Profitability Recovery of Japanese Companies Under High Yen

Osaka – Sunday, December 5, 2010




In the previous article "High Yen Slashes Profitability of Japanese Companies – The Reality" the author introduced some cases of how Japanese companies including those that are usually regarded as globally competitive have been suffering from the recent high yen.



In this article, the author would like to introduce some cases of how other companies have managed to recover their revenue and profitability despite the recent high yen.



1. How much Japanese listed companies recovered their performance in Apr-Sep 2010 despite extreme high yen?



1) Overall



The increase rate of consolidated operating profit was 2.4 times that of the previous year, which was much more than the original estimation of 70% increase from the previous year. The profit level recovered to 98% of Apr-Sep 2008 (i.e. before the worldwide economic crisis), and to 80% of Apr-Sep 2007 (i.e. the peak).



2) Specific examples






(1) Ushio, Inc.



Business of Ushio, Inc., whose business supports 3D movie boom with 3D film projector for theatres, continues to be strong even in high yen situation. They could only sell 3 products 10 years ago but their business is expected to grow as much as 7500 units, with global market share of 60%.



(2) Ricoh



Ricoh’s business in Americas that had been sluggish started to recover despite the recent high yen. They had thoroughly transferred sales know-how to the U.S. companies they had acquired, and their America business is expected to become positive soon in 2011, first time after 14 quarters.



2. How did Japanese companies manage to recover profitability despite the recent high yen?



1) Cost reduction



Primary reason for the profitability recovery is extreme cost reduction measures since the worldwide recession, which is sometimes said as practically the biggest post-war restructuring. Manufacturers drastically reduced cost (personnel etc.) last year to lower break even point by 13%. This decrease percentage is the biggest in the past 25 years (i.e. statistics is available and thus can compare).



Companies have been continuing their efforts to cut costs and improve productivity. For example, the reason for increase in Hitachi’s operating profit for Apr-Sep 2010 was increase in revenue and cost reduction (50% each).



Positive effects of such of their efforts have been conspicuous; operating profit of Japanese companies in total increased by 2.8% to reach 5.6%. The increase rate is the biggest since the economic bubble collapsed. The operating profit of 5.6% is almost 5.8% or Apr-Sep 2007, which was the peak.



2) Demand growth of emerging markets



Much of their sales and business growth came from growing demand of emerging market, Asia in particular. For example, increase of revenue of Komatsu in total was 33% when it was 58% for China. Increase of revenue of Nissan in total was 28% when it was 64% for Asia.



Some others were especially successful in business of emerging markets with launching products meeting local needs. For example, Sony developed and launched low cost flat panel TVs with limited functions in India and deprived the top market share position in India of Samsung.



3) Countermeasures to the high yen



This includes production shift to overseas as mentioned in the previous article, leveraging low cost components supplied from overseas, and owning both receivables and payables in foreign currencies.



For example, Hitachi Construction Machinery Co., Ltd. increased their production in Europe to raise their overseas production rate. Kawasaki Kisen Kaisha, Ltd. started to study accepting some portion of their receivables of their newly supplied products in USD instead of in Japanese yen. NEC separated their export-oriented semiconductor business and as a result they are no longer affected by foreign exchange fluctuation against USD. Toshiba, with similar measure, had positive effect with high yen, benefiting also with production outsourcing expansion to overseas contractors.



3. What is the outlook for the latter fiscal year of 2010?



1) Overall



Anxiety psychology proliferates among Japanese companies due to continuing high yen, termination of government’s economy stimulation incentives and slow recovery of economy of developed countries; however, there are some possible solutions of overcoming such anxiety factors. One is cultivating and harvesting the “new revenue seed” that was planted and came out in the first half of 2010. Another is flexibly adapting to external and internal environmental changes to upgrade available technologies and open/create new market.



2) Specific examples



(1) Ozu Corporation



Ozu Corporation, a leading paper distributor in Japan, started new business, operating their new factory of plants. With decreasing paper demand, they aim to benefit the recent trend of “security of foods”.



(2) NHK Spring Co., Ltd.



NHK Spring Co., Ltd started production and supply of new suspension that supports magnetic head of HDD (Hard Disk Drive). They already enjoy global market share of 45% but aim to further get ahead of their competitors with next generation products whose control accuracy has more than doubled.