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Hitachi bullish on prospects despite UK nuclear plant pullout

CEO Higashihara sees ABB power grid acquisition as 'black ship' of reform

Hitachi President and CEO Toshiaki Higashihara promised to make "contributions to infrastructure and employment in the U.K." despite ending its participation in a nuclear project. (Photo by Yuki Kohara)

TOKYO -- Hitachi's withdrawal from a 3 trillion yen ($28.4 billion) nuclear power plant project in the U.K. has not ended the Japanese industrial conglomerate's ambitions to become a "truly global company," according to CEO Toshiaki Higashihara.

In September, Hitachi pulled out of the massive Wylfa Newydd nuclear power project, which was once expected to meet 6% of the U.K.'s electricity needs and create thousands of jobs. The project had been stalled since January 2019 over a lack of progress in securing funds.

Hitachi made the decision "largely because it has been 20 months" since the impasse was reached, Higashihara told Nikkei Asia. "We thought one year was the limit." Hitachi "cannot wait for something when we are not sure how long it will take," especially with the uncertainty caused by COVID-19 and Brexit, he said.

But, Higashihara added, "We can make contributions for infrastructure and employment in the U.K. through other things, such as railways."

For a company that generated annual revenue of almost 9 trillion yen in the financial year ended March 2020 from a range of infrastructure businesses, from railways to office building management systems, cancellation of a single project may not matter much. Hitachi's global expansion reached a milestone when the company completed the purchase of Swiss rival ABB's power grid business in July, at a cost of over 1 trillion yen.

Although Hitachi is active in Europe, North America, China and the rest of Asia, sales in Japan accounted for more than half its sales for the financial year ended March.

Hitachi supplied Azuma high-speed trains to British rail operator LNER. They entered service last year and can reach speeds of around 200 kph. 

Hitachi supplied rolling stock to British rail operator LNER. The Japanese company earns almost 60% of its rail-related revenue in Europe but is looking to expand into other markets.

Unlike Hitachi's railway business, which has helped it build its previously domestically focused business outside Japan, the unit it acquired from ABB represents "a black ship that we brought in from outside to change Hitachi," Higashihara said, referring to the foreign gunboats that appeared off Japan's shores in the 1850s, concentrating the minds of Japan's leaders and forcing the country to modernize.

"To expand businesses locally, [the company] needs to be led locally," he said.

ABB's power grid business "is managing 15,000 customers in over 90 countries effectively," said Higashihara. He stressed that Hitachi can learn from ABB's management style, with local teams leading businesses while the headquarters keeps a grip on governance. "We can achieve localized globalization by using such functions of ABB," he added.

The purchase was not cheap. Kazutaka Yoshizumi, an analyst at SMBC Nikko Securities, said he expects it will take roughly 10 years for Hitachi to see a return on its investment. "Such a time span is not necessarily bad for a big, heavy business. ... The strategy makes sense," he said.

Yoshizumi also suggested it will take a long time for Hitachi to integrate the unit and create synergies, following a big shake-up of its businesses.

In addition to learning from ABB's approach to management, Hitachi hopes to sell its information technology solutions to ABB's clients, primarily in the U.S. and Europe. "We have set up a team to work on aging infrastructure in the U.S. And while progress is slow in Asia because of COVID-19, we are also working on possible collaborations globally," Higashihara said.

Since becoming CEO in 2016, Higashihara has focused on strengthening Hitachi's IT offerings to complement its hardware products and operational know-how in areas such as industrial equipment. Its Internet of Things platform, called Lumada, makes use of data and technology across different sectors.

Higashihara reiterated Hitachi's areas of focus -- railways, energy, industrial equipment and health care -- would not change regardless of the pandemic. He said Lumada can help to resolve various problems in these sectors arising from COVID-19.

"[The use of] touchless, remote and automation [technologies] is set to accelerate in each sector," he suggested. For example, elevators could be designed with facial recognition built in, so that people do not have to touch the buttons.

Higashihara said the Japanese industrial conglomerate “is headed in the right direction and will accelerate because of the coronavirus.” (Photo by Yuki Kohara)

The company "is headed in the right direction, and will accelerate because of the coronavirus," he said.

Spotting potential shifts in demand means listening more to customers, Higashihara stressed, saying it was no longer good enough simply to believe in the quality of Hitachi's technology and products.

He said the global coronavirus crisis was not bad, in a way, "because it made [employees] think about how they can contribute to society."

To improve communication with its customers, Hitachi needs local partners. Hitachi bought Malaysian artificial intelligence and data analytics company FusioTech Holdings this year. Higashihara is looking for "people who will talk to customers on the front line" in its future acquisitions, he said.

In Asia, "smart cities, smart industries and smart governments are set to grow and are what we will focus on," he said. Hitachi already offers an e-money pension payment system with Vietnam Post in Southeast Asia and is developing building management systems with Singaporean real estate company Frasers Property.

Higashihara also suggested that Hitachi's experience in the 2008 financial crisis has helped prepare the company for the pandemic. Hitachi was hit hard by that earlier crisis, which resulted in a net loss of 787 billion yen in the fiscal year that ended in March 2009. Since then, the company has simplified its corporate structure, ending its TV manufacturing operations and selling off or absorbing all but two listed subsidiaries -- in construction machinery and metals.

"If we stayed the same, we would have taken a huge loss again in this coronavirus crisis," Higashihara said. The company does expect its sales to drop by about 1 trillion yen this fiscal year, which ends next March, compared with the previous fiscal year's 8.7 trillion yen, but it expects to remain profitable, with an operating profit margin of about 5%.

Hitachi's two remaining listed subsidiaries could also be sold or integrated into the parent company. "Being a conglomerate is not bad," said Higashihara, because diverse revenue sources help to deal with the pandemic.

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