Early last year, big bets started to go wrong for a Japanese giant of toilets and faucets.

Founded in a five-firm merger, fattened by a spree of global acquisitions, Lixil Group Corp. was suddenly rocked by a Chinese accounting scandal. After a ¥66.2 billion writedown, Lixil turned to an outsider from the world of startups to lead the turnaround. And so Kinya Seto took over a more than 80,000-employee firm.

As the 56-year-old entrepreneur tells it, he has Japanese labor law to thank for his new job. In a country where it’s hard to reduce staff, the best solution to a bloated workforce may be to generate more work.

“When you merge five companies, the initial thought you might have is you have five accounting managers and you can just eliminate four of them,” Seto said in an interview at Lixil’s headquarters in Tokyo. “But that’s not going to happen in Japan,” he said. “That’s one of the reasons why Lixil should hire a guy like me who can create new value, new business.”

Lixil epitomizes the difficulties facing Japanese manufacturers as demographic changes shrink their domestic customer base. Lixil’s solution — clubbing together and expanding overseas — has left it grappling with how to run the companies it bought while making its businesses at home more efficient.

One of the most common global cost-cutting tactics — layoffs — is a hard sell in Japan, where politicians including Prime Minister Shinzo Abe have been reluctant to tackle the lifetime employment model that still persists at larger companies. The rigid labor market also makes it more difficult to hire people midcareer with experience integrating overseas acquisitions.

Lixil was born in 2011 through the merger of Tostem Corp., a supplier of building materials, and Inax Corp., which makes toilets and bathtubs, with a kitchen company, a maker of materials for skyscrapers and a manufacturer of gates and fences.

Under the leadership of Yoshiaki Fujimori, Lixil spent billions of dollars buying foreign companies, partly through borrowings. With the Development Bank of Japan, it agreed to acquire German bathroom fixtures company Grohe Group in 2013. The same year, it announced the purchase of U.S. bathroom-fixture maker American Standard Brands. Before that, the company bought Permasteelisa SpA, an Italian developer of curtain walls, in 2011.

The wheels started to come off in April 2015, when accounting irregularities were discovered at Grohe’s Chinese subsidiary, Joyou AG. The next month, Joyou filed for insolvency, leaving Lixil on the hook for a loss that was spread over the three years that ended in March.

“People may have learned a hard lesson, so I think they have an easier time to listen to me,” Seto said.

In 2000, while working at trading house Sumitomo Corp., Seto founded MonotaRO Co., a Japanese online seller of tools and industrial supplies that went public in 2006 and is now a $3.3 billion firm. He has started 11 companies in Asia, the U.S. and Europe, including Zoro Tools Inc. and Grainger Tech LLC. Before joining Lixil, he served as senior vice president of online business at W.W. Grainger Inc., a U.S. retailer of maintenance and repair products and joint-venture partner in establishing MonotaRO.

Since becoming president and chief executive officer of Lixil Group in June, Seto has moved to make the business leaner. Before the end of the month, he announced a reorganization that reduced the number of people in executive roles from 114 to 53.

His prescription for boosting sales at Lixil is to try to expand the stuttering market in Japan. He gives the example of the home-refurbishment business, which he says is smaller in the country because of a lack of contractors, not a shortage of demand. Seto sees an opportunity to increase this by making products easier to install, which would also widen the pool of people who could work as renovators.

Then there is the no-brainer of getting Lixil’s Japanese products sold at the overseas businesses it bought. They include a new stain-resistant ceramic technology that promises a toilet that will stay clean for 100 years. Beyond that, Seto says he wants to use the Japanese market as a laboratory, developing products for the nation’s elderly that can be used elsewhere as societies age.

“There are so many extra and excess things in this company,” he said. “The first part is how you can create better value in Japan, and the second part is how you can increase the value of the acquired companies.”

Still, he does not have free rein. Lixil, which has a market value of $6.4 billion, carried about $8 billion in debt at the end of June. Its equity ratio — the proportion of total assets attributable to shareholders — was 24 percent. Toto Ltd., a similarly sized competitor in Japan, had $268,000 in borrowings and an equity ratio of 52 percent.

“The biggest problem is the balance sheet,” said Masahiro Mochizuki, an analyst at Credit Suisse Group AG in Tokyo who is neutral on the stock. “The company is extremely highly leveraged.”

Mochizuki says Lixil paid a high price for Grohe and there is a risk it may have to write down some of the goodwill in the future. Not only that, Lixil is buying the Development Bank of Japan’s stake in the German company at the end of September, and he worries about how they will fund it.

Seto says he is not rushing to sell assets, but he is always open to discussion. Nor is he planning to raise more capital. The company registered to issue as much as ¥100 billion in bonds in July, and sold ¥35 billion of that last month. The rest of the roughly ¥44.5 billion Grohe purchase will be financed by borrowings and cash on hand, Lixil said. In July, the company agreed to sell Hivic Co., a precut timber business, to a Japanese private-equity fund for an undisclosed price.

“It’s true that we’re not making sufficient money compared with the balance sheet,” Seto said. “Since I came here, my first goal was improving operating profit. Operating profit can sustain the balance sheet, then you can have more freedom and flexibility.”

In August, Lixil announced a 39 percent increase in first-quarter operating income, citing favorable currency moves and the absence of one-off losses.

The company’s shares surged the most since 2008, which is good news for Seto, who has agreed to be paid fully in stock for a year, in an unusual move for a Japanese chief executive.

Still, Seto says he will not be worrying about the share price. If he does his job right, by creating new business and making Lixil an enjoyable place to work, the rest will follow.

While he is under no illusion about the difficulty of the task — or the difference from his past experience — he says he thinks it is all surmountable.

“With a venture, you build it from zero, you make the ideal thing yourself and if it goes well you feel great joy,” he said. “With such a big traditional Japanese company, it’s usually far from ideal in some respects. To try to make it something ideal is a great challenge.”

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