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Panasonic will focus more on home appliances and its EV battery unit as a new chief steps forward. (Source photos by Maho Obata, Reuters)
Business Spotlight

Panasonic aims to clean house with revival plan under new CEO

Japanese appliance maker and Tesla battery supplier hope to wow investors

MITSURU OBE, Nikkei staff writer | Japan

KUSATSU, Japan -- Panasonic's commercial interests span sectors and continents -- from making batteries for carmaker Tesla to washing machines for Latin America. But Masahiro Shinada, chief executive of the Japanese group's appliances division, sees a big part of the company's future in this rural town in its home country's mountainous interior.

At a vast factory in Shiga Prefecture that employs 5,000 people, Panasonic makes high-tech air conditioners with a very relevant feature -- they generate nano-sized water particles that work against the coronavirus and other viruses and bacteria as well as pollutants in the air. The technology to generate hydroxyl radicals, or atmospheric detergent, is now used in cars, elevators, buses and trains in Japan.

Sales of Panasonic's Ziaino air purifiers, which generate hypochlorous acid, a virus-inactivating substance, have trebled to over $100 million amid the coronavirus pandemic. The company is aiming for sales of almost $500 million in the next five years.

Shinada, the appliance business CEO, said in an interview with Nikkei Asia that the company is trying to put behind it the image of Panasonic being a declining TV maker, as it shifts toward health-related products. The rising sales are a welcome sign of revival in appliances, the 103-year-old company's founding business, after a decade during which Panasonic tried to shift into supposedly less contested, business-to-business areas, such as producing automotive components like batteries and car navigation systems for global automakers.

"In some categories, we should aim for No. 1 in the world, in others we aim for regional No. 1. We may not become as big as LG, but we can compete in terms of profitability," Shinada said. "We want to make the rest of the world know that Panasonic has been reborn."

The giant billboard atop this factory in Kusatsu, Japan, illustrates the central position that appliances occupy at Panasonic. (Photo by Mitsuru Obe)

It is a message Panasonic hopes investors will hear as it tries to draw a line under protracted restructuring campaigns under Kazuhiro Tsuga. His term as CEO ended on March 31 after nine years at the helm. He oversaw the aftermath of what analysts say was an overpriced Sanyo Electric acquisition in 2009, exits from semiconductors, LCD panels and solar panels, and a shift toward automotive components and avionics.

The group is making a fresh start under Yuki Kusumi, who was appointed as group CEO after leading a restructuring of the company's automotive business.

So far cautious optimism pervades. Panasonic's share price has risen more than 35% since the leadership changes were announced in November. On Feb. 2, the company upgraded its forecast for its annual profits in the year to March. Its electric vehicle battery venture with Tesla is expected to turn profitable on an annual basis for the first time since production started in 2017.

Kusumi, who succeeded Tsuga on Thursday but must have his appointment as group president confirmed at the company's annual shareholder meeting in June, gave a statement of his intentions when his appointment was announced.

"In our company, there are many businesses that are only generating low returns," he said. "From the viewpoint of our founder, it means our businesses aren't contributing as much to the society as before."

Kazuhiro Tsuga, left, has ended his term as Panasonic CEO and handed over the post to Yuki Kusumi, right. (Photo by Kosaku Mimura)

Panasonic's founder in 1918 was Konosuke Matsushita -- a self-made man who grew up without formal education. Matsushita once said that profit is a reward for contributing to society and that the mission of a manufacturer is to produce "as plentifully and inexpensively as tap water."

In postwar Japan, Panasonic was a symbol of recovery. It produced and exported appliances that -- like those of many other Japanese companies -- were initially considered second-rate goods but gradually acquired an international reputation for quality.

By the 1990s, Panasonic rivaled Sony and Philips for the position of top global TV maker. In the mobile phone market, too, Panasonic was a top global contender along with Motorola, Nokia and Ericsson. In the year ended March 1991, Panasonic was the second most profitable Japanese company after Toyota Motor and a top consumer brand in Asia.

Having grown into a corporate behemoth, however, it has struggled to adapt to changing times -- instead becoming emblematic of Japan's struggling manufacturing industry.

In segment after segment, it lost its lead to up-and-coming South Korean and Chinese competitors such as Samsung, LG and TCL. The past two decades have been a fight to turn its fortunes around.

The company's operating profit margin stayed below 5% for most of the past two decades, and stood at 4% at the end of this past December, behind that of Sony at 11.1%, Hitachi at 6.3% and LG at 5.1%, according to data from QUICK FactSet. Its market capitalization is still half its 2006 peak and about a quarter of Sony's.

The company has struggled to produce global hits. It does have a few strong segments, such as DVD and video players with a global share of 17%, but they are too small to support a group of 250,000 employees.

In Japan, Panasonic commands a near 30% share of the consumer appliances market, but its global share in 2020 stands at 2.5%, down from 2.8% in 2015. That puts the company seventh in the world, behind peers such as Midea, Philips and Haier, according to market research company Euromonitor.

Even in air conditioners -- a Panasonic strong suit -- the brand's global share during the past five years has slipped to 4.1% from 5.1%. That makes it No. 5 in the world, Euromonitor data shows.

"It's an overly diversified company. ... The company has too many products," said Atul Goyal, managing director of equity research at U.S. investment bank Jefferies. "I wish them to first focus and shrink to a smaller size, be a winner in three to four businesses, then grow those four businesses, not going left, right and center."

Some experts say the issue is much more to do with marketing than with technology. Marketing, especially in the global markets, is seen as critical.

"How to sell in large volumes is always a challenge to Panasonic," said Atsushi Osanai, a professor at Waseda University Business School. Unless the company gets its global marketing right, it will remain "an elephant at home, a cat abroad," Osanai said.

Others say Panasonic, like other Japanese electronics makers, has been too focused on technology while not paying enough attention to product convenience, ease of use, digital features and cost-performance.

Panasonic is not alone among Japanese electronics companies in trying to transform itself. Hitachi has divested its appliances unit to focus on transportation and other infrastructure businesses. Sony has reconfigured itself into a games, image sensor and entertainment conglomerate. Sharp has been acquired by Foxconn of Taiwan.

Panasonic is adjusting its focus -- and returning its appliance operations to center stage. (Photo by Mitsuru Obe)

At any company, Goyal said, the most scarce resource is top management time. "If you give the top management an unprioritized list of 50 things to do, they can't do a job," the Jefferies researcher stressed.

It emerged in March that Panasonic, in one of its last acts begun under Tsuga, intends to acquire Blue Yonder, an AI company whose technology monitors supply chains in real time and predicts demand, allowing the user to optimize inventory levels and logistics operations.

Panasonic already owns 20% of the U.S. company. Its desire to acquire Blue Yonder shows that business services remain a key to Panasonic's profitability, but the intended acquisition could again raise questions about the company overstretching itself. Shares fell more than 6% when Nikkei revealed the talks with Blue Yonder.

Even Panasonic's key strategic collaboration, on battery production for electric vehicles with Tesla, has been far from smooth.

Back in 2010, when Panasonic decided to invest $30 million in the startup, the EV market was small and the outlook uncertain. In 2014, Panasonic agreed to participate in the development of Tesla's "gigafactory" EV plant, which came online in 2017.

But when the idea of expansion came up in 2018, Panasonic hesitated. It took the company until August 2020 to decide to go ahead. The indecision frustrated investors, as Tesla turned to other suppliers -- CATL in China and LG Chem of South Korea -- and started pursuing battery development on its own.

"Panasonic cannot even focus on the one good business they thought they had," Jefferies' Goyal said. "They should have invested heavily. They should have taken risks and expanded that business proactively."

Amid the leadership transition, Panasonic is now adjusting its focus by returning its appliance business to center stage.

Shinada, the appliance chief, said the company is regaining its "fighting spirits." He acknowledges that Panasonic needs to focus on areas where it has strengths. "'Working for people' has been the original mission of this company. That's what we want to focus on."

He added that the appliances business is now broad, including business-to-business services such as making large air conditioners for offices and refrigeration systems for supermarkets and convenience stores.

Shinada stressed that Panasonic has a ways to go in terms of reducing the cost of its products and making them more suitable for a wider number of consumers outside Japan. The company's decision to shift the global appliance business to China is an example of how it is trying to respond, he said.

Masahiro Shinada, head of the appliance business, says, "We want to make the rest of the world know that Panasonic has been reborn."  (Photo by Kento Hirashima)

Take its commercial refrigeration business in China. Its QR code-operated "smart lockers" are installed at convenience stores and coffee houses across big cities in China, including chains like HeyTea, allowing shops to serve customers without contact. The lockers were installed at 98 HeyTea stores last year and are expected to be at 500 more stores this year, according to Tetsuro Homma, the Mandarin-speaking CEO of Panasonic's in-house China & Northeast Asia Company.

Panasonic controls 30% of China's market for refrigerated food displays with sales of about $500 million. Homma thinks that the size of the business could triple to the level of the U.S., a market that Panasonic serves through subsidiary Hussmann.

Hussmann is a $1.5 billion business in a country of 300 million people. If China's 1.4 billion people "started asking for fresh food as Americans do, this business would become at least as big as in the U.S.," Homma said.

Still, Panasonic's business in China has never been easy. Its sales there have stagnated at around $7 billion with a share of around 2% in the home appliance market, despite it being the first Japanese company to enter China, in 1987.

Shinada says raising the share to 5% would have a huge revenue impact but added that Southeast Asia is where the company started its overseas push, in the 1950s and 1960s, and where it has a bigger market share. He noted the company's strong position in markets such as Vietnam and the Philippines.

"We are committed to reviving the home appliance business in [Southeast] Asia just as much as we are committed to the Chinese market," he said.

The company has much to prove. Some analysts say the recent recovery in Panasonic share prices is due entirely to a general upturn in the economy, not to efforts by the company itself. Tsuga, in unveiling his retirement plans last November, admitted as much.

"It was difficult to achieve growth with profitability," he said, pinning his hopes on his successor Kusumi. "He can make a harsh decision even though other people are reluctant to accept."

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