This content is from: Research

Nidec Corp. Is No. 1 on 2014 All-Japan Executive Team

Astellas Pharma and Tokyo Gas Co. also earn high marks from money managers and sell-side analysts.

From Locked ranking

For many of Japan’s corporate leaders, the old playbook strategies just aren’t working anymore. Profit from bilateral trade partnerships with neighboring China? This was a smart play as recently as 2010, when the latter was the world’s go-to economic powerhouse, but it makes less sense now that China’s expansion is slowing.

Push deeper into Europe or the U.S.? Growth rates in those areas remain uninspiring.

Focus on the domestic market? After a promising start, Prime Minister Shinzo Abe’s economic initiatives, collectively known as Abenomics, are arousing increasingly polarized opinions among business leaders and economists regarding their likely effectiveness.

All of this raises existential questions for Japan’s corporate managers: What markets should they be angling to sell to in the coming years, and what will buyers want?

“Japanese companies need to pivot, but where do they pivot to next?” wonders ­Kenneth Goldstein, an economist at the Conference Board, a New York–based business management research group. “The principal task now for the Japanese C-suite is to devise a strategy not for the next quarter but for the next decade.”

Some of the nation’s business leaders have already begun doing just that — even when it means embracing profound, fundamental changes. Take Shigenobu Nagamori, for instance. The CEO of Nidec Corp., which makes precision motors for cameras and computers, has guided the Kyoto-­based company he founded in 1973 from a three-­employee outfit working out of his garage to a 100,000-strong multinational that enjoyed record sales of ¥875.1 billion ($8.5 billion), a gain of 23.4 percent year over year, in the 12 months through March. Now, Nagamori says, it’s time for the manufacturer to prove it’s still light on its feet by pulling away from the markets it had been serving and focusing on faster-growing ones.

“Especially in autos, we see major innovation coming through,” Nagamori tells Institutional Investor. “Usually, when innovation is happening, that’s a good chance for new suppliers to come in.” The auto industry is eager for new technologies that improve vehicles’ fuel economy, safety and comfort, he adds, and Nidec is ready to provide the necessary components.

Wall Street is impressed. For a second year running, Nidec finishes in first place on the All-­Japan Executive Team, II’s exclusive ranking of the country’s top CEOs, CFOs, investor relations teams and IR professionals, as chosen by investment professionals. Survey results reflect the opinions of more than 375 analysts and money managers at 230 buy-side institutions that collectively manage roughly $648 billion in Japanese equities, and more than 240 analysts at 27 brokerages.

Declining global demand for cameras and PCs and rising interest in energy efficiency prompted Nidec’s executive team to reconsider the company’s focus, Nagamori explains. Although the autos business is the 69-year-old CEO’s top example of an industry brimming with opportunities, there are others. Makers of air conditioners, for example, need to improve the efficiency and effectiveness of those appliances, he says, as demand skyrockets in China.

To navigate its move from low-growth to high-growth lines, Nidec underwent two years of restructuring, writing down some of the assets related to producing motors for PCs and reallocating resources to develop products for other markets. The impact is already apparent: In the 12 months through March 2012, precision motors for hard disk drives accounted for 49 percent of Nidec’s sales while those for appliances, autos and commercial and industrial uses accounted for 30 percent. In the fiscal year just ended, the former figure had fallen to 41 percent while the latter climbed to 40 percent, management announced in late April. Nidec targets a respective reduction to 33 percent and rise to 50 percent for the fiscal year ending March 2016, ­Nagamori reports.

Also in late April the company announced that it would use stock swaps to acquire full control of its Nidec Copal Electronics Corp. and Nidec-Read Corp. subsidiaries. This will help the company more efficiently manage itself and the various complementary parts its produces, the CEO contends. “Our groupwide synergy policy is a reflection of a market change in which customers are requesting not just a motor but the motor plus several components associated with it,” Nagamori says. “We have a lot of good companies that have very unique technologies, and these companies all once had independent management. But as the market has changed to demand a more unified product, we think a unified policy is more important.”

This strategy should help the company save as much as $500 million in the next fiscal year, he estimates.

A similarly profound transformation has begun at Orix Corp., which rockets from No. 41 to finish in eighth place overall. The Osaka- and Tokyo-based financial services concern has been moving into new areas that CEO Yoshihiko Miyauchi believes promise significant profits, such as leasing solar power plants and managing real estate operations.

“We are very comfortable in the financial sector,” he says, “but it will become highly regulated in the coming years, so it will not be a very interesting area for anybody who wants to create something new in the economy, like us. It is important for us to find some new world for Orix.”

Miyauchi, 78, points to the collapse of Lehman Brothers Holdings in 2008 as the catalyst for Orix to reconsider its strategy. In the years before that bankruptcy, it had specialized in debt transactions and relied on high leverage to expand its balance sheet. In early 2006, Orix’s stock topped out at about ¥3,660, only to plummet to ¥200 three years later after credit markets froze. The shares have been steadily staging a comeback and were trading at ¥1,632 in mid-May, but he acknowledges that to keep pushing growth, the business will have to embrace major change.

“We recognized at the time of the Lehman crisis that the financial market is very volatile, and we have to be very careful about increasing leverage,” says Miyauchi, who has been Orix’s CEO for more than 33 years. “So we tried to move as quickly as possible from debt-type transactions to more equity-type transactions.”

Orix has been developing some 214 solar power plants across Japan and in early April announced that it had begun generating power at 67 locations. The company’s fervent interest in solar energy and other renewables was spurred by the March 2011 disaster at the Fukushima-­Daiichi nuclear power plant, Miyauchi explains. “Since the time of the accident, we’ve had lots of discussion in Japan about whether to continue with nuclear power or not,” he observes. “Yes or no, I believe it’s necessary to develop renewable energy.”

Another area of growth is Orix’s real estate division, which consists of property management; rental businesses; and the operation of such facilities as golf courses, hotels and nursing homes. It owns 98 properties — up from ten in 2001 — and real estate segment profits reached ¥18 billion in the 12 months through March, an eye-popping 221.4 percent increase over the previous fiscal year, the company reported in early May. (It also announced that total revenues in the fiscal year just ended jumped 27.1 percent year over year, to more than ¥1.34 trillion, with net income up 66.9 percent, to ¥186.8 billion.)

Roughly 30 percent of Orix’s income derives from overseas operations, and Miyauchi would like to see that figure climb to 40 percent in the next year or so. However, he won’t be the CEO leading the charge. This month he will move into the newly created position of senior chairman and will continue to work with Orix’s new management team in an advisory capacity. He will be succeeded by Makoto Inoue, who has been serving as co-CEO since January.

The Fukushima disaster also played a significant role in the transformation in progress at Tokyo Gas Co., which catapults from the No. 40 spot to No. 3. The meltdown led to power shortages and soaring electricity rates, and many in Japan called for a swift move away from nuclear power into other energy sources.

Tokyo Gas, Japan’s largest natural-gas utility, responded in November 2011 with its Challenge 2020 Vision, an agenda that laid out how Japanese energy companies would have to respond to the crisis and the role that Tokyo Gas would play. Management pledged to find ways to reduce the lofty energy costs that were hampering the economy and to enhance the provider’s liquefied-natural-gas supply chain to help facilitate the shift to natural gas.

LNG is made by cooling natural gas to a temperature that leaves it in a liquid form, which substantially reduces its volume and makes it easier to transport. It is the fuel that Tokyo Gas uses in its high-efficiency thermal power plants, and it was suddenly very much in demand in the wake of the Fukushima plant failure. Now the utility is seeking to increase its annual power-generation capacity from 2 million kilowatts to between 3 million and 5 million by 2020. To help bring this about, it is constructing a third unit at its Ohgishima Power Station, set to go live in fiscal 2015.

The gas business accounts for approximately 70 percent of Tokyo Gas’s net income, but Tsuyoshi Okamoto, who served as president and CEO for four years before becoming chairman in April — Michiaki Hirose is his successor — says the company wants to reduce that share to 50 percent by 2020. It hopes to do that by increasing the proportion of electric power, from 20 percent to 25 percent, and its overseas operations, from 10 percent to 25 percent.

In the two full fiscal years that it has been advancing the goals it laid out in Challenge 2020 Vision, Tokyo Gas has achieved record profits. Net income for the 12 months through March leaped 6.7 percent year over year, to ¥108.5 billion.

Now is the time for Tokyo Gas to “accelerate [its] efforts toward realizing the vision,” says Okamoto, 66. “I felt the time had come to turn the company over to a new leader to achieve this.”

For Astellas Pharma, which lands in second place overall — up from sixth place in 2013 — evolution is in the pharmaceutical giant’s DNA. The Tokyo-­headquartered outfit was created in 2005 through the merger of ­Yamanouchi Pharmaceutical Co. and ­Fujisawa Pharmaceutical Co. CEO Yoshihiko Hatanaka assumed the reins in June 2011 after two years as CFO and chief strategy officer and, before that, three years as president and CEO of Astellas US and Astellas Pharma US.

“We pursue a global category leader strategy,” the 57-year-old explains, “which means we establish competitive advantages as a market leader in multiple therapeutic areas with high unmet medical needs.” Those niches include diabetes mellitus, immunology (including transplantation) and infectious diseases, kidney diseases, neuroscience, oncology and urology, he adds.

The company has ascended to the leadership position in two of those specialties ­— transplantation and urology — and is about to close in on a third. “Because of a huge investment in the last five or six years, currently we are working toward oncology being the third global category leadership area for Astellas,” Hatanaka reports.

A major focus on innovation is intrinsic to his goal of becoming a pharmaceuticals front-runner in areas where medical solutions are lacking, he adds, noting that research and development spending as a percentage of sales has risen from 14 percent in fiscal 2008 to 18 percent in the fiscal year that ended in March.

In addition, in October the company established a new division, Astellas Innovation Management, that integrated the research responsibilities previously undertaken by multiple departments. It closed or scaled back operations at several facilities, consolidating the research functions at the 1.5 million-square-foot Tsukuba Research Center in Japan’s Ibaraki prefecture. This streamlined approach will enable Astellas to stay nimble and capable of shifting to new disease areas as global needs change, Hatanaka contends.

“We understand that forecasting and setting priorities is important, but at the same time, if we look at ten years from now, we need to explore new areas of disease,” he says. With that goal in mind, Astellas in April opened a regenerative-­medicine unit, which demonstrates the company’s commitment to research within cell-based therapies.

The willingness to explore new territory is what distinguishes business leaders from the rest of the herd, says the Conference Board’s Goldstein. “It’s said that every general is trying to fight the last war,” he notes. “Similarly, many CEOs are trying to replicate the last challenge.” But the top CEOs in Japan today know better, he believes, and have been quicker than their peers to embrace change. “Those companies are already in the process of transforming exactly what it is they do and what it is they produce.” • •

Related Content