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SDK to Shift Ceramic Abrasive Grain Production to China

September 18, 2003

Showa Denko K.K. (SDK) will start producing ceramic abrasive grains in Lianyungang, Jiangsu Province, China, in April 2004 through a joint venture with Mitsubishi Corporation.
The new joint venture—Lianyungang Zhaoling Abrasives Co., Ltd.—will produce white morundum (WA) and cubic boron nitride (CBN) grains that are now being produced at SDK’s plant in Shiojiri, Japan. Mitsubishi Corporation will be responsible for comprehensive distribution services, including raw material imports into and finished product exports out of China.
Shoko Co., Ltd., a consolidated subsidiary of SDK engaged in general trading operations, will also invest in the new company to be established later this month. The new company will be provided with SDK technologies and guided by SDK in quality control and assurance. It will become an integrated producer covering the whole stages from receipt of raw materials to packaging of finished products.
SDK will make sure to prevent leakage of technologies and have the new company control the critical refinement process of WA and subsequent processes as well as entire production processes of CBN. The raw materials will be provided by SDK and all of the finished products will be shipped to SDK.
As for the production of silicon carbide (SiC) abrasive grains, meanwhile, SDK suspended synthesis operations in Shiojiri about 15 years ago. Currently, crude SiC grains are imported from China for refinement in Shiojiri. SDK will entrust the whole SiC production processes to Chinese manufacturers by providing technical instructions. The shift, which started in July 2003, will proceed step by step.
Lianyungang Zhaohua Minerals Co., Ltd., a subsidiary in China of Shoko Co., Ltd., will serve as the link between SDK and Chinese subcontracting factories, providing them with SDK technologies and know-how and controlling quality assurance activities.
SDK has advanced technologies and established brands in the ceramic abrasive grain operations, but has been facing competition from low-priced imports. SDK will strengthen the cost-competitiveness of the business by shifting production to China and increase its presence in Japan and other Asian markets, taking full advantage of its advanced technologies and established brands. SDK expects to sell a total of ¥3.2 billion of WA, CBN and SiC abrasive grains in 2005.

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1. Profile of the new WA/CBN producing joint venture in China

Company name Lianyungang Zhaoling Abrasives Co., Ltd.
Location Economy-Technology Development Zone, Lianyungang, Jiangsu Province, China
Capital ¥250 million (Owned 55% by SDK, 40% by Mitsubishi Corp., and 5% by Shoko Co., Ltd.)
Number of employees Approx. 160
Production capacity 20,000 tons/year of WA and 20 million carats/year of CBN
To be established in: September 2003
To be established in September 2003
Completion of production facilities By the end of March 2004 (after trial run and adjustment)
Start of commercial operation Start of commercial operation: April 2004

2. Profile of Lianyungang Zhaohua Minerals Co., Ltd.

Capital US$ 975,000
Location Lianyungang, Jiangsu Province, China
Number of employees Approx. 80
Scope of business Production and processing of minerals
Ownership Shoko Co., Ltd. 49.7%
Lianyungang Metals Minerals & Machinery I/E Corp. Jiangsu 44.3%
Acheng City Xinrui Trading Limited Corporation: 6.0%

3. Descriptions of WA, CBN and SiC

WA

Abrasive grains used for wide applications, including processing of general parts and precision parts. Produced through fusion of calcined alumina, and refinement (crushing and classification)

CBN

Abrasive grains having hardness next to diamond. Used for high-speed, high-precision processing of iron-based precision parts for automobiles and ball bearing. Produced through synthesis, using hBN as raw material, and refinement (classification and coating)

SiC

General-purpose abrasive grains for lapping, and for cutting silicon for solar cells. Produced through synthesis, using silica and carbon as raw materials, and refinement (crushing and classification)