Seiko Epson : Ⅱ. Overview of Business

1. Overview of Business

1. Management policy, business environment and issues to be addressed, etc.

All forward-looking statements hereunder were made at Epson's discretion based on the forecasts and certain assumptions at the end of the fiscal year. These statements may differ from actual results and are not guarantees of the achievement.

(1) Basic management policy

Epson boldly undertakes challenges to create innovations beyond its own conventions and vision with a view to continuously creating game-changing customer value and playing a central role as an indispensable company in building a better society, based on the Company's unique strengths of efficient, compact, and precision technologies since the time of its founding. Based on the Management Philosophy and global tagline, we will make efforts to realize our goal by having all employees share values and act autonomously while demonstrating their comprehensive strengths, for the purpose of creating values that exceed customer expectations.

Epson Management Philosophy

Epson aspires to be an indispensable company,

trusted throughout the world for our commitment to openness,

customer satisfaction and sustainability.

We respect individuality while promoting teamwork,

and are committed to delivering unique value through innovative and creative solutions.

EXCEED YOUR VISION

As Epson employees,

we always strive to exceed our own vision,

and to produce results that bring surprise and delight

to our customers.

(2) Concept of aspirational goal and "Epson 25 Renewed" Corporate Vision

In March 2021, we revised our Corporate Vision and established "Epson 25 Renewed," with the goal of achieving sustainability and enriching communities, which we have set as our aspirational goal to pursue into the future.

• Our aspirational goal that Epson will pursue into the future

At present, humanity is facing a wide range of social issues, including climate change and the COVID-19 pandemic. We believe that we have entered an era in which people aspire to achieve a variety of enrichment, including not only material and economic wealth, but also spiritual and cultural enrichment. Sustainability is a fundamental requirement for achieving this. With this background, Epson develops its business by always focusing on social issues as a starting point, considering what we can do to solve them, and how we can use our technologies to solve problems and contribute to society. This is how we work to realize our abovementioned aspirational goal that Epson will pursue into the future.

• "Epson 25 Renewed" vision statement

We have established the vision statement for "Epson 25 Renewed," which is "Co-creating sustainability and enriching communities to connect people, things, and information by leveraging our efficient, compact, and precision technologies and digital technologies." We will provide solutions that connect people, things, and information in a smart manner to society as a whole, including people's personal lives, industries, and manufacturing sites, in order to achieve our aspirational goal. The three most important initiatives in doing so are the environment, DX, and co- creation.

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Environmental initiatives

• Promote decarbonization and close the resource loop, develop environmental technologies, and provide

products and services that reduce environmental impacts. DX initiatives

• Contribute to customer success by building a robust digital platform, connecting people, things, and information, and co-creating solutions that continue to meet customer needs.

Co-creation initiatives

• • Leveraging our technologies and product families, solve societal issues with partners by providing core devices and a place for co-creation and networking, as well as through collaboration and investment.
• "Epson 25 Renewed" policies
  With uncertainty in the social environment expected to continue, we will seek to secure profitability and future growth by focusing on priorities. Furthermore, we will also continue to strengthen our efforts for the environment, DX, and co-creation across business domains.

Category	Applicable businesses	Policy
	Office printing, Commercial & industrial printing,	See environmental changes as an
Growth areas	opportunity and invest
Printhead sales, Production systems
	management resources
		Emphasize profitability through
Mature areas	Home printing, Projection, Watches, Microdevices	structural changes and efficiency
		improvements, etc.
New areas	Sensing, Environmental business	Develop new technologies and
businesses

(3) Business and financial issues to be addressed with priority

• Policy and progress of innovation strategies and future initiatives

We have established innovation areas around customer value and societal issues in order to execute the strategy for realizing our goals. In the microdevices business that supports the following five innovation areas, we will contribute to the development of a smart communities with crystal semiconductor solutions enhanced with our efficient, compact, and precision technologies. Furthermore, in order to realize a sustainable society, we will also develop new environmental solutions that integrate materials technologies and contribute to decarbonization and closing the resource loop by giving top priority to our contribution to the environment.

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Office & home printing innovation

In this area, we seek to lead the evolution toward distributed printing that reduce environmental impacts and increase work productivity through inkjet technology, paper recycling technology, and open solutions. In office printing, projects acquired continued to increase as a result of coordination of solutions including verification and billing systems. Going forward, we will introduce products in the medium speed zone for which there is substantial demand while making efforts to strengthen sales networks and value promotion activities in each region in order to accelerate growth. In home printing, activities to increase recognition of high-capacity ink tank models for which brand ambassadors have been appointed in North America, Europe, China and Australia have proven effective. In the future, we will expand subscription services while creating a business model that enables long-term use of products for the purpose of contributing also to the reduction of environmental impacts.

Commercial & industrial printing innovation

In this area, we seek to offer inkjet technology and solutions that lead the digitalization of printing and contribute to lower environmental impacts and higher productivity. In the finished products business, we worked on efficient development of products and expanded the lineup through platforming in FY2021. We will continue this initiative in the future while connecting customers to Epson and also increasing the number of contracts of Epson Cloud Solution PORT, which provides total support to printing sites, with a view to multi-layering the sources of income in the future. In the printhead sales business, sales have been expanding steadily in China, a major market. Going forward, we will also make use of our sites in Europe to further expand sales, while developing new usages through open innovation.

Manufacturing innovation

In this area, we seek to innovate manufacturing by co-creating flexible high-throughput production systems that reduce environmental impacts. In FY2021, sales continued to grow as a result of sales expansion efforts focused on SCARA robots. Going forward, we will expand new products, and strengthen the sales structure and expand sales globally. We will also propose new production systems that combine equipment such as 3D printers and compact injection molding machines with robots.

Visual innovation

In this area, we seek to connect people, things, information and services with inspiring video experiences and quality visual communications to support learning, working and lifestyles. The profit structure has improved significantly through the operational restructuring, which we have been pushing forward since FY2020. Going forward, we will continue efficient business operations in existing markets mainly for standard models, while strengthening the business of high-brightness projectors that make the best use of the features of large screens and smart projectors for which the market is expanding.

Lifestyle innovation

In this area, we seek to utilize craftsmanship and co-create solutions that utilize sensing technologies to enrich diverse lifestyles. In the watch business, profitability has improved as a result of operational restructuring efforts, the recovery in demand and increase in the ratio of premium watches. We will continue such restructuring in the future. In addition, in the sensing business, we will develop new businesses through co-creation with an eye on the medium and long term.

• Strengthening business infrastructure

In order to realize each innovation mentioned above, we are strengthening the business infrastructure as follows.

Sales & marketing strategies

• Provide customer focused sales/support utilizing digital technology

We are strengthening CRM (customer relation management) in order to accelerate initiatives in growth areas. We will make a transition from activities designed to maximize sales of products to activities with a strong focus on providing customer value (consulting, value added solutions and maintenance services, etc.) and adoption of subscription services.

• Focused organizational improvements according to region and business segment

We will promote reorganization to strengthen cooperation of sales promotion and service support.

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Production strategies

• Leverage changes caused by the spread of COVID-19 to accelerate the existing strategy

With regard to parts procurement, we will continue to respond to the ongoing difficulties in procuring electronic parts and other components by securing parts in advance, changing product designs, and producing at multiple locations. As for securing logistics, we will strengthen relations with shipping lines through load capacity contracts and proceed with the search for alternative transport routes. In the production automation, although there are challenges with strengthening and developing human resources at production sites, we will promote digitalization of production equipment and launch of automated lines by developing hardware and data utilization technologies.

Technology development strategy

• Advance technologies that support innovation

We will focus particularly on strengthening material, AI, and digital technologies. In AI and digital technologies, we will accelerate and strengthen development of algorithms to develop company-wide software platforms to create data utilization business. In material technologies, we will promote development of dry fiber technology1, metal recycling, and CO2 separation/absorption technologies, among other things, as well as solidify environmental business with co- creation partners.

1 Epson's technology that converts materials into fibers with mechanical impact without using water (a moderate amount of humidity is required)

HR strategies

• Allocate human resources to priority areas

We will strengthen mid-career recruiting to secure human resources that lead growth areas.

• Strengthen human resource development

We will reorganize the existing education and training system and build a development system in response to changes in roles and duties, in addition to functional and operational axes.

• Organizational activation

In addition to conducting training for women and promoting childcare leave for men, we will create an environment that realizes diverse working styles, including expansion of workplace options, in order to promote diversity.

• Financial targets

We will shift to profitability-focused management to realize "Epson 25 Renewed" and seek to secure profitability and future growth by focusing on priorities without pursuing excessive sales growth. In accordance with this policy, we have set ROIC, ROE and ROS as financial targets.

Consolidated	FY2020 (Result)	FY2021 (Result)	FY2023 (Target)	FY2025 (Target)
financial targets
ROIC2	5.6%	7.3%	8% or more	11% or more
ROE	5.9%	15.2%	10% or more	13% or more
ROS	6.2%	7.9%	8% or more	10% or more

2 ROIC = Business profit after tax / (equity attributable to owners of the parent company + interest-bearing liabilities)

As a result of setting ROIC as one of the financial targets, we will be required to conduct management with higher capital efficiency. As such, Epson will introduce business portfolio management that clarifies the role of profitability and company growth to achieve efficient capital circulation, thereby enhancing management efficiency. By broadly dividing Epson's business areas into growth areas, mature areas, and new areas, as described above, we will set capital allocations and targets according to how the businesses are positioned and will determine the strategic direction of each business as we go through a regular review cycle.

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• Cash allocation

Allocate cash toward investments in growth and new areas and areas related to the environment, continuously provide stable shareholder returns, and strengthen our financial condition, such as the repayment of interest-bearing liabilities, while comprehensively taking capital demand into consideration.

(4) Initiatives to address sustainability issues

The global sustainability movement has rapidly picked up pace in recent years, as seen in the expansion of ESG investments and the formulation of national and regional sustainability-related policies. Under such circumstances, companies are expected more than ever to demonstrate their approach to addressing the issues society faces through sustainability and growth strategies based on sustainability activities. Epson has been helping to solve various societal issues through its products and services. Going forward, we will continue to work to fulfill our social responsibility and create shared value in order to achieve sustainability and enrich communities together with our customers and partners from a long-term perspective based on our Management Philosophy.

• Materialities and key sustainability topics, KPI

At Epson, we reference the societal issues and megatrends described in international social norms and other such sources, evaluated them from a company perspective and a social perspective, and identified four materialities ("achieve sustainability in a circular economy," "advance the frontiers of industry," "improve the quality of life," and "fulfill our social responsibility"), which are high-priority issues that we should address to solve societal issues. We then selected 12 key sustainability topics, set key performance indicators (KPIs) for initiatives, reflected them in our Mid-Range Business Plan, and steadily took initiatives in order to make materiality initiatives effective. We considered KPIs for all materiality in the initiatives for sustainability issues, but we first focused on corporate stability, and disclosed the KPIs for the two ESG-related materialities ("achieve sustainability in a circular economy" and "fulfill our social responsibility." We plan to disclose the KPIs for "advance the frontiers of industry" and "improve the quality of life" from FY2023 onward.

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