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Inside Hitachi


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INSIDE HITACHI

At a hushed laboratory overlooking the Pacific, Akira Doi is spending another autumn evening at work. Disk drives whir, and complex computer simulations flash across brilliant workstation screens. But despite the high-tech ambience, the director of Hitachi Ltd.'s Energy Research Lab is contemplating trains. Japan boasts the world's most efficient rail system, with 700 sleek Shinkansen bullet trains racing each day among 64 stations up and down Japan's spine. But that's not good enough for the indefatigable Doi and his team. They're dreaming up a new train--if you could call it a train--that makes the Shinkansen seem more like a steam engine. Swapping ideas over a high-speed computer network with engineers at a half-dozen other Hitachi labs, they're pooling knowledge in chips, advanced materials, superconductivity, and software.

Already, they have a magnetic-levitation prototype that whooshes down a guideway at 300 mph on a cushion of air. But that's just a start. Their goal is a nationwide maglev system controlled by a huge computer network that will behave like a living organism. Jobs such as scheduling and driving, now done by humans, will be surrendered to "intelligent" software, which will also untangle tie-ups and adjust the flow of trains. It's a transport system so vast and complex that no single Hitachi executive has a handle on the entire blueprint. Amazingly, too, aside from some concrete and steel, Hitachi could build it all in-house. Says Hitachi Executive Vice-President Yutaka Sonoyama: "There's no other company in the world in a position to handle this kind of thing."

BIG SHARE. That's no idle boast. The huge rail system is just a small slice of the secretive, $62 billion giant. With 28 factories, 800 subsidiaries, and 320,000 employees, Hitachi cranks out nearly 2% of Japan's yearly gross national product. No company ever occupied so much of the high-tech waterfront as Hitachi.

Mighty IBM and Hitachi's Japanese rivals Fujitsu and NEC make computers, but they don't sell $9 billion worth of TVs, VCRs, and other consumer electronics products. There's also an $20 billion division that makes power plants, generators, trains, elevators, and robots, plus a computer and chip division that rakes in as much cash each year as Motorola, Intel, and Sun Microsystems combined. Even American giant General Electric Co. doesn't compare. It gave up chips and computers years ago in the face of blistering competition from Japan. Single-handedly laying out 6% of Japan's corporate research and development spending, Hitachi holds the largest portfolio of Japanese patents and has topped America's list of patent earners for most of the last decade.

No Japanese company is as difficult to grasp as Hitachi, partly because of its amorphous management structure and partly because its huge cadre of engineer-managers shuns the press. Yet, to understand this behemoth is to penetrate to the core of Japan's industrial miracle and to understand Japan's continuing awesome strength as the world moves into a new high-tech age. In the sylvan seclusion of Hitachi's Central Research Laboratory in Tokyo, the new mantra is synergy and integration, focusing the entire company on electronic systems for the 21st century. It's a vision that spans the microscopic and the majestic. At one end, it's about circuits packed so densely on silicon that a supercomputer can slide into a billfold. At the other, Hitachi would help build huge automated factories, steel plants, and "intelligent" skyscrapers.

Now, Hitachi President Tsutomu Kanai and his board are mapping out their strategy for the 1990s and beyond. Rivals are watching closely because Hitachi's approach will set the agenda for other integrated electronics companies hoping to navigate this period of technological upheaval. Jarring shifts in the global computer business and saturation of once booming markets in chips and consumer appliances have pushed the Japanese electronics sector to the wall. But few doubt the stamina of Japan's high-tech powerhouses, among which Hitachi is king. War, oil crises, and high-yen shocks have made them only more resilient. Now, as second-tier companies fold or consolidate, the giants are digging in. While U.S. technology leaders seem bent on downsizing and deconstructing to shore up margins, Hitachi is betting that big is still beautiful.

It's a daring bet for these hard times. Key products in Hitachi's lineup, such as televisions and video cameras, aren't moving off the shelves, and Hitachi's memory-chip sales this year will be flat. In computers, the world is evolving away from the giant mainframes that Hitachi makes best. As a result, in the fiscal year just ended, Hitachi's net income plunged 45%, to $1 billion, on flat sales. Operating margins are a slim 4.5%, and profits could dip again next year. But typical of Japanese giants, Hitachi is willing to take the low margins during a recession to keep its empire intact.

NIGHTMARE. In fact, the sprawling company is probably the best positioned in Japan to make it through the turbulence. It is sitting on a cushion of $12 billion in cash. Builder par excellence of steel plants, rail cars, and power generators, Hitachi has a huge share of Japan's home market to guarantee profits. At the same time, it's racing ahead of the pack in blockbuster technologies such as neural networks, already field-testing one of the first to be embedded on a silicon chip. By drawing together the company's far-flung labs and factories, Hitachi plans to do nothing less than reinvent the world out of its own toy box of machines and mad science. "Something major is required to take electronics products to an entirely new stage," says Kenichi Imai, director of research at Stanford University's Japan Center in Kyoto. "If Hitachi can't manage that transition, nobody can."

Guiding all that heavy thinking, along with the sprawling, decentralized structure, makes Hitachi a manager's nightmare. But insiders say Tsutomu Kanai, 63, is just the man to steer Hitachi through the coming transition. A hands-on problem solver with a PhD from Tokyo University and 20 years in Hitachi's hard-charging energy unit, Kanai is a converted Christian and a tough nonconformist. He prefers a golf game with his wife to de rigueur matches with business buddies. He wears corporate blue suits today, but he's no career bureaucrat. An accomplished nuclear engineer, he designed and saw through to construction Japan's first all-domestic nuclear power plant. On weekends, he would gladly give up a baseball game to practice traditional ballads in solitude.

Kanai is now being tested by tough times. He's moving quickly to clean up the damage from the electronics debacle. He has transferred thousands of workers from idled VCR factories to more robust plants in the power sector. He has frozen middle managers' pay and slashed top executives' salaries up to 15%. He cut his own to $306,000. "Our ordinary workers have been hit hard," says Kanai. "Managers must experience the same kind of pain."

Kanai is also retrenching in such commodity businesses as dynamic random-access memory chips (DRAMs) and other semiconductors under price pressure from Korean competitors, focusing more on niche products such as semicustom chips and microprocessors.

Parlaying Hitachi's identity as both a computer maker and industrial heavyweight, Kanai is pushing big systems projects. One plan is to revolutionize Japan's already finely honed just-in-time distribution system. In the Shinjuku Station district of Tokyo, a computer-driven network of underground conveyor belts will someday banish delivery vehicles from the congested streets. And as Japan's cities turn more to regional power grids and "intelligent" systems, Hitachi will be there to supply computers, software, engines, and elevators. "With Hitachi, you've got the whole solution in one place," says Genya Chiba, vice-president of the government-backed Research Development Corp. of Japan.

Finally, Hitachi executives are carefully crafting their research blueprint for the 21st century. The company will spend $4 billion on R&D this year. While some 45% is headed into electronics, giant industrial systems and urban development projects will get more money in the next decade. And future energy systems, such as clean atomic fusion reactors, are also a growing priority.

FINANCIAL MUSCLE. With its fat reserves, Hitachi can deliver on its promises. In the boom days of the 1980s, Hitachi's conservative management stood on the sidelines while rivals Sony, Matsushita, and others took on billions of dollars in debt to snap up Hollywood film studios and U.S. chip-design boutiques. Today, while Fujitsu and NEC pay huge sums in interest, Hitachi enjoys a stream of interest income. "Other companies can't raise cash, except at very high cost," says Chuck Goto, general manager of equity research at S. G. Warburg Securities (Japan) Inc. in Tokyo. "But if Hitachi wants more revenues, it can build a new plant. It's got the strongest balance sheet in the industry."

Supported by such financial muscle, Hitachi has sheltered its R&D operations better than most competitors. At the Systems Development Lab in a Tokyo suburb, weary software writers unwind at a posh new clubhouse, complete with traditional gardens and tatami-mat tea rooms. And it's keeping the tap open. Even in the recession, huge sums still flow into biotechnology, a pursuit that is unlikely to benefit Hitachi's main electronics businesses for years (page 99). Says Kanai: "Basic science is something we will never sacrifice."

As Japan's star technology innovator, the company has also amassed a wealth of intellectual properties. One of the few blights on its record was the 1982 FBI sting that caught Hitachi trying to pirate IBM operating software. Hitachi settled out of court. Still, it ranks No. 4 in total U.S. patents granted since 1963, right after IBM, GE, and AT&T. Says Hitachi Vice-President Sonoyama: "We see them, increasingly, as strategic assets." Those assets are drawing partners from around the world as electronics giants rush into alliances to save costs. Texas Instruments Inc. chose Hitachi to co-develop future DRAM products. Other partners include Hewlett-Packard in microprocessors, GE in nuclear reactors, and IBM for huge printers that attach to mainframes, a niche that brings Big Blue more than $2 billion a year.

Although it ranks among the samurai of Japanese industry, Hitachi is in many ways a loner. It has a corporate culture that is egalitarian and individualistic in a world of hierarchy and conformity. Hitachi engineers delight in tales of solitary, misunderstood researchers who pursued hunches all the way to the market. Take the story of Yasutsugu Takeda, Hitachi's top R&D administrator. Arriving in the early 1970s at the Central Research Lab, Takeda began studying semiconductor lasers, which emit light when tweaked with an electric current. The devices were invented at GE but were so hard to fabricate that GE backed out. For the same reason, "I couldn't get any Hitachi factory interested in commercializing them," says Takeda.

Undaunted, he wrote up a catalog of semiconductor lasers he could custom-produce at his workbench and mailed it out to customers such as IBM, Bell Telephone, Xerox, and Canon. "Once I had orders lined up, I gave the list to the head of one of our chip-production plants," recalls Takeda. That was the beginning of Hitachi's flourishing optoelectronics business. But it doesn't end there. A colleague picked up where Takeda left off, improving the materials over the next decade. Today, Hitachi has a 60% stake of the world market for special laser devices that zip voice signals down fiber-optic phone lines. American Telephone & Telegraph Co. and others use the lasers in their transcontinental phone networks.

With such a loose and decentralized management, it's often hard to tell who's in charge. But the place has given rise to some unusual rebelliousness that pays off. When a former Hitachi CEO decided that hydroelectric power was passe in the early 1980s, he tried to order a research team in that sector to disband. Instead of bowing to the CEO, the team went underground, taking advantage of the ample allotment of unmonitored research time to pursue the project. Several years later, they surfaced with a new system that scored big with power companies facing environmental restrictions.

ELITE CORPS. Decentralization is the creed at all levels of the company. Most of Hitachi's 28 factories function virtually as separate companies, spending on research as they please, developing their own products and bringing them to market. If this defies rules taught in B-schools, that's no surprise: None of the company's top executives has an MBA. Indeed, all six men who have stood at the helm were engineers. But in keeping with the loose structure, none ever became a hallowed presence on the scale of Akio Morita at Sony Corp. or Konosuke Matsushita, founder of the Osaka-based Matsushita empire. "It's never been easy to say exactly who is steering Hitachi," says Managing Director Takeda.

Of course, management at Hitachi isn't as chaotic as it seems. Ten executive managing directors watch over Tokyo-based operating divisions responsible for each of Hitachi's main businesses. They're in constant touch with factory heads in their bailiwicks and report back to Kanai and his six vice-presidents. On the research side, factories commission and pay for research work they require from any given laboratory, while headquarters kicks in for giant, strategic projects such as maglev trains, demanding collaboration from groups of labs and factories. To maintain harmony, the heads of all the labs meet twice a month in Takeda's spacious office across from the Imperial Palace in Tokyo.

If there are any heroes within the loosely knit organization, they are Hitachi's elite corps of more than 1,200 PhD engineers. Their advanced degrees, mostly earned after joining the company, win them a place in a shadow society at Hitachi called Henjinkai, or oddball club. The group was created years ago to forge stronger links among gifted researchers at Hitachi's scattered facilities. Members fraternize at technical conferences, swap ideas, and informally advise Hitachi's board on important technology developments. Top guns do their most far-out work at Hitachi's Central Research Lab, the company's spiritual core. On a 51-acre refuge west of Tokyo, they contemplate micromachines and virtual reality as they stroll on pathways through natural forest and manicured gardens or work out in the Olympic-size swimming pool.

RESEARCH WEB. Such collegiality also helps Hitachi tap the vast expertise housed across the company's dozens of divisions. When the prototype of the maglev train recently sputtered, the company could draw on Doi at the Energy Lab and his supercomputer mavens to work out design flaws. Doi in turn could call on engineers in Mito Works to help modify the train design. In the same manner, Hitachi uses no less than seven laboratories to contribute their specialties in robotics, organic chemistry, and supercomputer modeling to perfect the world's highest-performance disk drive (table, page 94).

Hitachi's research web has spread to include applied math in Dublin, high-speed chips at Britain's Cambridge, and U.S.-style high-definition television in Princeton. It has recruited the best and brightest: Electronics superstar Jack S. Fuhrer, former head of TV research at the David Sarnoff Research Center, runs the Princeton lab.

The roots of Hitachi's obsession with research stretch back to the company's origins, in 1910, as an electrical repair shop for motors imported from the U.S. and Europe. When World War I interrupted machinery imports, homegrown production became a national mission. Working out of a cramped shed in a small fishing village north of Tokyo, Hitachi founder Namihei Odaira and a coterie of fellow electrical engineers from Tokyo University began taking orders for small motors and other electrical equipment. What could no longer be purchased, they skillfully reverse-engineered.

Through the war years, Hitachi's product lines expanded as orders for heavy equipment streamed in from power companies, manufacturing plants, construction companies, and the military. Odaira and his crew fought against staggering disadvantages. Rivals Toshiba, Mitsubishi Electric, and NEC had grown up within giant industrial combines known as zaibatsu, where they had access to capital from banks at the center of each group and guaranteed demand for their wares from other group members. Upstart Hitachi, in contrast, had nothing to depend on but superior engineering. And even in the half-century since World War II, with the zaibatsu disbanded--later to become keiretsu--Hitachi has yet to shake the image of the country samurai, or nobushi. The term suggests a scrappy fighter, unfamiliar with the comforts and the political wiles of the capital.

Perhaps because the company began as a federation of fiercely independent engineers, it diversified and grew without any commanding managerial presence. Factories sprang up one after another, producing everything from electric fans to giant turbines to chips, VCRs, and computers. And the company spawned hundreds of subsidiaries in chemicals, construction equipment, cable, and magnetic recording tape. Sales quadrupled from 1965 to 1975 and once more over the past 15 years. Spectacular growth masked the fact that no one had a firm grip on the reins.

Critics complain that this headlessness bred inertia, and they point to bungled starts and missed opportunities. In the mid-1980s, Hitachi and Toshiba raced each other to market with one-megabit DRAM chips. Then the high-yen recession hit, and Hitachi retrenched. Toshiba persevered--and got rich on one of the most profitable chip products ever. But Hitachi's looseness has paid off over the long haul. Throughout the 1960s, computers soaked up an inordinate share of Hitachi's R&D outlays, while the division hemorrhaged red ink. Under identical pressures, Matsushita Electric jettisoned its computer division in 1964, followed by Hitachi's two mentors in data processing, RCA and GE. The mass retreat sparked a crisis at Hitachi.

But instead of leaving the field, management continued to subsidize computers with cash from its heavy-equipment businesses and from sales of consumer products. A decade later, Hitachi managers celebrated as the company's IBM-compatible mainframes and disk drives blossomed into the company's biggest cash cow. Even today, these products account for more than a third of revenues. "Hitachi never backs off or lets go of a division," says Eiichi Sano, a former Toshiba manager who now directs research at a government manufacturing promotion center. "The company is thinking years down the road."

So today, while most companies are wrestling with the concepts of multimedia products, Hitachi has a first generation in production. It rushed out new workstations fitted with video cameras and high-speed chips for transmitting images and stereo sound, allowing for global videoconferences with data swaps and 3D graphics. Hitachi builds huge optical libraries for hospitals, archiving thousands of patient records in the form of digitized X-rays, CT-scans, and magnetic resonance imaging, or MRI, tests.

But these products are just crude mock-ups of the wonders that faster chips and better software will usher in (table, page 98). Top-ranked scientists at Hitachi's main lab are feverishly pursuing communications and imaging circuits that will lead to handheld video phones. No more fussing with keypads, or even touch-screens: The palmtop supercomputers of the coming century will accept voice commands.

VANGUARD. Computer networks are also poised to make an evolutionary leap. At the Systems Development Lab, Hitachi's elite computer architects are working on software that would let a network of, say, 1,000 personal computers work as a single, massively parallel supercomputer. Since each desktop on the net would pack the power of today's mainframes, their combined potency would be off the charts.

In the same way, by pooling its strengths in chips, computers, and audio-video systems, Hitachi plans to be in the vanguard of so-called virtual reality. With the combination of sophisticated sensors and unlimited computing power, people will someday be able to meet, work, and entertain themselves in computer-generated environments--a coffee shop in Paris or the distant moons of Saturn--without leaving home.

These are not the proprietary schemes of Hitachi. The entire global electronics industry is caught up in identical dreams. At the moment, the visions are caged by the economic slump and by the lack of industry standards for these next-generation products. There is far to go in this brave new world of intelligent machines, and of course Hitachi won't lead in every facet. The U.S. software geniuses such as Apple, IBM, and Microsoft are blazing many of the trails.

But Hitachi has an awesome collection of building blocks, from integrated circuits to wireless communications to full-blown industrial systems. More than ever before, says Kanai, "our different businesses are revitalizing each other and making us stronger." Hitachi's good fortune is also Japan's, since the company has provided the underpinning for every Japanese electronics effort since the war. Today, Hitachi's factories are fully staffed, its research labs well funded, and its coffers flush. When the new technology paradigms finally fall into place, Hitachi will be there.Neil Gross in Tokyo


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