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Review of Operations Electronic Equipment and Metal Products VITAL TECHNOLOGIES The electronic equipment and metal products segment mainly comprises the semiconductor business centered around LSI sound chips run by the Yamaha Semiconductor Division and its manufacturing subsidiary Yamaha Kagoshima Semiconductor Inc. It also includes the high-performance copper and nickel alloys and related processed parts supplied by Yamaha Metanix Corporation. Semiconductor products find applications in Yamaha’s areas of comparative strength—music and networks—including mobile phones, amusement and automotive equipment, consumer products such as televisions and communications equipment. Electronic metal products, meanwhile, have broad application in PCs, mobile phones, and automotive electronics. Fiscal 2006 performance Segment sales fell ¥12.9 billion, or 18.7%, compared with the previous year, to ¥56.2 billion. Lower market demand for LSI sound chips for mobile phones was compounded by unit sales price erosion. Sales, however, of electronic metal products began to recover slightly in the second half of the year along with digital consumer electronics markets. Segment operating income nonetheless fell a significant 60.3%, to ¥7.9 billion, reflecting the drop in demand and the associated price erosion of LSI sound chips for mobile phones. 26 Market trends and business strategy Sound chip for mobile phone Alloys for lead frame Electronic equipment (semiconductors) As anticipated, business conditions were particularly harsh during the year under review. Although the global mobile handset market expanded almost 20% in shipment volume terms during the year, most of the growth was concentrated in emerging markets where handsets do not typically contain LSI sound chips, including those made by Yamaha. In addition, despite strong underlying demand from users and handset makers for greater sound and music functionality, the value of ringtones has declined amid the proliferation of high-performance multifunctional handsets. Yamaha’s strategy is to shift steadily to higher-value LSIs that incorporate digital amplifier or compressed music playback functions, as well as conventional ringtone functions. While striving to maintain market share of LSI sound chips for mobile handsets, Yamaha will work to expand business by leveraging its know-how in sound and by supporting various handset makers. In the amusement equipment sector, pachinko and pachislot machines continue to become ever-more complex. This has brought about the need for advanced functionality and performance for devices for these machines, such as sound source and graphics processors. Shipments of a new graphics LSI for next-generation machines began in the second half of the year, and results have been promising thus far. Going forward, Yamaha aims to drive continuous growth in this area by promoting product development through active communication with and proposals to equipment makers. Yamaha continues to actively develop products for new applications to offset slower demand for LSI sound chips for mobile phones. Besides amusement equipment, Yamaha is targeting markets and applications in the automotive, consumer electronics, and communications equipment sectors. Plans are to make timely launch of new products that befit needs. Electronic metal products Yamaha’s subsidiary Yamaha Metanix Corporation manufactures and sells copperbased and nickel-based lead frame materials, copper-based connector materials, and related processed parts. An inventory correction in the first half of the fiscal year under review was conducted, mainly for digital consumer electronics market. Demand, however, began to pick up in the second half of the year, and the market gradually recovered. Although demand continues to rise, fierce competition persists in this market. And that, combined with steep increases in raw material prices, means that the market outlook warrants little optimism at present. Amid these trying market conditions, Yamaha continued to employ total production management (TPM) activities during the year to raise and stabilize earnings by boosting productivity and reducing costs. Yamaha expects its copper-based connector material business to contribute to growth in the year ending March 2007 with the shift of that business to full-scale production. Other efforts to raise profits in this segment include a focus on expansion within the sector of materials for automotive components. Yamaha Annual Report 2006 27