BUSINESSWEEK ONLINE : NOVEMBER 13, 2000 ISSUE
INTERNATIONAL BUSINESS Japanese High Tech Roars Again Reforms in Japan bring profits back, but more changes are needed When Koji Nishigaki took over as president and CEO of NEC Corp. ( NIPNY) in March, 1999, few were willing to place long-term bets on the high-tech manufacturer. Like most leading Japanese makers of chips and computers, NEC was an ailing giant, staggering under years of sickly profits, poor management, and over-diversification. Nishigaki didn't waste time: He immediately began revamping management, slashing jobs, and unloading unprofitable units. Today, NEC is reaping the rewards. For the six months ended Sept. 30, sales were up 9%, to $23 billion, on an operating profit of $690 million, compared with a loss of $73 million for the same period last year. NEC also revised its yearly operating profit projection upward by 20%. ''It's an enormous job to restructure,'' says Nishigaki. ''But it's helping us recover.'' BIG JUMPS. A similar sweet song is being sung at the headquarters of Hitachi ( HIT), Toshiba, and Fujitsu ( FJTSY), integrated electronics companies that manufacture and sell a wide range of products and services--from chips and computers to telecommunications gear and information systems. Thanks to robust demand for chips that power cell phones and other gadgets, all are boasting big jumps in operating profits. And all but Fujitsu have revised upward their forecasts for fiscal 2000, which ends next March. A high-tech comeback? Not quite yet. Investors, spooked by rising oil prices, a weak euro, and the specter of a global slowdown, have hammered the stock prices of Japan's electronics giants despite their solid earnings. Foreign investors, who own close to 30% of the shares in each of the companies, want to see more drastic restructuring and improved overseas investments. Not least among their concerns is that NEC and its rivals still depend on the fickle semiconductor market for 20% to 40% of their profits. Another slump in the chip market, along the lines witnessed in 1998-99, would certainly affect earnings. But there's more to this recovery than a bounce in the chip market. Japanese consumers can't seem to get enough of the latest in portable, digital electronic gadgets. Digital cameras, notebook PCs, and handheld devices, all crammed with components made by the likes of NEC, Toshiba, Sanyo, and others, are flying off the shelves. It's not just consumers who are shelling out the yen. Japan Inc. is spending heavily on new technology, which last year accounted for a record high 20% of private-sector investment. The trend promises to pick up this year as companies shift to Web-based supply networks, serviced by the likes of Fujitsu and Hitachi. NEC and Fujitsu especially are benefiting from a surge in spending on telecom equipment and infrastructure. The shopping spree will only accelerate next year when Japan starts rolling out the world's most advanced, high-speed wireless cell-phone system. The government meanwhile plans to invest $6.5 billion in information technology this fiscal year, 20% of it to be spent connecting offices and homes to a national fiber-optic network. More important are the changes taking place within the companies themselves. A new generation of pragmatic CEOs is abandoning the old business model, which stressed growth and job creation through diversification, with little regard for shareholder value. The new CEOs are downsizing, cost-cutting, and spinning off or merging superfluous divisions. As a result, according to Jardine Fleming Securities estimates, NEC's operating profit margin will rise from 2.2% in fiscal 1999 to 4.7% this year, Fujitsu's from 2.9% to 5.5%. ''By Japanese standards,'' says Kevin Hebner, strategist for Credit Suisse Asset Management in Tokyo, ''their restructuring has been impressive.'' NEC's Nishigaki gets the highest marks. Over the past year, he has cut 4,000 jobs and is on track to attain his 2002 goal of eliminating a total of 15,000 jobs, or about 10% of the global workforce. He pulled the company out of the money-losing consumer-PC market in the U.S. and agreed to consolidate memory-chip and optical communication operations with rival Hitachi. Nishigaki is shifting NEC's core business to Internet services, based on the company's Big Globe service provider, Japan's second largest. In July he unveiled a $5.6 billion fund that will be used to buy stakes in small U.S. technology companies. Nishigaki's counterparts at Fujitsu, Hitachi, and Toshiba aren't far behind. Fujitsu President and CEO Naoyuki Akikusa has shut down chip plants in Britain and Japan, and recently announced a halt to development of IBM-compatible mainframes by Amdahl Corp., Fujitsu's U.S. subsidiary. For his part, Hitachi President Etsuhiko Shoyama reorganized the sprawling conglomerate into 10 core divisions, giving each the autonomy to make investment decisions. Tadashi Okamura, who became Toshiba's new president in June, plans to overhaul the company's chip operations, spin off money-losers, and redirect capital spending to such growth sectors as cell phones and notebook PCs. Investors, however, are proving tough to please. The stock price of all these companies has declined since early this year, paralleling the 20% drop in the TOPIX, or Tokyo Stock Price Index. On Oct. 31, Hitachi's share price fell to $10.88, its lowest level this year, even though it announced that operating profit jumped 152% in the first half. What gives? According to Steve Myers, industry analyst for Jardine Fleming in Tokyo, investors are more concerned about a global downturn than company specifics. He says they are all asking one question: ''Is the U.S. economy headed for a recession?'' Contributing to the uncertainty is concern over memory-chip prices. Starting in 1998, when the industry went through a major slump, companies like NEC, Hitachi, and Mitsubishi Electric suffered heavy losses that pushed them to the wall. ''The market isn't being fooled,'' says business consultant Till Vestring, of Bain & Co. Japan. ''Everyone is expecting these companies will be hit when this semiconductor cycle winds down.'' SLOWDOWN? It's also not clear that the new company leaders are all true reformers. Since the beginning of Japan's recession, many executives have taken initial steps, then failed to improve shareholder value by boosting innovation and productivity or by beefing up corporate governance. That doesn't appear to be the case with Nishigaki, who impressed investors by meeting with them on Oct. 26 to explain NEC's interim results and announce a new corporate strategy. But executives at the other companies may put on the brakes now that they've hit their earnings targets. That would bode ill for Japan's high-tech giants. Their future prosperity depends on transforming themselves from capital-intensive conglomerates into fleet-footed IT companies. That means speeding up, not slowing down, on corporate reforms--especially given the prevailing uncertainty in the markets. By Irene M. Kunii in Tokyo _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Japanese High Tech Roars Again CHART: Earnings Up, Stock Prices Down INTERACT E-Mail to Business Week Online

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