Analysis

Not swept away

In post-tsunami Japan, its machinery industry begins to recover and turn to the future. At first it didn’t feel unusual, but then it went on and on. So I got myself and my wife under the table…. I’ve lived in Japan for ten years and I’ve never felt anything like this before. The aftershocks keep […]

In post-tsunami Japan, its machinery industry begins to recover and turn to the future.

At first it didn’t feel unusual, but then it went on and on. So I got myself and my wife under the table…. I’ve lived in Japan for ten years and I’ve never felt anything like this before. The aftershocks keep coming. It’s gotten to the point where I don’t know whether it’s me shaking or an earthquake.”

Even watching through the easy distance of a TV screen the horror hit home. Watching the sea take the land like someone had tipped bath water over a play set and realising that those were real people driving the soon to be swept away toy cars was both surreal and terrible. In all 15,000 lives were taken by the water and the ensuing chaos.

Hundreds of thousands were left displaced and their lives changed forever. In the context of such devastation, it almost seems distasteful to look at the effect that the disaster had on the many thousands of companies located on the prefecture, but Japan’s domestic fleet of machines proved crucial in the hours and days that followed. Thousands of machines were mobilised to help with the immediate task of sorting through the millions of tonnes of debris scattered over the torn coastline, helping the rescue effort, clearing the way as emergency teams began the arduous task of finding trapped survivors.

If Japan wanted to recover they would prove crucial to getting the country back to work and on its feet financially as a major contributor to bringing money into the country. But we’re getting ahead of ourselves. There was work to be done.

Companies like Komatsu, Hitachi and Hyundai all have major manufacturing bases and plants in the region, and it soon emerged they had been critically disabled by the tsunami. Many plants were without power, some were critically damaged and even those that had escaped relatively unscathed were shut down as the companies on their supply chains were wiped out.

This was reflected by share prices which fluctuated wildly in the cold-eyed columns filling the screens of the world’s financial markets.

Komatsu, the so-called Japanese Caterpillar, had posted an operating profit of $738.5 million for Q1 2011, almost double on the previous year, but was facing major challenges to get up and running. The disaster had wiped millions of Yen off its share price.

Meanwhile Toyota and Honda Motor Co revealed that domestic production in March plummeted by more than 60% from the previous year following the disaster. Honda’s production fell 62.9% to 34,754 units in March. Toyota, which resumed manufacturing operations at all domestic plants on 18 April, said domestic production fell 62.7% to 129,491 units, the lowest rate since 1976. At the same time, the Yen, which had been priced way above other currencies for so long analysts had begun to question whether Japan’s manufacturers would ever be competitive, also began to gain value as investors turned bullish on the money markets. It was the sort of bad news for the construction machinery industry did not need – the resilience and maybe the future of an entire industry was being tested.

Japan sits close to one of the world’s most active earthquake zones, with the archipelago located in an area where several continental and oceanic plates meet. In 1995 the Kobe earthquake struck one of its vital nerve centres for steel manufacturing, plunging the country deeper into the worst recession for several decades. In the intervening years, Japan had asked itself what it could have done better. It had reacted too slowly and that the government-led relief effort was under-manned and ill-equipped.

Fortunately this time around the response was both swift and, most crucially, effective. A proposal for a $50 billion budget to help finance to the reconstruction in Japan was soon unveiled and included the construction of 100,000 temporary homes for the displaced. It was a timely boost to manufacturers, who at best had seen output levels splutter to 50% of normal at best.

Komatsu also had the Fukushima nuclear plant to worry about. Many of the company’s plants were extensively damaged by the tsunami. Repeated aftershocks, black outs and disruption to water supplies hampered repairs, but the situation at a facility near the nuclear plant were even more precarious, said Komatsu US’ Dave Grzelak.

“Shipments of equipment have been delayed because roads and harbour facilities from and near our plants have been severely damaged. Gasoline shortages and rolling electrical blackouts that affect trains make it difficult-to-impossible for employees to get to work.”

“Shipments of equipment have been delayed because roads and harbour facilities from and near our plants have been severely damaged. Gasoline shortages and rolling electrical blackouts that affect trains make it difficult-to-impossible for employees to get to work.”

Company president Kunio Noji said the company had to respond swiftly to get up and running. Although power shortages by the Tokyo and Tohoku Electric Power Companies meant the company had to cut power consumption by 30% of its daily peak use and production was only possible by using its in-house power generation.

“Although we stopped production at some of our plants after the earthquake, our maintenance people from the Awazu, Osaka and other plants rushed to the affected plants and suppliers’ locations and worked to recover their production the day after the natural disaster,” Noji told analysts.

By May, Komatsu’s recovery was well underway and the company was starting to feel the benefit of the disaster funding. In fact its share price had increased by 10% since the disaster, way ahead of a Nikki average fall of 6% as investors speculated it would be a major beneficiary of the rebuilding process.CFO Mikio Fujitsuka was sanguine about the year despite the boost from the government.

“It is unclear how much rebuilding-related demand there will be and we have not incorporated any into our forecast. We are looking for domestic demand to be flat year-on-year,” Fujitsuka said.

One of the most impressive recoveries over the last year took place at Hitachi. According to Michijiro Kikawa, Hitachi Construction Machinery’s president his company managed to quickly restore production in just over a month.

“Facilities of a number of group companies, including five production bases in Ibaraki Prefecture and sales, service and rental bases in the Tohoku region were affected by earthquake,” said Kikawa, “but all related parties made efforts towards the restoration of those bases in order to minimise the impact on stakeholders, and we were able to restore production capacity to pre-disaster levels in mid-April. The fact that all group personnel came through the disaster unscathed was the greatest relief.”

In 2008 Hitachi set out its mid-term management plan setting targets for sales of 1 trillion yen ($13 billion – to put that in context Caterpillar raked in $54 billion in 2011) under the theme of establishing the company among the global top three construction machinery companies. It was an ambitious programme but achievable according to Kikawa.

“To achieve those targets, we mapped out a growth strategy centered on three axes: a “hard (products) axis” to establish new core products, a “soft axis (solutions)” to strengthen after sales customer support throughout life cycle of machine, and a “regional axis” to strengthen business development based on the regional market characteristics of countries around the world.”

 “To achieve those targets, we mapped out a growth strategy centered on three axes: a “hard (products) axis” to establish new core products, a “soft axis (solutions)” to strengthen after sales customer support throughout life cycle of machine, and a “regional axis” to strengthen business development based on the regional market characteristics of countries around the world.”

Kikawa explained that the company has since been forced to revise its plans.

“The global construction machinery market has faced two changes that could be described as dramatic. One of these was the Lehman Shock, which occurred in 2008. Another great change was the rapid growth of emerging markets.”

Kikawa understands that the emerging markets will be the fighting grounds for Japanese manufacturers like itself.

“After the Lehman shock, demand for construction machinery made a rapid recovery in the emerging countries, including China and India, against the backdrop of rapid economic development. The ratio of demand for hydraulic excavators between the advanced countries and emerging countries, which was 50:50 in the term ended March 31, 2008, has shifted to 20:80 in favour of emerging markets.”

While the volume and structure of global demand for construction machinery changed dramatically in this way, HCM rolled out its growth strategy based on those three axes.

“Although we could not achieve the numerical targets raised at the beginning of the plan, we were able to make certain strategic moves with potential for future growth. For example, in the hard axis, opportunities appeared that seemed likely to become our next core products, such as ultra large dump trucks for resource excavation such as mining, etc. We intend to sell these trucks as a package with our ultra large excavators and expand the parts and service business that would accompany these sales. Also, on the soft axis, we are continuing to establish our know-how in this mining business, contracting to undertake maintenance after sales, and this also promises growth in the future.

“Moreover, on the regional axis, I think that the measures we have taken in each region have steadily produced results, including the strengthening of dealers in China and other parts of Asia, the strengthening of our dealer networks in Russia and India, the strengthening of our mining business systems in Africa.”

Kikawa has recently become disappointed at the flabby demand experienced towards the end of 2011. Last year he forecasted 20% growth. By the time Hitachi’s financial year climaxes in March, he expects demand to have dropped by as much as 30%.

“I had expected Chinese demand to come back sooner,” he said at his most recent meeting with journalists. “The business environment is changing greatly, including increasing severe environmental and energy restrictions, and the intensification of the competitive environment due to the rise of Chinese and South Korean manufacturers.”

In a world where the Yen refuses to fall in price Kikawa is keen to see Hitachi become a lot more flexible in its approach to markets, like the Middle East.

“Our business is rapidly spreading on a global basis and our overseas business ratio has reached 80%. Consequently, we will review head office functions and the roles and responsibilities of regional business divisions and undertake reform towards systems whereby local personnel can develop business matched to their countries. We will delegate authority to regional operating divisions working locally, promote local personnel to top management positions, and strengthen our global governance systems and diversify management based on “Kenkijin Spirit,” our common global philosophy.”

“It will be important for us to make our value chain spanning product development to production, sales and service even stronger than ever. Because of this, while globalising our development system towards prompt “hard” (products) supply matched to the requirement of the various regions of the world on the one hand, we will promote a flexible manufacturing system that develops and produces core components in Japan and tailors the rest to local needs, and are also planning to respond to increased demand by investing in large-scale production facilities.

“Furthermore, in solution areas such as sales and service, we will upgrade our sales support systems for our dealers in each region looking and focus on the creation of systems that aim for customer satisfaction by supporting product lifecycles over the long term.”

He thinks that there are two great perspectives involved with regard to the CSR that Hitachi should deliver.

“With the recent earthquake, the important roles fulfilled by Japanese manufacturing industries through the supply of superior technology and products were once again highlighted in global economic—industrial society. The stable supply of superior products is the foundation of the CSR of the manufacturing industries.

“We will think once more about the modalities of manufacturing that will be called for in the future from now on, including things such as raising business continuity plans (BCPs) for times of disaster to the next level, the strengthening of supply chain management in alliance with business partners, and the pursuit of further energy savings based on the electricity supply situation, and we will cast each of these into shape.

Kikawa continued: “I  would like to turn the HCM Group into a truly global corporation that always has global social issues like this in its field of vision and both achieves growth as a company and contributes to the creation of a sustainable global society to earn the trust of all stakeholders through global business operations.”

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