Winners / Selection Rationale

Customers of the environment measurement equipment market are predominantly government and public organizations and institutions, and supplying equipment to this market is often not so profitable for a manufacturer due to budget constraints faced by the customers. Furthermore, the industry is plagued by chronic severe competition. One of the segments in this market, however, is engine performance measurement equipment and systems that enjoys a relatively favorable market environment. New equipment and systems are needed not only to cope with emission control laws that are often revised for even tougher targets but for automotive manufacturers to differentiate themselves from competitors by developing more efficient engines with lower emissions.

Horiba produces a turnkey system that can analyze and measure components of exhaust gas emitted from engines that is used for laboratory experiments and also in production lines. The company has an overwhelming global market share at 80% for automotive engine measurement systems, and customers include the Environmental Protection Agency in the US that often sets the agenda for global environmental control, other government agencies in the world in charge of emission control, as well as most of the major car, motorcycle and engine manufacturers in the world. Horiba's exhaust gas analyzer systems are also used by numerous car repair and maintenance factories and gas stations that handle periodic testing of cars for approval by the Ministry of Land, Infrastructure and Transport.

Horiba has established an overwhelming 80% market share, and the only remaining major competitor existing today is AVL in Australia. AVL is also an engine manufacturer, and their strength is their capability to offer all measuring equipment associated with engine development, not limited to exhaust gas emission measuring. However, it is abundantly clear that Horiba is the dominant competitor in the emission measurement field, as seen from their global market share figure. There have been new market entrants from among the general measurement equipment manufacturers, but none remained in the market for longer than a few years.

Horiba specializes in engine measurement system equipment, and because of their dominance with 80% global market share, they can offer system equipment with high performance with lower cost to customers than in cases where customers developed them on their own. At the same time, Horiba customizes its system products to each customer's needs. Since Horiba focuses on engine emission measurement technology, the company can thoroughly respond to customer needs, much better than competitors offering converted general-purpose measuring equipment.

Horiba offers a fully automated turnkey system that enables various analyses and experiments with exhaust gas. As a result, only one operator is needed to run the system instead of the five operators previously required for conventional equipment, and the system leads to more efficient development, because more reliable experiments can be carried out more frequently with shorter turn-around cycle.

Horiba's service is not limited to automation of a test cell or a system unit of the measurement equipment but has expanded to facility management that controls and manages a number of test cells on-line with special software. Horiba's approach is to include as many activities as possible in the system, so that areas of outsourcing by the customers can be expanded, increasing the value Horiba offers and thus helping grow their business. Horiba's customers meanwhile can achieve even better efficiency in engine development through outsourcing more of their activities to Horiba.

Major customers of Horiba, including car, motorcycle and engine manufacturers, are expanding their business globally and seeking to achieve a common worldwide development process and to share data globally, thus requiring the same performance in measurement results wherever a test is performed. On the other hand, emission control regulations are different in each country, and Horiba needs to set or modify the system to comply with the sampling method (preparatory process before drawing exhaust gas into the analyzer) and data collection functions specified by the regulatory agency of each country. Furthermore, Horiba needs to adjust the system for the different development policies and approaches of each customer. By standardizing its hardware globally and having its developers in Japan, US and Europe work together, Horiba offers a system with globally standardized specifications. Thanks to Horiba's highly efficient product development process based on this global strategy and to Horiba's high quality measurement hardware, a Horiba customer can obtain highly reliable data that it can use throughout its global network. At the same time, Horiba locally customizes its systems using its engineering staff in each local market, allowing fully local completion of the whole cycle of designing, production and installation of a system.

Horiba's offer of not just equipment but the system as a whole, and of customization supported by local engineering capability, increase the value added of its product, which in turn leads to the price premium Horiba enjoys.

The characteristics of Horiba's value chain lie in its organization structure with "virtual headquarters" (hereinafter VHQ) assigned in each function of Product Planning, Design Development and Engineering, Automated System Development, and Sales & Marketing. Each VHQ sets the demarcation between global standardization and local customization for its function, based on careful consideration in seeking an optimal solution for overall global results.

Product planning
The Global Product Planning Group is a VHQ consisting of international members from Japan, US and Europe which determines what should be defined as a globally standardized product or system and what should be locally modified. Values or functionalities customers universally request are defined as "global contents", while regulatory differences or needs specific to customers of a region or a country are defined as "local contents". As a result, a gas analyzer system (a system of analyzers that is housed in a 19-inch rack and managed and controlled by integrated software) is standardized as global content, while the sample handling system and automation system (software that automatically operates various equipment) are defined as local content.

Product development
Horiba owns three technical centers in Japan, US and Europe, each with a unique focus and strength: the gas analyzer core system in Japan, the sample analyzer in the US, and the automation system in Europe. Development of global contents as defined by a VHQ is assigned by that VHQ to one of the technical centers according to the main thrust of the technology requirement.

Development activities for a project defined as local content are carried out in each market covering the whole process from designing and production through installation. Such local activities can be completed in a relatively short period of time because of proximity to the customer and independent nature of the project, which does not require international coordination.

Manufacturing
Horiba outsources the majority of its manufacturing, which amounts to 70% of the total production cost, and concentrates on high value-added activities to be done in-house including manufacturing of the sensor, a crucial component of the gas analyzer, and quality control and adjustments prior to product shipment. Manufacturing outsourcing enables short delivery time and flexible response to fluctuation in demand.

Marketing and sales
Because of Horiba's position as a key supplier to environmental protection agencies around the world, it has access to information regarding future trends in regulatory changes. This is a unique information-gathering capability of Horiba.

Horiba had a direct sales network for overseas markets from the beginning but relied on trading companies to cover the domestic market. This was due to the need to cover a vast number of repair shops and gas stations that constitute part of the measuring equipment market and the fact that Horiba's corporate policy dictated the outsourcing of non-core activities such as manufacturing and sales. However, in April 2002, the Measuring Systems Division switched to the direct sales force approach, as its major customers are limited in number and credit management and other administrative workload is not so burdensome. As a result of this shift, Horiba became able to obtain information directly about customer needs, which led to development of a series of new unique products such as the fuel-cell evaluation system, the particulate matter (PM) measuring equipment for exhaust gas, and portable exhaust gas measuring system. Consequently, the Division's new product sales as a percentage of total Division sales increased from 4.5% in the financial year ending March 2002 to 7.8% in FY2005.

After-sales service
Horiba dispatches its service staff to work at each major customer's premises so that service engineers of the customer organization can be trained to provide higher quality system maintenance and also reduce system downtime. This results in a higher rate of operation for the exhaust gas measuring system and helps shorten the product development cycle for customers.

Human resource development
Horiba trains and develops its staff members to become comfortable in working in multi-cultural environments so that they can effectively work in a global team assignment including Virtual Headquarters. 53% of the group employees are non-Japanese, and Horiba sends Japanese staff to overseas group subsidiaries and invests heavily in overseas training programs, and as a result, more than 10% of the headquarters staff has extended work experience overseas.

Car manufacturers, which are Horiba's major customers, need to operate globally and comply with different regulations in each country. Horiba's activities simultaneously achieve technological evolution and efficiency through global integration, while responding to local needs in each market and enabling customized offerings for each user. This ability is supported by engineering capability built in each country, three global core technology centers, VHQs that define activities to be done by global integration as opposed to local customization, and the company's human resources development system. (Please refer to "Activity System Map" attached for more detailed accounts of relationship among these activities.)

• Organizational set-up of VHQs that enabled both global efficiency and adaptability for each local market.

Horiba started to develop engine measurement systems around 1962, when the State of California passed an automobile emission control law that set a limit on carbon hydrate and carbon monoxide contents in vehicle exhaust gas emissions. From the beginning of the development project, Horiba focused on accuracy of measurement and chose a different technology from those adopted by competitors who already had started development efforts. While competitors pursued gas chromatography technology that can simultaneously measure multiple components in a gas sample, Horiba concentrated its resources on infrared technology that can provide a rapid response to deliver the analysis result. Horiba's unique technology was later chosen as the specific measuring method stipulated by the Japanese government in 1970's when a law was passed to control exhaust gas emission for used cars, and it also led to the sale of the system in 1975 to the Environment Protection Agency in the United States.

During the same period, Horiba acquired patents on gas sampling methods from a US company to expand its product line for peripheral equipment to be integrated as a system with its gas analyzer. Then Horiba acquired a division of Inter Automation Corp. of US to reinforce software development capability to market the full measuring system lineup that is required to develop a car or engine, clearly departing from being a hardware supplier of gas analyzer equipment and associated peripheral equipment. This system allowed automation of the development process and measuring equipment applications in the customer's facilities and offered a total integrated solution for the customer.

In the 1980's, in addition to improving measuring equipment that already possessed overwhelming competitive strength, Horiba honed its technological skill in automation technology, capitalizing on rapidly advancing information technology. Major customers of Horiba's systems at that time were US car manufacturers who had a common policy of outsourcing low value-added activities in their development process.

Throughout the 1980's, each customer developed its own automation system for exhaust gas measuring and experimenting, but in the 1990's it became well recognized that a better system was available at lower cost if they purchased the automation system from Horiba. In this period, Horiba started to globally standardize its hardware pieces including packaging design and was successful in putting together a lineup with standard global specifications implemented by its global development team.

The reorganization of global car manufacturers which began in 2000 has brought about global integration of car design and development and the need for Horiba's customers to share development processes and data globally. Horiba responded quickly by creating a global development system centered on hardware.

In 2001, Horiba formed a joint venture with leading measuring equipment companies in UK and Germany that specialized in automation, with an aim to further strengthen the function in automation R&D. In 2005, Horiba acquired the engine performance measuring equipment division (Driving Testing Systems Division) of Schenk GmbH in Germany. The acquired division will provide systems for measuring engine and brake performance as well as their development support systems. Capitalizing on the synergy effect of these moves, Horiba plans to strengthen its capability to support improved engine performance in removing harmful contents from exhaust gas.

• Horiba provides the total system and does not sell the measuring unit alone. It loses customers who want to develop their own exhaust gas measuring system using a purchased measuring unit.
• Horiba chose not to pursue efficiency gained from concentration of engineering resources in one location, but to build local engineering capabilities in major locations all over the world.
• Horiba does not pursue global launching of an existing system built for a specific market. If Horiba tries to modify a product or a system developed first for its home market Japan so that it can be marketed overseas, localization is carried out at its offices in the target markets.
• Horiba also does not pursue the other extreme approach of producing a few global products or systems that are based on various needs globally gathered from different markets with a lot of compromises. Horiba feels that such an approach would not sufficiently satisfy the needs of each customer.
• Horiba insistently pursues a direct selling approach in the global market and does not rely on sales through trading companies

Horiba's return on invested capital has consistently been higher than the mean of the measuring and analyzing equipment manufacturers in Japan, and its advantage is growing. Its return on sales is also higher than the industry average.

Return on invested capital (ROIC)　　　(Unit = percentage point) Return on invested capital = Operating income / Average invested capital

Return on sales (ROS)　　　(Unit = percentage point) Return on sales =Operating income / Net sales

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