Hitachi and Mitsubishi Heavy Industries Discuss Integration – Why and Its Meaning

Osaka - Sunday, August 7, 2011




Following the announcement made by Panasonic on July 28 of selling their refrigerator and washing machine business originally of Sanyo to Haier explained in the previous article Increasing Chinese Companies Acquiring Japanese Companies – How and Why?, Nikkei, Japan’s leading newspaper specialized in business and economy, reported on August 5 that Hitachi and Mitsubishi Heavy Industries are to start discussing integration of their main businesses including social infrastructure, with a possibility of future merger (management integration) of the two companies.



Taking this opportunity, Nikkei also made a special article insisting that Japan is facing a historical turning point in its core industries. This is because the recent M&A related announcements are the signs that restructuring in manufacturing industries, the “engine” of the Japanese economy.



1. Why the two companies decided to start discussing integration of their social infrastructure business?



It is because although the two companies are leading companies in this business domain in Japan, it is extremely difficult for them to compete and survive in the global market. The two companies do have world-class R&D capability but to compete in the global market they need to further become competitive in total power.



They realized this because recently they have been losing business negotiations for order intakes and their western counterparts winning. This attributes primarily to the fact that they were slower than their western counterparts to start developing business in future growth markets, in emerging countries in particular in earnest.



Such examples include the business negotiation for order intake of coal-fired thermal power station of Malaysia in March this year, the largest one in South East Asia, in which Mitsubishi lost and Alstom won (Hitachi also was involved in this at the beginning). In September of 2010, Hitachi lost and group of Canadian companies including Bombardier won the business negotiation of order intake of monorail construction of Sao Paulo, Brazil.



2. What is the positioning of the two companies in the global market?



This is summarized below (Source: Nikkei, translated by the author).



Company / No. of Employees (kilo) / Sales (trillion yen) / Net Profit (billon yen)

GE / 280 / 11.8658 / 916.4

Siemens / 400 / 8.5880 / 463.3

Hitachi / 360 / 9.3158 / 238.8

Mitsubishi Heavy Industries / 2.9037 / 30.1

* GE: for fiscal year ending December 2010, Siemens: for fiscal year ending September 2010, Hitachi and Mitsubishi: for fiscal year ending March 2011. 1 USD = 79 yen, 1 Euro = 113 yen



For gas turbine sector, #1 is GE with market share of 44%. #2 is Siemens with market share of 28%. #3 is Mitsubishi but with market share of only 8%.



And for railway sector, total market share of the big 3 companies (Bompardier of Canada, Alstom of France, Siemens of Germany) reach over 50%, with solid manufacturing and maintenance sites worldwide, when it is only just less than 5% for Hitachi.



3. Which market(s) do the two companies regard as the promising, future growth market(s)?



It is the worldwide infrastructure market, such as power generation. According to Organization for Economic Co-operation and Development (OECD), worldwide amount of power to be generated will be more than 3 trillion kW/h in 2035, which is increase by 80% from 2008. Investment in power generation infrastructure is expected to reach as much as 130 trillion yen between 2010 and 2035, of which 1/4 (approximately 32 trillion yen) is expected to be in China.



4. In which sector(s) the two companies could generate synergy if they are integrated?



One possible sector that the two companies generate synergy by leveraging their strengths is “Smart City” business. This is a city in which energy is efficiently used leveraging IT, of utilizing natural energy such as wind and solar.



This is because Hitachi is engaged in both social infrastructure and IT system, and Mitsubishi has world class technology in renewable energy such as wind and geothermal power.





In the next article, the author would like to introduce what Nikkei means when they say “historical turning point in industries in Japan”.





Resources:-

Hitachi and Mitsubishi Heavy Industries started discussing integration of their main businesses including social infrastructure, with a possibility of future merger (management integration) of the two companies. This is because although they are the two leaders in Japan with world class technology in R&D, they are not competitive enough to survive and compete in the global market. With integration, they aim to generate synergy in promising market expected to grow in the future such as power generation, leveraging their strengths. Their discussion, together with recent M&A related announcements, means that Japan is facing a historical turning point in its core industries.