SMC : Integrated Report 2023（12MB）

Integrated

Report

2023

SMC Corporation

Akihabara UDX Building (15F), 4-14-1,Soto-Kanda,Chiyoda-ku, Tokyo 101-0021, Japan https://www.smcworld.com/en-jp/

©SMC Corporation All Rights Reserved CC-E24-1A

Contents

Philosophy	03
Our Products	04
History	06
Value Creation at SMC
Top Message	08
Value Creation Process	12
SMC's Strengths (Competitive Advantages)	14
Long-term Management Vision	16
Message from the Director (Finance and Accounting)	18
Materiality and SDGs	20
Message from the Director (Sustainability)	24
Business Strategy
Market Environment	26
Ensuring Our Product Supply Capability	28
Strengthening Our Sales Force	30
Research & Development	32
Topics	34
Climate Change Initiatives	36
Human Capital Initiatives	39
ESG Initiatives
Environment	42
Social	52
Governance	64
Data
Financial Data (10 Years)	72
Corporate and Stock Information	74

Philosophy

Management

Philosophy

Contributing to automated,

labor-saving operations

Focusing on the main business Supplying products globally

Management Vision

The Company shall strive to develop products capable of accurately capturing customer needs and to create a framework capable of responding to customer requests for delivery dates, quality, prices, etc.

The Company shall focus on newly expanding production facilities and

replacing existing facilities,

establish a globally optimal production system with future vision in mind,

and shall accelerate rationalization and cost reduction.

The Company shall aim to survive competitions in the global markets and to

acquire higher market shares.

Materiality

Editorial Policy

The SMC Integrated Report has been prepared as a tool to communicate SMC's philosophy and business model to our stakeholders. In addition to information on our products, business strategy, financial strategy, and ESG information, the report also includes our history and recent topics to help stakeholders better understand value creation and sustainable growth at SMC.

Reporting Period

In general, this report covers the period from April 2022 to March 2023, but activities prior to or after this period are also included.

Scope of Report

This report focuses on SMC Corporation and includes content about some other Group companies.

Guidelines Referenced

During the editorial process, we referred to the International Integrated Reporting Framework recommended by organizations such as the IIRC and WICI, as well as the Guidance for Collaborative Value Creation published by Japan's Ministry of Economy, Trade and Industry.

I	II	III	IV
Respect human rights,	Actions to take on	Stable global	Develop human resources &
Promote diversity &	Climate Change &	product supply	Disseminate automation
Ensure safe and secure	Environmental Issues		control technology
work environment

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Our Products

SMC-A Comprehensive Manufacturer of Automatic Control Equipment

SMC's pneumatic instruments and other automatic control equipment perform tasks such as pushing, gripping, and turning, in place of manual labor. These machine components are essential for automated, labor-saving operations in virtually every industry, including the semiconductor, automotive, machine tool, food machinery, and medical equipment industries.

Pneumatic Instruments

Pneumatic Instruments

Push

Grip

Turn

Uses compressed air to do the work that would traditionally be done with manual labor

Compress air	Remove heat and	Filter and adjust	Control air flow	Move work pieces	Exhaust to atmosphere
moisture	pressure

Temperature Control Equipment

Since 1978, SMC has been developing chemical solution temperature control equipment to meet the demand for these products in the semiconductor manufacturing process. For more than 40 years, it has been refining its technological capabilities by pursuing superior quality and energy-saving performance. Today, SMCʼs temperature control equipment is used not only in semiconductors, but also in a wide range of industries that require precise temperature control, including machine tools, food machinery, measuring instruments, physical and chemical analysis equipment, medical and pharmaceutical products, as well as breweries, plant factories, robotic milking, and even EV battery manufacturing.

• Where it is used

Semiconductor manufacturing	Plant factories	Robotic milking	EV battery manufacturing
equipment

Possibilities of Automatic Control Equipment

SMCʼs automatic control equipment is used for labor-saving and automation in a wide range of industries because of its simple design, ease of handling, and versatility. As a leading manufacturer of automatic control equipment, SMC is working to further expand its product applications. SMC's products are also used in craft beer brewing. A wide range of ingredients are used in craft beer to express various flavors, and the fermentation temperature must be fine-tuned according to the type of yeast used. SMC's temperature control equipment plays an important role in this process.

Compressor

Dryer

Air line equipment

Solenoid valves

Actuators

Other Automatic Control Equipment

Milling/Malting	Malt	Wort/Air Supply (Wort Aeration)		Cooling and Temperature Control
Process					Yeast
Milling		Mashing Filtration	Boiling
		Fermentation
		Hops
				Cooling
Heated water	Water
			Filtration

Cooling and Temperature Control

Filling (Bottles, Cans, Barrels)

Maturation		Can filling

Packaging

Barrel filling

Aging barrels

Detection Switches

Temperature Control Equipment

Electric Actuators

Vacuum Equipment

Milling/Malting Process

Can be used for opening and closing hatch doors in dusty environments

Cylinder with Stable Lubrication Function (Lube-retainer)

Used for loosening stuck grains

Air Shocker

For transfer of grain material

Pulse Valve Valve for Dust Collector

Wort/Air Supply (Wort Aeration)

Can be used to purify compressed air supplied to the wort prior to fermentation

Membrane Air Dryer	Line Filter
	Mist Separator
	Micro Mist Separator
	Activated Carbon Filter

Bacteria Removal Filter

Cooling and Temperature Control

For temperature control of maturation tanks, fermentation tanks, and for use with heat exchangers

Thermo-chiller

Circulating Fluid Line Equipment

S Couplers Stainless	3-Color Display Digital Flow
Steel Type	Switch for Water

Filling (Bottles, Cans, Barrels)

These products are made with stainless steel for improved corrosion resistance, have a hygienic design, use grease for food machinery, or use compatible materials, etc.

Hygienic Design Cylinder

Stainless Steel Cylinder

Stainless Steel Speed

Clean Design Manifold Controller (Elbow Type)

Valve

EHEDG Compliant/Clean Design/FDA Compliant Fittings

High Vacuum Valves	Chemical Liquid Valves	Process Valves	Static Neutralization Equipment
			(Ionizers)

Note:Please use within the scope of specifications listed in the catalog/operation manual, etc. It is the customer's responsibility to determine the suitability of each piece of equipment for their facility.

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History

SMC History

SMC was established in 1959 under the name Shoketsu Kinzoku Kogyo Co., Ltd. Its current name "SMC" stands for Sintered Metal (Shoketsu Kinzoku in Japanese) Company. Under the "customer-first policy" maintained since its establishment, responding to customer requests, SMC began the manufacture and sales of automatic control equipment including pneumatic instruments. Globally expanding its manufacturing, sales, and research and development activities, SMC continues to grow as a comprehensive manufacturer of pneumatic instruments with the top global market share.

Products

'93 5-port solenoid valve (SY/SX)

'98 2-port chemical liquid valve (LVC/LVA/LVH)

2023/03 Net sales (Consolidated)

824.7 billion yen

'09 5-port solenoid valve (SY3000/SY5000)

'14 Compact cylinder (JCM/JMB/

	JCQ/JMGP)
	'10 Direct-operated2-port
	solenoid valve (VX2)
'04 Refrigerated	'11 Fieldbus system
thermo-chiller (HRZ)
	(EX260)

'70 Japan's first aluminum-bodied air cylinder (CM/CA)

'59 Filter elements

'77

'71 High-performance solenoid valve (VS)

'82 Compact cylinder (CQ)

'89 Air gripper (MHQ/MHC)

'84 Compact 5-port solenoid valve (VZ) '86 Vacuum ejector (ZM)

'87 Vacuum pad

'88 Digital pressure switch (ZSE/ ISE)

General purpose fluid control valve (PFC/QFC/SSC)

'89 Mechanically jointed rodless cylinder (MYC/MYH)

'94 Refrigerated air dryer complying with CFC regulations (IDF/IDU)

'04 2-port solenoid valve (VX)

'95 Electric actuator (LJ1)

'04 Ionizer with electrostatic sensor (IZS30)

2023/03 Net sales (Non-consolidated)

510.4 billion yen

'61 Air F.R.L. (3-part combination: filter, regulator, lubricator) units for air line equipment	Net sales (Consolidated)
Net sales (Non-consolidated)

1960		1970	1980		1990
	Established	1962:From Start-up	1974:From Take-off		1989:From	Ascent

2000

20102023

Major Events/Facilities

'59 Established under the name	'73 Soka 2nd Factory
Shoketsu Kinzoku Kogyo Co., Ltd.	'83 Tsukuba 1st Factory
'67 Embarked on overseas sales operations
'68 Soka 1st Factory	'84 Embarked on overseas
	manufacturing operations

'86 Corporate name changed to SMC Corporation

SMC Manufacturing (Singapore)

'87 Listed on the Tokyo Stock Exchange 2nd section

'89 Listed on the Tokyo Stock Exchange 1st section

'91 Japan Technical Center

Kamaishi Factory

'94 Yamatsuri Factory

'97 Tono Factory	'00 Embarked on overseas R&D operations	'14 SMC Manufacturing (Vietnam)
'98 Acquired ISO 9001 certification	'00 SMC (Beijing) Manufacturing	'21 East Japan Logistics Center
'99 Acquired ISO 14001 certification	'13 Shimotsuma Factory	'22 West Japan Logistics Center

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Value Creation at SMC

Top Message

We aim to be the world's No. 1 provider of automatic control equipment that contributes to the global challenges of automation and decarbonization.

President Yoshiki Takada

Despite record-high sales and profit, significant supply chain disruptions remain a challenge

In the fiscal year ended March 31, 2023, SMC was able to achieve a record high in both net sales and operating profit, thanks to continued investment in automation by the manufacturing industry in general, as well as positive effects of the foreign exchange rate. Our ongoing efforts to diversify our customer base and supply products to businesses in a wide range of fields, including the semiconductor, automotive, machine

tool, food, and healthcare industries, have paid off with these favorable results. On the other hand, we faced more difficulties in procuring parts and materials than expected, resulting in delivery delays and other issues for some of our products. If we had been quicker to bolster our supply chain, such as by establishing multiple procurement chains, we would have been able to further boost our sales and profit, so I feel that we still have some work to do in this area.

Numerous risks have emerged in recent years, including natural disasters such as torrential rains and major earthquakes, the spread of infectious diseases, political and military conflicts, and price hikes and supply shortages in product components. As a company that supports the businesses of customers around the world, SMC must continue to operate and fulfill our responsibility to supply products under any circumstances.

In order to establish an even more robust system for supplying products, SMC has been working to enhance its business continuity plan (BCP) since 2021, and has invested more than 80 billion yen in relation to this in the fiscal year ended March 31, 2023.

SMC has long adhered to a strategy of investing in facilities in low-cost countries and cutting costs through centralized production. However, in light of the various growing risks and unpredictable social condition we face today, we believe it is necessary to establish systems that enable us to produce a single product at multiple locations. In addition, procurement of key components is concentrated in Japan, particularly in the northern Kanto region. As SMC's sales grow, our suppliers must also increase their supply capacity, something that may be difficult to do depending on the circumstances at each company. Therefore, SMC is also working to develop new suppliers and establish a system for in- house production. We are also working to optimize production activities overall by visualizing the utilization of all-purpose machine tools located in our factories across Japan and improving operational efficiency, such as by using available machines to perform certain processes at other factories.

Providing a stable supply in any environment to meet customer demand for full line automation and decarbonization

In order to respond quickly and flexibly to the diverse needs of our customers around the world, SMC has established production factories tailored to local markets, in addition to mass-production factories in six countries: Japan (Soka, Tsukuba, Shimotsuma, Yamatsuri, Kamaishi, and Tono), China (Beijing and Tianjin), Vietnam, Singapore, India, and the Czech Republic.

SMC also has sales offices in more than 80 countries and regions around the world and employs over 7,000 sales staff to meet customers' needs. Our intimate familiarity and thorough knowledge with production lines in diverse industries and our dedication to consistently supplying products with minimal downtime have earned us a solid reputation

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Value Creation at SMC

Top Message

among our customers as a reliable partner.

Pneumatic instruments, SMC's core products, are environmentally- friendly automatic control equipment powered by compressed air that is safe to be discharged into the atmosphere. Expanding demand and applications for SMC products will itself help to resolve social issues, such as reducing CO2 emissions. We will leverage the technological capabilities we have accumulated at SMC over the years to develop and supply automatic control equipment products with even greater energy-saving performance.

Until now, SMC has focused primarily on proposing products to those in charge of production facilities and design. However, in recent years, our customers' issues and interests have shifted to the automation and decarbonization of the entire production facilities and as a result, we are receiving more requests from top management (or those in positions close to management) to evaluate their entire facilities and propose improvements from the perspective of an expert in pneumatics.

Pneumatic instruments run on compressed air generated by a compressor. It is said that these compressors are responsible for about 20% of the electric power consumed by an average manufacturing plant. For example, when compressed air is used to move an object, if the air blow nozzle is placed close to the object, lower pressure is required to move the object. On the other hand, if the nozzle is placed farther away, higher pressure is required. Air pressure is often wasted on the factory floor in this manner. If equipment is designed to eliminate this waste, it will reduce compressed air consumption, and in turn, reduce the power consumption of the entire factory. Our customers are highly interested in optimizing their facilities to save air and power, for the sake of reducing both CO2 emissions and electricity costs.

SMC will be a one-stop shop for these customer needs, providing total solutions that are a step above what we have offered in the past.

We aim to be "the best supplier" to our customers, as well as "a company that makes employees feel a sense of well-being"

I worked in the United States for about 30 years starting in the 1990s and served as president of SMC Corporation of America for 16 years, where I promoted a management style centered on localization. Considering the recent rise in interstate tensions, we can expect rapid changes in the environment of each country and region to require each location to respond to the market in an autonomous manner. SMC has appointed local personnel to fill the top positions at most of our overseas subsidiaries, and has further committed to delegating authority and responsibility to local management. Unlike most Japanese companies, which tend to hire local personnel on short-term contracts, SMC's foreign employees have long tenure on average, and many local

personnel are appointed to senior management positions. I believe that having so many locals in top management positions has had a major impact on our ability to utilize local talent in each of the countries in which we operate. Employees are much more motivated when they are in an environment where they can be evaluated and promoted by top executives of the same nationality. In marketing, as well, it is best for locals themselves to conduct business negotiations with the customers. While we are clearly at a disadvantage in away markets, I believe that the localization of management is essential to overcoming this disadvantage, and that without such localization, we will not be able to achieve globalization in the true sense of the word.

I was appointed executive vice-president in 2019 and president in 2021, and had experienced a reverse culture shock of how unique the environment and values are in Japan. The differences are too vast to be described in a few words, but there are, for example, significant differences in terms of how people value age. In Japan, people are required to provide their age for all kinds of procedures, and their age is even stated in news articles. Career-wise, there are invisible, age- dependent barriers, such as not being considered for a promotion until one has reached an "appropriate age" for the position. These are values that do not exist in Western countries. Also, in the United States, marketing majors are equipped with the knowledge and skills they need to be an immediate asset to a company when they graduate. In contrast, in Japan, few people study marketing in university, so they have to learn it from scratch after they joined the company. Furthermore, U.S. companies will fire an employee who fails to deliver results on the job, whereas at a Japanese company, people can still remain employed at a company even if they fail to deliver results. In Japan, firing an employee is considered to be cruel, but Americans believe that it is more cruel

and miserable to keep an employee who is not suited for the job while demanding that they work harder or relegating them to an unimportant position. I myself have seen many people in the U.S. who left a company and went on to become successful and happy elsewhere.

These differences between the values of Japan and of the West are beginning to manifest as a gap in competitiveness. In terms of labor productivity per person, Japan ranks quite low compared to the rest of the world. Low talent mobility and the fact that companies retain nearly all of their employees are factors that contribute to lower productivity. And while employee compensation is essentially an investment in the company's growth, in Japan, labor has become a fixed cost, making even large companies have low profitability and poor competitiveness. Furthermore, many Japanese people do not feel particularly alarmed by this situation, and are reluctant to change. In my view, it is no wonder that our society as a whole has become stagnant.

As a member of senior management, I want to build a company that is not only the best supplier to our customers, but also makes all of our employees feel a sense of well-being. When it comes down to it, the most straightforward way to achieve a sense of well-being is to increase employees' salaries. To achieve this, we must increase productivity rather than being satisfied with the status quo. Compared to a life of long commutes to work, returning home exhausted from being at a workplace where overtime and long hours are the norm, it is clearly a happier life to use one's head fully to increase productivity at work, return home on time, and still earn a higher salary. I believe that unless we become a company like this, we will lose our competitiveness and have no future.

Pneumatic instruments that replace manual labor are products that offers high value across borders and ethnic groups

Since its establishment in 1959, SMC has developed a unique

management strategy with the goal of "capturing all customer needs," and has accumulated a wealth of expertise by opening more than 500 offices in over 80 countries and regions around the world. Today, with 23,000 employees and a lineup of 700,000 products, we provide the best products and services to approximately 700,000 customers who are introducing automation in virtually every industry around the world. I am immensely proud of these footprints, and I intend to build on these accomplishments to make our company the de facto standard in automatic control equipment. As a milestone, we have set the medium- term goal of reaching "one trillion yen in net sales in FY2026." In the world of business, the notion of maintaining the status quo means going extinct, so we set this goal because we believe that by breaking out of the status quo and taking an aggressive stance toward growth, we will reach the one trillion yen level at some point.

To achieve this goal, we are currently implementing a growth strategy that targets an average annual growth rate of 8%. The growth of the company is created by the motivation of each and every employee. This past August, we held a general meeting with about 500 sales staff in Japan. No Olympic athlete can afford to lose in Japan when they are aiming to win on the world stage. We must win at home in Japan, too, so we organized an opportunity for all employees involved in domestic sales to meet under one roof and exchange information directly with each other. Since business is a game of who has better information, we encourage our sales staff to travel abroad whenever they can to gather information and broaden their perspectives. Also, at SMC, we do not have this patronizing attitude of, "our parent company in Japan is more advanced." We are always looking to obtain best practices from overseas and bring them to the Japanese market as well. For example, regulations on carbon neutrality are progressing in Europe, and we feel that the time has come to approach the governments of various countries about the need to also regulate production systems and equipment. We are exploring the possibility of lobbying these governments, which exercise strong leadership at the top of their countries, to mobilize society as a whole by mandating the introduction of air management systems, products that can significantly reduce the amount of compressed air used. We would also like to challenge ourselves to expand the reach of these movements to the rest of the world, including Japan.

Our core products, pneumatic instruments, replace actions performed with manual labor, such as pushing, carrying, gripping, and turning objects. The value of our technology transcends national borders and race, giving us unlimited growth potential. At SMC, we strive to be a company that can provide a stable supply of products to an ever-greater number of customers around the world, and we are working together as a group to achieve this goal. We look forward to the continued understanding and support of all of our stakeholders.

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Value Creation Process

Value Creation at SMC

Management Philosophy

Contributing to automated, labor-saving operations

Focusing on the main business

Supplying products globally

Risks and Opportunities →See p. 36

The risks of climate change are getting closer to us than ever before.

At SMC, we believe that we can turn the risks of climate change into profit opportunities by proving products and services that help reduce CO2 emissions.

SMC's Strengths

• Collective capabilities to provide a One-Stop Shop for various

automatic control equipment

• Highly versatile with excellent environmental performance product lineup
• Product development tailored to customer needs and a supply

system enabling short delivery

• Global manufacturing, sales, and R&D network

Capital Enhancement

●Human capital

SMC is actively investing in human capital in order to adapt to changes in the business environment, create innovation, and achieve higher productivity.

We aim to be a company that attracts diverse talent regardless of nationality, gender, or

""

age, and provides a structure and environment that enables employees to demonstrate their full potential and feel pride, loyalty, and fulfillment at work.

●Global production and sales system

As a leading manufacturer of automatic control equipment, we are striving to establish a BCP framework that will allow us to continue supplying products under any emergency situation. SMC has built a global production and distribution system and sales network with the aim of becoming a company that is recognized by our customers as a trusted partner.

• R&D

SMC has established technical centers in five countries (Japan, the U.S., Germany, China, and the U.K.), where we employ 1,700 engineers to provide technical support to customers worldwide and deliver new products tailored to their needs.

We will expand technical centers in each country, including the "Kashiwanoha Campus New Technical Center" (provisional name), in order to strengthen our R&D function and secure outstanding technical personnel.

Materiality →See p. 20

Based on our Management Philosophy, SMC has identified four items of Materiality that will strengthen the link between our business activities and the resolution of social issues.

We have linked this Materiality to specific activities outlined in the SMC SDGs TARGET in order for the entire Group to work together toward a more sustainable future.

Governance →See p. 64

Value Created by SMC

Contributing to solving various social issues, such as aging population, shrinking workforce, and climate change

Achieving carbon neutrality

Technology that drives the automatic control equipment sector, developed by global R&D structure

Supporting a wide range of industries with over 700,000 product variations

Workplaces where diverse talent can feel a sense of pride, loyalty, and fulfillment at work

Achieving a sustainable

society

Contributing to the SDGs

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SMC's Strengths (Competitive Advantages)

We consider the following points to be SMC's strengths (competitive advantages). By further refining these strengths, we aim to

further enhance customer satisfaction and increase our corporate value.

Value Creation at SMC

One-Stop Shop

Comprehensive manufacturer of pneumatic instruments

Pneumatic instruments, SMC's core products, comprise a system of equipment that process, adjust, control, and operate compressed air generated by a compressor. As a comprehensive manufacturer that produces and sells all of these instruments, SMC offers customers a one-stop shop for a full range of pneumatic instruments.

Automatic control equipment other than pneumatic instruments

SMC offers an extensive lineup of pneumatic instruments and other automatic control equipment, including temperature control equipment, switches and sensors, electric actuators, high vacuum equipment, chemical liquid valves, process valves, and ionizers, in order to propose the best equipment selection for our customers.

Pneumatic instruments in factory production lines

Dryers

Air line equipment

Compressors

Actuators

Solenoid

valves

Extensive Product Lineup and Ample Inventory

As a result of SMC's efforts to develop products tailored to customer needs and increase product variation, we have achieved an extensive product lineup of 12,000 basic models and 700,000 variations.

Global Network

Development of Products with Excellent Environmental Performance

At SMC, we develop products that reduce CO2 emissions and environmental impact throughout the product lifecycle, from raw material procurement and production to customer use and disposal.

We are also specialized in downsizing and reducing the weight of our products, leveraging the technical expertise we have gained through meeting the needs of our customers. Downsizing and reducing the weight of automatic control equipment leads to weight reduction and load capacity improvements in equipment and robots, contributing to energy consumption reduction throughout the customer's factory.

Furthermore, in recent years, we have developed energy-saving products that offer significant reductions in CO2 emissions, and we strive to promote these products to our customers.

Based in more than 80 countries and regions and having over 7,000 direct sales personnel, SMC has established a system to supply products that meet customer needs anywhere in the world with short lead times. We have established mass-production bases for worldwide customers in China (Beijing and Tianjin), Vietnam, Singapore, India, and the Czech Republic, in addition to six factories in Japan (Soka, Tsukuba, Shimotsuma, Yamatsuri, Kamaishi, and Tono). We also have R&D centers in Japan, the U.S., Germany, China and the U.K. to provide advanced technical services and a stable supply of products on a global scale.

Countries and regions	Direct sales personnel
Over 80	Over 7,000people
Mass production bases Manufacturing personnel
12locations	Over 10,000people
R&D bases	Engineering personnel
5locations	Over 2,000people

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Long-term Management Vision

The automatic control equipment manufactured and sold by SMC are industrial products mostly used in factory production lines, that annual net sales are affected by capital investment demand. On the other hand, the demand for automation and labor-saving is expected to grow in future, as a result of the shrinking working population and global warming. At SMC, we are making ongoing and systematic efforts to expand our production capacity, strengthen R&D capabilities, and invest in human capital to ensure that we are well positioned to meet this future growth in demand. Based on the above, SMC has set "net sales of one trillion yen by FY2026" as a medium-term goal. However, instead of formulating a medium-term management plan, we are clearly stating our long-term management issues in our "Management Philosophy" and "Long-term Management Vision."

Creating a System to Meet Customer Needs

SMC has offices in more than 80 countries and regions around the world that employ more than 7,000 sales staff, and technical centers in five countries (Japan, the U.S., Germany, China, and the U.K.) that employ 1,700 engineers.

We will continue to strengthen our global network in order to accurately and fast respond to customer needs with respect to products, delivery dates, quality, and prices.

Focusing on the Main Business

At SMC, we are dedicated to our mission as a machine component manufacturer, devoting our management resources to our core business of automatic control equipment, and we abide by a policy of not engaging in the manufacture and sale of equipment that competes with our customers.

SMC aims to be a trustworthy business partner with whom customers can feel comfortable consulting their products and production lines.

Value Creation at SMC

Supplying Products Globally

Expanding our production capacity is essential in order to achieve "net sales of one trillion yen in FY2026." SMC is expanding and upgrading its production facilities, focusing on the six factories in Japan and the factories in Vietnam and China.

• Changes in Capital Investment

(Billion yen)

150
120						120
90				83.4	81.5
60		38.3
	31.9	27.4
30
0	2018	2019	2020	2021	2022	2023	(FY)
						(Projected)

Capturing a Higher Market Share

SMC has captured the top market share in pneumatic instruments, its core product category.

We are pursuing various strategies to maintain our high market share in Japan, China, and other parts of Asia, while increasing our market share in Europe and the United States, where our market share is relatively low.

Domestic		Global
Market Share		Market Share
62%	37%

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Value Creation at SMC

Message from the Director (Finance and Accounting)

In the face of global supply chain disruptions, we aim to achieve significant growth by transforming risks into opportunities through proactive investments.

SMC's major supplier companies, enabling them to supply parts in sync with production at SMC. By supporting our suppliers in establishing dual production sites, we aim to make SMC's BCP for production more resilient. Several companies are already in the process of starting production in SMC's Tono Factory, while several dozen more companies

business in automatic control equipment, SMC is making investments to address these types of risks and ensure business continuity.

From an investor's point of view, it is better to make a large return with minimal funds, in other words, the higher the ROE, the better. However, at SMC, we believe that priority should be placed on making sufficient

Masahiro Ota

Director and Executive Officer

Business results and major initiatives during the fiscal year ended March 31, 2023

In the fiscal year ended March 31, 2023, SMC achieved its record high net sales and profit since the company's establishment. SMC largely benefited from foreign exchange rates, as overseas sales account for about 80% of our total sales. In addition, strong capital investment by semiconductor manufacturers, which grew significantly compared

to the previous fiscal year, and booming battery production fueled by the shift to electric vehicles, were also growth drivers. On the other hand, we continued to experience significant disruptions in the supply chain, including soaring prices and shortages of parts and materials, making it a particularly challenging year in terms of parts and materials procurement. In addition, while the theory in the manufacturing industry is that profit margins usually rise at an accelerated pace in line with sales growth, in this case, both raw material and labor costs also rose, resulting in less profit growth than what was expected.

Since the 1990s, SMC has expanded its business driven by longstanding free trade progress. However, the structure of the global economy is now undergoing major changes; this was never more evident than last year. The location savings approach-mass producing items in places with low labor costs-will no longer be enough for us to get by as in the past. SMC has major mass-production factories in six countries around the world. We intend to minimize the impact of changes in China's business environment on our business performance by implementing Business Continuity Plan (BCP) measures such as establishing multiple bases of production, and by moving closer to a system of "local production for local consumption," in which the products sold in China are produced in China as much as possible.

We are also working to address rising energy and labor costs by improving production efficiency. Since automating and streamlining production sites is very much our core business, we are accelerating these efforts while simultaneously taking the approach of increasing productivity by consolidating operations in our administrative departments through IT investments aimed at increasing the transparency of administrative procedures. Rising labor costs have become a worldwide trend, especially in Western countries, so we will need to make a global effort to visualize and integrate our operations. In light of these challenges, in the fiscal year ended March 31, 2023, we have been aggressively investing in facilities to enhance our product supply capability. We have been expanding capital investments in Vietnam as a production base that can complement and replace what has until now been China's role in supplying mass-produced products and parts worldwide. Our factory in Vietnam is already in operation, but we have secured enough land for future expansions. We will establish a system capable of supplying mass-produced products worldwide from Vietnam, with this factory serving as an important base for production in SMC's BCP.

Meanwhile, we are also expanding capital investments in Japan, our main base for product development and production, in order to expand our product supply capability. The Tono Supplier Park, currently under construction at a site adjacent to the Tono Factory, will be occupied by

are expected to move in and begin production in the spring of 2025, when the Tono Supplier Park is scheduled for completion. Since SMC still procures the majority of its components in Japan, we are working to strengthen our domestic procurement system in this manner. However, from the perspective of global components procurement, we are looking to establish a diversified procurement system by broadening the regions from which we source and our currency options for procurement.

SMC's strengths and financial strategy

SMC's products constitute a series of automatic control equipments, including pneumatic instruments, which are component parts used in the production lines of our customers-primarily manufacturers. Failure to supply just one piece of SMC equipment is enough to stop a customer's entire production line. Customers are aware of this and will not procure products from a company that "does not know when it will be able to supply the equipment," "cannot supply the equipment because it has been discontinued," or "may shut down because of its poor performance." From this perspective, companies such as SMC that supply industrial goods must be able to maintain a stable supply of products that reliably perform as required within a reasonable lead time, otherwise customers will lose confidence in doing business with them. Since its establishment, SMC has consistently placed the highest priority on this aspect of its business activities. Although we entered overseas markets at a relatively early stage of our business, we made steady efforts to meet customer expectations in each of those countries, such as making appropriate local investments, holding sufficient inventories, and delivering products to customers with short lead times, to assure customers that we would not withdraw from the market anytime soon despite being a foreign company. Today, SMC maintains business relationships with many customers in a great number of countries. This is one of our greatest strengths, not only in terms of product sales but also for product development.

These relationships of trust between SMC and its customers around the world have been cultivated over many years, and continuing to honor that trust is the most important factor in increasing the value of SMC's business. Recently, natural disasters have become more frequent in many parts of the world due to the effects of global warming. Additionally, with the spread of information technology around the world, there is a greater risk of business activities being disrupted due to cyber attacks and other factors. Besides enhancing our production capacity and the operational infrastructure necessary to expand our core

investments at the right time, in order to develop our core business and to stay ahead of various emerging risks. For this reason, SMC invested more than 80 billion yen annually for two years beginning in the fiscal year ended March 31, 2022, and plans to invest another 120 billion yen in the fiscal year ending March 31, 2024. In addition to dual sourcing in production and implementing IT solutions to improve production efficiency, SMC also makes investments to ensure cyber security and data redundancy. We are also allocating funds to ensure inventory levels are sufficient for the components used in our products, while replacing them with materials that are easier to procure and establishing multiple sources of procurement.

Very few finance and accounting directors would ever mention spending money in this way, but I believe that there are only a few players who are willing to make this level of investment to address the global supply chain challenges. In these fast-moving times of change, it is critical that we continue to earn our customers' trust as a supplier they can rely on. We intend to turn emerging risks into opportunities to further increase our market share, and SMC's most important management indicator is the expansion of sales that will enable us to bring in excess profit above our break-even point as a manufacturer.

Message to our shareholders and investors

In a business environment that has changed in recent years, SMC is aiming to expand its business while making sufficient investments for growth. We believe that the market for automatic control equipment will expand over the medium to long term. While we are also identifying markets with room for development, we will first allocate profits earned from business activities to investments for growth, in order to further solidate our strong business model and allow us to win against the competition.

At the same time, we are also committed to returning profits to the shareholders who support SMC. Since FY2019, we have been returning profits to shareholders with targets of dividend payout ratio of approximately 25% and a total payout ratio of 50%. For the time being, we intend to climb the growth ladder by investing half of profits earned back into the business, while returning the other half to shareholders. In focusing on our own growth at SMC, we place priority on being a company our customers can confidently do business with. Also, we will further make proposals that lead to improved productivity and reduced CO2 for our customers, which actively contribute to addressing the issue of carbon neutrality beyond our own company.

18 SMC Integrated Report 2023

SMC Integrated Report 2023 19