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Hitachi hatches plan to beat its U.S., German rivals

Hitachi has received an order for 866 train cars and the 27.5-year maintenance service from the British government.

TOKYO -- Japan's largest electronics conglomerate Hitachi reported record operating profit in the fiscal year ended March this year, for the first time in 23 years. Although Hitachi has an overwhelming presence in the domestic electronics market, the company finds it difficult to close the gap with its U.S. and German rivals General Electric and Siemens.

     Its rivals are engaged in a takeover battle over the French multinational conglomerate Alstom to achieve further growth. Hitachi has to make its next move boldly, but first it needs to strengthen the competitiveness of its individual business fields. A key test for Hitachi is in high-speed railways, whose speed and stability attract high praise abroad.

     When asked about acquisition offers made by GE and Siemens for France's Alstom at a press conference on Monday, Chairman and CEO Hiroaki Nakanishi said calmly, "This might sound arrogant, but a joint venture between Hitachi and Mitsubishi Heavy Industries might have triggered their acquisition offers. It's an understandable strategy."

     The takeover battle for France's Alstom began in April. GE, which is taking the lead, is offering to buy Alstom's over 2 trillion yen ($19.4 billion) energy business, which accounts for slightly over 70% of the company's sales, for roughly 1.7 trillion yen. Meanwhile, it seems that Siemens is making an unprecedented offer to acquire Alstom's energy business and sell its railway business to Alstom instead.

     With the common goal of beating GE and Siemens to establish the No. 1 integrated thermal power generation system company in the world, Hitachi and Mitsubishi Heavy jointly established Mitsubishi Hitachi Power Systems this February. The combined company's annual sales are roughly 1.2 trillion yen. The annual sales of GE's thermal division are 1.5 trillion yen and those of Siemens are roughly 1.3 trillion yen. Even if Hitachi can finally catch up with its rivals, the gap will widen again if either of its rivals acquires Alstom.

     Nevertheless, Hitachi only has a 35% stake in the integrated company and Mitsubishi Heavy is taking the initiative. Hitachi's possible strategy is to grow its remaining nuclear generation and substation facilities.

     Market attention is focused on the energy business. Hitachi, however, may be focusing on the railway business, which Alstom left as its core business and trying to invest funds obtained from the sale of its energy division for growth. If business integration with Siemens materializes, sales will be far greater than 1 trillion yen.

     Currently, the annual sales of Hitachi's railway business are less than 200 billion yen. Hitachi has expanded its European business in an attempt to go after the Big Three, namely Alstom, Siemens and Canada's Bombardier. From this April, the company has sited the global headquarters of its railway division in the U.K., and is also building a plant there. "We would like to expand business across Europe, with the U.K., where we have a track record in high-speed railway, being a foothold," President and COO Toshiaki Higashihara said.

     However, Europe is home to its rivals. Alstom is the manufacturer of the TGV, France's high-speed railway with a maximum speed of over 570kph. Siemens has strong connections to German National Railways.

     In mid-April, Hitachi concluded a formal agreement with the British government on the train car renewal business of the country's Intercity Express Programme (IEP). The total project cost is around 1 trillion yen. In addition to 866 train cars, Hitachi has also received an order for the 27.5-year maintenance service. Hitachi has already delivered the high-speed railway Class 395 system, which runs London's suburbs.

     "Japanese finely-tuned services were accepted in the U.K., where delays in delivery time and train service for the convenience of train car manufacturers was considered acceptable," noted a Hitachi executive. Although the Class 395's maximum speed of 225kph and the IEP's 200kph are inferior to that of the TGV, delivery times and punctuality are their strengths.

     Hitachi's group operating profit rose 26% from the previous year to 532.8 billion yen, based on U.S. accounting standards, in the fiscal year ended March 2014. This was the highest level since the fiscal year ended March 1991, when it reported a group profit of 506.4 billion yen. The company is also expected to report a record-high group operating profit of 560 billion yen for the two straight years to March 2015, up 5% from the previous year. However, the company's operating margin is expected to be 6% this fiscal year, lagging behind GE and others, which are expected to report double-digit operating margins.

     In its midterm management plan, Hitachi aims to increase its operating margin to 7% next fiscal year and to double digits in later years. To achieve this goal, it needs to foster a world-beating business that can generate hundreds of billions of yen in sales and benefit from economies of scale. For Hitachi, which has a collection of smaller businesses compared with its rivals, the rail business is the one most likely to contribute to its operating margin. It will have to grow its railway business quickly.

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