Accelerating Growth of Musical Instruments Business

November 26, 2010

Contents 1. Positioning of musical instruments business within Yamaha 2. Musical instruments market and Yamaha's position 3. Yamaha's business strategy Turning acoustic musical instruments business into profit Growth in Chinese and emerging markets
2

Positioning of Musical Instruments Business within Yamaha

Musical Instruments Segment

Core Business Domain Focused on Musical Instruments, Music, and Audio"
Musical instruments segment Products
Musical instruments Professional audio equipment Audio products

Services
Music school Music software

Musical Instruments Segment Sales & Operating Income

Billions of yen

600

Sales

Lifestyle-Related Products

Operating Profit
Other than musical inst. Musical Instruments

500

414.8
400

427.0

Billions of yen

30 300

25.0 309.0
20

200

18.5 276.3
10

100

6.8 5.1
FY2007.3 FY2008.3 FY2009.3 FY2010.3 FY2013.3

0
FY2007.3 FY2008.3 FY2009.3 FY2010.3 FY2013.3

-10

The musical instruments segment accounted for 67% of sales and 75% of operating income for the period ended March 31, 2010.
5

Musical Instruments Market and Yamahas Position

Size of Global Musical Instruments Market

Estimated size of global market by product
(unit: Billions of yen, at wholesale price)

Piano 120 PA equipment 370 Digital keyboard 130

Market size: Approx. 1,010 billion

Yamaha's share: 18%

Wind instruments 150

Guitar/Drum 240

*Based on our own estimation. 7

Past Trend in Musical Instruments Market

Trend in developed countries

Sign of recovery from demand contraction following economic crisis
Increasingly low price Reduced public expenditure Cutbacks in capital expenditures by private sector Slow recovery in economy

Trend in emerging countries

Steady increase in demand
Small impact of economic crisis Growing BRICs market Increasing middle-income population in Asia

Changes in distribution
Increasing sales through web shops Reducing number of specialty shops, rise of volume retailers
8

Projection of Musical Instruments Market Growth (by product group)

1,400 1,200 1,000 800 600 400 200 0
FY2010.3
US$ =93 Euro=131

Billions of yen

1,080 1,010

1,130

represents impact of exchange rate attributable to yen appreciation. Figures do not reflect the impact of exchange rate.

PA equipment Digital keyboard Wind instruments Guitar/Drum Piano

FY2013.3
US$ =87 Euro=112

5 years later

Estimated growth for the next 5-year period: 11.2% (2.2% per annum) Estimated market size in 2015: 1,130 billion
9

Projection of Musical Instruments Market Growth (by region)

1,400 1,200 1,000 800 600 400 200 0
Billions of yen

1,080 1,010

1,130

represents impact of exchange rate attributable to yen appreciation. Figures do not reflect the impact of exchange rate.

China Asia Pacific Europe North America Japan

FY2010.3
US$ =93 Euro=131

FY2013.3
US$ =87 Euro=112

5 years later

China and Asia-Pacific countries will lead the growth, while Japan, U.S., Europe, and other developed countries will remain almost flat.
10

Market Environment Recognition and Yamaha

Category
Piano Digital keyboard Guitar/ Drum Wind instruments PA equipment

Share
(2010)

Market Condition and Outlook

The world-largest Chinese market will grow further. Sales in developed countries will gradually decrease in the future. Yamaha has the No.1 position in the global market. Demand is increasing mainly in emerging market. The electronic keyboard market is dominated by a small number of Japanese companies, incl. Casio, Roland, and Korg. Yamaha has the largest share in the world. The market is stable in developed countries and expanding in emerging countries. Each product category is consisted of a few leading brands and many small-sized pure-play manufacturers. Yamaha aims to increase its share focusing on electric acoustic guitar. Stable market. Further growth is expected in emerging countries. Chinese manufacturers are growing fast. Yamaha has a leading position in various product categories. The market is growing further. Yamaha has been challenged by fierce competitors in each product category, but has advantage in terms of input devices (mixers) over them.
11

33%

49%

7%

20%

8%

Market Size and Yamaha's Share by Product Group

Piano 2010 2013 Digital keyboard 2010 2013 Guitar/Drum 2010 2013 Wind instruments 2010 2013 PA equipment 2010 2013

33
Yamaha Yamaha's share Other than Yamaha

49

20

8
0 100 200 300 400
Billions of yen

Estimated 2010 market sizes and shares. Yamaha has a 23% share of the musical instruments market (excl. PA).
12

Yamaha's Business Strategy

Musical Instruments Business: Medium-Term Sales & Operating Income Targets

Sales
(Billions of yen)

Operating income

350 309.0 300 250 200 150 100 5.1 50 0 FY2010.3

US$ =93 Euro=131

40 276.3 270.0 30 18.5

20

7.0

10

0 FY2011.3
US$ =87 Euro=112

FY2012.3

FY2013.3
US$ =90 Euro=127

5 years-later

Targeted sales growth for the next 3-year period: 12% Achieve operating income margin of 6% in 3 years and 10% or higher in the future.
14

Breakdown of Changes in Sales for Medium-Term Plan

(unit: Billions of yen)

PA equipment

N. America/ Europe/Japan
(+8%)

Guitar/ Drum Piano/ Digital Digital keyboard piano

Wind inst.

10.6

3.5

Asia Pacific

16.6

6.4

309.0

(+21%)

China
(+50%)

8.8

2.1 10.1

7.3

276.3
FY2010.3

2% (+1 .7 +32

FY2013.3 By business domain By region

15

Turning Piano Business into Profit

Turning Piano Business into Profit

Structural reform of Piano Division

Review of operations and functions Review of operation volume

Locally-sourced parts Review of wood procurement

Premium pianos Prestige pianos Affordable pianos Pianos made in Indonesia

Reduction in manufacturing cost

Strengthening product competitiveness

17

Turning Piano Business into Profit Enhancing Operational Effectiveness

Review of Piano Division functions Achieve equidistance between Piano Division and three factories.
Transfer indirect functions (incl. product development) from Piano Division (HQ) to three factories. Piano Division should perform minimum-necessary functions. Enhance independence and operational efficiency of manufacturing bases.
Piano Division Marketing SCM
Development Designing

Quality control

Kakegawa Factory

Production Administration technology Purchasing

Hangzhou Factory (China)

Jakarta Factory (Indonesia) 18

Turning Piano Business into Profit Enhancing Operational Effectiveness

Review of Piano Division functions Achieve equidistance between Piano Division and three factories.
Transfer indirect functions (incl. product development) from Piano Division (HQ) to three factories. Piano Division should perform minimum-necessary functions. Enhance independence and operational efficiency of manufacturing bases.
Marketing SCM SCM SCM Piano Division prod Kakegawa prod Production Administration Quality Development factoryuctio uctio Purchasing technology control Designing n n

Indirect Function

Indirect Function

Indirect Function

Kakega Kakegawa wa Factory factory

Hangzhou Factory (China)

Jakarta Factory (Indonesia) 19

Turning Piano Business into Profit Manufacturing Cost Reduction

Kakegawa Factory

Supply of knock down parts

Overseas Factories (China/Indonesia)

Reduce cost and strengthen Reduce cost and strengthen price competitiveness by using price competitiveness by using parts and components made in parts and components made in Chinese and Indonesian Chinese and Indonesian factories. factories. Increase Kakegawa Factory's Increase Kakegawa Factory's overseas parts procurement overseas parts procurement ratio from the current 3% to ratio from the current 3% to 15% in 33years. 15% in years.

Accelerate in-house manufacturing and Accelerate in-house manufacturing and local procurement of parts local procurement of parts Transfer wood processing (preprocess) to Transfer wood processing (preprocess) to the two overseas factories the two overseas factories

Reduce cost by increasing productivity and local procurement ratio

Increase profitability
20

Enhancing Product Competitiveness and Increasing Profitability of Kakegawa Factory

Respond to polarizing demand for individual preferences-oriented and price-oriented
Flagship model "CFX" Premium Piano series Development of new products with attributes inherited from CFX Prestige Piano series Use of low-cost parts made in overseas factories Affordable Piano
CF series Grand Piano made in Kakegawa UP made in Kakegawa Upright Piano made in Kakegawa Premium piano Prestige Piano (GP) Prestige Piano (UP)

Newly introduce low-end pianos to the market

Affordable Piano

21

Turning Piano Business into Profitability Manufacturing Base Strategy

140,000

129,100 units 116,000 units

120,000

100,000

83,000 units
80,000

82,000 units

63,000

China

20,000
60,000

36,000 24,000

40,000

20,000 39,000
0 FY2007.3 FY2010.3

34,000

37,600

Indonesia

20,000

26,000

19,000
FY2013.3

20,000

Kakegawa

5 years later

Partial review of the medium-term plan Change in the production volume at Kakegawa from 18,000 units to 20,000 units in March 2013.
Increase the ratio of overseas production (primarily China) 130,000 units Keep the production volume of Kakegawa at 20,000 units in 5 years
22

Increasing Piano Business Profitability

Improve the Operating Income by 5 billion from FY2010.3 to FY2013.3

Effect of consolidating Japanese Factories: 0.8 billion

Logistics cost Energy cost

Lowering Kakegawa's breakeven point: 2.6 billion Greater use of overseas manufactured parts Disposition of unprofitable models Improvement of productivity Effect of production increase: 1.6 billion Increase production in China/Indonesia (In-house manufacturing of parts at overseas factories) Increase production of high-grade GPs
23

Piano Business Numerical Targets

FY2010.3 Result Sales

(Billions of yen)

FY2013.3 Target

Target for the 5th year

40.3

45.0

50
Operating income margin

Operating income

negative

+0

5%

24

Strengthening Profitability of Wind Instruments Business

Strengthening Profitability of Wind Instruments Business

Implement manufacturing reform ahead of the original schedule
Accelerate cost reduction efforts Consolidate domestic manufacturing bases (To be completed in FY03/2012) Transfer processes to overseas production bases Increase the number of material sources (Increase use of overseas materials) Increase market competitiveness & profitability Drastically boost sales in China Regain share in the U.S & European markets Introduce lower-cost models

New Xiaoshan Factory

26

Wind Instruments Business Manufacturing Base Strategy

k (thousand) units

400

400 k units 350 k units

330 k units 310 k units

300

Indonesia
Woodwind instruments production base Full production of woodwind instrument parts

23% 14% 38%

200

China
27% 25%
Brass instruments production base for all markets except for Japan Local material procurement functions

100

63% 35% 34%

Toyooka
High value-added products Skill transfer

31%

0
FY2007.3 FY2010.3 FY2013.3 5 years later

Increase overseas production to achieve 400 k units/year in 5 years

27

Wind Instruments Business Numerical Targets

FY2010.3 Results Sales

(Billion of yen)

FY2013.3 Plan

Target for the 5th year

31.0

34.5

36.0 >10%

Operating income margin

3%

10%

28

Growth in Chinese Market

Musical Instruments Segment Sales Plan for China and Emerging Countries
Billions of yen

90 80 70 60 50 40 30 20 10 0 FY2010.3 FY2011.3 FY2013.3 -

85 68
Mature Market
S. Korea, Taiwan, Australia, Singapore, etc.

52

57

Growth Market
Russia, CIS, India, ASEAN, Latin America, Middle East, and Africa

China

5 years later

Achieve a 30% growth in 3 years and a 60% growth in 5 years.

30

Chinese Musical Instruments Market

Billions of RMB

14 12 10 8 6 4 2 0 FY2010.3 FY2013.3 FY2015.3 5 years later

Domains covered by Yamaha

12.0 9.8 7.0

PA equipment B&O

Price range

Guitar/Drum

Digital Keyboard Piano

Volume

The market is led by piano products: As of 2010, 40% of the market is accounted for by piano products.

The market has a pyramid structure with a wide base. The bottom part is dominated by Chinese local manufacturer.
31

Growth Strategy: Promoting Market-Tailored Products

Increase sales of musical instruments segment to 1.5 billion yuan in 3 years and 2.3 billion yuan in 5 years.
Price range (1,000 RMB)

Number of pianos sold in retail market by price range

Up to 2008, Yamaha lowest price was set at 20,000 yuan. In 2009, a 17,800 yuan model was introduced.

35-40 30-35 25-30 20-25 15-20 10-15 5-10

The target price level for the next period will be 15,000 yuan.

Tianjin Factory (Digital musical instruments) Hangzhou Factory (Piano/Guitar) Suzhou Factory (Electronic parts/AV) Xiaoshan Factory (Wind instruments)

10,000 units 8 10 12

There is a plan to introduce Chinaexclusive models by making use of local manufacturing bases.
32

Growth Strategy: Expansion of Sales Network

March 2010 1,000 stores March 2013 1,500 stores

Piano Wind instruments Digital keyboard Others Total

2010 2013 350 500 170 260 250 500 230 240 1,000 1,500

In local cities, Yamaha aims to open a general musical instruments store as a starting point. In large cities, Yamaha will expand and upgrade specialty stores.

33

Yamaha in Growing Chinese Market

Projection of market growth (number of units)
(1,000 units)
Piano Digital piano
Portable keyboard

2010 250 100 370 500 310 2010 32 22 112 13 17

2013 280 140 460 670 370 2013 50 40 180 50 30

5 years later

300 160 530 800 430

5 years later

Market Yamaha

Guitar Wind instruments

(1,000 units)
Piano Digital piano
Portable keyboard

65 60 300 100 50
34

Guitar Wind instruments

Growth in Other Emerging Countries

Sales Plan for Other Regions

In the next 5 years, "emerging market" will account for 48% of total sales in the Asia-Pacific region.
Billions of yen

60 50 40 30 20 10 0
FY2010.3

+38% 48.3 39.7

15.6 8.3 15.7

54.8
Emerging market Medium-growth market Mature market

41.2
25.8 21.8 17.4 10.8 10.8

9.0 15.1
FY2011.3

15.3
FY2013.3

17.9

5 years later 36

Sales Plan for Emerging Countries

In emerging markets, achieve a growth rate of 40% in 3 years and 66% in 5 years.
Billions of yen

30

25.8
25 20 15 10

+66%
2.1

3.2 6.4 6.0 5.3 1.7 3.4

Other developing markets Middle East/ Africa/CIS

15.6 1.8 4.1

3.9

1.9 4.4 4.4 3.5 0.8 2.4

FY2011.3

5.1 5.5 4.9 1.1 3.0

FY2013.3
Brazil Indonesia India Russia

5 0

3.3 0.5 1.9

FY2010.3

5 years later
37

Increasing Middle-Income Population

Middle-income population is rising in rapidly-growing emerging countries.
Upper-income population: 1-5%

Middle-income population: 10-35%

Increase sales by introducing low-priced products

Local-taste models Low-priced keyboard Low-priced electric guitar FG/Nylon string guitar Low-priced digital piano CIS-compliant PA equipment

38

Yamaha's Presence in Emerging Markets

Completion of operational base establishment in every emerging market Shift to the full profit-maximization phase

Russia (2007)

Dubai (1997)

S. Korea (2001) China (2002) Mexico (1958) Panama (1975)

Russia and operational to the sales network expansion phase.

India (2008) Taiwan (1996) Thailand (1989) Malaysia (1974) Singapore (1966) India: Establish Indonesia (1990) bases and shift

Brazil (1973) Australia (1986)

Increase the number of sales base in emerging countries from 2,000 sites in 2010 to 3,400 in 2013 to 4,400 in 5 years. Strengthen music promotion activities by increasing the number of music school students from 130,000 in 2010 to 180,000 in 2013 to 200,000 in 5 years. Support various music activities for the youth.
39

Key Points of Strategies for China and Emerging Countries Wrap up

Introduce strategic products to the expanding middle-income population

Shift the primary target of product development from developed countries to China and emerging markets.
Develop new piano models that target most selling price range in China. Low-price guitars and local-taste PKs for emerging countries Wind instruments that can compete with Chinese products

Expand sales network Increase the number of people who play music, using Yamaha music schools
Attract middle-income population by deploying the Yamaha Business Model
40

In this report, the figures forecast for the Companys future performance have been calculated on the basis of information currently available to Yamaha and the Yamaha Group. Forecasts are, therefore, subject to risks and uncertainties.

Accordingly, actual performance may differ greatly from our predictions depending on changes in the economic conditions surrounding our business, demand trends, and the value of key currencies, such as the U.S. dollar and the euro.