Shin Etsu Chemical : Annual Report 2021 for viewing

ANNUAL REPORT 2021

Business Principle

The Group strictly complies with all laws and regulations, conducts fair business practices

Chairman's Message

We will respond swiftly to changes in the economic environment and enhance our corporate value

by seizing growth opportunities.

and creates unrivaled value for society and industry through the provision of key materials and technologies.

CONTENTS

I would like to express our sincerest gratitude to all our customers, business partners, shareholders and local communities for their support and cooperation.

In FY2020, the entire international community has faced the unprecedented challenge of the COVID-19

enhancement of facilities for future growth.

Achieving a sustainable society and curbing the environmental impact is a challenge for the entire world. Contributing to the SDGs is one of our management principles. We are developing and launching materials

• Chairman's Message
  2 President's Message

Value Creation at the Shin-Etsu Group

History

• Value Creation: Past and Future

Business Model

• The Shin-Etsu Group at Present

Special Feature

• PVC

10 Semiconductors

Sustainability

1. Multifaceted Sustainability Initiatives

1. ESG Promotion

1. Identifying Key Issues (Materiality)

1. Human Resources

1. Environment

1. Governance

1. Activity Status of Outside Directors and Outside Audit & Supervisory Board Members
2. Management
3. Non-FinancialData

For more details:

Investor information

https://www.shinetsu.co.jp/en/ir/

Data Section

Business Overview

1. Business at a Glance
2. PVC/Chlor-AlkaliBusiness

1. Semiconductor Silicon Business

1. Silicones Business

1. Electronics & Functional Materials Business

1. Specialty Chemicals Business

1. Processing, Trading & Specialized Services Business
2. Technologies, Materials and Products of the Shin-Etsu Group

Financial Information

42 Ten-Year Summary

1. Consolidated Balance Sheet
2. Consolidated Statement of Income /
   Consolidated Statement of Comprehensive Income
3. Consolidated Statement of Changes in Net Assets
4. Consolidated Statement of Cash Flows

Company Data

1. Shin-EtsuGroup Companies

1. Investor Information

Sustainability information

https://www.shinetsu.co.jp/en/sustainability/

pandemic. This resulted in constraints on economic activities on a global scale. We have been striving for steady growth by placing our top priority on the health and safety of our employees as well as by ensuring thorough risk management. We have also been working to achieve steady growth through a stable supply of high-quality products based on close communication with customers. One of our management mottos has long been "Never forget a crisis in the midst of a favorable wind, and plan ahead for growth when faced with a headwind." This time, we have been able again to achieve solid performance by sticking to this policy and responding quickly to the changes in market conditions.

We continued to invest steadily for growth in FY2020 with the aim of increasing our corporate value. This year, at Shintech in the U.S., an integrated PVC production plant under construction in Louisiana is scheduled to start operations. Also, we have started the next PVC expansion project at the same site. Upon completion of the expansion by the end of 2023, Shintech will have production capacity of 3.62 million tons per year, further strengthening our position as the world's largest PVC manufacturer. In the semiconductor silicon business, the whole company is working as one to promote research and development, innovate the production process and ensure stable supply to satisfy customer demands for high-quality products. In all our businesses, such as the silicones business and the electronics & functional materials business, we are actively investing resources, including human resources and capital, into R&D and the

that will help solve SDG-related issues, and working to curb the environmental impact and reduce greenhouse gas emissions. Up to now, we have produced many products that serve to prevent global warming. PVC products contribute to the e•ective use of resources and energy savings, as well as to the reduction of waste through recycling. In addition, semiconductor silicon, rare earth magnets, and silicone resins are essential materials for electric vehicles and information and communication devices. These products contribute to energy conservation and the advancement of digital transformation (DX) in society as a whole. We are tackling the e•ective use of resources and the reduction of greenhouse gas emissions by promoting further innovation in production technologies. We will continue to achieve a sustainable society by focusing on the development and stable supply of high-quality materials and products, and on the advancement of production technologies.

Our aim is to further enhance our corporate value by working together with you to achieve growth. We would like to thank all of you for your continued understanding and support.

Chairman

Chihiro Kanagawa

ANNUAL REPORT 2021 1

President's Message

As an essential supplier to human life and industries throughout the world,

we will continue to contribute

to the realization of the sustainable growth of society.

because of elevated public awareness of the environment. PVC is a material of choice not only from an engineering point of view but also from an environmental point of view. Our capacity expansion by Shintech in North America should be completed for start-up in the middle of this year. In the meantime, we have begun construction of the next capacity expansion there.

apply our technologies to all fields and applications of electric motors and drives. We also make wise use of our rare earth separation and purification technology.

We will expedite commercial production and development of 5G-related products. We will launch micro LED materials, a lithium-ion battery performance enhancer and heterogeneous semiconductor substrate

The past year or so has got us a fair amount of learning and thinking. It began with the declaration of a pandemic, which triggered restrictions and lockdowns. As the world has been grappling with the infection, there have been changes and developments in societies, economies and markets. Some of these changes might not last but others may be here to stay even after the pandemic comes to an end. Throughout this period, our company not only fared well but also demonstrated its resilience. I am very proud of our people. They kept the focus, carrying out their work and duties with unprecedented circumstances and challenges unfolding. They are truly essential.

While our business portfolio proved adaptable enough to keep working well, we will not take it for granted. We will strengthen it and make it fitter and more viable. We take changes as opportunities for growth. As more changes come, we will work with our customers more closely than ever before. We are determined to be the most reliable supplier to all our customers with best in class quality, technology and practices. We will develop numerous products which help solve the issues faced by our customers.

Lately, major countries have set goals for reduction in greenhouse gas emissions and

begun to move forward to achieve carbon neutrality. Our business is all in all aligned to help reduce greenhouse gas emissions. We will commit to further aligning our business to this goal. It is imperative to maximize e ciency throughout the economies in this day and age, when human beings pursue sustainable growth and prosperity while reducing the burden on the environment. We can play a key role to that end. We will develop our product o-erings with this focus and make contributions in such a manner that the more our products are used, the better for industries and human societies become. In addition, we will adopt technologies that are

e-ective in reducing greenhouse gas emissions as many of them and as soon as we can. We are determined to do our part as an essential supplier to human life and industries throughout the world.

Globalization may be reevaluated and modified or revised if a potential decoupling of the global economy arises from the U.S.-China confrontation. Regardless of how all that may unfold, we will be flexible and swift enough to continue to play a key role as an essential supplier.

Let me give you a summary of where we are with our business segments.

Growth in PVC demand is expected to continue in major markets thanks to the rising demand for housing and infrastructure and

For the silicones business, we are enhancing the downstream capabilities and enriching our product o-erings for customers everywhere in the world. We will continue to develop products and their applications in order to provide solutions to our customers.

As for the cellulose business, in addition to pharmaceutical excipients and industrial additives, which have been our focus, we are meeting the increasing demand for food applications. To help yield a good crop, we will increase the lineup of pheromone products. We are also adding pheromone products for forest preservation. For other products such as polyvinyl alcohol, we are working on new applications.

Demand for semiconductor devices is so strong in all directions that there is a persistent shortage of semiconductors. As semiconductors are regarded as strategic materials, we as a pivot in the supply chain provide the ultimate quality and reliable supply that will support further scaling down and integration. We contribute to the advance of digitization toward the so-called

"de-materialization" of the economy.

With regard to the lithographical areas, we stay tuned with and support further shrinkage and integration, multi-layering resist system and advanced packaging by speeding up development. We accelerate capacity plans to meet the quality and supply required by customers in a timely manner. The use of rare earth magnets in automotive applications (especially environmentally friendly automobiles, which use rare earth magnets about 10 times more than conventional automobiles), factory automation, data centers and wind power turbines continues to grow. We

products.

In sum, we are setting our growth on three currents, that is to say an upward trajectory of semiconductor demand, development for carbon neutrality and increasing needs for better infrastructure and housing.

We pay great attention to shareholders' return. In this regard, we declared an annual dividend of ¥250 per share, which is the highest mark in the Company's dividend history.

In order to continue to do what we have been able to do for our customers, our shareholders and the communities where we are in, it is essential that the Company continues to grow. We are working on various initiatives to broaden our business portfolio and expand our footprint. We will remain focused on our customers and their needs to be relevant to them, committed to governance to be relevant to our shareholders and responsible to be relevant to our communities.

I sincerely thank our shareholders for your

confidence, our customers for their partnership and our entire Shin-Etsu team for their dedication to our operations.

President

Yasuhiko Saitoh

2 Shin-Etsu Chemical Co., Ltd.

ANNUAL REPORT 2021 3

Value Creation at the Shin-Etsu Group

History

Value Creation: Past and Future

The Shin-Etsu Group produces a variety of products that fulfill both societal demand and changing requirements. In the future,

we will continue to contribute to the resolution of societal issues by creating new value.

New challenges/ corporate structure reform

1990s

				Net sales		Investment
	New growth strategy development	Tireless perseverance
	in the face of challenges
	2010s	2020s
	● Identified key ESG issues
Enhancement of
international competitiveness			FY2019			2,000
2000s									(Billions of yen)
		Net sales exceeded

Societal issues and challenges facing the Shin-Etsu Group

Challenges

Founding and early years	Formation of our business foundations
Founding-1940s	1950s-1960s
● 1927: Shin-Etsu	● Revamped our carbide
Nitrogen Fertilizer Co.,	business
Ltd. commenced
production of carbide
and lime nitrogen
fertilizer in Niigata
Prefecture
● Began producing
manganese metal at
the Isobe Plant
(Gunma Prefecture)
● Established the Takefu
Plant (Fukui Prefecture)

Enhancement of existing businesses and international expansion

1970s-1980s

• Established the Theme Selection Committee
• Reconstructed business of the Naoetsu and Takefu plants
• Promote managerial e…ciency

• Launched activities of the Operating Fund E…ciency Committee, the Z-Committee*1 and the G-Committee*2

*1 Committee targeting the development of new businesses

*2 Committee with the objectives of improving productivity and streamlining processes

FY1995

Net sales exceeded

¥500.0 billion

FY1998

Conducted investment worth

¥136.3 billion

● Established the CSR Promotion	¥1.5 trillion
Committee (now,the "ESG
Promotion Committee")
FY2006			1,500

Net sales exceeded

¥1.0 trillion

	1,000
	FY2020
	Conducted investment worth
FY2008	¥265.0 billion
500
Conducted investment worth

¥268.4 billion

0

Creating new social value by providing products and technologies that contribute to "connectivity," "energy/resource e¢ciency," "productivity enhancement," "smart infrastructure" and "health enhancement"

Note: Net sales for FY1926-FY1977 are non-consolidated, whereas net sales recorded since the beginning of FY1978 are consolidated. The Company began collecting data concerning total investment in FY1987.

PVC/

● Launched PVC production in

● Shintech launched PVC production

● Shintech increased its production

● Shintech launched production in

● Shintech increased its production

● Shintech launched ethylene

Japan

in Freeport, Texas

capacity in the state of Texas

Addis, Louisiana

capacity in the state of Louisiana

production in the state of Louisiana

Chlor-Alkali Business

● Established a PVC business in

● Established the Kashima Industrial

● Expanded PVC operations in Europe

● Shintech built an integrated plant complex

● Shintech increased its production

Portugal

Complex (Japan)

(through corporate acquisition)

(Plaquemine, Louisiana) from the raw materials stage

capacity in the state of Louisiana

Semiconductor

● Established Shin-Etsu Handotai

● Overseas expansion (plant construction in

● Conducted plant expansion in Malaysia

● Began mass production of 300mm wafers

Co., Ltd.

Malaysia, the U.S. and the U.K.)

● Constructed a production plant in

● Increased production capacity in

Silicon Business

● Completed construction of the

Taiwan

Japan and the U.S.

Shirakawa Plant (Japan)

Silicones Business

● Began production of silicone

● Overseas expansion (U.S., South

● Increased monomer production

● Constructed a monomer and

● Constructed a polymer plant in

● Increased monomer production

Korea, Taiwan and the Netherlands)

capacity at the Matsuida Plant (Japan)

polymer plant in Thailand

China (in Nantong)

capacity in Japan and Thailand

● Began production of high-purity

● Began production of rare earth magnets

● Commercialized photoresists

● Constructed a preform manufacturing facility within

● Constructed rare earth refinement and

● Increased photoresist

Electronics &

rare earths at the Takefu Plant

● Began production of epoxy molding

● Developed pellicles and liquid

the Kashima Plant and began mass production (Japan)

magnet production plants in Vietnam

production capacities in

(Japan)

compound (EMC)

fluoroelastomers

● Developed photomask blanks

● Built a photoresist plant in Taiwan

Japan and Taiwan

Functional Materials

● Began manufacturing synthetic

● Began EMC production in

● Developed high-brightness LED materials

● Constructed a preform production

● Constructed low dielectric

Business

quartz substrates used for IC

Malaysia

● Developed the new alloying process by grain boundary

plant in China (Jiangyin/Zhejiang)

constant thermosetting

photomask

dišusion for the production of rare earth magnets

● Constructed a new photomask blanks

resin plant facilities (a

● Began production of optical fiber preform

used in the production of rare earth magnets

plant in Fukui Prefecture (Japan)

5G-related product)

Specialty Chemicals

● Commercialized vinyl chloride-vinyl accetate

● Developed aroma chemicals and

● Began production of silicon metal in

● Began production of cellulose in

● Established a new manufacturing plant for cellulose derivatives

Business

based copolymer, VAM, PVA and cellulose

synthetic pheromones

Australia (through corporate acquisition)

Germany (through corporate acquisition)

for coating applications in the U.S.

● Increased cellulose production capacity in Japan and Germany

Processing,Trading &

● Established Shin-Etsu Polymer

● Established Shin-Etsu Engineering

Specialized Services Business

● Established Shin-Etsu Astech

Societal trends

1950s-1960s

1970s

1980s

1990s

2000s

2010s

2020s

Sharp economic growth

Two separate

Plaza Accord

Collapse of the bubble economy

IT bubble collapse

Great East Japan Earthquake

Spread of the

oil crises

Japanese asset price bubble

Spread of information and

2008 global financial crisis

Adoption of the Sustainable Development Goals

COVID-19 pandemic

(Heisei economic boom)

telecommunications technology

Societal issues

DX

Digital transformation

Climate change countermeasures

Decarbonization

Carbon neutrality

E¡ective use of resources

Sustainable procurement

Health

Safety and security

4 Shin-Etsu Chemical Co., Ltd.

ANNUAL REPORT 2021 5

Value Creation at the Shin-Etsu Group

Business Model

The Shin-Etsu Group at Present

The Shin-Etsu Group is creating unrivaled value through the provision of key material and technologies. In support of this aim, the Company generates products that fulfill market needs and contribute to the resolution of societal issues through an integrated process encompassing manufacture, development and sales. At the same time, we are pursuing world-class technology and quality while relentlessly striving to improve productivity. We also strive to respond swiftly to changes in economic conditions and our business environment while stably delivering products to customers throughout the world.

Corporate

Resources

Number of employees

24,069

Locations

Plants in Japan:

27 plants at

16 companies

Plants and sales bases overseas:

93 locations in

19 countries

The Triangular Link

Production

PVC/Chlor-

Alkali

Business

Semiconductor	Silicones
Silicon
Business
Business

Points of Focus as

We Target

Sustainable Societies

Connectivity

Energy/

Resource

E'ciency

Results and Value Created

							Financial
							FY2010		FY2020
							results
							Net sales	¥1,058.3 billion		¥1,496.9 billion
							Operating income	¥149.2 billion		¥392.2 billion
							Net income after taxes	¥100.1 billion		¥293.7 billion
							ROIC	9.7%		%
										17.2
							ROE	7.0%		%
										10.7
							Cash dividend per share	¥100		¥250
							Market	March 31, 2011		March 31, 2021
							¥1,786.8 billion		¥7,754.1 billion
							capitalization

Research			Six
centers			Businesses
12 locations
Electronics	＆		Specialty
	Functional		Chemicals
	Materials			Business
Equity ratio	Business		Processing,
		Trading &
83.2%
		Services
			Specialized

Development BusinessSales

Business partners

Relationships built on mutual trust and

strong partnerships

Strengthening

Our Manufacturing Foundation

Capital

Human

investment

P.16

Environment P.18

Governance

P.21

Resources

¥228.8 billion

• Shin-EtsuChemical Co., Ltd.

Productivity

Enhancement

Smart

Infrastructure

Health

Enhancement

				Patents acquired and held	1,842
				Patents acquired
				Patents held	21,222
				Market share
				PVC, semiconductor silicon,	Global rank: No. 1
				pheromone formulations
				Cellulose derivatives	Global rank: No. 2
				Japan rank: No. 1
				Silicones	Global rank: No. 4
				Japan rank: No. 1
				Sales composition ratio of	14.2%
				environmental products*
				Greenhouse gas	46.4% reduction
				emission intensity
				(compared with FY1990)
				Composition ratio of	74.0％
				overseas sales

As of March 31, 2021

*Products that contribute to the achievement of Sustainable Development Goals 7 (aˆordable and clean energy) and 13 (climate action)

ANNUAL REPORT 2021 7