November 7, 2009 – Osaka, Japan
Today, Nikkei, Japan’s leading newspaper specialized in economy/business and politics, reported that financial performance of Japanese listed companies in total to bottom-out by the end of the fiscal year (FY) ending March 2010, according to estimation of head quarters of the companies. Consolidated profit for FY ending March 2010 is estimated to be +0.7% vs. previous year, although the estimation in August was -9%. This is because of reduction in fixed cost* and economy-boosting measures of governments of various countries, which led to drastic improvement in profit and loss (P/L) of consumer electronics and automobiles. However, there are anxieties such as ongoing high yen situation and improvement of business climate likely to terminate after January 2010. Therefore, some experts view that outlook demands caution.
Increase/Decrease of Consolidated Profit by Industry: Consumer Electronics and Automobile are the Drivers of Recovery
Source: Nikkei (translated by the author)
Increase From Previous Year
Electronics / 1 .484 trillion yen
Oil / 734 billion yen
Automobile and Components / 50.63 billion yen
Electricity etc. / 1.263 trillion yen
Decrease From Previous Year
Steel / -1.2145 trillion yen
Trading / -61.84 billion yen
Machinery / -36.91 billion yen
Marine Transportation etc. / -1.478 trillion yen
Nikkei reports that the data used are of 940 companies who have finished making financial announcement for first half of 2009 (April-September 2009) by November 6, 2009 (excluding financial institutions). These companies cover 78% of total market value.
According to the current analysis, consolidated profit for FY ending March 2010 is expected to be +0.7% from previous year, which is 9.8 trillion yen. Some experts view that the speed of recovery is more than anticipated and it is possible that the final performance achievement would be better than this. Consolidated profit of listed companies was directly and negatively impacted by the worldwide economic crisis, resulting in decrease in profit first time in 7 quarters, by more than 60%.
Improvement in revenue by quarter has been evident since January this year. January-March in loss was the bottom, and it went back in black in total for April-June, and the profit increased for July-September, meaning consecutive improvement. This is the reason for the favourable outlook for the total FY year ending March 2010.
The driver for the performance improvement is reduction in fixed cost. Sales are estimated to be approximately 343 trillion yen which is -13% from previous year but the profit is estimated to be about the same with previous year because cost reduction by companies is ongoing with the greater speed than originally assumed. For example, Komatsu is to double the amount of fixed cost reduction to 50 billion yen. Thus, profit ratio of listed companies in general is to improve, highlighting the recovery driven by rationalization.
Economy-boosting measures by the government played as a driver for the performance improvement as well. Consumer electronics that posted large amount of loss benefited from eco-point system, an economy-boosting measure implemented by the Japanese government, and their sales (e.g. TV) increased, leading to increase in profit by almost 1.5 trillion yen. Automobiles and components are also estimated to increase their profit by approximately 500 billion yen, going back to black. For example, Nissan is benefiting from positive effect of government’s economy-boosting measures designed to promote buying new cars to replace old ones, to revise its original outlook of increasing loss to 20 billion yen in profit. Improvements in oil attributing to increase in resource price are also evident.
On the other hand, financial performance of steels and machinery are deteriorating. This is because their primary customers of automobile and electronics are still cautious of facility investment and production increase. Trading companies are also to decrease their profit because their automobile and steel businesses are struggling.
The outlook for the future remains uncertain. There are many companies that out-perform vs. original plan for April-September but estimation for total year remains the same. For example, VP of JFE Holdings comments that it is doubtful whether the improvement in steel stock demand continues, and that high yen is also an anxiety factor. Many management executives are not confident in sustainable business improvement because of doldrums of consumer spending and employment.
* Brief Explanation on Fixed Cost (source: Nikkei, edited and translated by the author）
Fixed Cost is the cost that is constant regardless of fluctuation in sales of a company such as employment cost of back office department and depreciation cost of plant and equipment. On the other hand, cost that fluctuates linking with by production volume and sales such as raw material cost and operating labour cost are called “variable cost”. Many companies cut fixed cost to quickly recover their profitability when they face drop in sales.
Sales equaling total of fixed and variable cost is called break even point. Dividing this by sales is break even point ratio. According to Nikkei’s analysis of 1633 listed companies (non-consolidated), this ratio was about 80% before 2007 but for 2008 it increased to more than 89% because the reduction in fixed cost was not in par with drastic drop in sales and revenue.
2009年10月25日日曜日
JAL to be GM of Japan – Turnaround under Government’s Control
October 25, 2009 – Osaka, Japan
Today Nikkei, Japan’s leading newspaper specialized in economy and politics, reported that on October 24, the Japanese government finalized the policy of aiding turnaround of JAL (Japan Air Lines) by making JAL leverage public institution of “Company Turnaround Aid Institution”. Related ministers will discuss this issue and officially announce the policy by the end of this month, with the objective of reducing excess debt under the government’s control and develop drastic restructuring plan. The institution will execute bridge financing etc. to abolish credit uneasiness of JAL. The government will wait for the restructuring plan then study increase capital by public funding as a last resort. More drastic solution is to be studied and developed for pension debt reduction which is currently very slow in progress. Restructuring plan development under strong government’s control is to start at last.
According to Nikkei, the outlook of the JAL turnaround is as below.
Capital increase: Current restructuring plan is 300 billon yen including public funding. The government’s policy includes leveraging Company Turnaround Aid Institution to insert capital by the end of 2009.
Debt write-off: Current plan is 220 billion yen. The government’s policy is to convincing syndicates of banks to accept debt write-offs, on condition that JAL will drastically restructure with public funding.
Debt-for-equity swap: Current plan is 30 billion yen. The government’s policy is to convincing syndicates of banks to accept debt-for-equity swap, on condition that JAL will drastically restructure with public funding.
Bridge financing: Current plan is 200 billion yen. The government’s policy is to execute this by the end of November 2009.
Pension debt reduction: Current plan is reducing insufficient accumulation to 100 billion yen from 330 billion yen. The government’s policy is change to more drastic plan.
Restructuring: Current plan includes cutting almost 9000 jobs and abolishing 45-50 routes by 2014.
Capital deficit: Current estimation is up to 270 billion yen.
JAL’s turnaround has been going through a trial and error process as below.
June 30: 100 billion yen financing agreement with Development Bank of Japan etc. froze.
August 7: April-June consolidated financial result was in red by 99 billion yen.
August 21: Starting negotiation of integrating air cargo business with NYK (Nippon Yusen Kaisha) Line.
Beginning of September: Alliance negotiation with Delta and American Airlines including financing came to light.
September 15: Draft of management improvement plan with pillars of cutting 68000 jobs and abolishing total of domestic and international 50 routes proposed at blue-ribbon panel.
September 25: A task force directly controlled by Mr. Maehara, Minister of Land, Infrastructure, Transport and Tourism established, marking the start of reviewing the current turnaround plan.
October 13: The task force proposed a turnaround plan draft to financial institutes etc. requesting them to accept debt write-offs of 300 billion yen in total.
October 20: The task force made the revised draft including increase of capital of 300 billion yen by public funding etc.
The Japanese government finalized the policy of aiding turnaround of JAL (Japan Air Lines) by making JAL leverage public funding by Company Turnaround Aid Institution because of the tough reality that they would not be able to win understanding and support from syndicates of banks without strong control and interference from the government. Under a situation of extreme funding difficulties, the government decided to back-up in full scale. Hatoyama administration cannot fail this turnaround with wall at their back; as Mr. Maehara states, we cannot have a situation in which we do not have flights and allow inconvenience to travellers. However, there are many hurdles and obstacles to overcome and the outlook is not necessarily bright.
The turnaround is not only about financing and debt write-offs. It is really all about whether the mindset of current JAL employees and retired workers, and the whether the system and culture of the entire company change from the current “the government will foot the bill” culture. It is only when the company totally change from inside to an organization that it will start creating value to generate revenue with optimum cost so that financing/cash flow management will be a sound one.
Today Nikkei, Japan’s leading newspaper specialized in economy and politics, reported that on October 24, the Japanese government finalized the policy of aiding turnaround of JAL (Japan Air Lines) by making JAL leverage public institution of “Company Turnaround Aid Institution”. Related ministers will discuss this issue and officially announce the policy by the end of this month, with the objective of reducing excess debt under the government’s control and develop drastic restructuring plan. The institution will execute bridge financing etc. to abolish credit uneasiness of JAL. The government will wait for the restructuring plan then study increase capital by public funding as a last resort. More drastic solution is to be studied and developed for pension debt reduction which is currently very slow in progress. Restructuring plan development under strong government’s control is to start at last.
According to Nikkei, the outlook of the JAL turnaround is as below.
Capital increase: Current restructuring plan is 300 billon yen including public funding. The government’s policy includes leveraging Company Turnaround Aid Institution to insert capital by the end of 2009.
Debt write-off: Current plan is 220 billion yen. The government’s policy is to convincing syndicates of banks to accept debt write-offs, on condition that JAL will drastically restructure with public funding.
Debt-for-equity swap: Current plan is 30 billion yen. The government’s policy is to convincing syndicates of banks to accept debt-for-equity swap, on condition that JAL will drastically restructure with public funding.
Bridge financing: Current plan is 200 billion yen. The government’s policy is to execute this by the end of November 2009.
Pension debt reduction: Current plan is reducing insufficient accumulation to 100 billion yen from 330 billion yen. The government’s policy is change to more drastic plan.
Restructuring: Current plan includes cutting almost 9000 jobs and abolishing 45-50 routes by 2014.
Capital deficit: Current estimation is up to 270 billion yen.
JAL’s turnaround has been going through a trial and error process as below.
June 30: 100 billion yen financing agreement with Development Bank of Japan etc. froze.
August 7: April-June consolidated financial result was in red by 99 billion yen.
August 21: Starting negotiation of integrating air cargo business with NYK (Nippon Yusen Kaisha) Line.
Beginning of September: Alliance negotiation with Delta and American Airlines including financing came to light.
September 15: Draft of management improvement plan with pillars of cutting 68000 jobs and abolishing total of domestic and international 50 routes proposed at blue-ribbon panel.
September 25: A task force directly controlled by Mr. Maehara, Minister of Land, Infrastructure, Transport and Tourism established, marking the start of reviewing the current turnaround plan.
October 13: The task force proposed a turnaround plan draft to financial institutes etc. requesting them to accept debt write-offs of 300 billion yen in total.
October 20: The task force made the revised draft including increase of capital of 300 billion yen by public funding etc.
The Japanese government finalized the policy of aiding turnaround of JAL (Japan Air Lines) by making JAL leverage public funding by Company Turnaround Aid Institution because of the tough reality that they would not be able to win understanding and support from syndicates of banks without strong control and interference from the government. Under a situation of extreme funding difficulties, the government decided to back-up in full scale. Hatoyama administration cannot fail this turnaround with wall at their back; as Mr. Maehara states, we cannot have a situation in which we do not have flights and allow inconvenience to travellers. However, there are many hurdles and obstacles to overcome and the outlook is not necessarily bright.
The turnaround is not only about financing and debt write-offs. It is really all about whether the mindset of current JAL employees and retired workers, and the whether the system and culture of the entire company change from the current “the government will foot the bill” culture. It is only when the company totally change from inside to an organization that it will start creating value to generate revenue with optimum cost so that financing/cash flow management will be a sound one.
2009年9月13日日曜日
Drastic Deterioration in Break Even Point Ratio of Japanese Manufacturers May Well Indicate Further Tough Job Market in Japan
Sunday, September 13, 2009 – Osaka, Japan
Nikkei, Japan's leading newspaper specialized in economy and politics, reported today that break even point ratio* of Japanese manufacturers for 2008 increased by 13.1% from 2007 to 89.2%, reaching the level of 7 years ago. This is because the degree of cost reduction such as of fixed cost was not in line with the drastic reduction in sales attributing to worldwide bad economy. It is said that the performance of manufacturers are beginning to improve, but since increasing sales is difficult companies will need to further cut costs to improve break even point ratio. This implies that there will be further job and/or salary cuts meaning tough job market continues.
This finding is based on the Nikkei’s survey in which data of 1009 manufacturers listed whose metrics can be compared on the consecutive basis were collected and analyzed. The most critical reason for the deterioration in break even point ratio is reduction in sales, which was minus 10.7% vs. 2007 for 2008.
Looking into more details, it can be concluded that companies were unable to cope sufficiently with drop in sales. This is because variable cost such as cost of raw materials was minus 9.7% vs. 2007 for 2008, i.e. the attrition rate is smaller than that of sales. On the other hand, fixed cost was plus 1.5% vs. 2007 for 2008 although personnel cost was minus 2.9% vs. 2007 for 2008. This is because companies had been aggressively investing until the first half of 2008 leading to depreciation being plus 7.6% vs. 2007 for 2008. It is estimated that consolidated sales for the year ending in March 2010 would be minus 13% vs. previous year and cost reduction would be the key for performance improvement.
Looking into more detail by industry, break even point ratio for automobile that has dropped sales drastically in the U.S. and Europe reached 96.2% which was increase by 23% from 2007, and this figure is serious because it had not surpassed 90% since 1995. Other industries whose drop in the figure was serious include oil (71 points), nonferrous (8 points), precision machinery (16 points). Food was the only industry whose figure improved among 17 industries.
Break even point ratio of over 100% means cost is bigger than sales thus the company going in red. Break even point ratio of Advantest Corporation whose sales of semiconductor test equipment reached 150% resulting in consolidated operation loss of 49.5 billion yen. Therefore, the company is planning to decrease fixed cost by job and salary cut in order to decrease the amount of loss. It is likely that other companies would take the same measures to improve their break even point; therefore, the job market is likely remain tough for the time being.
* Break Even Point Ratio: break even point of a company is the sales when the cost and sales is the same. Dividing this by the actual sales is the break even point ratio. Below 100% means the company is in black and over 100% means the company is in red. The smaller the break even point ratio, the more resistant to drop in sales thus better profitability.
Nikkei, Japan's leading newspaper specialized in economy and politics, reported today that break even point ratio* of Japanese manufacturers for 2008 increased by 13.1% from 2007 to 89.2%, reaching the level of 7 years ago. This is because the degree of cost reduction such as of fixed cost was not in line with the drastic reduction in sales attributing to worldwide bad economy. It is said that the performance of manufacturers are beginning to improve, but since increasing sales is difficult companies will need to further cut costs to improve break even point ratio. This implies that there will be further job and/or salary cuts meaning tough job market continues.
This finding is based on the Nikkei’s survey in which data of 1009 manufacturers listed whose metrics can be compared on the consecutive basis were collected and analyzed. The most critical reason for the deterioration in break even point ratio is reduction in sales, which was minus 10.7% vs. 2007 for 2008.
Looking into more details, it can be concluded that companies were unable to cope sufficiently with drop in sales. This is because variable cost such as cost of raw materials was minus 9.7% vs. 2007 for 2008, i.e. the attrition rate is smaller than that of sales. On the other hand, fixed cost was plus 1.5% vs. 2007 for 2008 although personnel cost was minus 2.9% vs. 2007 for 2008. This is because companies had been aggressively investing until the first half of 2008 leading to depreciation being plus 7.6% vs. 2007 for 2008. It is estimated that consolidated sales for the year ending in March 2010 would be minus 13% vs. previous year and cost reduction would be the key for performance improvement.
Looking into more detail by industry, break even point ratio for automobile that has dropped sales drastically in the U.S. and Europe reached 96.2% which was increase by 23% from 2007, and this figure is serious because it had not surpassed 90% since 1995. Other industries whose drop in the figure was serious include oil (71 points), nonferrous (8 points), precision machinery (16 points). Food was the only industry whose figure improved among 17 industries.
Break even point ratio of over 100% means cost is bigger than sales thus the company going in red. Break even point ratio of Advantest Corporation whose sales of semiconductor test equipment reached 150% resulting in consolidated operation loss of 49.5 billion yen. Therefore, the company is planning to decrease fixed cost by job and salary cut in order to decrease the amount of loss. It is likely that other companies would take the same measures to improve their break even point; therefore, the job market is likely remain tough for the time being.
* Break Even Point Ratio: break even point of a company is the sales when the cost and sales is the same. Dividing this by the actual sales is the break even point ratio. Below 100% means the company is in black and over 100% means the company is in red. The smaller the break even point ratio, the more resistant to drop in sales thus better profitability.
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