Sanken Electric : REPORT 2021

SANKEN REPORT 2021

SANKEN ELECTRIC CO., LTD.

3-6-3, Kitano, Niiza-shi,

Saitama-ken352-8666, Japan

Tel: [phone]

Fax: [phone]

https://www.sanken-ele.co.jp/en/

Yasuzaemon

Matsunaga

Tetsuji Kotani

Sanken Electric

Creates with Society

Slogan Meaning

Our slogan, "Power Electronics for Your Innovat!on," expresses the essence of our expectations for the medium-term management plan, as we start Medium-Term Management Plan 2018. The slogan embodies Sanken Electric's aspiration as a company to contribute through power electronics to the innovations of its customers, its individual employees, and society.

Corporate Philosophy

Our mission is to provide optimal solutions in our core semiconductor businesses for power electronics and peripheral fields, thereby contributing to the advancement of industries, economies, and cultures all over the world.

We will strive constantly to innovate our technological strengths and creative power as we pursue reliable quality.

Moreover, we will share our customers' values as we develop our business globally, leveraging our proprietary technologies.

We will respect each of our employees and treat all of them fairly.

Our employees will strive to grow as trustworthy individuals and as businesspeople.

We will carry out our duties with a highly ethical perspective as businesspeople who value technology and creativity. We will treat our customers and suppliers with fairness and integrity.

We will strive to maximize our corporate value for the sake of our shareholders,

while fulfilling our social responsibilities and striving for harmony with the environment.

Profile

In 1937, the Toho Industrial Research Laboratory was established by Yasuzaemon Matsunaga, then president of the former Toho Electric Power Co., Ltd., as a 50th anniversary project of the company intended to conduct industrial development that is realistically useful to society. Tetsuji Kotani, who was chief of the semiconductor laboratory of the Toho Industrial Research Laboratory, took over the engineers and facilities of the laboratory when it was dissolved at the end of World War II, and established Toho Sanken Electric Co., Ltd. in 1946. Later, in 1962, the company adopted its current name, Sanken Electric Co., Ltd.

The Company established a dedicated semiconductor factory based on results of work on copper oxide and selenium rectifiers that had been ongoing since the research laboratory days. In 1958, we succeeded in creating a prototype for an innovative heat-dissipating silicon diode, and subsequently a silicon power transistor. Thereafter, we grew in step with the electronics industry, establishing a strong position as a power electronics manufacturer. We have kept pace with the changes in the times and provided high-quality solutions in the power supply and peripheral business fields to meet the diverse demands of society and our customers. We will continue as we have done in the past to provide original, cutting­-edge products and striving to be a leading innovator in the field of power electronics.

Sanken Report 2021	1

To Our Stakeholders

In 2021, we began a fresh start as a specialized semiconductor manufacturer.

Sanken Electric Co., Ltd. is a company which has strong competitiveness in the global market by providing energy savings and solutions, based on our cutting-edge power conversion and motion control technologies. In FY2021, we began a fresh start as a specialized semiconductor manufacturer for products such as power modules, power devices, and sensors.

Electricity and electronics are indispensable to modern life. Power semiconductors are devices needed every time electricity is used. Sanken Electric products are used in familiar things like cars, air conditioners and televisions and also in places that aren't as visible. For over 70 years, our products have supported people's lives.

Addressing environmental problems and saving energy

on a global scale have become urgent challenges. With a large number of products and technologies that lead to high efficiency and energy savings, Sanken Electric makes a major contribution to global energy conservation through products for inverters used in air conditioners and for low fuel consumption and increased efficiency in automobiles. Additionally, we will promote activities such as carbon offsetting to reduce CO2 generated from business activities and aim to be a company that can achieve continual growth and social contributions.

While business opportunities will be successively generated by the new industrial revolution being driven by IoT, AI, big data, autonomous driving, and 5G, the sustainability of global society is at a major turning point, reflecting

the impact of the pandemic on the economy, society and other developments. Since its establishment in 1946, Sanken Electric has been constantly involved in research and development. We will continue to work on perpetually innovating technological capabilities and providing products of assured quality to help solve global environmental and social issues and further develop industries, the economy and culture. I thank you for reading this report and would be delighted should it deepen your understanding of our operations.

Hiroshi Takahashi

Representative Director, President

Contents

1. Corporate Philosophy
2. To Our Stakeholders

1. Special Feature:
   New Medium-Term Management Plan

1. Special Feature:
   Toward a New Normal for Sanken Electric

1. Net Sales and Core Products

1. A Message from the President

1. Business Overview

1. CTO Interview

1. CSR Vision

22 Sanken Group's Contribution to Society (Priority Measures in ESG Management)

24 Contribution of Sanken Electric's Products to a Sustainable Society

26 Contributing to Reductions in the Environmental Impact of Our Business Activities

28 Social Contributions Related to Business Activities

30 Corporate Governance 34 List of Officers

Takashi Wada	Hiroshi Takahashi
Director, Chairman	Representative Director, President

36 Messages from External Directors 38 Key Consolidated Financial and

Non-Financial Data (11 Years)

40 Business Risks

42 Consolidated Balance Sheets

44 Consolidated Statements of Operations

45 Consolidated Statements of Comprehensive Income (Loss)

46 Consolidated Statements of Changes in Net Assets

49 Consolidated Statements of Cash Flows

50 Notes to Consolidated Financial Statements

81 Corporate Information

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Special	New Medium-Term Management Plan
Feature

Overview of Medium-Term

Management Plan 2021

The Sanken Group will complete restructuring and put development reforms firmly on track in fiscal 2021 (the year ending March 2022) and demonstrate the results of optimizing production and realizing growth strategies during Medium-Term Management Plan 2021.

We aim to drive a focused organization to become a highly profitable company that contributes to innovation for our society through the development and implementation of unique technologies.

Business Portfolio Rebuilding

Power modules, power devices, and sensors

Growth

Sales growth outpacing semiconductor market growth

KPIs

		• Operating
	FY2023
	profit margin: At least 13%
	Consolidated
	• Net sales:	At least ¥170 billion
	Targets
		• ROE:	At least 12%
◆ Overview of Medium-Term Management Plans
2017		Medium-Term	Medium-Term
	Management Plan 2018	Management Plan 2021

Overview of New Medium-Term Management Plan

◆ Initiatives to Enhance Corporate Value

Medium-Term Management Plan 2018

Medium-Term Management Plan 2021

Fiscal 2017

Fiscal 2018

Fiscal 2019

Fiscal 2020

Fiscal 2021

Fiscal 2022

Fiscal 2023

Restructuring

• Capital increase via third-party allocation

• Allegro IPO

Restructuring  Phase 1

Restructuring

Phase 2

• Discontinue unprofitable device products

• Domestic plant and overseas subsidiary

• Complete domestic

• Withdraw from non-strategic unit product

closures

production base

reorganization

markets

• Transfer infrastructure business

• Headquarters early retirement program

• Exit LED lighting business

at Allegro

Growth

Development Reforms

• Develop Sanken Power-electronics

• Strategic partnership with STMicroelectronics

strategies

Platform (SPP)

• Start of operations at the Production Development Center

• Establish overseas development

Production Strategies

bases

• Dalian Sanken: Start operations at new module plant

• Ishikawa Sanken: Start operations at new module plant

Finish restructuring, optimize production and realize growth strategies via Medium-Term Management Plan 2021

Growth in the three pillars of power modules,	Target sales growth outpacing market
growth for the Sanken Group overall
power devices, and sensors
Power semiconductor market headed for full-
Strengthen power modules by increasing sales
fledged uptrend on tailwinds from eco-friendly
for automobiles and industrial equipment
vehicles and digital transformation
Fiscal 2019	Fiscal 2023	Fiscal 2026	Semiconductor	Growth rate by market envisioned in
market scale (1)		the medium-term management plan

• Begin restructuring	• Execute restructuring	• Complete restructuring
•  Capital increase via third-	•Launch development reforms	•Realize growth strategies
party allocation at Allegro	and growth strategies	A three-year period for com-
	• Allegro IPO	pleting restructuring, including

production base reorganization, and demonstrating results from

Sales of Share

Power		Power	Power	Power
Modules	Power	Modules	Devices	Modules
Power	Devices
Devices
Sensors		Sensors	Sensors

	516.9
433.1
	CAGR
	6.1%
	(Billions of USD)
2020	2023

(Calendar year)

Industrial Equipment and Consumer

White Goods

Automotive
	6.5-8.5%
137.2	CAGR
	6-8%

development reforms

• Medium-Term Management Plan 2018 and Medium-Term Management Plan

2021 continue with an integrated management strategy

Aiming to realize a recovery of the Sanken Core over the six years they cover

• Allegro continues to collaborate with technologies, development, and sales

Market Module By

				Power semiconductor
				market scale (2)
	Automotive	Automotive			20.3
	Industrial		16.9
	Equipment		Automotive
			White	CAGR
		Industrial	6.3%
	White	Goods
White Goods	Equipment
Goods
		Industrial
			Equipment	(Billions of USD)
				2020	2023
				(Calendar year)

		CAGR
		4-6%
		CAGR
		9-11%
		(Billions of yen)
	2020	2023

(Fiscal year)

as a consolidated subsidiary

Note: Sanken Core: Sanken Electric semiconductor business excluding Allegro

Source: (1) Prepared by the Company based on World Semiconductor Trade Statistics (WSTS) forecast released in December 2020

1. Prepared by the Company based on Power Semiconductor Market 2020 by Yano Research Institute Ltd.

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Special	Toward a New Normal for Sanken Electric
Feature

Toward a New Normal for Sanken Electric

Striving to Speed Up Management Through a Generational Change andAdvancing to a New Growth Stage

Takashi Wada

Director, Chairman

perspective. As part of my role as chair of the Board of Directors, I will strive to maintain and strengthen Group governance, including Allegro, which is a publicly listed company, along with focusing on advancing ESG man- agement. The president serves as chair of the Executive Committee and has final authority over management decision-making. The Board of Directors must be managed while considering how these management decisions will be evaluated externally. Moreover, opportunities have been provided to hold exhaustive prior discussions with external directors on important matters. Through these efforts, we have established a management structure that facilitates even more effective governance. Going for- ward, I'd like to support the Group's growth strategies, including the recovery of the Sanken Core, together with the new president.

Establish an Independent Business Model

and Steadily Seize Opportunities in the

Global Market

Currently, the power semiconductor companies that compete with us are becoming increasingly larger, thereby strengthening their market share and ability to control prices. In contrast, I believe that the final-product manufacturers who are Sanken Electric's customers are constantly seeking "independent medium-sized companies that have unique technological capabilities and that are not controlled by any specific company." These customers regularly approach Sanken Electric with requests to support their needs for modules and devices. I see this as proof of my belief. Since our foundation, we have established an independent business model that is not

I'd Like the New President to Steadily Advance Medium-Term Management Plan 2021, Striving to Realize the Recovery of the Sanken Core and Laying the Groundwork for the Future from the Next Medium-Term Management Plan Onward

In the process of selecting a new president, candidates were considered from a wide range of perspectives from both within and outside the Company in the voluntary Nomination Committee, which is chaired by an external director. Following repeated discussions, we ultimately decided to appoint Mr. Hiroshi Takahashi, who is highly knowledgeable about matters such as engineering, cus- tomers, and product development, as our new president. Mr. Takahashi has a background in engineering. He gained professional experience as a department manager in the motion control business field and played a leadership role in expanding business for current intelligent power module (IPM) products for white goods. Mr. Takahashi also possesses leadership experience in production departments and is expected to further enhance the product capabilities of the Sanken Core. In the near term, I'd like Mr. Takahashi to steadily advance Medium-Term Management Plan 2021. By executing our growth strate- gies, I'd like him to strive for the recovery of the Sanken Core and to lay the groundwork for the future from the next medium-term management plan onward. I also want Mr. Takahashi to envision what the world might look like even further into the future. From 2030 onward, there will be many issues such as carbon neutrality, digital transformation (DX), and work style reforms. In this context, I'd

Supporting the Sanken Group's Growth Strategies Together with the New President, Based on the Results of Simultaneous Restructuring and Growth Strategies Implemented to Date

Looking back at market conditions since my appointment as president in 2015, I believe that the markets experienced a tumultuous six-year period due to events such as intensified trade friction between the US and China, economic stagnation, and the spread of COVID-19 from 2020. Initially, when I was appointed as president, the Sanken Core was facing the issue of declining profitability. To break through this impasse, a new strategy was needed to create numerous attractive products. Under these condi- tions, we explored ways to put the Sanken Group back on a growth trajectory and decided to simultaneously implement restructuring and growth strategies. Since 2017, after we raised funds from a capital increase via third-party allocation at our US subsidiary Allegro MicroSystems, Inc. (Allegro), restructuring advanced from Phase 1 to Phase

2. Development reforms shifted from establishing overseas development bases to formulating a platform development

concept (the Sanken Power-electronics Platform (SPP)). In these and other ways, we steadily implemented management policies aimed at improving corporate value under Medium-Term Management Plan 2018.

However, the times have changed over the past few years. In this new era, corporate management must be guided by the assumption that paradigm shifts can-andwill-happen following unexpected changes. Therefore, I wanted to speed up management through a generational change. We now expect to complete restructuring, and we achieved the listing of Allegro's shares on the Nasdaq Stock Market in 2020. I also wanted to show both internally and externally that the Sanken Group is now taking a new step forward. For these reasons, I decided to proceed with a change in president. Personally, I have no regrets, and I believe that I have fully accomplished my duties as president. During this period, restructuring did entail some painful changes. However, under Medium- Term Management Plan 2021, which began in fiscal 2021 (the year ending March 2022), I believe the Sanken Group has now entered a phase when it can focus on realizing its growth strategies.

Looking ahead, we will clearly separate the roles of the chairman and president from a governance

affiliated with any corporate group. For example, in the automotive sector, we have built relationships with Tier 1 companies, which serve as sales channels that lead to various OEM companies, regardless of corporate group. In the white goods sector, we deliver Sanken Electric's products not only to the domestic market in Japan, but also to leading local companies in China and South Korea. In these ways, the Sanken Group's core strength lies in the fact that it has an expansive customer base in Japan and overseas. It is precisely because we have such a business model that we will have growth opportunities in the global market.

In addition, "For the Innovation of Our Customers and Individual Employees" has been adopted as the slogan of Medium-Term Management Plan 2021. To realize this slogan, power semiconductors will become the core of our future business model. Moreover, we will shift from our conventional business model of supplying customized products for specific customers to providing products based on platform development (SPP). I believe that this shift will allow the Sanken Group to achieve steady growth.

like him to strengthen our power semiconductors and the Sanken Group's strategic role in society.

Looking ahead, I believe that ESG management will be an essential requirement for the survival of companies. Activities such as reducing CO2 emissions and supporting environmental protection efforts have been inseparable from the businesses we have undertaken over many years. In fact, sustainability is the starting point for our activities. As we mark the 75th anniversary of our foundation in 2021, I'm determined to do my utmost to support our new management team based on the activities described above, with the aim of advancing the Sanken Group to an even higher stage.

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