A Complex and Unpredictable Operating Environment

Geopolitical risks are emerging all the time, as exemplified by the prolonged Russian invasion of Ukraine and renewed instability in the Middle East following the U.S. and Israeli attacks on Iran. In addition, the interplay between multiple factors, ranging from rising interest rates and the disruption caused by the Trump administration’s reciprocal tariff policy to the stagnation of the Chinese economy and the faster-than-anticipated advances in generative AI, has fueled increasing uncertainty about the future and rendered the broader operating environment more complex and difficult to predict. If all we do is rely on firm Japanese and international construction markets and continue conducting traditional management based on past experience and data, we will not be able to keep up with the rapidly changing operating environment. We need to build a flexible management structure for anticipating specific potential events and impacts and proactively implement viable countermeasures.

Recognizing Global Business Environment Realities

This is an urgent issue even in the Obayashi Group’s core domestic construction business. In FY2026, construction investment in Japan is expected to exceed the FY2025 ¥76 trillion level and rise above ¥80 trillion for the first time in 30 years. Demand is expected to remain steady across a wide range of sectors. In addition to such fields as urban redevelopment, disaster prevention and mitigation, and projects related to national resilience measures, this includes rising demand in sectors not affected by economic cycles. Key examples are large-scale capital investment in semiconductor-related facilities fueled by economic security concerns, growing demand for data centers driven by the accelerated advancement in AI, and defenserelated construction in the face of rising geopolitical risks.

 

On the supply side, the construction industry has faced many difficult issues, including severe labor shortages and worker aging, long working hours, low wages, soaring costs for materials and labor, and unilaterally imposed contract terms regarding matters such as construction schedules and payment conditions. Efforts to improve the institutional environment progressed in FY2025 with developments including the third comprehensive amendment of the three acts for construction professionals (including the Construction Business Act), amendment of the Proper Transactions Act,1 and the instigation of the Guidelines for Price Negotiations for Appropriate Passthrough of Labor Costs. If the construction industry itself did not operate under a sustainable industrial structure, it would be difficult to continue meeting capital investment demands, which could potentially hinder the future development of social infrastructure, raising the cost of social capital development. To remain an appealing industry into the future, the construction industry must overcome certain challenges including improving employee treatment to secure workers, addressing soaring material costs, reforming work styles, and increasing productivity. As a leading company in the Japanese construction market, the Obayashi Group has an extremely significant role to play and responsibility to fulfill.

 

In addition, ensuring safety and quality is the top management priority. Thanks to united efforts across the Company and our suppliers and subcontractors, we reduced the total number of accidents in FY2025 by approximately 20% year on year in our domestic construction business. However, we have not yet managed to eradicate fatal accidents altogether, a situation that we take very seriously. We fully recognize the Group’s ongoing social mission to ensure the safety of everyone involved in our business and are pursuing thorough safety management.

Turning to the Obayashi Group’s overseas construction business, operating primarily in North America and Asia, we are making steady progress. The North American construction market is the world’s largest, worth over ¥300 trillion annually. That market is expanding due to factors including rising infrastructure and energy demand, as well as the construction of semiconductor plants and other manufacturing plants, and data centers driven by AI demand. To capture this demand, in 2025 Obayashi Group acquired all shares of GCON Inc., a company with extensive construction experience in the critical environments2 field, making it a consolidated subsidiary. This followed on from the 2023 acquisition of MWH US Acquisitions, Inc.,3 a company engaged primarily in building water treatment facilities. In addition, over the past few years WEBCOR, L.P. has been addressing stagnant investment from private real estate developers primarily by shifting its main target to public education and medical facilities. Through such means, it is successfully adapting to the changing business environment.

 

In Asia too, construction investment is being driven by demand for projects such as social infrastructure that supports economic growth, as well as for energy-related facilities, and data centers to meet AI demand. Going forward, construction investment in Asian countries is expected to increase steadily based on such factors as projected population growth and the need to diversify geopolitical risks. In that region, Obayashi Group companies will continue their united efforts to generate sustainable growth primarily in Singapore, Thailand, Indonesia, Vietnam, and Taiwan.

 

1. Official title: Act on Preventing Delay in Payment to Small and Medium-Sized Entrusted Business Operators in Relation to Manufacturing Consignment 
2. Facilities requiring advanced environmental management such as research facilities, data centers, hospitals, and manufacturing facilities
3. Current company name: MWH MANAGEMENT, INC.

Medium-Term Business Plan 2022—The Final Year

FY2026 marks the final year of Medium-Term Business Plan 2022 (Plan 2022). Since we announced the plan in March 2022, the operating environment has changed more than could possibly have been anticipated, with soaring construction material prices, a rise in construction demand that has exceeded our production capacity, and global supply chain disruptions, among other developments. During that time, we have also reviewed our performance indicator targets to sharpen our focus on capital efficiency, and to that end we announced the addendum to Medium-Term Business Plan 2022 in May 2024. Thanks to the successful strengthening of our business foundation and acceleration of Company-wide transformation laid out in Plan 2022, we were able to achieve a return on equity (ROE) of 10% or higher for the second consecutive year in FY2025, exceeding our performance indicator target and the cost of shareholders’ equity expected by the stock market.

 

Having said that, an analysis of the current situation by business portfolio reveals considerable differences compared to the assumptions used to formulate Plan 2022. In the domestic construction business, the share of orders for social infrastructure development projects, defense-related facilities, semiconductor plants, data centers, production equipment plants, battery manufacturing plants, and other projects exceeded expectations because they were underpinned in part by central government policies on national resilience, national security, economic security, and other concerns. Conversely, the performance of the Japanese renewable energy business—which Obayashi Group had planned to participate in and turn into a major revenue pillar—was much lower than expected, especially for offshore wind power projects. In the overseas construction business, North American subsidiaries acquired through previous M&A and Asian subsidiaries operated primarily by locally hired staff are both growing independently, with their share of consolidated net sales expanding to over 30%. In the real estate development business, we have worked to expand performance both inside and outside Japan, but addressing low capital efficiency remains an issue. Accordingly, we have begun reviewing our strategies, including ensuring an appropriate level of asset holdings and the potential to shift assets off the balance sheet. Regarding new business initiatives, we continue to make growth investments and launch multiple revenue-generating businesses to help promote sustainable growth for the Obayashi Group.

Restructuring Obayashi Sustainability Vision 2050

In FY2026, the final year of Plan 2022, we are not only striving to achieve the plan’s performance indicator targets, but also to thoroughly implement the measures outlined in the plan and advance discussions on the formulation of the next medium-term business plan. Before actually embarking on the plan’s formulation, we decided to restructure Obayashi Sustainability Vision 2050 (OSV2050). OSV2050 was revised in 2019 to evolve Obayashi Green Vision 2050, our medium- to long-term environmental vision compiled in 2011. Since then, more than seven years have passed, social trends have changed dramatically, and the future business environment now looks different from our expectations at that time. In addition, the content of OSV2050, including operational direction and targets, was expressed only in terms of overall concepts, making it difficult to incorporate them adequately into management strategies and business plans such as the medium-term business plan during their formulation and evaluation. The objective of the OSV2050 restructuring is to create a vision that guides both management strategy and business plans— redefining goals in light of changes in the business environment and describing a more concrete roadmap for reaching those goals. We are currently formulating the next medium-term business plan using the restructured OSV2050 as a guideline. The new OSV2050 is due to be disclosed at the same time as the next medium-term business plan.

Personnel System Reforms

We are also working to restructure our personnel system ahead of the next medium-term business plan. I said earlier that one aspect of my role involves aligning the growth ambitions of the Company and its employees and building an organization in which every employee’s self-fulfillment journey contributes to the Obayashi Group’s sustainable growth. To achieve that, we must fundamentally review our personnel system with a view to optimizing human capital and aligning Company and employee growth trajectories. In this regard, we face specific challenges. For example, in the domestic construction business, employees from the large cohort who joined the Company during Japan’s 1980s bubble economy period are now reaching retirement age and the mid-level workforce is comparatively sparse. We must therefore actively assign the next generation of talent to positions with significant responsibilities and duties. Meanwhile, in the overseas construction business, we must strategically secure and train global talent over the long term. We must also hire external talent with expertise and skills that the Obayashi Group does not possess in order to develop businesses other than construction. At the same time, I want to create a personnel system that addresses changing perceptions among employees and their families and increasingly disparate values in term of work-life balance. Such a system will improve employee engagement and encourage a diverse range of human resources both inside and outside Japan to tackle new challenges without fear of failure and fully demonstrate their abilities. Finally, we have introduced a stock-based incentive plan for employees in managerial positions in the form of an employee stock ownership plan (ESOP) trust. The objective is to encourage business execution that enhances corporate value by heightening management’s sensitivity to medium- and long-term performance and stock price and increasing the extent to which management shares value with our shareholders.

Understanding Our Business Foundation, Including the Supply Chain, and Taking Action

Although construction demand remains high, certain supply-side issues are becoming increasingly apparent. The construction industry has faced long-standing structural challenges such as labor shortages, worker aging, and soaring material and labor costs, and now, domestic construction capacity itself is constraining market growth. Work style reforms and changing working environments make it increasingly difficult to cope with busy periods in the traditional way by adjusting working hours and other elements. We fully recognize that our supply chain is not just a cost structure but an essential management foundation on which business continuity is based, and that ensuring the sustainability of the entire supply chain, including suppliers and subcontractors, is vital. We therefore work tirelessly to strengthen relationships with our suppliers and subcontractors. This includes conducting proper business transactions and reviewing payment terms to help them stabilize their management foundations, as well as supporting them in improving working environments, training skilled workers, and conducting recruitment activities to secure suitable workers, among other measures. We will continue to promote initiatives to generate sustainable development across our supply chain.

Improving Productivity Using AI

Plan 2022 laid out the aim of increasing productivity through the use of digital technologies, and we have pursued initiatives such as the development of labor-saving measures and automated and autonomous construction technologies at construction sites. Some of those technologies are now moving from the proof-ofconcept stage to on-site implementation, and our investments are starting to generate some tangible benefits. However, given the small proportion of mid-level employees in the workforce, it is now imperative that we pass on knowledge and skills and maximize organizational intelligence. Furthermore, some business processes rely on individual experience and personal insight, and we have not amassed sufficient data to enable us to accumulate and utilize knowledge and information on decision-making at the organizational level. To alleviate that situation, we set up an organization under the direct control of the Corporate Strategy Division to formulate and promote AI strategies. That organization is engaging in co-creation with individual divisions to restructure business processes across the Company and build the database required for advanced AI utilization. With AI evolving so rapidly, the ability to incorporate AI into business operations can greatly influence a company’s thinking, decisionmaking, and speed of execution. Indeed, we are entering an era in which AI is the key determinant of competitiveness. The drive to incorporate AI extends beyond simply improving efficiency and reducing costs to transforming the very structure of our operations and decision-making processes. Obayashi’s talent pool, including around 8,000 top-level construction engineers, will continue to be one of the Group’s greatest competitive advantages. To optimize that competitive advantage, we will utilize generative AI so that employees can be assigned to more advanced roles, such as identifying challenges and formulating hypotheses to achieve sustainable growth. This will allow us to enhance the value of our human capital. We will also address worker shortages resulting from population decline by using AI-equipped robots and construction machines, as well as other equipment, to implement automated and autonomous operation, thereby reducing hazardous tasks and improving working environments and conditions. In conjunction with this, we will promote sustainable construction industry development by introducing physical AI at construction sites.

Determining the Direction of Sustainable Growth and Improving Capital Efficiency

The addendum to Plan 2022 defines Obayashi Group’s drive for sustainable growth as “establishing a Group-wide business structure centered on the domestic construction business and in which other businesses generate performance equal to or greater than that of the domestic construction business.” To achieve that sustainable growth, we must make an unyielding commitment to keep domestic construction at the heart of our business and consolidate our position as a leading company in the Japanese construction market. Then, we need to steadily build a portfolio encompassing diverse global businesses including overseas construction, real estate development, green energy, and new business initiatives. Within that process, M&A has been positioned not as a means of expanding short-term performance and business scale, but as a crucial strategic tool for developing our business portfolio over the medium to long term. Specifically, when judging a potential M&A project, we consider such criteria as whether injecting Obayashi Group management resources into a target company would drive its growth, and whether a target company would provide strategic inroads into new markets that the Obayashi Group wants to enter. The Multiplex acquisition announced in FY2026 is intended to facilitate the Obayashi Group’s full-scale entry into the Australian construction market, establish a foundation for its construction business in the U.K., and expand its building construction business in Canada. Meanwhile, our participation in a highway concession project in Jakarta, Indonesia, stemmed from the long-standing relationship we have established with our local partner company and will help pave our entry into a new business area.

 

The next medium-term business plan will take into account the changes and issues that have arisen since the business environment and business portfolio were laid out in Plan 2022. On that basis, it will define anew the growth strategies and future vision of each business for enhancing Obayashi Group’s corporate value, as well as the necessary level of equity and cost of capital to achieve those goals. We intend to present a capital policy that includes performance indicator targets and shareholder returns. That involves prioritizing capital efficiency and setting new return on invested capital (ROIC) and ROE targets for each business, as well as committing to a balance sheet structure and level of asset efficiency that generate returns for the Obayashi Group based on ROA levels.

A Message to Our Stakeholders

One constant in this era of perpetual uncertainty is the fact that honest craftsmanship and the challenge-driven mindset of each employee remain the true sources of Obayashi Group’s sustainable growth and enhanced corporate value. As president, it is my role to rigorously pursue safety and quality, as well as compliance, in the construction business, while also steering operations to ensure optimal use of Obayashi Group’s solid management foundation and diverse management resources. In addition to focusing on domestic construction as our core business, I will lead the identification of business opportunities arising from social challenges and the establishment of a business portfolio that offers diverse solutions to tackle those challenges. Moreover, by building an organization that operates based on honest craftsmanship and a challenge-driven mindset and responding to society’s expectations, I will do everything in my power to maintain our position as a company that is needed and trusted by all its stakeholders.

 

I ask for your continued understanding and support as Obayashi Group pursues its future initiatives.

October, 2026