Market Conditions

Investment in domestic building construction is estimated to have risen moderately during the fiscal year ended March 31, 2008, as private-sector investment compensated for the continued decline in public spending on building construction projects. In Japan, however, annual spending has increased only slightly in the past several years, and prospects for private-sector spending, which had been strong in recent years, are becoming increasingly unclear. Moreover, high labor and material costs, the largest hurdle in the construction industry, are becoming more serious with further increases in the cost of steel and other materials. General contractors are making maximum efforts to streamline operations in order to compensate for increased costs, but the results have not been sufficient and earnings have worsened. Anticipating market trends and effectively dealing with rising costs continue to be the construction industry’s foremost challenges. The revised Building Standard Law has made permit approval procedures more complicated. The industry expects this to result in construction delays. While the impact on Kajima has been minor thus far, the situation warrants continued observation.
 

Performance

Domestic building construction contracts for the fiscal year ended March 31, 2008 increased 16.1 percent compared with the previous fiscal year to ¥1,057.5 billion on a non-consolidated basis. Revenues on domestic building construction decreased 5.1 percent to ¥938.0 billion. The gross profit margin dropped substantially from 6.4 percent to 3.6 percent for domestic and overseas building construction on a non-consolidated basis due to the exceptionally high increase in labor and material costs, mainly in metropolitan Tokyo, which resulted in the provision of an allowance for foreseeable losses for construction.
 

Strategies and Initiatives

Although the real estate development business has recently been making significant contributions to Kajima’s overall results, the domestic construction business, primarily private building construction, continues to be our core business segment. The most important and urgent company-wide issue is strengthening profitability, which has declined drastically because of high labor and material costs. To restore profitability, we must gain even greater customer trust by demonstrating our comprehensive capabilities for meeting their increasingly sophisticated and diverse needs. We will do this by making use of the latest knowledge and techniques in wide-ranging areas including design, construction, research and development, and marketing.

We also aim to provide high-quality buildings and generate stable growth by assigning dedicated project teams with specialized skills to a range of sectors including large-scale redevelopments, medical-care facilities, high-tech production facilities for electronic devices and other sophisticated products, logistics facilities and commercial facilities. At the same time, as construction costs rise, we are staying abreast of the market, implementing optimum procurement plans and continuously strengthening our construction capabilities to improve profitability by establishing a low-cost structure and further increasing productivity. In addition, we are setting ourselves apart from the competition by proposing a flexible approach that considers various business plans in order to minimize the impact of the revised Building Standard Law.

For the fiscal year ending March 31, 2009, we forecast a 13.0 percent year-on-year drop in contracts to ¥920.0 billion, based on increasing uncertainty about private-sector spending trends and considering the optimum scale of business vis-à-vis management resources. Our objective is to raise the gross profit margin from 3.6 percent to 5.5 percent in the fiscal year ending March 31, 2009 through a strictly selective marketing approach and implementation of various measures throughout the Company to improve earnings.
 

Market Conditions

In Japan, private-sector civil engineering investment recovered moderately, but the domestic civil engineering market continued to contract with the unrelenting decrease in public-sector investment. Moreover, the operating environment remained challenging due to high labor and material costs and intensifying competition.
 

Performance

Domestic civil engineering contracts for the fiscal year ended March 31, 2008 increased 11.8 percent to ¥239.8 billion with the acquisition of several new contracts from the private sector. Revenues, however, decreased 2.1 percent to ¥247.5 billion, mainly due to the reduced volume of public works in progress compared with the previous fiscal year.

We exercised our technological capabilities and overall strengths to survive in this relentless business environment. In particular, we promoted technological development.
 

Strategies and Initiatives

Civil engineering investment in Japan is expected to continue contracting steadily, and the market is expected to remain intensely competitive. We are fully leveraging our technological capabilities and working to raise profitability. Despite these conditions, for the fiscal year ending March 31, 2009, we set the target for domestic civil engineering contract awards at ¥250.0 billion, up 4.3 percent from the previous fiscal year.

With the increasing emphasis on technological strengths in the comprehensive evaluation bidding format, we are working to secure new contracts by mobilizing our technological capabilities in all areas and further enhancing our technology portfolio. We will continue to promote research and development focused on large-scale and other projects where we can fully demonstrate our overall strengths.