development of social infrastructure such as 4G / 5G base stations and data centers, and the recent evolution and wider adoption of technologies such as data sensing, edge devices, high-speed communications, and data storage, which generate zettabytes of data traffic. Our scenario sees semiconductor test demand also increasing as demand for semiconductors, which handle all this data, grows dramatically.

Early 2020 saw the beginning of the global Covid-19 pandemic. This unprecedented event has caused hardships for many and has badly damaged various businesses. On the other hand, it has also accelerated transformational changes in communication styles. The value of gathering at work and having face-to-face conversations has become less obvious to many, due to the normalization of digital communications, which are unaffected by physical distance, but while this change may seem to

Grand Design: Mid/Long-Term Management Policy (FY2018~2027: For more information, please visit https://www. advantest.com/about/management-policy.html)

MTP1: First Mid-Term Management Plan (FY2018~2020): For more information, please visit https://www.advantest.com/ investors/ir-library/pdf/E_MLTP_180426_slide.pdf)

MTP2: Second Mid-Term Management Plan (FY2021~2023): For more information, please visit https://www.advantest. com/investors/pdf/E_MLTP2_210524_slide.pdf

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CEO Message

have occurred abruptly in response to Covid-19, it is nothing more than the very shift to a new style of communication that we always expected to see in the future.

In the past, sales of products used directly by people, such as replacement personal computers, or the adoption of digital cameras, and LCD TVs, drove demand for semiconductors. Trends in demand for these items drove waves of demand for semiconductor test, and had a major impact on our busi- ness. However, in the current IoT era, where all manner of things are connected to the internet, data communications are rapidly expanding into the realm of M2M (Machine to Machine) where human intervention is minimal or absent, including social / transportation infrastructure, data centers, and industrial equipment. More and more products in this area are being equipped with semiconductors, further diversifying the industry's end-product base. At the same time, I believe that the absolute num-

Overview

Strategy

Sustainability

Information

Our mid-term management plans (MTP1, MTP2) aim to achieve the goals of our Grand Design by 2027, but at the same time, they are initiatives to strengthen and expand Advantest's ability to sustainably bring in revenue to achieve social value," and thus we can say that they are blueprints for growth that will continue beyond that date. I believe that this sustainable "earning power" is key to improving our corporate value, as I explained in our MTP2 announcement.

Enhancing Corporate Value by Expanding the "Value Cube"

ber of semiconductors in use will increase steadily due to the "data explosion" mentioned above. In addition, against the background of increasing social demand for decarbonization, semiconductors are required to save energy and use less power, which promotes higher performance, greater complexity, and stronger reliability guarantees. As a result, more advanced and efficient semiconductor test is indispensable. These trends, combined with the early spread and global expansion of digital communications impelled by Covid-19, were among the factors that boosted demand for semiconductors and test during the MTP1 period (FY2018-2020).

MTP2 Targets Further Growth

We launched MTP2 in April 2021. While following the same route as MTP1, this plan will accelerate growth further through stead engage with the following five strategic issues, we will strengthen Advantest's foundation for corporate value improvement and sustainable growth.

The corporate value enhancement we aim for is the expansion of social contributions through business growth. The ability of Advantest's core business to grow steadily is itself a contribution to humanity's sustainable future. Conversely, businesses that do not reflect the values of society will not grow sustainably. Figure-(1) shows the improvement of corporate value that we aim for under MPT2 as the sustainable expansion of future profits (earning power) along the three axes of ① shareholder value, ② stakeholder value, and ③ ESG value, using the analogy of an expanding cube. Above all, I believe that enhancement of our ESG initiatives is key to promoting growth along the other two axes, and we therefore added it as our fifth strategic issue under MTP2, as mentioned above.

Sustainable expansion of

1 Shareholder perspective future profits

Corporate value

X years later

Present corporate value

3 ESG perspective

2 Stakeholder perspective Figure-(1)

		Reinforce core businesses, invest strategically
	1
		Seek operational excellence
5 Strategic	2
3	Explore value to reach a higher level
Issues
4	Pioneer new business fields
		Enhance ESG initiatives
	5

Growth Investments Spur Innovation

Growth investments are indispensable for leveraging the sustainable strength and earning power of a company over the medium to long term. Based on this belief, we carried out two M&As (the system level test business transfer from Astronics, and the acquisition of Essai), and one capital and business alliance (with PDF Solutions) during the MTP1 period. These acquisitions and partnerships aim to reduce the time, cost, or risk of in-house development by buying already-established technologies, products, customer bases, etc., but that is not their only advantage: Incorporating external knowledge also means seizing opportunities for new innovation.

Economist Joseph Schumpeter, in 1934, defined innovation as "new combinations" of new or existing knowledge, resources, equipment, and other factors. Advantest's purpose and mission of "enabling leading-edge technologies" has enabled us to establish our current position as a global leader in semiconductor test while further advancing the unparalleled measurement technology that we have amassed over many years. However, in-house technology development is limited by a "knowledge boundary" imposed by an inevitable degree of organizational homogeneity, which makes it difficult to search for new knowledge. M&A and business alliances bring the advantages of being able to start a business in a short period of time by supplying what the acquiring company does not have, and also promote "new combinations" of new and existing knowledge, that is, innovation. As an example, we acquired Verigy, another tester provider, in 2011. Although it operated in the same industry, Verigy was

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CEO Message	Overview	Strategy	Sustainability	Information

a treasure trove of knowledge that was new to Advantest at the time, ranging from development, de- sign, quality assurance, production and procurement, to corporate culture, personnel systems, market communications, and beyond. 10 years have passed since then. There is no doubt that the success of MPT1 was supported by many innovations, including products, new systems, new cultures, and more, created from "new combinations" of knowledge. This also gives us confidence that we will achieve our MTP2 goals. In this light, growth investments undertaken during the MTP2 period will also be long- term measures to hone our strength (earning power) and enable Advantest to grow further beyond the 2027 finish line of our Grand Design.

Further Enhancement of ESG Initiatives

As I mentioned earlier, the driving force of our corporate value is sustainable earning power, which is the ability to grow while doing business that delivers the value society is demanding and I believe this will be enhanced by the further promotion of ESG. In July 2019, we updated "The Advantest Way," our corporate philosophy system. The Advantest Way sets guidelines for ESG promotion, but in order to connect these guidelines to more practical activities, we added "further enhancement of ESG initia- tives" as our fifth strategy under MTP2, announced in July 2021. This newly establishes a basic policy for ESG promotion, stipulates that Executive Management Committee and the Board of Directors will hear reports on the status of ESG promotion and discuss these issues twice a year, and makes clear that "further enhancement of ESG initiatives" is one of the important issues that executives in central management roles should tackle. In addition, to promote ESG within the Advantest Group as a whole, we have formulated our "ESG Action Plan 2021," see pages 45-46 . which provides activity guidelines for the entire Group, as well as for ESG activities that each business group and regional subsidiary can work on.

On that note, I believe that one important element in the further enhancement of ESG is individual employee buy-in. At this point many companies are focusing on ESG and initiatives related to the SDGs, which is well and good, but if we cannot offer convincing answers to employee questions such as "Why is this necessary?" and "How does my work contribute to social sustainability?", we will just end up nagging employees into going through the motions. Even if a person understands that combating global warming is an urgent issue, or even if he or she knows there are not many female managers in the company, he or she is not going to put much effort into solving those issues if they don't particularly impact his or her own life and work, or to put it another way, if he or she doesn't see any value in

it. Again, our story is that growing our core business (from employees' point of view, this means doing their jobs well) is the driving force for improving corporate value, and that this capacity contributes to society. So first of all, I believe it is management's responsibility to clearly demonstrate the value of ESG, talk about it often, and proactively hold discussions. To be honest, I think it will take a while until all employees buy into this story. However, I think it is important for management to grow the number of employees who see value in ESG and are "hungry" to solve ESG challenges, even if just one by one, with clear awareness and determination.

Advantest Leadership Model Improves Teamwork

Advantest operates on a global stage. Since more than 90% of our consolidated sales are made overseas, and the semiconductor industry increasingly disperses design and manufacturing across regional borders, our customers are located all over the world, in Europe, America, Southeast Asia, Taiwan, South Korea, and China. We cannot win business without controlling complex value chains and responding quickly to market changes and geopolitical risks. Team strength is the key to that, on both a global and local level. Of course, improving the skills of individual employees is important, but establishing and instilling a leadership model is essential for achieving solid results as a team. One could liken a team to an orchestra. Depending on the conductor, a piece can be played in a wide variety of ways. While respecting individual diversity, we will strengthen our leadership to produce re- sults. As a part of our corporate philosophy system, The Advantest Way, we started

holding "Advantest Leadership Model" workshops in 2021. see pages 64 Approximately 1,200 managers in Japan and overseas are eligible. These workshops are not "employee trainings" to impart knowledge and skills, but rather define "leader", "manager", "coach" and "expert" as the four types of skills required for leadership. We have positioned this as a "journey" where leaders seek to discover through their daily work how these skills should be deployed and balanced. There is no one easy answer, of course. However, I am convinced that regularly thinking about these things and taking on challenges as team leaders, without fear of failure, will, in sum, make our global team more powerful.

Towards the Future Beyond "Tested by Advantest"

Our Grand Design targets a semiconductor test market share of 50% or more by 2027. This means that more than half of all the world's semiconductors that need to be tested will have been tested with our products and solutions. It is no exaggeration to say that "Tested by Advantest" is a synonym for semiconductor safety and security. That said, we have our roots in measurement technology, and to this day it is our core competence. The semiconductor testing business is just one application of that technology. More and diverse applications for measurement technology exist, and though it may take some time to commercialize them, we are working on developing business opportunities in some of these new areas, including the medical field. We will continue to take on challenges with our eyes on a future that extends beyond "Tested by Advantest."

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Mega Trend and Our Market

The Digital Revolution and the Data Explosion

Overview

Strategy

Sustainability

Information

Semiconductors Are Evolving Into Social Infrastructure

In the decades since the electronics industry took off in the latter half of the 20th century, many have talked about the "digital revolution," meaning the dramatic changes wrought upon society by digital technology. However, we believe that the evolution of digital technology over the last few years has accelerated to the point where the "revolution" tag is finally warranted.

At the heart of the present digital revolution is the analysis of big data. The evolution of sensing and networks has made it possible to convert all events affecting society, from road congestion to atmospheric conditions, into data. By collecting vast amounts of data and deeply analyzing it, we

can obtain new knowledge that was hitherto unavailable. People have begun to make major judgements affecting our lives and our industries, ranging from proposed solutions for major issues such as urban problems and climate change to forecasts of product sales and stock prices, based on data, which now occupies a position so important that it could be called the "new oil." In addition, as a result of Machine -to-Machine exchanges of data without human inter- vention, the amount of data generated worldwide continues to grow exponentially. This is the "data explosion."

Improvements in semiconductor performance led to the data explosion. Semiconductor and semiconductor production equipment manufacturers constantly strive to develop manufacturing technologies that can integrate more semiconductor components onto each chip. Thanks to the success of EUV (extreme ultraviolet) lithography technol- ogy, which enables the drawing of finer circuits, and the evolution of laminate package technology, which enable higher integration of semiconductor devices "stacked" into three-dimensional structures, it is certain that semiconductor performance improvements will continue inexorably.

High-speed,high-precision sensing and conversion into data of real-world events; high-speed calculations; the writing and reading of vast amounts of data; and high-speed communications. These were the necessary conditions for a digital revolution, and it is the evolution of semiconductors which has supplied them. By enabling advanced processing of massive amounts of data, semiconductors are now playing an indispensable role as infrastructure for society.

Semiconductor circuit miniaturization (left) and 3D layering (right) technologies continue to evolve.

Past

Data processing is localized to computers

Present

All social phenomena are surveilled and converted into data

Analyzed data is fed back to society

Computer terminals operated by humans

Society

Computers that process, analyze, and store data

Opportunities and Risks for Advantest

Test systems that can verify the performance of advanced technologies also contribute to semiconductor evolution. Data obtained from test systems is not only useful for determining the quality of semiconductors, but can also signpost potential improvements in manufacturing processes. By utilizing test data, semiconductor manufacturers can improve manufacturing yields for advanced semiconductors and ramp up volume production quickly. The current situ- ation, in which demand for advanced semiconductors for applications such as 5G communication, AI, and connected vehicles, is expanding at an unprecedented rate, presents enormous business opportunities for Advantest.

Of course, opportunities are always accompanied by risks. The response to the Covid-19 pandemic has boosted demand for semiconductors via the imposition of remote work requirements, but it has also created risks, such as supply chain disruptions and adverse effects on semiconductor

demand owing to macroeconomic decline. In addition, it is still impossible to predict whether and how movements related to geopolitical risks and national economic security policies will affect the semiconductor industry. The dangers of climate change and natural disasters cannot be under- stated. There are also movements to reframe the traditional values of the market economy, ranging from the backlash against globalization to "stakeholder capitalism."

In summation, it is it is important for Advantest to strengthen our information gathering and analysis capabilities and flexibly respond to change while pursuing our vision of "adding customer value in the evolving semiconductor value chain" and implementing our existing growth strategies,. In addition, for us and for all companies, ESG initiatives such as supply chain management and corporate governance are now indispensable to sustainable growth.

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