Hitachi’s new chief executive Toshiaki Tokunaga, announced on Monday, is facing high expectations and the challenge of further internationalising a standard-bearer for Japanese manufacturing whose shares have trebled in value over the past two years.
Fifteen years ago, Hitachi was on the brink of bankruptcy after posting the biggest-ever loss for a Japanese manufacturer of $8bn. It had become a symbol of the Asian economy’s tired and unwieldy industrial conglomerates.
But the 114-year-old poster child of Japan’s decade-long corporate governance reforms has recovered by transforming itself into an industrial software and hardware provider since 2009. It has reaped the rewards of the artificial intelligence and clean energy booms to catapult itself into the ranks of the nation’s top-five most valuable companies, ahead of SoftBank Group, Nintendo and Honda.
“Hitachi used to be a troubled hardware manufacturer . . . it has now morphed into a growth stock. It’s no longer a value stock. Now it’s everyone’s favourite,” said Masakazu Takeda, portfolio manager at Sparx Asset Management, a Hitachi investor. The challenge now is “whether it can live up to market hype and expectations”, he added.
Hitachi’s performance underlines divergent paths and fortunes for Japan’s once-dominant electronic groups, which include Sony, Panasonic and Toshiba. They have all tried to reinvent themselves after the nation ceded semiconductor and electronics manufacturing leadership to rivals overseas.
Once known as a producer of everything from washing machines to chips, Hitachi has slimmed down, with a primary focus on digitising infrastructure and power grids.
“Investors have conviction that the structural reforms at Hitachi are real,” said chair Toshiaki Higashihara in a recent FT interview in Tokyo. “Next, we need to take this up another level.”
Tokunaga, who rose through the ranks in its IT business over 34 years and whose father worked at a Hitachi factory, will replace 68-year-old Keiji Kojima and be responsible for executing a growth strategy centred on its digital business.
The 57-year-old holds $8.2mn of Hitachi stock, a position warmly approved of by investors eager to see more executives on the Tokyo Stock Exchange aligned with their interests through shareholdings.
Hitachi has gone from more than 1,000 consolidated subsidiaries in 2015 to 614 currently. Twenty-two of them were listed separately on the Tokyo Stock Exchange in 2008; now none are. Mismatched divisions from chemicals to construction machinery were painfully sold off for ¥3.3tn ($19.5bn).
The proceeds were recycled into buying the lion’s share of the electricity grid business from Switzerland’s ABB for $6.8bn in 2020 and US software provider GlobalLogic for $9.6bn a year later.
From the outside, Hitachi still looks like a sprawling conglomerate spread across train infrastructure, power grids and factory automation. But investors are convinced it has successfully broken conglomerate silos, applying IT and data science to become something like a management consultant to utilities, manufacturers and railway operators.
Net income is predicted to hit ¥600bn this year, more than double the average in the decade to 2020, even as revenues have stayed flat.
One of the keys to Hitachi’s success enabled by the governance and culture overhaul is Lumada, a division that wraps up its data science services for infrastructure operators. It will make up 41 per cent of core earnings this year despite only being set up in 2016.
Pelham Smithers, an independent analyst, said that Hitachi’s turnaround had been “remarkable” but the changes went beyond the “peeling of the onion” by selling divisions, with Lumada developed so it could bring data analysis to traditionally analogue realms.
“The likes of Tesla and Microsoft have evangelised monetising data. Hitachi is the poster child of that approach in Japan,” he said, adding that it has “arguably the biggest AI business in Japan at present”, referring to Lumada’s growing capabilities.
Ryo Harada, analyst at Goldman Sachs, agreed, saying the opportunity was huge to apply AI in domains where the US big tech groups lacked real-world expertise. “The most popular use of AI is search engines but the next frontier is industrial areas,” he said.
Underpinning all this is the huge spending taking place on data centres and power grids because of the shift to AI and cleaner power. Peers such as Schneider Electric and Siemens have also benefited from investor clamour for “pick-and-shovel” businesses that help build and run AI and power infrastructure.
In an example of the upheaval, Higashihara is in discussions about the role the company will play in dealing with a 50 per cent increase in Japan’s power consumption by 2050 because of AI and data centres — a stark reversal from forecasts for dwindling demand as the population shrinks.
“If we leave out nuclear power generation, I don’t believe there will be sustainable power supplies in Japan,” he said, adding that Tokyo had to commit to building new plants.
The new chief executive will find himself with a chair wanting the core businesses to be augmented through generative AI and using its existing assets and financial firepower to build new business lines such as cancer treatment and energy savings for data centres.
“We’re in the financial position where we are good to do another big deal,” said Higashihara. “To set up companies in new sectors, such as power savings for data centres or healthcare, there may be times when we want ventures or companies to be a big base. To save time, we would think about M&A.”
But some investors have grown cautious as Hitachi shares have run up dramatically. The business is still exposed to delays and cost overruns that bedevil engineering projects, they say. Swelling order backlogs for power transformers and train carriages have cast uncertainty over future costs when the equipment does get built years later.
The company still needs to prove it can deliver its data-centric business model outside Japan and buck the trend of Japanese IT companies struggling to translate domestic success into overseas expansion.
“The biggest challenge is how do they grow abroad,” said Damian Thong, analyst at Macquarie, citing how Japan’s IT market was totally different from other countries.
Despite Hitachi’s governance reforms, along with the majority of its employees sitting outside Japan and 62 per cent of revenues coming from overseas, Higashihara said that appointing a first non-Japanese chief executive — as others from Nissan and Olympus to Takeda have done to varying degrees of success — remained out of the question.
“Hitachi is still a Japanese company. We still have a deep relationship with the Japanese government and financial world,” he said. “If we become a truly global [company] . . . then I think a non-Japanese person can take the top job. But that’s several years away.”
