Summary

Harmonic Drive Systems Inc. is a company primarily engaged in the manufacture and sale of precision reduction gears. Established in 1989, its flagship product, the “Harmonic Drive,” is widely used in industrial robots, medical devices, and automobiles. The company adopts a build-to-order business model, with more than 90% of its products manufactured to customer-specific specifications, enabling a high level of customer satisfaction. Its business is divided into the Precision Gear Business and the Mechatronics Products Business. In fiscal year 2023, sales amounted to JPY 42.3 billion for the Precision Gear Business and JPY 13.3 billion for the Mechatronics Products Business. While the Precision Gear Business increased by 7.3% year on year, the Mechatronics Products Business saw a decline of 18.5%. The company maintains a strong market position both domestically and internationally, supported by competitive advantages derived from highly precise products based on strain wave gearing technology. In recent years, the market environment has expanded due to progress in automation, and responses to emerging markets such as EVs and surgical-assistance robots are required. At the same time, instability in the international environment and foreign exchange risks are factors affecting performance. In fiscal year 2023, performance was impacted by the COVID-19 pandemic, with net sales declining by approximately 22% year on year to JPY 55,796 million and operating profit falling significantly. Nevertheless, the company is advancing internal reforms and aims to achieve net sales of JPY 58,500 million and operating profit of JPY 2,700 million in fiscal year 2024. Under its medium-term management plan, the company plans investments of approximately JPY 10 billion to achieve sustainable growth, focusing on capital expenditures and research and development. New business initiatives emphasize humanoid robots and AI-related technologies, while strengthening existing businesses. Regarding shareholder returns, the company targets a consolidated payout ratio of 30% and aims to maintain stable dividends. Risk factors include performance volatility, industry-specific risks, financial and management risks, technological innovation risks, ESG-related risks, and geopolitical risks, all of which require appropriate management. Overall, Harmonic Drive Systems is a company expected to pursue sustainable growth while flexibly responding to changes in the market environment.

1. Overview of Fiscal Year 2023 Performance

In fiscal year 2023, Harmonic Drive Systems Inc. recorded net sales of JPY 55,796 million, representing a decrease of approximately 22% compared with the previous fiscal year. This decline was attributable to a challenging market environment affected by the COVID-19 pandemic, cautious capital investment by manufacturers—particularly in China—and inventory adjustments by customers. Operating profit fell sharply to JPY 124 million from JPY 10,225 million in the previous year. Due to the recording of an impairment loss of JPY 28,159 million as an extraordinary loss, the net loss attributable to owners of the parent reached JPY 24,806 million. The Precision Gear Business, which accounts for approximately 70% of total sales, showed a year-on-year increase of 7.3%, while the Mechatronics Products Business declined by 18.5%. Looking ahead, the company aims to achieve net sales of JPY 58,500 million and operating profit of JPY 2,700 million in fiscal year 2024, while promoting internal reforms and focusing on productivity improvements and quality enhancement. Although risks remain in the market environment, initiatives toward sustainable growth are required. In particular, maintaining competitive advantage through flexible responses to customer needs and expanding international operations will be crucial. Investors should closely monitor how the company’s growth strategies and adaptability to the market environment will affect future performance.

2. Performance Outlook for the Fiscal Year Ending March 2024

For the fiscal year ending March 2024, the company targets net sales of JPY 58,500 million and operating profit of JPY 2,700 million, aiming for sustainable growth. Following the severe market conditions in fiscal year 2023—marked by cautious capital investment by manufacturers, especially in China, and customer inventory adjustments—net sales declined by approximately 22% year on year. However, a recovery trend is expected in fiscal year 2024. Demand for the core Precision Gear Business is expected to increase, driven by industrial robots, medical devices, and autonomous driving technologies, particularly amid the advancement of automation. While the Mechatronics Products Business is shifting toward new markets such as collaborative robots, it is expected to continue declining compared with the previous year. Based on the medium-term management plan, investments will be made in capital expenditures and research and development, with particular expectations for the market introduction of new products tailored to the EV and medical fields. The company plans to maintain competitiveness by focusing on productivity improvements and quality enhancement, while establishing systems that can respond quickly to customer needs. Although risks remain in the market environment—including geopolitical instability, foreign exchange risks, and fluctuations in resource prices—strengthened risk management is required. Overall, Harmonic Drive Systems demonstrates a commitment to recovering performance through strategic initiatives aimed at sustainable growth.

3. Medium- to Long-Term Growth Strategy

Harmonic Drive Systems Inc. has formulated a new medium-term management plan covering fiscal years 2024 to 2026, with sustainable growth and flexible responses to environmental changes as its basic policy. The plan aims to strengthen the company’s positioning in growth markets and enhance long-term corporate value. In particular, the provision of high-quality products that meet customer expectations and improvements in QCDS (Quality, Cost, Delivery, and Service) are emphasized. In the short term, the company has set targets of net sales of JPY 58,500 million and operating profit of JPY 2,700 million for fiscal year 2024, while simultaneously advancing initiatives based on its long-term vision for 2030. Key material issues include environmental initiatives, human capital development, and enhancement of corporate value, with the goal of contributing to sustainable development. Investments of approximately JPY 10 billion are planned, primarily in capital expenditures, research and development, and IT infrastructure. Capital investments will focus on introducing automated production lines and building digitally enabled production management systems to improve the efficiency of manufacturing bases. Research and development will center on new strain wave gearing technologies and mechatronics products, with particular emphasis on launching new products for the EV and medical fields. The creation of new businesses and growth strategies for existing businesses are also regarded as important, with plans to focus on humanoid robots and AI-related technologies. For existing businesses, the company aims to expand product lines in response to increasing demand for surgical-assistance robots in the medical device field and to optimize the supply chain to enable rapid market introduction and monetization of new products. Targets under the new medium-term management plan include net sales of JPY 55.8 billion and operating profit of JPY 2.7 billion for fiscal year 2024. Progress will be regularly reviewed, and measures will be revised as necessary. In addressing risk factors, the company intends to respond sensitively to changes in the external environment and demand fluctuations, and to establish strategies to mitigate risks. Digitalization of production processes and the introduction of IoT are being promoted to improve operational efficiency. Establishing robust execution and accountability frameworks is also essential, with a policy of fostering collaboration among departments to ensure organizational alignment. Through this series of initiatives aimed at sustainable growth, Harmonic Drive Systems is positioned to achieve improved performance in the future.

・ In fiscal year 2023, net sales declined by approximately 22% year on year and operating profit decreased significantly; however, the company aims to achieve net sales of JPY 58,500 million and operating profit of JPY 2,700 million in fiscal year 2024.

・ For the fiscal year ending March 2024, the company plans to target net sales of JPY 58,500 million and operating profit of JPY 2,700 million, seeking a recovery in performance driven in particular by increased demand in the Precision Gear Business.

・ Harmonic Drive Systems Inc. has formulated a new medium-term management plan for fiscal years 2024 to 2026, aiming for sustainable growth with a focus on enhancing the environment, human capital, and corporate value, while targeting net sales of JPY 58,500 million and operating profit of JPY 2,700 million.

Business Overview

1. Overview of the Business Model

Harmonic Drive Systems Inc. is a company primarily engaged in the manufacture and sale of compact precision reduction gears. Established in 1989, the company’s business model specializes in made-to-order production of high-precision reduction gears and mechatronics products, and it is known for high-mix, low-volume manufacturing tailored to customer-specific requirements. Its flagship product, the “Harmonic Drive®,” is widely used in fields such as industrial robots, medical devices, and automobiles, and is particularly valued for its high precision, durability, and compact design.

One of the company’s key strengths lies in its build-to-order business model, under which more than 90% of its products are manufactured to customer specifications. This structure enables flexible responses to diverse customer needs and results in a high level of customer satisfaction. In addition, the company has established an integrated system encompassing design, manufacturing, and sales, with rigorous quality control throughout the process. As a result, product reliability and quality are ensured, leading to repeat orders.

Furthermore, the company is advancing its global expansion, actively entering overseas markets in addition to Japan. Through wholly owned subsidiaries and joint ventures, it deploys region-specific sales strategies in North America, Europe, China, and other areas, thereby managing risk through geographic diversification. Such an international network is considered an important factor in maintaining competitive advantage.

In summary, Harmonic Drive Systems is a company that aims for sustainable growth by specializing in the development of high-precision products while maintaining a production structure capable of responding quickly to customer needs.

2. Main Business Segments

Harmonic Drive Systems’ operations are mainly divided into two segments: the Precision Gear Business and the Mechatronics Products Business. Each segment adopts strategies tailored to different demand profiles and market characteristics in order to expand revenue.

The Precision Gear Business is the company’s core business, accounting for approximately 70% of total sales. Demand for the “Harmonic Drive” is particularly strong in industrial robots, medical devices, and autonomous driving technologies. Its compact and highly precise design promotes utilization across a wide range of industries, and the company offers a competitive lineup of products.

The Mechatronics Products Business is also an important segment, offering products such as actuators, motors, and sensors. This segment specializes in providing customized solutions to meet customer needs arising from technological innovation and automation. In recent years, attention has focused on a shift toward fields such as collaborative robots, with ongoing efforts to expand functionality.

In fiscal year 2023, sales amounted to JPY 42.3 billion for the Precision Gear Business and JPY 13.3 billion for the Mechatronics Products Business. While the Precision Gear Business increased by 7.3% year on year, the Mechatronics Products Business declined by 18.5%. Although performance varies by segment, the Precision Gear Business continues to serve as the central pillar supporting the company overall.

3. Market Position and Competitive Advantages

Harmonic Drive Systems boasts a high market share both domestically and internationally in the precision reduction gear market. This strong market position is supported by several factors.

First is the company’s technological capability. Its strain wave gearing technology, based on more than 50 years of experience, provides overwhelming advantages in fields that require precise control. In addition, the build-to-order production system enables the company to quickly deliver products tailored to customer-specific needs, resulting in a high degree of adaptability to market demands. Such flexibility helps build strong customer trust.

Second, the company’s global expansion contributes to risk diversification. By understanding regional needs in markets such as Japan, North America, Europe, and China and implementing product strategies accordingly, the company strengthens its market share. Effective execution of region-specific strategies allows it to maintain an advantage even in highly competitive environments.

Finally, investment in research and development underpins the company’s competitiveness. By leveraging its proprietary technologies and continuously developing new products, the company is able to offer solutions that respond to changing times. Through its technological strength, flexibility in meeting customer needs, and global expansion, Harmonic Drive Systems has established competitive advantages that support sustainable growth.

4. Market Background

In recent years, the precision reduction gear market has experienced rapid growth, driven primarily by the advancement of automation. In particular, rising demand in areas such as electronic devices, manufacturing machinery, and autonomous driving technologies has brought increased attention to Harmonic Drive Systems’ products, contributing to an expanding market.

Moreover, emerging markets such as EVs (electric vehicles) and surgical-assistance robots are creating business opportunities amid growing demand for sustainable technologies and innovation. Companies are accelerating technological adaptation in these fields, and Harmonic Drive Systems is no exception. Strengthening research and development and responding swiftly to changing market conditions will be increasingly important going forward.

At the same time, the market environment entails certain risks. Instability in international affairs, foreign exchange risks, and fluctuations in resource prices may affect business operations. Accordingly, the company needs to reinforce its supply chain and enhance risk management.

By responding flexibly to market changes and introducing new technologies, Harmonic Drive Systems is expected to achieve sustainable growth and further strengthen its position in the future.

Taking these factors into account, the business overview of Harmonic Drive Systems demonstrates the establishment of a competitive business model that serves as a foundation for sustainable growth. The next chapter will focus on performance trends and future strategies, exploring the potential for further growth.

Performance Trends

1. Overview of Recent Performance

Looking back on the performance of Harmonic Drive Systems Inc. (hereinafter, “the Company”) in fiscal year 2023, it is evident that the Company operated in a challenging market environment affected by external factors, including the impact of the COVID-19 pandemic. In fiscal year 2022, the Company achieved sales of JPY 71,527 million, recording year-on-year growth of 125.3%. However, in fiscal year 2023, net sales declined by approximately 22% year on year to JPY 55,796 million. This decline was mainly attributable to cautious capital investment by manufacturers—particularly in China—as well as customer inventory adjustments, which led to sluggish demand in the medical device and industrial robot markets.

Operating profit decreased sharply to JPY 124 million from JPY 10,225 million in the previous fiscal year. This was the result of low factory utilization due to a sudden drop in orders and the burden of fixed costs. In addition, the Company recorded an impairment loss of JPY 28,159 million as an extraordinary loss, resulting in a net loss attributable to owners of the parent of JPY 24,806 million. Despite these severe conditions, the Company is advancing internal reforms, focusing on productivity improvements and quality enhancement. Looking ahead, the Company aims to achieve net sales of JPY 58,500 million and operating profit of JPY 2,700 million in fiscal year 2024, raising expectations for growth.

An examination of these performance trends highlights the Company’s sensitivity to external conditions while underscoring the need for initiatives aimed at sustainable growth. For investors, it is important not only to assess current results but also to evaluate how the Company is building a foundation for future growth.

2. Income Statement Analysis

A closer look at Harmonic Drive Systems’ income statement reveals a significant decline in net sales in fiscal year 2023. Net sales amounted to JPY 55,796 million, representing a 22% decrease from fiscal year 2022. Cost of sales totaled JPY 45,741 million, with the cost ratio exceeding 82% of net sales, indicating strong pressure on profitability from rising costs. Under these conditions, operating profit remained at JPY 124 million. The operating margin declined sharply from 15.3% in fiscal year 2022 to 0.2% in fiscal year 2023, suggesting insufficient control of fixed costs.

Selling, general and administrative expenses amounted to JPY 15,561 million, remaining at a relatively high level compared with the previous year, which calls for further cost reductions and more efficient operations. Although a gain on sales of JPY 5,865 million was recorded as extraordinary income, improving underlying operating profitability requires a longer-term perspective. In addition, the impact of extraordinary losses cannot be ignored, and establishing a sustainable profit structure remains a key challenge.

Overall, the income statement analysis indicates that efficient cost management and strategies to maximize profitability are essential for performance recovery. Investors need to closely monitor how the Company’s strategies are translated into concrete actions.

3. Balance Sheet Analysis

Harmonic Drive Systems’ balance sheet provides important insights into liquidity and the structure of assets and liabilities. As of the end of March 2023, total assets amounted to JPY 154,336 million, comprising current assets of JPY 52,175 million and non-current assets of JPY 102,161 million. Current assets included cash and deposits of JPY 20,784 million, trade receivables of JPY 17,574 million, and inventories of JPY 12,502 million, indicating a certain degree of liquidity.

However, the declining trend in the current ratio over recent years is a cause for concern, as current liabilities have increased sharply, suggesting potential short-term funding pressure. The risk of asset impairment also exists, and the recognition of an impairment loss of JPY 28,159 million represents a significant issue in terms of asset valuation and management strategy.

Although the equity ratio remains at a relatively high level, future expenditure plans and liquidity constraints indicate that further strengthening of financing and cash flow management would be desirable. Investors should consider how the Company’s financial soundness may affect future performance.

4. Cash Flow Statement Analysis

The cash flow statement is an important indicator for understanding Harmonic Drive Systems’ fund management. In fiscal year 2023, operating cash flow amounted to JPY 10,850 million, showing improvement from the previous year, although greater stability is still required. The increase in operating cash flow, driven by a recovery in orders and profitability, can be viewed as a positive factor.

In investment activities, cash outflows of JPY 9,069 million were recorded, mainly due to purchases of property, plant and equipment. While these investments may contribute to future growth, they also carry the risk of overinvestment, making careful planning essential.

In financing activities, increases in long-term borrowings and the acquisition of treasury shares were observed. The Company is expected to continue exploring appropriate financing methods. Overall, while operating cash flow remains at a healthy level, risks related to investment and financing activities are evident, and close attention to future fund management is required.

5. Analysis of Performance Indicators

Performance indicators serve as a barometer of Harmonic Drive Systems’ financial health. In fiscal year 2023, ROE stood at −44.5%, an extremely severe figure reflecting the net loss attributable to owners of the parent. While ROE generally represents returns to shareholders, this negative value may undermine investor confidence.

ROA reached −16.1%, clearly indicating pressure on profitability relative to total assets. EBITDA also declined and is particularly noteworthy as an indicator of core operating profitability. These figures highlight the need to establish a clear business model aimed at sustainable profit generation and to strengthen the Company’s earnings base.

In summary, performance indicators reveal the management challenges facing Harmonic Drive Systems, underscoring the necessity of implementing concrete measures to secure profitability. Investors should take these metrics into account while maintaining expectations for the Company’s growth strategy.

Overall, although Harmonic Drive Systems is facing economic headwinds, it demonstrates a commitment to long-term growth strategies. Going forward, continued attention to market conditions and the progress of internal reforms will be essential, along with ongoing strategic evaluation.

Medium-Term Management Plan / Growth Strategy

1. Overview of the Medium-Term Management Plan

Harmonic Drive Systems Inc. (hereinafter, “the Company”) has formulated a new medium-term management plan covering fiscal years 2024 to 2026, with sustainable business growth and flexible responses to changes in the business environment as its basic policy. This plan aims to strengthen the Company’s positioning in growth markets and enhance long-term, sustainable corporate value. In particular, emphasis is placed on providing high-quality products that meet customer expectations and on improving QCDS (Quality, Cost, Delivery, and Service).

In the short term, the Company has set targets of net sales of JPY 58,500 million and operating profit of JPY 2,700 million for fiscal year 2024, with the aim of achieving sustainable growth. At the same time, initiatives based on the Company’s long-term vision for 2030 are being pursued, with the goal of establishing a leading position in the industry. Key material issues have been identified as the enhancement of the environment, human capital, and corporate value, reflecting the Company’s intention to contribute to sustainable development.

From an expert perspective, a long-term viewpoint is essential for sustainable corporate growth, and flexibility in responding to changing markets is increasingly required. This medium-term management plan represents a strategic initiative to mitigate management risks and expand the customer base.

From an investor’s perspective, the Company’s commitment to clear growth targets and sustainability initiatives is a positive factor for value creation. Expectations are high for future performance, along with sustained improvement in corporate value and expanded growth potential.

2. Investment Plan and Priority Initiatives

Under its medium-term management plan, Harmonic Drive Systems plans investments of approximately JPY 10 billion. The primary areas of investment include capital expenditures, research and development, and IT infrastructure development, all of which are expected to contribute to enhanced competitiveness. In terms of capital investment, the Company will focus on introducing automated production lines and building digitally enabled production management systems to improve the efficiency of its manufacturing sites.

Research and development will center on new strain wave gearing technologies and mechatronics products, with a particular focus on launching new products tailored to the EV (electric vehicle) and medical fields. These investments are expected to accelerate product development in line with market needs in an increasingly competitive environment.

Experts note that such investment strategies are likely to contribute not only to short-term profit growth but also to long-term enhancement of corporate value. In an environment of rapid technological innovation, proactive investment is critical to expanding market share and establishing competitive advantages.

For investors, it is evident that these initiatives will strengthen the Company’s growth foundation. The focus on capital expenditures and R&D is seen as a factor that enhances expectations for returns, while the construction of a stable earnings base is viewed as a clear path toward sustainable growth.

3. New Businesses and Segment-Specific Growth Strategies

Harmonic Drive Systems places strong emphasis on the creation of new businesses and the growth of existing ones. In terms of new businesses, the Company plans to strengthen its conventional strain wave gearing and mechatronics product lines while also focusing on humanoid robots and AI-related technologies. These fields are expected to experience rapid growth, and early market entry is likely to enhance competitiveness.

For existing businesses, continuous review and improvement in response to market changes are essential. In particular, in the medical device field, demand for high-precision components for surgical-assistance robots is increasing, prompting the Company to expand its product lineup accordingly. The Company also plans to optimize its supply chain to enable the rapid market introduction and monetization of new products.

Experts emphasize that addressing environmental issues and sustainability is indispensable to future growth strategies, and that the development of new technologies should contribute to society. By clearly demonstrating this direction, the Company is expected to strengthen customer trust and enhance brand value.

From an investor’s perspective, the success of new businesses and the strengthening of existing ones are directly linked to overall corporate growth, making this strategy highly significant. The Company’s ability to capture new market opportunities and maintain competitiveness will have a substantial impact on future investment returns.

4. Outcomes, Expected Effects, and KPIs

The new medium-term management plan incorporates specific numerical targets. For fiscal year 2024, the Company has set targets of net sales of JPY 55.8 billion and operating profit of JPY 2.7 billion, reflecting its commitment to sustainable growth. These KPIs serve as important indicators for communicating performance to external stakeholders and for enhancing credibility with investors.

Progress under the plan will be evaluated on a regular basis, and initiatives will be revised as necessary. In addition, the Company will periodically reassess key material issues—such as environmental initiatives, human capital development, and corporate value enhancement—to further accelerate growth.

Experts note that the establishment of KPIs is essential for measuring business progress, and that sharing common goals across the organization contributes to improved operational efficiency and stronger team cohesion. Evaluating the degree of strategy execution is also expected to enhance the visibility of corporate growth.

For investors, these planned initiatives and clearly defined performance indicators are critical to understanding the Company’s growth potential. The use of well-defined KPIs, rather than vague targets, provides a sound basis for evaluating management performance and making investment decisions.

5. Approach to Risk Factors

To sustain corporate growth, addressing a wide range of risk factors is essential. Harmonic Drive Systems responds sensitively to changes in the external environment and fluctuations in demand, and has established strategies to mitigate risks. In particular, instability in international affairs and rising material costs have increased management risks, making preparedness for these factors increasingly important.

Concrete risk management measures include the digitalization of production processes and the introduction of IoT technologies to improve operational efficiency. As a result, supply chain stability is expected to improve, and the Company’s ability to detect and respond to risks will be enhanced.

Experts emphasize that a flexible approach to risk, supported by a strong corporate culture, forms the foundation of effective risk management. Having appropriate countermeasures in place also contributes to maintaining and strengthening competitiveness.

From an investor’s standpoint, how a company addresses risk factors is an important indicator of reliability. Companies that manage risks appropriately are considered more resilient to future uncertainties, which may encourage more proactive investment decisions.

6. Establishment of Execution and Accountability Frameworks

The success of the medium-term management plan depends on the establishment of robust execution and accountability frameworks. Harmonic Drive Systems is building a cooperative structure across departments to ensure consistency in organization-wide strategy execution. In addition, it is necessary to clearly define responsible persons for each project and strengthen accountability.

Effective implementation of strategy requires company-wide communication, and systems to promote information sharing are being developed. These efforts are expected to strengthen collaboration among departments and create an environment conducive to generating results efficiently.

Experts also point out that clarifying execution and accountability structures enhances the effectiveness of strategy implementation and enables human resources to be utilized to their fullest potential. Such frameworks are likely to lead to more efficient operations and improved overall corporate performance.

From an investor’s perspective, the organizational structure through which a company executes its strategy is a critical evaluation factor. Companies with strong execution capabilities are often viewed favorably in investment decisions, as they are expected to achieve future growth.

Harmonic Drive Systems’ medium-term management plan has been designed to support future performance improvement through a series of initiatives aimed at sustainable growth. The Company’s commitment to executing this plan and pursuing tangible results will serve as an important guidepost in the evolving market environment. In the next chapter, further strategic elements will be examined in greater depth.

Medium-Term Management Plan / Growth Strategy

1.  Announcement and Direction of the New Medium-Term Management Plan

On May 13, 2024, Harmonic Drive Systems announced its new medium-term management plan for fiscal years 2024–2026. This plan aims to build on the achievements of the previous period and pursue further growth, with a particular focus on delivering value to customers from the perspective of “QCDS” (Quality, Cost, Delivery, Service). Under the previous medium-term management plan, despite the impact of COVID-19, demand increased in industrial robots and semiconductor manufacturing equipment. However, in fiscal 2023, orders fell sharply due to customer inventory adjustments and cautious capital investment in Chinese manufacturing. In response, the Company has set a policy to strengthen production capacity and promote digitalization in preparation for new demand growth.

Experts have positively evaluated the announcement of this new plan, even under the current challenging environment. Establishing a system that can respond swiftly to customer needs is considered a key measure for maintaining competitiveness and is regarded as an appropriate strategic direction.

From an investor’s perspective, this new medium-term management plan is expected to outline the Company’s growth strategy. The execution of specific initiatives and the anticipated recovery in performance make the Company a potential long-term investment opportunity.

2. Summary of the Previous Medium-Term Management Plan Results

Regarding the previous medium-term management plan (fiscal years 2021–2023), while overall targets were not fully met, it is emphasized that many important initiatives were implemented. Net sales for fiscal 2023 amounted to JPY 55,796 million, significantly below the target of JPY 70,000 million, and operating profit was limited to JPY 124 million. In particular, goodwill impairment losses reached JPY 24.806 billion, resulting in a net loss attributable to shareholders of the parent company.

Experts note that the impact of impairment losses serves as a warning to the Company, but understanding the challenges faced and assessing risk tolerance will be critical for future investment decisions. Observers will also focus on how the Company recovers from the current situation and progresses toward growth.

For investors, understanding historical performance data and the underlying business environment is crucial for the next investment decision. The Company’s determination to pursue growth even in a challenging market environment holds potential for future earnings.

3. Strengthening Competitiveness through Productivity and Quality Control

The new medium-term management plan highlights productivity improvement and quality control as key themes. Investments in automation and digitalization to streamline production management are expected to further enhance the Company’s competitiveness. Updating machinery and equipment and reviewing manufacturing processes are urgent tasks; their effective implementation is anticipated to reduce costs and shorten lead times.

Experts point out that in the current uncertain economic environment, flexibility in corporate responses is required. These initiatives are expected to strengthen trust with customers and, in the long term, enhance brand power.

From an investor’s perspective, concrete measures to enhance production capacity are likely to contribute to performance recovery and provide potential for increased future earnings. Ongoing monitoring of progress will therefore be essential.

4. Market Environment Changes and Their Impact

In fiscal 2023, the market environment—particularly cautious capital investment by Chinese manufacturers and adjustments in the semiconductor industry—led to a decrease in orders for Harmonic Drive Systems. This has raised concerns about a slowdown in overall industry growth. How the Company interprets and responds to this situation is a critical issue for investors.

Experts note that a recovery in semiconductor demand or signs of a rebound in the automotive industry could alleviate these concerns. Furthermore, increased automation and digitalization could drive renewed demand for industrial robots, potentially turning a headwind into a tailwind for the Company.

Investors can better manage risk by accurately evaluating the potential impact of these market trends on future performance. Such assessments are important for making informed investment decisions that take the Company’s long-term prospects into account.

5. Strategic Expansion into Global Markets

The new medium-term management plan includes a policy to strengthen global market expansion. The Company aims to establish a system capable of responding to demand in emerging markets and to pursue initiatives addressing renewable energy and automotive industry needs. This strategy seeks to establish the Company not only as a strong player in the domestic market but also as a competitive global enterprise.

Experts highlight that expanding into global markets is key to corporate growth and helps diversify risks. In particular, increasing demand in China may create strategic growth opportunities.

For investors, global expansion is an attractive factor that could enhance corporate value by creating new growth markets. Monitoring the Company’s international strategy is important for making investment decisions that consider long-term growth potential.

6. Sustainability Initiatives and Corporate Value

Harmonic is strengthening its sustainability initiatives, placing emphasis on corporate responsibility toward environmental issues. The new medium-term management plan includes measures to reduce environmental impact and develop sustainable products. The Company also remains committed to contributing to local communities, with activities designed to support long-term corporate growth.

Experts stress that balancing sustainability with growth is key to enhancing future corporate value, and fulfilling social responsibility is crucial. Such initiatives are expected to enhance the Company’s image and build trust with customers and investors.

For investors, Harmonic’s sustainability activities serve as an indicator of the Company’s future growth potential. The market impact of these initiatives should be continuously monitored, reinforcing the Company’s reputation as one capable of sustainable growth.

7. Future Strategy and Outlook

Overall, Harmonic Drive Systems is strengthening its strategic positioning for future growth. The new medium-term management plan serves as an important guideline for the Company’s future direction. Flexibility in responding to market trends and customer needs is expected to further enhance competitiveness.

Investors should pay attention to how these strategies and initiatives are executed and reflected in performance. Evaluating the Company’s flexibility and approach to technological innovation, and observing how its initiatives are received in the market, will be important for future investment decisions. Through these efforts, Harmonic is expected to pursue sustainable growth and ultimately contribute to enhancing corporate value.

Harmonic Drive Systems’ activities will continue to be a focal point for investors, and the Company’s responsiveness to industry changes will form a foundation for long-term success.

Company Overview

1. Basic Information

Harmonic Drive Systems Inc. (hereafter “the Company”) was established in 1989 as a manufacturer of precision reduction gears, with its headquarters located in Shinagawa, Tokyo. The Company specializes in the mechatronics field, developing, manufacturing, and selling products centered on high-precision reduction devices known as “Harmonic Drives.” These devices play a critical role across a wide range of applications, including industrial robots, medical equipment, aerospace, and space development. By maintaining a made-to-order production system tailored to customer requirements, the Company sustains its competitiveness in the market.

A notable feature of the Company is that approximately 90% of its products are custom-made. Its small-lot, high-mix production system allows flexible responses to diverse customer needs. Harmonic Drive Systems operates globally, with a strong presence in the U.S., Europe, and China. Moving forward, the Company plans to accelerate technological innovation under its new medium-term management plan, aiming for sustainable management while expanding into new markets such as medical equipment and next-generation transportation systems.

2. History and Key Milestones

Harmonic Drive Systems was established in 1989 as a continuation of the former company founded in 1970. Originally formed through a partnership with a U.S. corporation, the Company has built a solid position in the precision reduction gear industry over approximately four decades. In 1998, the Company registered its shares over-the-counter, followed by listing on JASDAQ in 2003, reflecting its business expansion and growth. Additionally, in 2010, it was listed on the Osaka Securities Exchange, successfully enhancing its international presence.

Since 2011, the Company has expanded into the Chinese market, followed by South Korea and the United States in 2012. In 2021, it achieved full subsidiary status in the U.S., and in 2022, it transitioned to the Tokyo Stock Exchange Standard Market, pursuing strategic growth through partnerships with well-known companies. These milestones provide the foundation for long-term profitability and establishing trust across broader markets.

3. Organizational Structure and Key Management

Harmonic Drive Systems has built an organization with an efficient operational structure and diverse talent. Its management team comprises professionals with extensive industry experience, taking key responsibilities in strategy formulation and execution. Notably, President and CEO Akira Maruyama has held important positions such as Head of Corporate Planning and executive roles in sales divisions, earning high recognition for his proactive approach to management.

Management diversity supports the Company’s competitiveness. By bringing together members from different backgrounds, the Company can integrate technical expertise with market strategy, enabling rapid responses to market changes. The Company also fosters a culture that values employee input and promotes innovation, maximizing organizational capabilities. This structure is expected to support continued growth in the future.

4. Business Operations and Market Development

Harmonic Drive Systems specializes in manufacturing total motion control products, including precision reduction gears, servo motors, and actuators. Its Harmonic Drive technology is widely recognized for high precision and efficiency, serving customers in automotive, medical, semiconductor manufacturing, and other industries. The Company’s market expansion extends beyond Japan to the U.S., Europe, and China, with the establishment of a new business segment in China being particularly notable.

Amid increasing demand in the mechatronics and automation markets, the Company is leveraging its technological advantages to expand its market share. Initiatives in medical devices and next-generation transportation systems are expected to become significant sources of future revenue. Globally, its products enjoy a strong reputation for reliability, positioning the Company for continued growth across multiple sectors.

5. ESG and Sustainability Initiatives

Harmonic Drive Systems promotes initiatives toward a sustainable society. Guided by its corporate philosophy, the Company emphasizes environmental, social, and economic approaches, particularly focusing on eco-friendly product development and energy-saving activities. These efforts enable sustainable growth while maintaining the delivery of high-quality products to customers.

Internally, the Company enhances work environments and promotes diversity. Improvements in childcare leave uptake and the advancement of diversity & inclusion initiatives are recognized, supporting a workplace that fulfills corporate social responsibility. Continued active engagement in building a sustainable society is expected to contribute to the enhancement of brand value.

Achieving both growth and sustainable management is a critical factor for Harmonic Drive Systems to remain competitive in future markets. By adopting flexible approaches to new technologies and markets, the Company’s trajectory represents a key point of attention for investors.

Shareholder Returns

1. Dividend Policy and History

Harmonic Drive Systems Inc. (hereafter “the Company”) regards shareholder returns as a key management priority and has established a dividend policy aimed at sustainable growth and maximizing shareholder value. The Company targets a consolidated payout ratio of 30%, distributing profits based on business performance while aiming to steadily increase dividend amounts. This dividend policy is a core element of the medium-term management plan, focusing on stabilizing cash flow to support corporate growth.

Looking at past dividend history, the Company has tended to increase dividends in line with improving business performance, maintaining a certain level of stability. However, in fiscal 2020, business performance was severely affected by the COVID-19 pandemic, making it difficult to maintain dividends. From fiscal 2021 onward, performance recovered, enabling dividend increases, and in fiscal 2023, a further increase in dividends was announced.

The Company is notable for adopting a flexible dividend policy that reflects its business environment and performance fluctuations. Maintaining stable dividends demonstrates a commitment to meeting shareholder expectations and is considered essential for supporting sustainable growth. Management focuses on determining appropriate dividend levels over the medium to long term, which is expected to enhance shareholder trust.

By ensuring the prudence of its dividend policy, the Company intends to continue enhancing market competitiveness and meeting shareholder expectations. This approach aims to solidify the Company’s position within the industry and achieve sustainable shareholder returns.

2. Share Buybacks and Their Impact

As part of its shareholder return strategy, the Company actively conducts share buybacks. Share repurchases are widely used as a means of returning value to shareholders and serve as an important measure to improve shareholder value and capital efficiency. Buybacks can also correct undervaluation of shares and improve earnings per share (EPS).

Specifically, a share buyback plan has been approved for fiscal 2025, under which the Company intends to acquire 400,000 shares for approximately ¥1.2 billion. By reducing the number of outstanding shares, this buyback is expected to increase EPS and dividends, thereby providing returns to shareholders. The Company has conducted share buybacks in the past, and their effectiveness has been confirmed, supporting continued implementation.

However, share buybacks involve certain risks. Market trends and changes in the economic environment may prevent the anticipated effects from being realized. The Company therefore exercises careful judgment and reviews its strategies while evaluating capital efficiency. Additionally, buybacks contribute to improving stock liquidity while maintaining shareholders’ ownership ratios, creating a strategy that enhances long-term shareholder value.

Thus, share repurchases are an important part of the Company’s management strategy and a means of earning shareholder trust. Proper execution of buybacks is expected to support sustainable growth.

3. Financial Indicators and Shareholder Returns

Sustaining shareholder returns requires a sound financial foundation. Key indicators such as ROE (return on equity) and ROIC (return on invested capital) are emphasized, reflecting the Company’s commitment to capital-efficient management and long-term maximization of shareholder value. The targeted levels of ROE and ROIC reflect economic returns on invested capital, and improving these indicators enables effective shareholder returns.

The medium-term management plan also sets targets for operating margin and EBITDA ratio, which are important measures of business strategy and operational efficiency required for sustainable growth. Achieving a 15% operating margin and an EBITDA ratio of 25% or higher stimulates corporate actions and contributes to securing shareholder returns.

Furthermore, improvements in business performance and profit growth naturally lead to higher dividends and share price appreciation, generating high expectations from shareholders. Strengthening financial indicators enhances shareholder confidence and provides a sense of security regarding the Company. Consequently, the Company continuously monitors its equity ratio and debt position, making sound management decisions and efficiently utilizing capital to support further growth.

In this way, the Company aims to contribute to shareholder returns through strengthened financial indicators, providing investors with confidence under a stable management foundation.

4. Communication with Investors

Transparency and communication regarding shareholder returns are crucial for earning investor trust. Management is responsible for explaining dividend policies and business performance, actively providing shareholders with relevant information. Transparent information helps shareholders better understand the Company’s growth strategy and financial condition, supporting stable investment decisions.

In particular, by maintaining a clear policy of a 30% consolidated payout ratio, the Company ensures transparency in profit distribution based on performance while building shareholder trust. This framework for shareholder returns provides many investors with a stable source of income, and the sustainability of dividends strengthens the bond between the Company and its shareholders.

Additionally, proactively sharing earnings forecasts and dividend projections strengthens communication with shareholders. When business performance is likely to fluctuate due to market conditions, providing advance information helps investors understand the situation, reinforcing the Company’s role as a reliable partner that meets shareholder expectations. Effective communication both strengthens shareholder trust and contributes to enhanced corporate value.

5. Medium- to Long-Term Expectations for Investors

The Company approaches shareholder returns from a medium- to long-term perspective, aiming for sustainable growth. Under the medium-term management plan, the Company seeks to improve sales, operating profit, and financial indicators, while maintaining and expanding stable dividends. These efforts are expected to support dividend increases and share price growth, enhancing shareholder trust.

Even in the face of short-term performance fluctuations, adopting a flexible dividend policy ensures stable returns. Providing shareholders with transparent information regarding growth strategies and market trends is a corporate responsibility, allowing them to benefit from sustainable growth.

Moreover, strengthening shareholder returns through share buybacks and reinvestment must be balanced with maintaining corporate competitiveness. Establishing a responsive structure to market changes enables the Company to continue creating long-term corporate value, fostering a win-win relationship with shareholders.

In this way, shareholder return policies form an integral part of the Company’s strategy to support sustainable growth and provide a foundation for enhancing trust with shareholders. Harmonic Drive Systems aims to grow as a company that meets shareholder expectations with a long-term perspective.

Business Risks

1. Factors Affecting Business Performance

Harmonic Drive Systems Inc. faces factors that can cause fluctuations in revenue, particularly influenced by market conditions and customer trends. Demand for industrial machinery and robot components is a direct driver, closely tied to investment trends in equipment and the automation shift. As recent data shows, sales increased in fiscal 2021–2022 due to the recovery of automation investments and rising semiconductor demand, but demand softened in fiscal 2023. Such cyclical demand fluctuations represent a risk to stable business performance.

Risks also arise from the industries of the Company’s customers. For example, reliance on the automotive or semiconductor sectors makes the Company vulnerable to trends within those industries. If these sectors stagnate, a reduction in orders can directly impact performance. Additionally, the characteristics of individual contracts affect results; long lead times, cancellations, or specification changes in customized products can result in costs that cannot be recovered. Therefore, a multifaceted analysis of factors influencing performance and a proactive approach to risk management are essential.

Moreover, as the Company expands internationally, external factors such as exchange rate fluctuations and geopolitical instability also pose risks. Sudden currency changes can affect profitability, requiring the formulation of hedging strategies. In this way, business performance is strongly influenced by both customer industry dependence and external economic conditions, necessitating strategies that enhance adaptability through rapid market analysis.

2. Industry-Specific Risks

The precision reduction gear industry has unique risks that directly impact corporate stability and growth. Rapid technological evolution is a key factor affecting the entire industry. With AI and robotics becoming mainstream, new technologies may suddenly be required. Failure to meet such demands risks weakening competitiveness. Competitors introducing innovative products can intensify competition and challenge the Company’s brand advantage.

Economic conditions are also critical. A downturn can reduce orders, negatively affecting performance. In particular, declining capital investment directly lowers demand for industrial machinery, posing a risk to business stability. Quality management is another important concern; defects or faulty products can compromise reliability and lead to reduced customer orders.

Supply chain vulnerabilities cannot be ignored. Unstable supply from external sources can impact production. Mitigation requires securing diverse suppliers and optimizing inventory management. To quickly adapt to changes in market conditions, the Company must closely monitor domestic and international technological trends and implement flexible strategies.

3. Financial and Management Risks

The Company’s financial position is exposed to various risks requiring careful management. Key factors include debt ratios and cash flow health. Rising interest-bearing debt increases interest burdens, and continued performance deterioration could threaten operational stability. Liquidity constraints may hinder new capital investments or R&D funding.

Management governance also faces challenges. Inadequate internal controls increase the risk of misconduct or regulatory violations, undermining overall corporate credibility. Strengthening the board of directors and audit functions is necessary to enhance transparency and implement measures before risks materialize. Furthermore, reliance on a concentrated customer base means that sector-specific economic changes can disproportionately impact the Company, requiring proactive financial strategies in response to competitive and market shifts.

Thus, transparent financial reporting and robust risk management are fundamental to achieving sustainable growth. Maintaining appropriate evaluations and financial stability is essential for sustaining a competitive advantage in the global market.

4. Technology Innovation Risks

While technological innovation provides opportunities, it also poses risks. In the precision reduction gear industry, delayed adoption of new technologies increases the risk of losing competitiveness. With advances in AI, IoT, and robotics, user performance requirements are constantly evolving, and the Company must launch new products faster and more accurately than competitors. Failure to do so risks market share loss and could negatively affect long-term growth.

Investment in R&D is critical, with timing and direction directly impacting business performance. Proper investment decisions and anticipation of future market needs are essential. Additionally, if new product development fails to align with market demand, investment losses may occur. Investors should evaluate how the Company plans to respond to future competitive environments and its commitment to technological innovation.

5. ESG-Related Risks

ESG (Environmental, Social, Governance) risks, increasingly prioritized by investors, are an unavoidable consideration for companies. With growing emphasis on sustainability, companies must enhance environmental stewardship and fulfill social responsibilities. Firms neglecting ESG considerations risk negative market perception as investor and customer values shift.

Environmentally, sustainable sourcing, waste management, and energy efficiency are required. Failure to comply with stricter laws and regulations may result in fines or operational restrictions. Socially, labor conditions and workforce diversity are critical; neglect can lead to reputational damage and employee turnover, weakening competitiveness.

Governance requires transparent corporate management. Ethical standards and leadership quality enhance corporate credibility, making strong governance essential. Proper ESG management and sustainability initiatives are expected to reduce future risks.

6. Geopolitical Risks

Changes in international affairs represent geopolitical risks that can significantly affect the Company. Events such as US-China relations, Middle Eastern instability, and the UK’s EU withdrawal can impact business partners and market demand. This increases the likelihood of supply chain disruptions, trade friction, and currency fluctuations affecting profits.

Companies must understand geopolitical risks and establish systems to prevent their impact. Industries reliant on international markets must promptly adjust risk management and strategy. Monitoring political conditions in relevant regions or countries is crucial to maintaining supply chain stability.

7. Closing Remarks

This chapter has analyzed the diverse business risks faced by Harmonic Drive Systems Inc., including factors affecting performance, industry-specific risks, financial and management risks, technology innovation risks, ESG-related risks, and geopolitical risks. Proper understanding and management of these risks are critical to ensuring sustainable corporate growth. The next chapter will explore the Company’s strategies and risk management approaches based on this analysis, aiming to deepen the perspective of investors.