To : John Alexander, Jr.

From : A. Perkins Kensington

Re : Asian Production Base

Date : February 7, 1995

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As you requested, this Memorandum sets forth the results of my recent tour of Asian economies with the United States International Chamber of Commerce in light of our recent discussion on the need for UT to create a production base in Asia. We visited 8 countries (Japan, China, Hong Kong, Singapore, Korea, Thailand, Malaysia and Indonesia). In each location we met with government officials charged with industrial policy and foreign investment and with representatives of local industry engaged in our area of business. The trip was a real eye opener for me. The level of activity and development in East and South-East Asia is truly stunning. UT needs to capitalize on the opportunities there by moving forward with the Asian production base we have discussed for a number of years.

A number of the persons I met in the NIC countries (Korea, Singapore, Hong Kong and Thailand) were interested in learning whether UT plans actively to expand into the Asian markets and in what manner. Industry representatives in each country were interested in our technologies and cooperation in their markets but, unfortunately, the level of their domestic markets, R&D capacity, local operations, service infrastructure and similar factors would make it difficult for UT to establish a base of operations in these countries. (There certainly is no reasonable opportunity for an ìAsian baseî for our type of organizationís products in the less advanced Asian industrial countries such as Malaysia, Indonesia and China).

As we have discussed previously, that leaves Japan. While costs in Japan are very high (and the tax regime is difficult), Japan appears highly suitable in virtually every other respect for our type of organization. Among the advantages are: (i) a very highly educated and motivated managerial and engineering labor pool (especially available during the current recession), (ii) a stable political and economic environment, (iii) close proximity to many of our non-U.S. customers, (iv) readily available capital at low rates, (v) no limitations on foreign exchange remittance and repatriation of capital, and (vi) highly developed communications facilities for close coordination with the head office. My conclusion is that we have little alternative but to locate our production base in Japan soon if we hope to have a viable long-term base in East Asia.

As we have discussed, our main problem is capital. As Allan Ketchi mentioned at last quarterís planning meeting, we have exhausted our regular financing lines, are fully committed on capital allocations for domestic projects through the next 3 years and are too much leveraged to go to Wall Street with a bond offering having a coupon which would give the kinds of return we are seeking. I see little alternative but to seek a partner in Japan which sufficient resources to handle our needs. Allanís projections of the costs of the kind of facility we have been looking at indicate that to set up the precision machinery manufacturing plant, processing and packaging warehouses and R&D laboratories for the next generation of precision machine tools we want to produce will require investments of between $500 million and $700 million over five years. This will mean we need a very big and well heeled partner.

While I was in Tokyo I spoke with senior officers of most of the distributors and customers we use for our product lines there. As usual most of them were polite but seemed unenthusiastic about our setting up a facility in Japan (too many relationships to protect). The only exception was Yasuda. As a trading company, Yasudaís people are very pragmatic about business and they seem to understand the potential in Asia which we believe is there. They even seemed to accept that a full-scale facility might be needed in Japan to service the Asian market including Japan.

They also are very interested in our Microscopic Integrated Precision Industrial Tool (ìMIPITî) technology. Ike Hosomi even suggested (jokingly) that he would like to have exclusive distribution rights for Asia when we go to production of bio-engineering and medical applications using the technology. I told him we would have to have a lot closer relationship with a company before we would consider making that sort of commitment.

After reviewing our other relationships in Japan, I think Yasuda is our best chance given what we want to accomplish. They have a very deep market penetration in Japan and Asia, lots of financial clout and great relationships with most of the Japanese consumers of our product (including hospitals, universities, medical laboratories and biotechnology firms). They also need us since they have almost no controlled production, little precision manufacturing technology (other than a few manufacturing patents on industrial machine tools) and virtually no R&D capability. The real question is to what extent they wish to get into the production side and the degree of their readiness to make a long-term capital commitment.

You may want to talk to Hosomi about our ideas next week when you are in London. He told me he will be at the Annual World Precision Tool Development Conference at which I understand you are to speak. In the meantime, I will brief Ketchi and Uri about my trip and Yasudaís interest separately. Iíll also mention the project to Blackacre since its probably best to get legal involved early with a project of this magnitude.

Please let me know if you have any questions about my trip. Have a good trip to London.

Perky