To watch the restructuring going on at Hitachi Ltd. (PINK: HTHIY) is to see how and where Japan’s large corporations must, and can, change to survive and compete globally.
English: a photo of Hiroaki Nakanishi, the president of Hitachi Corp. (Photo credit: Wikipedia)
Hitachi Ltd. is Japan’s largest and most global industrial power and electronics conglomerate. Its operations consolidate 939 subsidiaries, 599 of which are outside Japan. In the fiscal year ended March 2012, of USD 117.9 billion in revenues, USD 50.4 billion, or 43%, came from outside Japan. Of its 320,000 employees, 110,000 are overseas. In December Hitachi Ltd. will hold a board of directors meeting in New Delhi, India, the first meeting held overseas in the company’s 102 year history.
Hitachi Ltd. voluntarily delisted from the NYSE in April this year, unable to justify the cost. It now trades OTC under the symbol HTHIY. Current price is $51.32. 52 week high/low is 66.99/50.31. Hitachi Ltd. closed last Friday on the Tokyo Stock Exchange at JPY 410, off 2.84%. The YTD high/low is JPY 556/398. The 10 year high is JPY 947 reached in April 2007; the 10 year low of JPY 227 was hit in December 2009. The stock is at a 1.09 times price-to-book. Dividend yield is 1.95%. The P/E is 9.66 expected forward earnings.
In FY 2007- 2009, Hitachi recorded losses totaling JPY 952 billion (USD 12.2 billion). It was a crisis. In April 2010 the company’s board selected as a new CEO Nakanishi Hiroaki (66), a 40 year Hitachi man and longtime executive, to turn the company around.
Japan’s last spectacular corporate turnaround, that of Nissan, was performed by a foreigner, Carlos Ghosn. Ghosn’s magic gave rise to conceit that foreigners have an advantage, and may in fact be indispensable (hardly credible after the failure of Howard Springer at Sony, to take only one example), in making organizational and cultural changes needed in Japan’s multinational companies.
By contrast, CEO Nakanishi may unrivaled, even by Japan’s high standards, as a corporate insider. Before becoming CEO, had been running Hitachi’s global business for a decade, from positions of President of Hitachi America, and Chief Executive for Europe. His early management career was in Hitachi’s Information and Telecommunications Systems Group. Nakanishi joined Hitachi in 1970 after graduating from Tokyo University with a degree in electrical engineering. He was sent by Hitachi to take an MA in computer science from Stanford in 1979.
“No one knows Hitachi better than me,” CEO Nakanishi has said. Since taking the helm he has marshaled his inside knowledge, and a proclivity for making quick and bold decisions, into a program for organizational, cultural, operational, human resource reforms—called the Smart Transformation Project”--that could become the template to revive Japanese industry.
What Nakanishi sees as Hitachi’s greatest challenge, and the greatest threat to its survival, is its low profitability. Under Nakanishi’s leadership, after the disastrous losses in prior years, Hitachi swung to a record profit of JPY 347 billion (USD 4.2 billion) in FY 2011 (ended March 31, 2012). This result was boosted by one time gain on sale of the company’s San Jose, CA-based hard disk business to Western Digital and spin-off of a loss-making small- and medium-sized LCD panel business. But last year’s one-off record performance still left Hitachi with a dangerously puny 3.6% return on sales. This compares poorly indeed against the 9.6% return on sales of GE and 12.4% of Siemens, Hitachi’s global peers.
As I have written in this blog before, Japanese industry—indeed Japanese society—labors under a seemingly pathological tolerance toward costs, or, perhaps more accurately, intolerance toward trade-offs to reduce costs. In global competition, Hitachi is regularly underbid by 30% by Chinese and Korean competitors, whose ability to compete on technology and delivery is also constantly improving. Unless Hitachi can substantially reduce costs and increase profitability (both essential to strengthening its balance sheet, also a severe weakness), the company’s future must remain in doubt.
Nakanishi’s Smart Transformation Project is his comprehensive assault on Hitachi’s cost structure. Its goal is to reduce the percentage of total costs to revenues by at least 5 percentage points in FY 2015, compared with fiscal 2010. And there is much more in Nakanishi’s restructuring plan for Hitachi. I will go into the details of the Smart Transformation Project and other restructuring plans in my next post.
