Business / Corporate | FOCUS

Resurgent Hitachi goes global after painful reforms

by Keiichiro Otsuka

Kyodo

In February, Hitachi Ltd., the nation’s largest maker of electric equipment and infrastructure systems, splurged on one of its priciest acquisitions. The target was the railway vehicle and signal businesses of Italy’s Finmeccanica S.p.A., a deal estimated at over ¥250 billion.

The move was in line with the company’s accelerated shift in recent years toward global expansion, reducing its reliance on the domestic market, where business potential is shackled by the shrinking population. Hitachi plans to derive more than half its group revenues from abroad in fiscal 2015.

The business model Hitachi is pursuing is the same one being used as General Electric Co. Joining the ranks of the U.S. conglomerate, which is far more profitable, remains a challenge, although Hitachi is making a strong comeback from its loss-making years in the late 2000s — a period that had some employees fearing bankruptcy.

Hitachi started to bleed heavily in fiscal 2006, the start of four consecutive years consolidated net losses. Overshadowed by the global financial crisis, the loss expanded to a staggering ¥787.3 billion in 2008, giving it the dubious distinction of racking up the largest yearly loss by a Japanese manufacturer in history.

The top officers in charge at that time — Chairman Shoyama Etsuhiko and President Kazuo Furukawa — stepped down in March 2009 to take responsibility.

In an unusual step, Hitachi called back Takashi Kawamura from Hitachi Maxel Ltd., where he was chairman. The former executive vice president had taken the job at the subsidiary thinking it was his retirement swan song.

Back at Hitachi, Kawamura, then at the rather advanced age of 69, assumed the posts of both chairman and president.

Apparently not much attached to the company’s reputation as an “integrated” appliance maker with an extensive product range, he streamlined it by abandoning several noncore businesses.

He undertook further structural reforms with Hiroaki Nakanishi after passing the presidency to him in April 2010. That led to the sale of the hard disk drive business, which Hitachi had bought from IBM Ltd. in 2003, to Western Digital Technologies Inc. in 2012.

Hitachi even pulled out of production of flat TVs, considered the centerpiece product of many home electronics makers.

After emerging as a leaner entity, Hitachi has placed greater focus on railways and other infrastructure businesses, as well as information technology systems and automotive operations.

In fiscal 2014, Hitachi reported a ¥600.4 billion operating profit, breaking its record for two years in a row and underscoring its resurrection.

As the company reached cruising speed, Nakanishi became chairman and CEO in April 2014 while Toshiaki Higashihara took over as president and chief operating officer.

Compared with its domestic rivals, Hitachi has clearly emerged as one of the winners. Sony Corp. has posted net losses for six of the past seven business years, while Toshiba Corp. is mired in accounting irregularities and Sharp Corp. is in a dire slump requiring drastic restructuring.

Chairman and CEO Nakanishi, however, does not seem to be content.

“We need to respond to a market that is getting all the more global or else we’ll end up going extinct,” he said in an interview in Las Vegas in late April on the sidelines of a corporate exhibition.

Spearheading Hitachi’s global strategy is its railway operations.

“This was seen as something of a small business just until recently because of its relatively small scale of operations within the group,” a Hitachi executive said.

Still, it has a solid track record. Hitachi designed and manufactured many of Japan’s bullet, trains including the E5 series, which boasts a top operational speed of 320 kph and is still in use on the Tohoku Shinkansen Line.

In July 2012, Hitachi won an 866-car order for 122 Class 800 trains to be used on a high-speed rail service in Britain. This March, it inked a deal to deliver 234 AT-200 vehicles for 70 trains that will run on a suburban line in Britain.

The acquisition of the Italian Finmeccanica units in February more than doubles Hitachi’s rail business revenue to around ¥400 billion a year.

European machinery makers such as Germany’s Siemens AG and France’s Alstom maintain a solid presence in the rail car market, while China’s two biggest rail car makers — China CNR Corp. and CSR Corp. — decided to merge in March in a deal likely to create a strong challenger.

Hitachi, however, sees room to play.

“Hitachi isn’t limited to vehicle manufacturing but can respond to a broad range of customer needs such as signal controlling, traffic management, rail car control and build seat reservation systems and chip-based ticket systems,” said President and COO Higashihara.

Hitachi is also aiming at ¥1 trillion in North American revenue in fiscal 2015 — a sum it hopes to double by fiscal 2020.

“We are just starting up the engine and hoping to at least double sales,” Nakanishi said.

“We will continue (mergers and acquisitions) to acquire necessary technologies and customer bases” to strengthen our core operations, such as IT systems and automotive equipment, he said. For example, Hitachi Data Systems Corp. is buying Pentaho Corp., a U.S. developer of “big data” analysis software by the end of June.

Hitachi has some homework to do to improve profitability. Its modest 2.5 percent margin on ¥241.3 billion in profit in fiscal 2014 falls far behind GE’s 10.2 percent margin on $15.23 billion in net profit in 2014.

Its weakness might stem from a lack of business in areas where it has a dominant edge, like GE does in aircraft engines. It was also laden with a massive ¥3.35 trillion in debt as of March 31.

Typical of a mammoth conglomerate, Hitachi has “compartmentalized operations that stifle communications,” a Hitachi executive noted.

Once it overcomes these challenges and its global strategy bears fruit, Hitachi may find itself positioned to better emulate the far more profitable GE.

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