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Hitachi overhaul pays off in record black ink

But Japanese conglomerate's long quest for 10% operating margin still not over

Hitachi CEO Toshiaki Higashihara announces the company's medium-term business plan on April 27. (Photo by Keiichiro Sato)

TOKYO -- Hitachi's restructuring efforts are finally bearing fruit as the company forecasts operating profit to rise 5% to 750 billion yen ($6.87 billion) this fiscal year, a second straight annual record.

The operating margin may reach 8% for the first time. This would mark a milestone on the path to the long-held target of 10%, which the Tokyo-based electronics and industrial conglomerate could not achieve when earnings rebounded in the years after the 2008 financial crisis.

Operating profit grew 22% to 714.6 billion yen for fiscal 2017, the company reported on Friday. Revenue climbed 2% to 9.36 trillion yen.

Fiscal 2018, which began April 1, "will be a year of structural reform so we can evolve into a global company," CEO Toshiaki Higashihara told reporters here. Hitachi has sold off such operations as power tool maker Hitachi Koki and stopped taking new orders for large industrial plants overseas, a money-losing proposition.

After being stuck in the 6% range in recent years, the operating margin finally rose to 7.6% in fiscal 2017 -- just 0.4 percentage point short of the 8% targeted for the medium term through fiscal 2018. But foreign rivals in heavy industry equipment boast even better margins. General Electric logged a 10% operating margin in core operations for the January-March quarter, even while sustaining a net loss.

Siemens of Germany had an 11% margin for core businesses in October through December. Hitachi's earnings foundation is still not strong enough for it to join the "10% club" of companies with consistent double-digit margins.

Further cost-cutting is thus in the cards for Hitachi this fiscal year. The group will launch efforts to downsize to about 500 companies from the current 800 and consolidate overhead systems. The goal is to save more than 100 billion yen by fiscal 2021.

Hitachi also seeks to come up with products where it can be a global leader -- much like aircraft engines for GE. Hitachi is often said to lack market influence, so it will pour resources into proprietary industrial motors, for instance, to strengthen its presence. It also will work to turn a profit from the "internet of things" business, seen as a future pillar of growth.

Its market capitalization of roughly 3.9 trillion yen is hardly more than that of Mitsubishi Electric, whose operating profit is not even half as high. Risks associated with the nuclear energy business seem to be weighing down Hitachi stock.

The company has requested assistance from the U.K. to secure a profit on a nuclear plant project there. Market participants are wary after Toshiba incurred massive nuclear-related losses in the U.S.

Some other sources of concern also need addressing. In South Africa, Hitachi has been working with Mitsubishi Heavy Industries on a fossil-fuel power business. The partner is demanding more than 700 billion yen in compensation for losses associated with such complications as construction delays.

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