Manufacturing News

Hitachi President Prods Turnaround

When Hiroaki Nakanishi became Hitachi Ltd.'s president in April 2010, the Japanese electronics behemoth was in the darkest period of its 102-year history, with four years of losses totaling nearly ¥1 trillion ($12.5 billion). Hitachi is now undergoing one of the most remarkable turnarounds in Japanese corporate history.

While other Japanese electronics firms continue to suffer from losses in consumer products and the punishing impact of the strong yen, Hitachi—Japan's largest electronics manufacturer—has posted a second year of record profits.

On Thursday, the company announced a 45% increase in net profit to ¥347.18 billion ($4.35 billion) for the past fiscal year, benefiting from the sale of its hard disk business.

Hitachi under Mr. Nakanishi has broken away from a plodding, risk-averse style of management, spinning off at breakneck pace its consumer-related operations in mobile phones, computer parts and flat-panel TVs to concentrate on selling big-ticket—and more profitable—power plants, rail lines and water treatment facilities.

His next step is an ambitious cost-cutting program reaching every corner of the sprawling conglomerate, which boasts the equivalent of $121 billion in annual sales and 900 subsidiaries making everything from nuclear plants to rice cookers.

Mr. Nakanishi aims to double profit margins by 2015 to near 10%, bringing in the capital, he said, needed to become a dominant global player.

"It's a matter of whether we live or die," Mr. Nakanishi said in an interview with The Wall Street Journal. "In order to become a global player, the biggest bottleneck is not our revenue size but our profitability."

In the U.S., Hitachi products are mostly hidden in a wide range of goods. Hitachi supplies inverters and motors for the Chevy Volt electric vehicle. Its batteries power hybrid cars from Buick. Hitachi's computer storage systems are in data centers; its proton therapy systems are used for cancer treatment at the Mayo Clinic and elsewhere.

Hitachi's best-known U.S. consumer product may be the Magic Wand, a vibrating massager that has a loyal following.

Mr. Nakanishi's 10% profit goal isn't unusual among global giants—General Electric Co., Siemens AG, International Business Machines Corp. and ABB Ltd. all have double-digit margins.

But it is radical for Japanese conglomerates, which tend to focus on size over profits. NEC Corp., Toshiba Corp., Fujitsu Ltd. and most of Japan's large electronics conglomerates have profit margins of less than 5%, if they post a profit at all. Hitachi's operating margin was 4.3% in the most recent fiscal year.

Such global ambitions have required a change in thinking for the 66-year-old Mr. Nakanishi and the company he joined as a young man in 1970 after graduating from Tokyo University.

He earned a master's degree in computer science from Stanford University in 1979, during a break from Hitachi.

In the early 1990s, he spearheaded the development of a new automated control system for Tokyo's railway system, which can update train times for accidents or delays while also instructing train drivers to speed up or slow down to maintain schedule times.

Unlike Japan's last great corporate turnaround story—Nissan Motor Co.'s streamlining in the early 2000s under chief executive Carlos Ghosn, an outsider to the company—Mr. Nakanishi is a consummate insider. Mr. Nakanishi, a grandfatherly figure with silver hair and rimless glasses, said when appointed president, "No one knows Hitachi better than me."

The company under Mr. Nakanishi has backed away from consumer electronics and the components that go inside them. Instead, the company is focused on global infrastructure projects such as building a railway system in the U.K. or a nuclear power plant in Lithuania.

Consumer businesses are forecast to account for less than 10% of Hitachi's revenue this fiscal year—nearly half the level of just a year ago. Its infrastructure businesses, meanwhile, will account for two-thirds of Hitachi's total revenue this year and almost 80% of its profit.

The sale and construction of expensive infrastructure projects also carries risk. Hitachi's power systems division fell into the red in the past fiscal year because of the time and expense to fix welding cracks in boilers for thermal power plants in Germany.

And although the company posted a record profit in the past fiscal year, it sees profit falling 42% in the current year without the one-time boost from selling its hard disk operation for $4.8 billion.

Still, Hitachi's resurgence reflects a grim reality for Japan's battered electronics sector: The wondrous gadgets and living-room electronics that once symbolized Japanese manufacturing prowess no longer reliably turn a profit. The company stands out in a tradition-bound corporate culture that makes it hard for executives to make sharp changes in strategy.

Sony Corp. has lost money selling TVs for eight years but has said it was focused on a turnaround rather than an exit. The company on Thursday announced its fourth-straight year in the red, with a record net loss of ¥456.7 billion for the fiscal year ending in March, the worst in its 66-year history.

For most of the past decade, Hitachi has topped the ranks of publicly traded Japanese companies in the number of employees. But over the past year, the company reduced its payroll to 323,540 employees, a 10.5% decline—mostly from the sale of its hard disk drive operation—and is expected to drop below electronics rival Panasonic Corp.

In Japan, the size of a company in terms of revenue and employees often rivals profitability, part of a traditional view that companies exist to nurture its employees and contribute to the broader good of the society—as well as make money.

Japanese laws also make it difficult to shed businesses and workers. But Hitachi's recent streamlining is seen by analysts as a model for reviving Japan Inc.

"We can start to see even traditional companies becoming more aggressive about trying to be more profitable," said J.P. Morgan electronics analyst Yoshiharu Izumi. "Japanese companies follow the crowd, so if a company like Hitachi says it is targeting double-digit profit margins, there will be companies that will be influenced by that."

Investors have loved the rebound at Hitachi, Japan's fourth-largest company in revenue—smaller only than Toyota Motor Corp. and the quasigovernmental telephone and postal service monopolies.

Since Mr. Nakanishi has become president, the stock is up 39%, while the Nikkei 225 is down 19%.

From its founding in 1910 as a maker of electric motors for mining, Hitachi has been Japan's industrial and technological backbone.

Its construction equipment erected buildings nationwide; its energy equipment powered factories and offices; its trains carried workers and Hitachi appliances filled homes.

By the late 1980s, when Japan appeared invincible, so too did Hitachi. And when the Japanese economy faltered, Hitachi followed.

In 2004, Mr. Nakanishi, a fluent English speaker, was picked to run overseas operations. One of his first orders was to find out why the company's hard disk business was losing money.

Hitachi had bought IBM's HDD business for $2.05 billion in 2002 and merged it with its own disk operations. The company unit had failed to turn a profit ever since.

After poring for two months over the $4 billion business, which had become a drag on Hitachi's earnings, Mr. Nakanishi decided it was poorly managed. "I had no choice but to do it myself," he said.

Inside the company, news soon spread that the senior executive, rumored to be on the shortlist to become the next president of Hitachi, was being shipped off to a money-losing operation in San Jose, Calif., 5,000 miles from headquarters.

Mr. Nakanishi said his decision was necessary for the company but not too savvy for his career. "I figured there was no shot to be president now," he said.

Mr. Nakanishi found the quality problems went deep. Nearly 60% of the hard disk drives off the production line were unsuitable for use. As a result, personal computer manufacturers couldn't rely on Hitachi for the parts.

Mr. Nakanishi recruited executives from a competitor, realigned product lines and manufacturing sites. The operation began to turn a profit in 2008.

As Hitachi's president, Mr. Nakanishi later decided that the hard disk drive business, now generating profit margins of more than 10%, was no longer a core product for Hitachi.

In late 2010, Hitachi began planning a public offering of the unit, estimating a $2 billion valuation. Before it could go public, Western Digital bought the business in March for $4.8 billion.

The sale of the hard disk drive unit, a business that Mr. Nakanishi had personally toiled over for several years, was profitable and sent a message companywide: There will be no sacred cows protected in the restructuring.

Past Hitachi management would have been reluctant to sell the business, Mr. Nakanishi said. But the fast-moving nature of the hard disk drive industry wasn't well-suited for a large conglomerate.

"The debate would have been why sell now when it's making money," he said. "But I, as the president, made the decision quickly and no one objected."

Mr. Nakanishi's style hasn't always worked. Last August he stepped outside his Yokohama house and confirmed to reporters that he was in talks with rival Mitsubishi Heavy Industries Ltd. over a possible merger. Such open discussion of private negotiations is practically unheard of in Japan. Mitsubishi Heavy—and even Mr. Nakanishi's own press office—denied his comments. Mitsubishi executives were so angry they scotched any further talks.

But Mr. Nakanishi's success over the past two years is all the more notable, given the company's earlier troubles.

Hitachi had recorded the biggest-ever annual loss by a Japanese manufacturer in the year ended March 2009, the equivalent of $9.9 billion.

The company tapped Takashi Kawamura, chairman at a subsidiary, to run the company. Mr. Kawamura assembled a so-called emergency cabinet, which included Mr. Nakanishi, who was tapped to run the power and industrial business.

The mild-mannered Mr. Nakanishi pushed Hitachi to bid on a contract to build nuclear reactors in the United Arab Emirates. The job was won by a Korean consortium.

"The reality was that Hitachi is weak," Mr. Nakanishi said at the time. "We have a lot of things to learn.

Mr. Nakanishi later recalled that experience when he took over as president a few months later. He initiated a major overhaul of the company's cost structure to better compete with lower-cost rivals in such overseas infrastructure projects.

For the first time, Hitachi brought in outside consultants to study its overseas rivals. The company learned global competitors IBM and GE were well advanced in bulk procurement of resources, as well as outsourcing such services as technical support and accounting to lower-cost countries.

An initiative announced in March aims to close that gap with targets to shave ¥450 billion in costs over the next four years. Hitachi plans to boost procurement of materials from overseas, for example, where prices average 40% cheaper than in Japan.

In April, Hitachi delisted from the New York Stock Exchange, figuring the low volume didn't justify the cost. Hitachi has initiated plans to find savings in its U.S. real estate holdings, where it rents more than 100 offices for its 28 subsidiaries.

Mr. Nakanishi has directed his company to look outside Japan for growth, which now accounts for 57% of its revenue and two-thirds of its employees. He is leading by example, hitting the road as the company's chief salesman.

Last June, just three months after the Fukushima Daiichi accident, a brutal blow to Japan's nuclear power industry, Mr. Nakanishi met Lithuanian Prime Minister Andrius Kubilius to press the case for a nuclear power plant, made by Hitachi's joint venture with GE.

One month later, Lithuania granted the Hitachi team priority negotiating rights.

When a change of government in the U.K. two years ago threatened a major high-speed railway order—with Hitachi first in line as the preferred bidder—Mr. Nakanishi flew to London to meet with the new transport minister. After a project review, Hitachi maintained its preferred-bidder status. The company expects a final agreement in the next few months.

Last month, Mr. Nakanishi addressed 800 new employees. He said Hitachi's future depended on its transformation to a global company.

"It's not enough to simply take the services and products we sell in Japan and bring them to our overseas customers," he said. "In order to really find out what they need, you can't do it sitting at your desk in Japan and studying it, you have to go to the local market, learn the language and sense it for yourself."

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