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Hitachi hopes two heads make for less exhausting global management

Left to right: Former Hitachi Chairman Takashi Kawamura, new President and COO Toshiaki Higashihara and new Chairman and CEO Hiroaki Nakanishi pose Jan. 8 after announcing the revamped management team.

TOKYO -- Hiroaki Nakanishi has had his hands full as president of Hitachi, the sprawling machinery and infrastructure conglomerate. With the Japanese company bent on global expansion, he has been jetting around the planet to negotiate with customers. He has achieved results and won plaudits from the market, but he has also worn himself down. 

     Now Nakanishi will have some extra help. Hitachi on April 1 moved to strengthen its governance by creating a new CEO post and partnering that with a chief operating officer. Nakanishi, 68, becomes chairman and CEO. Toshiaki Higashihara, 59, moves up from senior vice president to become president and COO.

     Since he became president in 2010, Nakanishi has managed to generate more than 400 billion yen ($3.86 billion) in annual operating profit over the last four years. He stabilized earnings by selling off small to midsize panel and hard disk drive businesses. He also declared the company would continue groupwide restructuring efforts "indefinitely."

     Nakanishi's endless pursuit of efficiency has gone over well with investors. Currently, Hitachi's shares are trading at roughly double the price seen at the time he became president. Many say the stock is a "buy" because Nakanishi is in charge.

     In mid-December last year, Nakanishi asked Higashihara to become president. Higashihara was extremely reluctant. "I would not like to take the job after you, Mr. Nakanishi," he told him. 

     With the new setup, Higashihara will not have to entirely fill those rather large shoes. After the change was announced in January, Hitachi's stock moved only slightly the following couple of days. Investors recognized the company was not veering far from the status quo.

No rest

Nakanishi's predecessor, Takashi Kawamura, 74, served as both chairman and president in 2009 as he sought to guide the company back from a 787.3 billion yen loss. Kawamura consolidated power to ensure quick decision-making. 

     However, the increasingly global nature of Hitachi's business makes it difficult to run a one-man show.

     Hitachi derives a large portion of its profit from heavy electrical machinery, infrastructure such as railways and data storage products. In the past, the company used to rely heavily on capital spending by domestic clients such as Tepco and Nippon Telegraph and Telephone group. Today, it counts Saudi Aramco, a petroleum and chemicals enterprise, and Anglo-Australian miner Rio Tinto among its customers.

     On one occasion, Kawamura squeezed in a trip to the United Arab Emirates to make a pitch for a nuclear reactor project, even as he was orchestrating a deal in another country. Hitachi was unable to land the contract. A year later, he decided to slide over into the chairman's seat and let Nakanishi share the load as president.

     Nakanishi's travel schedule, though, has been just as hectic. Last December, he attended a meeting in Australia, then flew to the West Coast of the U.S., and then finally moved on to the East Coast. By the time he landed in Washington, D.C., he was exhausted. Grueling trips like this one reportedly had Nakanishi telling confidants: "I can't handle all the responsibilities of leading this company on my own."

Mind the margins

As CEO, Nakanishi may have a somewhat lighter burden, but there is little doubt about his management approach. Question is, how will Higashihara handle the presidential duties? "I will implement midterm business plans," he said. "I will meet a lot more customers and land orders from them to generate profits. That's the mission of a COO." In other words, Higashihara appears keen to leave the strategizing to Nakanishi.

     Higashihara was selected to be president largely because of his stellar track record in building connections with global oil and power companies. As head of Hitachi's infrastructure segment, he also cultivated profit opportunities in after-sale maintenance services and operational support, as well as consulting. In a sense, Higashihara represents Hitachi's transition from pure manufacturer to all-around service provider.

     Despite the company's progress, Hitachi has a long way to go. Its group operating profit margin stands at about 5%, roughly half the levels of U.S.-based General Electric and Germany's Siemens. Its outside directors, such as former 3M CEO George Buckley, frequently point out Hitachi's weak profitability. 

     "The company failed to recognize where we can offer added value and focused single-mindedly on selling individual devices and machines," one Hitachi executive officer said, explaining the profitability problem. This is all the more reason to pursue the service angle.

     Hitachi plans to get a new board of directors approved at its general shareholders meeting in June. Of the 12-member team, seven are outsiders and three are foreign nationals. The outside directors are likely to keep the pressure on Nakanishi and Higashihara to develop an earnings framework to match Hitachi's powerful rivals.

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