Japan's Big Five electronics companies have fabulous engineering talent but it's not helping now. They need to shut factories, cut staff and focus on areas for future growth. None of that comes easy.
From his office high in Toshiba's headquarters, Susumu Kohyama wrestles with the same dilemma that confounds corporate leaders across recession-wracked Japan: He knows his company should fire excess staff and sell unprofitable businesses. But such moves are deeply shameful in Japanese corporate culture, to be
considered only as a final resort. So for now Toshiba takes smaller steps--trimming staff through attrition, reducing its ownership of noncore businesses but rarely selling outright. And Kohyama, Toshiba's general manager of corporate planning, scribbles diagrams to show how the electronics giant might realign sprawling divisions that make products as diverse as notebook computers, elevators and nuclear-power plants. Kohyama draws a large circle to represent corporate headquarters--he adds a happy face as an afterthought--and, in one version, he places eight smaller satellites that represent Toshiba's newly reorganized divisions in orbit around headquarters. In another, he draws three broader fields--hardware, software and services. Which will it be? "We're still in the middle of discussions," says Kohyama. "It should take another year or two to finalize the structure."
A year? Maybe two? As Toshiba prepares for the March 31 fiscal year-end, with its first losses in 23 years, its greatest liability is proving to be its own sluggish corporate culture. The same is true at NEC, Hitachi, Fujitsu and Mitsubishi Electric, which together with Toshiba are known as Japan's "Big Five" industrial-electronics firms. Together they account for 5% of the country's GDP and more than a quarter of its exports; their combined workforces number nearly 1 million. But only Fujitsu will finish fiscal 1998 with any profits--a modest ¥20 billion ($169 million) on sales of ¥5.25 trillion.
All five are engineering powerhouses, but it's their management skills that are being put to the test now: Markets for key products are glutted and they need to adjust--or face more losses. Moreover, as product life cycles grow shorter, they need to focus on fewer, related products instead of trying to compete with dozens of different ones. In short, they need to decide where their future growth will come from and channel resources accordingly. So far, the staff cuts and organizational shuffles the five have announced fall far short of such a total rethink.
"It's not enough; we know that," Toshiba's Kohyama says with some frustration. Kohyama, 56, is Toshiba's youngest senior manager. He spent 18 months in the 1970s at Honeywell Inc.'s Solid State Electronics Centre in Minneapolis, where he picked up an American accent and observed the more flexible U.S. management culture. Compared with the pace of change at U.S. rivals such as Lucent or IBM, Toshiba's overhaul is "too slow," he concedes. "How to accelerate the process is a challenge."
The Japanese electronics companies' "technological strength hasn't changed, but the market has," says Masanori Moritani, an author of books on Japanese technology. "I think it's going to be rough. They have no bright prospects for the future."
The Big Five's collective humiliation comes as a shock after the glory years of the 1980s, when they were so successful in exporting semiconductors and supercomputers that trade wars broke out with the United States. Their telecoms equipment, cooling systems and elevators set world standards. Although none of the five are focused on consumer products, all scored a few hits, such as Toshiba's video recorders, adding to Japan Inc.'s image of invincibility.
More-alert management could have spotted the problems coming: The five were focused on making more and better computers, chips and other hardware, but oversupply was pushing down prices. Meanwhile, U.S. competitors were leaping into the more profitable arenas of software and services, offering customized solutions to computing and networking problems. The Big Five still looked good as long as sales held up in Japan, their biggest market. But prolonged recession has pulled that support out from under them.
The companies have announced revamps in recent months, but they have saved their most aggressive moves--slashing staff and closing factories--for overseas, where most derive only a small portion of revenue. At home, they're relying on attrition to reduce staff.
"It's the same old style: early retirement, borrow more money, shove people into subsidiaries, no new hires," says Brian Rose, an economist with Warburg Dillon Read in Tokyo.
Toshiba and Fujitsu have taken the boldest moves, either selling a few noncore businesses or forming joint ventures with foreign firms to help expand markets. Most of the five are shrinking their boards of directors to speed up decision-making. And all are studying their corporate structures, comprised in each case of hundreds of subsidiaries, to figure out how to get the most out of the parts.
For the first time, they are setting goals for returns on equity--nothing like the 20%-plus levels that investors demand in the United States, but better than the 5% or less that most Japanese companies have managed in the past.
At NEC and Hitachi, big hopes are riding on new leaders who take office on April 1. At NEC, Hajime Sasake will be the first chairman to come from the semiconductor side, rather than telecoms, and Koji Nishigaki will be the first president with a background in marketing instead of engineering. At Hitachi, the new president, Etsuhiko Shoyama, comes from the software division.
If the new management teams need a model for bolder action, they can find one close to home--at consumer-electronics giant Sony. Always a leader within Japan Inc., Sony announced plans on March 9 to trim a larger proportion of its workforce and production capacity than most of the industrial-electronics firms. And it took that radical step even though it's in much better shape, expecting a ¥155.4 billion profit for fiscal 1998.
Sony's reorganization plan also reflects a fully formed vision of where the company sees its biggest opportunities in the future--digital network systems and the entertainment content they will carry. Sony says it will delist three subsidiaries, including Sony Music Entertainment, and make them wholly owned companies so they can develop greater synergies with other companies in the group.
Some analysts hope Sony's revamp will have a salutory effect on other Japanese corporations. For example, the Big Five's plans to shrink their boards of directors follow a similar move by Sony in 1997. But Sony too is stopping short of actually firing anyone inside Japan--even for Sony, Japanese culture sharply limits managers' flexibility in responding to market changes.
Inside Japan Inc., a social contract that dates back to the 19th century binds workers and companies for life. Managers regard firing someone as worse than committing a crime. Selling a business implies failure. "Japanese managers have a reasonable capability to start new things but lack the decision-making power to stop anything," says Koichi Hori, president of The Boston Consulting Group in Tokyo.
Look no further than NEC's lobby for evidence of this inertia: Five young receptionists greet visitors and point the way to elevators across the atrium--a job that could be handled by one person, or even a directory board tacked to the wall. Inside one elevator stands a black vinyl and chrome chair--for an elderly ex-chairman who died two years ago.
Tsuneo Iyobe, head of personnel at Mitsubishi Corp., a trading house that's loosely linked to Mitsubishi Electric, says he hasn't even set a target for staff reductions for fear of demoralizing people. More aggressively, Toshiba sold its automated-teller-machine business to Oki Electric--but then told the 300 or so employees they could return to Toshiba over the next three years if they were unhappy at Oki.
Toshiba also sold 40% of its money-losing air-conditioning business in Japan to Carrier, in hopes the U.S. firm will help it expand overseas. The partial sale was applauded, but some analysts said getting out of the business altogether would have been better. Yoshiharu Izumi, an electronics analyst at Warburg Dillon Read, sums up Toshiba's moves: "The image is very good, but the impact on the bottom line is quite limited. To a certain extent, Toshiba is manipulating investors."
Toshiba and Hitachi have both reorganized their businesses into groups with greater autonomy and bottom-line responsibility. But Hori, of The Boston Consulting Group, says this won't help "unless top management has the expertise in portfolio management and is willing to invest and divest people and money"--in short, to shut down bad businesses.
Giving divisions greater autonomy could even backfire by forcing them to create duplicatory marketing and support staffs, says Tomoyoshi Iwatsubo, a management expert at Tamagawa University and former consultant for Hitachi.
None of the restructuring moves address what many analysts consider to be the firms' major problem: their lack of focus. One analyst recalls an NEC ad that pondered a future in which all other electronics companies had disappeared; people could then buy everything they needed from NEC, it concluded. By contrast, the mantra among NEC's Western competitors for years has been to focus on core competencies.
Producing a wide range of products makes it harder to stay at the forefront of technological and market trends, much less develop a coherent strategy for growth. Iwatsubo says Japan's electronics firms don't have any vision for the future apart from trying to make more cheaply what everyone else is making.
Recently, the five companies have started talking about emulating IBM, the world leader both at making PCs and servers (computers that run networks) and in related software and services. Like IBM and Electronic Data Systems, the five are talking about the "solutions business"--providing customized computer and communications networks for clients.
"What they're saying is 'hardware margins are shrinking and we can't arrest the decline so I guess we have to copy IBM,'" says Scott Foster, an electronics analyst with ING Barings in Tokyo. "They're a decade late. But better late than never."
If systems solutions is the future, then firms such as Hitachi that have been giving divisions more autonomy may need to switch course, and strengthen cooperation among hardware and software divisions.
In terms of hardware, the five say they will focus on making "system LSIs," large-scale integrated circuits that combine memory and processing functions in a new kind of microchip for use in cell phones and other such devices. But Masahiro Akutsu, a technology specialist at the Mitsubishi Research Institute, notes that system LSIs differ according to their application. "Companies must focus on the field of use but they haven't made that clear yet," he says. For instance, will it be digital home appliances, or wireless communication devices, or transport systems?
No doubt strategy teams will be pondering these options over the coming months. Toshiba's Kohyama won't be the only one scribbling structural matrices, tossing them away and trying out new ones. Nor can the Big Five be written off. Says Chris Galvin, CEO at competitor Motorola: "There has been no lessening of how good they are at producing high-quality products."
But whatever final picture emerges will be critical to determining how quickly these leaders of Japan Inc. get back in the black--and can once again strike fear into the heart of corporate America.
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