Japanese Business Blog - Rudlin Consulting

Japan and the legacy of Margaret Thatcher

I suspect it is hard for people in Japan to understand why Margaret Thatcher’s death has aroused such strong feelings of hatred and adulation amongst British people, even 23 years after she ceased to be prime minister.

My generation (people born in the 1960s) is sometimes labelled “Thatcher’s children” – because we grew up under her. We remember 1971, when she was education minister and abolished free school milk for seven to eleven year old school children. Actually many children, myself included, really disliked the free school milk, which was lukewarm and smelly by the time we were given it to drink at morning break each day.

We had already moved to Japan by the time I was seven. I did not escape, however, as we had to drink milk at my Japanese school too, which was even worse tasting, in my opinion, because it was homogenised rather than pasteurised.

People thought we were crazy to move to somewhere as foreign as Japan, but England in 1972 did not feel like a comfortable place to be either – there had been miners’ and dockers’ strikes, followed by declarations of a state of emergency. Wage and price freezes had been announced and unemployment went over 1 million for the first time since the 1930s.

There were economic problems in Japan too – I remember the toilet paper panic buying because of the oil crisis – but as is now well known, the crisis was the trigger for Japan to start innovating in car manufacturing. Just before we left the UK, Honda had started importing cars to the UK, and when we returned to the UK in 1977, we decided to buy a Datsun Sunny 120Y.

My grandparents were horrified. They still had strong memories of the war and had opposed us moving to Japan. They could not understand why we did not buy a British car, like the Triumph Dolomite they owned. It was manufactured by British Leyland, which was then being crippled by a series of strikes.

Margaret Thatcher was extremely patriotic too – but she was happy to welcome any foreign investor who shared her ethic of hard work. While my generation was busy hating her for destroying mining communities, cutting education spending and warmongering, her government encouraged Nissan to open its first factory, in Sunderland, an area in desperate need of jobs thanks to the closure of mines and shipyards.

Thirty years later, there are no British owned volume car producers, but nearly 1.5 million vehicles were produced in the UK last year, closing in on the 2 million peak of 1970, and 86% of production is exported. Only 195,000 people are directly employed by the car industry, however, compared to 850,000 in 1970. The North of England remains a high unemployment, depressed region. This explains the depth of feelings about Mrs Thatcher’s legacy – she was right, from a business perspective, but there was a human cost which was not addressed.

This article by Pernille Rudlin originally appeared in Japanese in the May 15th 2013 edition of the Teikoku Databank News and also appears in Pernille Rudlin’s book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” – available as a paperback and Kindle ebook on Amazon.

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Successes & Failures of Japanese cross border M&A (#3 Ricoh and Ikon)

Ricoh undertook a “10,000 person restructuring” in 2011, using the usual method in Japan of trying to force into early retirement or transfer to subsidiaries their unwanted staff. This resulted in a judgement in the Tokyo courts in favour of two Japanese Ricoh employees on their claim that they had been unfairly forced to transfer to a subsidiary.

The Nikkei Business magazine, in its recent series on the successes and failures of Japanese cross-border M&A links this domestic issue to Ricoh’s acquisition of the US office equipment distributor Ikon Office Solutions in 2008 for $1.6bn. Ricoh acquired Ikon in order to compete with Canon, particularly in trying to enter the office tablet and projector markets in developed countries. However, just as with Nippon Sheet Glass/Pilkington and Daiichi Sankyo/Ranbaxy, the sudden change in operating environment from the Lehman Shock meant that Ricoh’s resulting bloated structure with many overlaps following the acquisition became a far more acute problem.

As the Nikkei points out, Japanese companies need to recognise that following a major M&A, their own Japan headquarters needs to change its structure in order to remain strong in everchanging global business environments.

On that point, during my recent visit to Japan, I was surprised how often the idea of setting up a separate, global headquarters, possibly not even based in Japan, was brought up by Japanese executives at the various blue chip companies I visited.

Successes and failures of Japanese cross border M&A (2 – Daiichi Sankyo and Ranbaxy)

In September 2013 the US Federal Drug Agency issued an import alert, prohibiting further manufacture of FDA regulated drugs at one of Ranbaxy Laboratories’ Indian factories, causing shockwaves at Daiichi Sankyo, who had bought 64% of Ranbaxy in 2008. This was the second time an alert had been issued in the past 5 years.

Nikkei Business, in their series on Japanese cross border M&As, draws parallels with the NSG/Pilkington case blogged previously saying that the same mistakes had been made by the Japanese acquiring company, in failing to do enough analysis beforehand.

Daiichi Sankyo thought it had fixed the quality problems which were exposed by the FDA in 2009, by firing the Ranbaxy former owner and CEO and sending a director from Japan as well as a quality control officer from the US subsidiary.

Daiichi Sankyo has not disclosed to the Nikkei the cause of the quality problems – apparently this is not even shared widely within the company. The Nikkei supposes that Daiichi Sankyo lacked understanding of Ranbaxy’s organisational structure and corporate culture. A supplier to Ranbaxy explains that “Indian companies do not work in a team the way Japanese companies do. There is a lack of solidarity, and a lack of trust between the boss and subordinates. There is just the hierarchical link between directors and employees. Orders from above are obeyed unquestioningly, and even if juniors sense there are problems, they do not say anything.”

Another comments “Employees in Indian companies are different from Japanese companies in that if they are asked for data and documentation from the authorities, they do not put the information together very thoroughly. There is also not the atmosphere where issues can be openly disclosed.”

If this is the case, it is therefore difficult to understand what is going on from the outside, and the word of the people on the ground cannot be 100% relied on, notes the Nikkei. What is needed for successful M&A is a strengthening of governance – management must be given the structures to understand exactly what is going on on the shopfloor.

As the Nikkei concludes, another failing of Japanese cross border M&As often lies in not being able to appoint a trusted person who also has the necessary local and industry expertise. The Indian executive, Atul Sobti, whom Daiichi Sankyo appointed in 2009 to replace the CEO/owner had previously been an executive at Japanese car companies, only lasted a year. In my experience, it is often the case that Japanese companies rate familiarity with Japanese corporate cultures over industry expertise when hiring local senior management. However Daiichi Sankyo seem to have changed their mind on this, as the successor to Sobti, Arun Sawnhey, is a pharmaceutical industry veteran.

One reason Japanese companies often give for not interfering too heavily in the newly acquired subsidiary is that they are anxious to retain the existing senior management, recognising that they do not have executives in the Japan headquarters they can despatch who have sufficient local and global industry experience and expertise. At the same time, judging by both the Ranbaxy and Pilkington cases, the local executives complain of a lack of access, support and influence in relation to the Japan HQ to carry out their jobs, and leave, or conversely, are quickly got rid of when problems arise or financial targets are not met.

A better balance has to be found between implementing the necessary changes to governance and strengthening oversight, whilst also ensuring that the senior local executives are given the support and integrated into the network back in Japan HQ to allow them to perform their roles effectively. Japanese executives are too ready to keep non-Japanese executives at arm’s length, so that if there are any problems, Japanese executive hands are clean.

Successes and failures of Japanese cross border M&A (Pilkington & Nippon Sheet Glass)

Softbank’s $21bn acquisition of Sprint, the merger of Tokyo Electron and Applied Materials and most recently LIXIL’s 3bn euro acquisition of German bathroom fitting manufacturer Grohe have provoked a two part series in the Nikkei Business magazine on the successes and failures of Japanese cross border M&A, starting with the article of 2nd December, which I read just as I was travelling to Japan to help with a post merger integration project.

Since 2000, domestic M&As have decreased, but cross border M&As have soared for Japanese companies, with a pause after the Lehman Shock in 2009-2011. Of the 15 M&As noted by the Nikkei from March 2011 to October 2013, 14 were cross border, and the majority were deals of over $1bn.

The Nikkei comments that although the reason for these acquisitions is clear (the hunt for growth outside the saturated Japanese domestic market), the post merger story has not been that rosy for many of the acquiring companies in the past decade. The Nikkei focuses on three cases – Nippon Sheet Glass’s acquisition of Pilkington in 2006, Daiichi Sankyo’s acquisition of Ranbaxy in 2008 and Ricoh’s acquisition of US company Ikon Office Solutions in 2008, to see what lessons can be learnt.

Nippon Sheet Glass/Pilkington

NSG were worried that they might be dumped by Toyota, their key customer, if they could not match Toyota’s overseas expansion. Before the acquisition of Pilkington, 80% of NSG’s sales were in Japan. Pilkington’s turnover was double that of NSG, so by acquiring it, NSG was finally able to be on equal terms with Asahi (who had previously acquired Saint Gobain). After the acquisition, the March 2008 results showed that NSG Group sales were 80% overseas, with profits at a record high. Stuart Chambers and other Pilkington executives took over the key management positions in the group and it seemed as if the company had become global overnight.

However the good times did not last, as the Lehman Shock brought about the world economic crisis, followed by the euro debt crisis, impacting the two main businesses of automotive glass and construction glass. The NSG management did not take any effective action “and then it hit us” says a Japanese executive at the time “that we knew nothing about Pilkington”. They thought it would be a growth engine, so did not do anything beyond cut employees and shut down operations.

Too focused on growth and globalization

This is where Japanese M&As often come unstuck says the Nikkei – they are so focused on the growth and globalization, they do not fully develop strategies and pathways for ensuring the M&A actually bears fruit. “We had to focus on the immediate crisis, rather than the growth of the new company” says Kazumitsu Fujii, an executive officer.

NSG did know Pilkington quite well – having held equity in the company since 2000, and collaborated on various projects together. Howerver they had not undertaken any simulation of the financial impacts of any worsening market conditions post merger. As one executive at the time says “we did not even have any thought that the economic situation would get so bad so quickly”.

Stuart Chambers resigned in September 2009, citing family pressures from being in Japan all the time – and it was felt that his heart was not really in the job.

NSG had a 4-3-3 10 year vision. The first four years were to be about integrating the two companies’ systems and cutting down the debts. The next three years were to expand sales in automotive and construction glass and the second 3 years were to be about investing in new businesses.

However the company has not managed to move on from the first phase yet. It seems that the lack of understanding and knowledge between the two companies has meant that the negative financial situation has dragged on. “We thought that once we had made the leap into being a global company, all kinds of paths would open up to us, but it was not the case” says a former employee.

The new President, Keiji Yoshikawa says “we are having to fix areas we did not see at the time of the acquisition”. Pilkington had centralised, standardized global HR management and sales systems which looked efficient at first glance, but meant that there were regional differences which were ignored.

For example, construction glass has to take account of the different climates and lifestyles, but apparently such products were not given much priority. So NSG have started to allocate budgets to projects such as fire resistant glass in Germany.

After 7 years, NSG have finally started to understand Pilkington, concludes Nikkei Business.

Standardization and taking the initiative

My personal thoughts on this, having conducted various cross cultural communications seminars for Pilkington and Nippon Sheet Glass at the time, was that the two companies knew each other pretty well. The gap was more to do with differing views and levels of experience in managing globally.

Pilkington, like many Anglo Saxon multinationals, would indeed emphasise a standard unified approach to management and product development around the world, in order to ensure maximum profitability. The Japanese view that products should be customised to suit different markets is not cost effective, in this world view.

The other issue, as is so often the case when Japanese companies acquire Western ones, is that both parties sit back and wait for the other to take the initiative – and this was amplified by the Lehman Shock – where quick and decisive action was needed. Pilkington may well have expected NSG to take the lead, whereas NSG was expecting Pilkington to have the global experience to provide the guidance for what to do in such extreme circumstances.

Does having more women managers help Japanese companies globalise?

The question of whether having more women managers would help Japanese companies to globalise was raised, but not discussed in depth due to time constraints, at a dinner I attended, hosted by a delegation to the UK from Japan Women’s Innovative Network – a Japanese non profit organisation. An impressively large number of younger women (70) had been sponsored by their companies to come to the UK for a week, visiting various UK companies such as British Telecom and AON, to study global leadership and diversity.

My view is yes, it does help Japanese companies to globalise if they have more (Japanese) women managers, for a couple of reasons. Firstly, it helps Japanese companies and corporate culture seem less “alien” to Western companies if there are more women in management positions in the headquarters, and secondly, because the adjustments Japanese companies will have to make in order to incorporate a more diverse Japanese workforce (gender or other diversity) will help them be more inclusive of “non-Japanese” diverse groups. Attitudes to overtime and working from home would be a couple of areas needing adjustment I would suggest.

On the first point, the question of the role of women in Japanese companies is frequently raised in the cultural awareness sessions we conduct in Europe for Japanese companies. Japan never does well in surveys of the position of women in society – see the most recent World Economic Forum Gender Gap report , placing Japan 114th out of 144 countries (updated for 2017). While you can question the methodology of such surveys, then along comes another one, conducted amongst Japanese women, showing that 1/3 of them want to be full time housewives.

Which leads me to point out in our training (and in the Advancing Gender Diversity day I spoke at for Hitachi’s European group companies – presentation on SlideShare here) that Confucian values remain strong in Japan – it’s not that women are seen as somehow less capable than men, more that there are expectations around the role they should fulfil in society.

Prime Minister Abe is trying to square a circle with Abenomics, by trying to raise the birthrate but at the same time encourage women to go back to work – aiming to have 30% of senior positions in all parts of society, by 2020, through improving childcare and parental leave. But with the amount of pressure on women to be good housewives and stalwarts of the Parent Teachers Association, no amount of improved childcare and leave is going to counteract this or compensate for both parents doing overtime until late at night.

Although the Japanese government can directly change the economy with the first and second arrow of Abenomics, through fiscal and monetary actions, the third arrow of structural reform requires nudging, or even shaming Japanese companies into doing the right thing – legislation alone will be hard to push through and even harder to enforce. So Abe launched in February the “Nadeshiko” * scheme, recognising firms which are making efforts to improve the working environment for women.

Firms given the Nadeshiko “brand” in February of this year include Kao, Nissan, Fast Retailing (Uniqlo) and Daikin. The scheme is not the only initiative taking place – various other surveys have been done of best places for women to work and the Hitachi Gender Diversity Day was partly inspired by the President of Hitachi, Hiroaki Nakanishi, declaring recently that the company aims to more than double the number of women managers by 2020.

Other recent surveys have named Benesse (no coincidence that the founder of Benesse is also the founder of J-WIN) as the most career friendly for women and companies such as Toshiba, KDDI, Bank of Tokyo-Mitsubishi UFJ and NTT have all announced targets for women managers. The Nikkei group has also jumped on the bandwagon, with a seminar series aimed at aspiring women managers (and even has a magazine “Nikkei Woman” ) and published its ranking last year of best places for women to work, which put foreign companies at the top (IBM Japan, Procter & Gamble) along with 2 life insurance companies, Takashimaya department store, Daiwa Securities, Sony, Panasonic, Bank of Tokyo Mitsubishi UFJ, Fujitsu and Sharp.

* Nadeshiko is a type of pink danthius flower associated with women in Japan. It was adopted as a nickname by the women’s soccer team of Japan on its way to becoming the first Asian team to win the World Cup, in 2011.

The original version of this article was published in Japanese in the Teikoku Databank News in 2014. An English version of it appears in Pernille Rudlin’s new book “Shinrai: Japanese Corporate Integrity in a Disintegrating Europe” is available as a paperback and Kindle ebook on Amazon.

The man who turned Hitachi around #5 – globalization of people

As well as the train business in the UK, the other case study that Takashi Kawamura, former President of Hitachi gives as a model of globalization is the data storage business, which was turned into a “solution” business rather than just selling Hitachi’s hardware. Kawamura says the person responsible for starting this change was the CEO of Hitachi Data Systems in the USA, Jack Domme. The key words which changed the business were “disaster recovery” and Domme hired people who weren’t just salesmen, but engineers, who could listen to customers and make proposals.

As well as having a strong local leader heading the UK train business and HDS, Hitachi’s China elevator business is also headed up by a Chinese President. According to Kawamura, all these businesses have switched to being “solution” oriented, to compete with IBM, Siemens and GE – this could not have been done if they were led by Japanese “sheltering under the umbrella” of Hitachi.

3 of Hitachi’s 13 board members are non-Japanese. The executive officers are still all Japanese but Kawamura thinks this needs to change too, so that non-Japanese are heading up Hitachi’s business divisions. “If our European rail business expands, then it might be better to have a British person heading up our transport systems division. If diversity advances in this way, then there will be much more lively debates and innovation, and it will be easier to undertake structural reform”

Hitachi aims to reach an operating profit of 7% (from the current 4.7%) by FY 2015, to close in on Siemens. “What is needed to be a globally excellent company is speed” says Kawamura.

From 2011, around 1000 young employees are sent out each year to work overseas for a maximum of 3 months. This is 10 times more than previously, and represents about a quarter of each cohort. Kawamura says it is done not just because Hitachi can afford it, but to show that the company is serious about globalization and also to act as a wake up call to the young employees about how much further they have to go in order to speak English or other foreign languages fluently, and to create relationships with local customers.

Around 60% go to developing countries – Kawamura says they have to survive some tough challenges, which in some cases have really changed employees’ mindsets.

There are are also top down diversity initiatives to globalize people, through the governance of the company. In 2012 Kawamura increased the number of external directors from 4 to 7 out of the 13 board members, and raised the number of non-Japanese from 1 to 3 and this year added the first foreign female board director, Cynthia Carroll, formerly of Anglo American.

“This diversity should have an impact on the mindset of our employees, but the other effect is to liven up board meetings. Japanese board meetings usually do not have much debate or discussion – the decisions have already been made at the management committee or operational committee level. And in companies like Hitachi which are very vertical, executives do not comment on other business divisions – they feel they are not qualified to criticise.

So our board meetings have become extremely “frank”, actually I feel beaten up by them – they ask why we have not reached 5% operating profit, why such elite Japanese graduates don’t seem to be very motivated, why we are so mild and not competitive. We use simultaneous interpreters in the board meetings, so the comments come bouncing out at us in real time. It’s not just criticisms, but also new business ideas come out of these meetings – new technologies we should adopt or businesses we should collaborate with. We held one of our board meetings in India, to show we were serious about tripling our business there. We are thinking to hold our board meeting somewhere in the USA this year.

George Barclay, who was CEO of 3M is actually British, and the current CEO is Swedish. Although 3M is an American company, Americans are in the minority on the board. Barclay tells me that’s normal if you want to compete globally”

It will also help with structural reform. Hitachi has just completed a global database of 300,000 personnel. This will be used for unified appraisals and global mobility of staff. Kawamura would like to see more non-Japanese in Japan, in team leader or General Manager positions. Seniority based promotion will probably come to an end.

Kawamura finishes the series by saying that he was too old to be President, which is why he handed over to Nakanishi after a year. He sees the role of Presidency as an agent – if there is proper diversity, then the company and the management will be “smart” and “aggressive” and the President does not even need to be charismatic.

The man who turned round Hitachi #4 – globalization and the UK train business

Overseas business accounts for less than 50% of Hitachi’s Y9665 trillion revenues. Domestically Hitachi is seen as a “winner” but globalization is an urgent issue. Takashi Kawamura, current chairman and former President, points out that compared to GE or IBM or Siemens, Hitachi’s market capitalization is still very low. When he became president in 2009 he emphasized that Hitachi needed to look more like a truly global company. “There was a tendency just to compare ourselves to ourselves, so it seemed as if our performance was better, compared to the past, but this was just inward looking.”

Kawamura had experienced the strength of GE and Siemens as competitors when he was in charge of the power systems business, as did his successor as President, Hiroaki Nakanishi, when he was running the hard disk drive business in the USA, competing with the global top 1 or 2 companies. “The people working in Japan for Hitachi don’t feel this pressure, but the Japanese domestic market is shrinking, and if Hitachi does not compete in the rest of the world, it will become a loser.” This is a problem faced by many Japanese domestic giants – most of their employees are focused on the company and its DNA surviving, and globalization does not seem imperative for this, if business is going well domestically, in fact globalization might even risk the long term survival of the company.

Kawamura gives a couple of what he calls “model cases” of globalization at Hitachi – the UK rail business and the data storage business in the USA.

Hitachi competed against Siemens, Alstom and Bombardier in July 2012 to win the bid for the UK’s Intercity Express Programme – the construction and leasing of trains from 2017 for 27 years. Together with a further order this July, this represents 866 carriages, for which Hitachi has invested Y9.6bn in a factory in County Durham.

Hitachi was only known for TVs and domestic appliances in the UK, and had no history of train business in the UK at all. Kawamura says it was not enough just to keep saying that Hitachi’s technology was superb – so at their own cost, they set up their own control equipment in an old carriage and gathered data by running the train at night.

Then with the 2010 election, the new coalition government launched a spending review, and froze the awarding of the contract, so Hitachi Rail Europe made its own proposals on how to cut expenditure and this led to Hitachi regaining preferred bidder status. Kawamura believes their success was due to appointing a strong local leader, the CEO of HRE, Alistair Dormer, formerly of BAE and Alstom, who had been at Hitachi since 2003. A British sales team was put together and given a large degree of freedom too, so that they knew the local market well and were able to address any needs.

Kawamura says that Hitachi changed tack with their 2012 Mid Term Plan, to focus not just on developing countries but also matured markets like the UK, because it was felt that developed markets also had big infrastructure challenges, and this was how Hitachi could build up its strength in solution businesses.

(continued – the man who turned Hitachi around – globalization of people)

The man who turned Hitachi around #3 – trimming the three branches

“I don’t really like it myself, but there is an expression in the Hitachi group “Gosanke – the three branches” – meaning Hitachi Metals, Hitachi Cable and Hitachi Chemical” – explains Takashi Kawamura, former President of Hitachi. The expression is historical, referring to the three branches of the Shogun producing Tokugawa clan during Japan’s feudal era.

The Gosanke are the largest, and longest surviving of the listed Hitachi group companies. Kawamura caused a sensation in 2010 when he appointed Hiroaki Nakanishi as President and stayed on as Chairman, by also appointing Nobuo Mochida of Hitachi Metals as Executive Vice President. “These personnel moves are a way of showing to the outside world what my intentions are. It was the first time that someone from one of the other listed Hitachi companies had been appointed as an executive of the main Hitachi organisation. Up until there was not even much exchange of personnel even amongst ordinary employees.”

Then in 2011, Kawamura made Hideaki Takahashi, who had been an executive officer in the main Hitachi company, President of Hitachi Cable. This was also a rare occurence, and was followed by the merger of Hitachi Metals and Hitachi Cable in July of 2013. This was to signify the end of Hitachi’s vertical mindset.

“I was most concerned about reforming the main Hitachi company. As I mentioned before, it was a donburi – good businesses covering up bad…. There was no sense of responsibility to the rest of the company in each division – for example, if some entertainment budget was left towards the end of the year, then the division would try to spend it all in a mad frenzy.” So in 2009 Kawamura set up an internal company system. There are now 6 groups, with around 30 independent companies, some listed, some not, which report into the consolidated accounts. If the internal rating of a division fell, then the mothership would not lend it any more money. Kawamura also started an annual “Hitachi IR Day”. “The president of each internal company suddenly changed their spots when they realised that each year they would be accountable to investors for the targets they had set the previous year,” notes Kawamura.

(Continues – the man who turned Hitachi around – the UK rail business)

The man who turned around Hitachi part 2 – social innovation and restructuring

The first action Takashi Kawamura undertook on being appointed President of Hitachi in April 2009 was to reform the governance of the company, allowing more independence to the listed companies in the Hitachi group and also the internal companies. Some restructuring and cutting loose of certain business lines also occurred.

“But what was really important” says Kawamura, “was that we had a direction for the future”. The key phrase he devised was “Social Innovation”. Apparently some native English speakers pointed out that such a phrase did not really exist in English in the sense it was used by Hitachi – to connect social infrastructure and information technology. But as it had meaning for Hitachi, Kawamura stuck with it. “Hitachi began with motors and power systems for mining, and is strong in power plants and rail, but also IT. It was often said inside Hitachi that they wanted to be “IBM+Siemens”.

Hitachi’s two biggest independently listed companies, Hitachi Cable and Hitachi Metals, were initially resistant, saying they were not involved in social innovation, but Kawamura managed to persuade them that ultimately they were providing the foundations for social innovation businesses.

Kawamura also followed a policy of focusing on upstream and downstream, and getting rid of “midstream” businesses. For example assembly of digital components- investing in a joint venture with Mitsubishi Electric – Renesas, which then merged with NEC Electronics. The mobile phone business was spun off into a joint venture with NEC. The hard disk drive business was sold to Western Digital.

“In other words, we were taking down our shop sign as a consolidated electricals company” says Kawamura. “Actually, I wish we had done it five years earlier, then we would not have made such big losses.” As the Nikkei points out, actually Hitachi was quicker to restructure than Panasonic or Sharp.

Kawamura believes that the best time to shut down a business line is just after the peak has been attained. But he recognises this is hard to implement – there are many people who joined Hitachi in order to be in that business. But Hitachi has had 100 years of moving from one peak to another, from motors for steel making to nuclear power stations to large scale computing, to hard disk drives.

The worst time for Kawamura was having to raise capital from shareholders in 2009, when Hitachi’s shareholder equity ratio had fallen to 11.2%, Hitachi normally guarantees whatever it sells – power plant efficiency, meeting deadlines etc, but of course dividends and share prices cannot be guaranteed. The share price fell to Y200, but despite everything, our shareholders took up the offering. “This really stiffened my resolve to carry out the reforms needed at Hitachi…. that is what being the manager of a company is about” Kawamura recollects.

(Continues – Part 3 – trimming the three branches)

The man who turned Hitachi around – boiled frog, donburi and battleships

The Hitachi group of companies, estimated to be the second biggest company in Japan in terms of employees after Toyota, and 4th in terms of revenue, has turned itself around considerably since 2009, when it chalked up “the largest loss in Japanese manufacturing history” of around $8bn.

It led to the premature ousting of Kazuo Furukawa as President, replaced by Takashi Kawamura as CEO and Chairman, who at 69 was 8 years older than Furukawa and must have thought his career was in a graceful curve towards retirement, as chairman of Hitachi Maxell and Hitachi Plant Technology.

Kawamura handed over the Presidency to Hiroaki Nakanishi in 2010, and continues as Chairman. A series of articles in the Nikkei Business magazine recently describe how he turned the conglomerate around to profitability in two years.

He describes how he saw Hitachi in 2009 as a “boiled frog” whereby each division was fooled by the cosy feeling of the slowly heating water, unwilling to make radical changes until it was too late. Japanese like to stick with things as they are, he comments.

Corporate governance was not working at Hitachi in 2009 he says. All the group companies were run by an Old Boys network from the Hitachi main company. If a younger President had been appointed, and wanted to change things, it would have been difficult to persuade his seniors. As Kawamura was older than most of the other presidents, he was able to push through reforms.

He describes Hitachi as having a “donburi” style of management [donburi is a rice with toppings dish] whereby the loss making businesses were covered by the profitable ones. “Bad businesses should be brought out into the open and a judgement made as to whether they can be reformed or scrapped”. This was forced upon Hitachi by the Lehman Shock but Kawamura was also more able to do it because he had been in a subsidiary of Hitachi.

Employees used to believe Hitachi was the unsinkable battleship. It survived 2 oil shocks without much impact on its financials. Japan’s big three electrical companies – Hitachi, Toshiba and Mitsubishi Electric used to be known as the wandering samurai, the merchant and the feudal lord respectively. A wandering samurai thrives when times are good, but is not flexible about change when it’s necessary.

There was also something known as “Hitachi Time” – whereby major decisions had to take account of so many people, including Old Boys and therefore were very slow to be reached. In 2009, Hitachi was renamed the sinking battleship. Kawamura uses a story he heard about the British Navy,as a metaphor for what had happened to Hitachi. British battleships were taking on about an inch of water a year, which will caused the ships to lose speed, so in the end, they are rusted up and useless. Hitachi had made losses in 2001, 2006 and 2007 as well as in 2009. Apparently the reason the the battleships took on water is that they had become heavier every year. This was due to an accumulation of personal possessions by the staff on board. So the British Navy is now very strict about what personal items can be brought on board.

(to be continued – what Kawamura did to reform governance)