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Japan rises again: Japan's reluctance to resort to Western streamlining is being tested by China's growth, global competitors and activist investors. (Regional Report/Asia).

Something is stirring in boardrooms in the Land of the Rising Sun. It's called risutora, or restructuring.

Japanese CEOs are making changes. None are as radical as those routinely implemented by their American counterparts, but cumulatively they point to an important increase in Japan's competitiveness. The steps include squeezing out older workers and excess labor, out-sourcing low-end manufacturing, shifting more production to China and getting out of unprofitable businesses.

Ironically, it was a gaijin, or foreigner, who showed Japanese execs the way: Carlos Ghosn, the Nissan Motors CEO who parachuted in from Renault when the French company took a controlling stake. Ghosn took a venerable but money-losing company and turned it profitable by cutting costs, shuttering old factories and demanding better prices from suppliers. "Ghosn's presence is like a storm wind," remarked Akio Kosai, chairman of Sumitomo Chemical, Japan's second-largest chemical maker.

Here are some of the tools CEOs are using to follow Ghosn's lead:

Trimming the work force

Japanese executives will probably never go as far a some free-market economists wish in slashing payrolls. Much more than their Western peers, Japanese managers feel an obligation to their work forces and to their country's social stability. "What CEOs worry about is maintaining the long-term viability of jobs in the enterprise," says Eamonn Fingleton, the Tokyo-based author of In Praise of Hard Industries.

But for the first time in the postwar era, flagship companies in Japan are shedding workers instead of passing on the pain to their suppliers and forcing them to trim labor costs. Last year, Matsushita President Kunio Nakamura started pushing 13,000 employees, or 10 percent of its Japanese work force, into early retirement. Clearly, the concept of lifetime employment is showing cracks. In a wrenching social phenomenon, Japanese "salarimen," who assumed they could coast to retirement at age 60 or so, are being shoved out in their 50s.

Getting out of non-core businesses

NEC, one of Japan Inc.'s most conservative companies, is spinning off its semiconductor business. NEC President Koji Nishigaki says his company plans to retain 70 percent of the new company's shares after the initial public offering. The unit will employ 25,000 workers and is expected to produce annual sales of about $5 billion, according to Nishigaki. This move is considered an acknowledgment by NEC that it can't effectively make all of the things it now manufactures and that it feels competitive heat from Korea and Taiwan. "More companies will follow NEC," predicts Shin Horie, vice president at Goldman Sachs in Tokyo.

Tadashi Okamura, the CEO of Toshiba, also is scrambling to better focus his company. When he took over in 2000, he inherited a company with $46 billion in sales, 190,000 employees and 353 affiliate companies. It made what by American standards was an absurdly wide range of products, from nuclear power plants to medical imaging systems, from elevators to cell phones. So in addition to laying off 17,000 workers in Japan by 2004, Okamura has started integrating his semiconductor operations with Fujitsu's, formed an alliance with Mitsubishi Electric to develop a global standard for third-generation mobile phones and announced the integration of Toshiba's power transmission business with Mitsubishi Electric's. It's tricky to sort out the issues of control in these ventures, but Japan's Big Six electronics concerns -including Fujitsu, Sony and Matsushita-all are using them to pool their expertise and resources. "We have to find a strategy to survive the global competition," Okamura recently told reporters.

NEC and Casio have each turned over some operations to a major outsourcing specialist. In October 2001, NEC announced that it would transfer the manufacturing business of its Ibaraki facility, which employs nearly 500 workers, to Solectron, which produces servers, workstations and storage products for NEC. This past May, Casio cut a three-year, $1.6 billion deal under which it will sell some of its manufacturing operations in Japan and Malaysia to the contractor Flextronics.

These moves aren't dramatic by American standards, but they are nonetheless noteworthy, since the Japanese have stuck fiercely to the notion that they had to run their own manufacturing operations. "But now those business models have become obsolete to some extent. They are trying to define a new model," says Satomi Ushioda, an analyst at Nikko Salomon Smith Barney.

Making the China play

Japanese CEOs have been skeptical of China's manufacturing capability, but now that's beginning to change. "To compete with Europeans and Americans locating very modern facilities in China, they don't have a choice but to move their latest manufacturing to China," says Takatoshi Kato, adviser to the president of The Bank of Tokyo-Mitsubishi and a former top bureaucrat at the Ministry of Finance. "We Japanese thought China didn't have the capacity to absorb the latest production capabilities, but now we realize they do."

Canon CEO Fujio Mitarai says he is expanding in China for another reason as well. "After joining the World Trade Organization, China is expected to develop as a huge market and we want to be there for that," Mitarai says. Right now, 65 percent of Canon s production is in Japan, but that figure is expected to decline to 60 percent by 2006-and China will be getting much of the company's new manufacturing.

To be sure, there are some steps that Japan's executives still are not taking. They haven't absorbed foreigners into their top management ranks and they haven't been able to delegate significant decision-making authority to regional headquarters. They've also wrestled with how to offer performance-based pay, a concept that strikes at the heart of their culture's group mentality.

But there's little doubt that Japan Inc. is making changes across a broad front. "The question is whether the changes are happening fast enough for us to compete internationally," says Kato. External factors are helping. Thanks to the relatively weak value of the yen and an increased volume of exports, companies such as Matsushita expect to regain profitability. At the same time, Fujitsu's losses are shrinking as semiconductor prices recover.

Japanese CEOs are no longer asleep at the wheel, and the effects of their revitalization are becoming apparent. American competitors, be advised: If you haven't already encountered market pressure from the Pacific, you're likely to feel it soon.

RELATED ARTICLE: What's Behind the Wake-Up Call

The transformative steps that many Japanese CEOs are taking have been spurred by two major changes in their economic climate:

Growing competition from South Korea and Taiwan. Korean firms such as Samsung Electronics, the world's No. 1 maker of semiconductor chips, are giving Japanese electronics giants a run for their money in digital videodisc players, bigscreen televisions and other high-margin businesses. Taiwan, meanwhile, is moving its high-tech manufacturing to China and obtaining a new advantage over Japan. European and American companies that have relocated huge amounts of manufacturing to China also have obtained a cost advantage over Japanese rivals that have kept production at home.

Pressure from investors. Traditionally, the vast majority of Japanese companies have been members of keiretsu business groups, in which participants hold a majority of one another's shares. That insulated CEOs from real investor pressure. But under a new government mandate and in reaction to a huge consolidation in Japanese banks, a selloff is underway. New investors, many of them foreign, are demanding better performance. "Until recently, Japanese CEOs didn't worry about profitability," says Goldman Sach's Vice President Shin Horie. The arrival of more foreign shareholders is magnifying the pressure of the shareholder, which has never happened in corporate Japan."
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Author:Holstein, William J.
Publication:Chief Executive (U.S.)
Geographic Code:9JAPA
Date:Oct 1, 2002
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