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Business trends

Corporate Japan sharpens business focus under investor scrutiny

Companies shed noncore operations at record pace

Japanese corporations are pulling out of businesses at a record clip this year.
Japanese corporations are pulling out of businesses at a record clip this year. (Photo by Kosaku Mimura)

TOKYO -- Under pressure to give up on money-losing operations, companies in Japan are shutting down or selling off a record number of business units.

Listed companies here withdrew from or scaled back 68 business segments in the first four months of the year, according to Goldman Sachs Japan. The figure reached nearly half of the 140 logged for 2017, meaning that the total for all of 2018 may exceed the record set in 1999.

A defining trend of 2018 is that companies are making bold decisions to exit from what were once mainline operations.

Casio Computer announced in May its withdrawal from the compact digital camera market, falling casualty to the growing consumer trend of using the ever-improving cameras on their smartphones. Casio's digital camera business incurred an operating loss of 4.9 billion yen ($44.6 million) for the year ended March 31, sinking deeper into the red from the year-earlier 500 million yen loss. Sales had plunged to a tenth the 130 billion yen peak of a decade or so earlier.

"Even if we continue this business, revenue is unlikely to increase," President Kazuhiro Kashio said.

Fujitsu said in January that it had agreed to sell off its mobile phone business unit, which had been facing fierce competition. The company will concentrate on its mainstay services of information technology.

This development is reflected in the declining number of business segments in companies' financial statements. The 159 nonfinancial Nikkei Stock Average components with March book-closings and for which past data is available listed 626 segments in their fiscal 2017 earnings statements -- down from the 674 of fiscal 2007.

Among the companies abandoning once-high-profile operations during that period was Japan Tobacco, which called it quits on beverage operations in 2015.

Companies are weeding out noncore operations under pressure from investors to improve return on equity. Corporate management is "not as hesitant about selling off unprofitable segments as before," said Masashi Akutsu of SMBC Nikko Securities.

Investors apparently think that Hitachi has done a good job scaling back operations. The conglomerate now has five listed subsidiaries, down from 16 a decade earlier. Hitachi stock has rallied 22% since January 2017, when it announced the sale of its entire stake in the old Hitachi Koki, recently renamed Koki Holdings, outperforming the broader Nikkei average's 17% increase.

"We are seeing good results from portfolio reorganization after withdrawals from low-profit business segments and cutting costs," Hitachi Chief Financial Officer Mitsuaki Nishiyama said. The company plans to reduce the number of group companies by an additional 40% by around fiscal 2021.

In the revised corporate governance code that took effect on June 1, the Financial Services Agency and the Tokyo Stock Exchange call on companies to accurately identify their cost of capital, which indicates returns expected by shareholders, and to explain how their business portfolios and resource allocation align with such returns.

Kawasaki Heavy Industries examines return on invested capital for business units. "No segment is a sacred cow," Vice President Kenji Tomida said. The manufacturer will consider shutting down or selling off units that fail to meet targets, he said.

Corporate Japan "still has much room for realignment," said Hiromi Suzuki at Goldman Sachs, predicting a possible "drastic increase in M&As between Japanese companies."

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