At Last, New Blood At Japan Inc.

But will this generation of leaders really turn their companies around?

The scene is suddenly familiar in recession-wracked Japan. On Feb. 19, Hisashi Kaneko bowed deeply before reporters and cameras and acknowledged his poor performance as president of nec Corp. Why? Under relentless pressure at home and abroad, Japan's largest chip and computer maker expects to post a $1.25 billion net loss, its biggest ever, in the year ending Mar. 31. nec will cut 15,000 jobs over the next three years. Kaneko will be among the first to go.

Japan's economic quagmire is finally sucking down the corporate elite. Once it would have taken a national scandal to dislodge the bosses of blue-chip Japan. But after eight years of sluggish growth, top management is starting to take the blame for the poor performance. Says Keiko Kondo, a strategist at Merrill Lynch in Tokyo: "Company presidents are resigning not only to take responsibility for large losses but also to show their employees that it's time to share the pain."

The logical follow-through to these departures is to appoint tough managers who can straighten out these sick companies. Yet while the new bosses replacing fallen corporate samurai say they are committed to change, it's far from clear whether they can turn their companies around--or, indeed, how easily their armies of employees will adjust to new corporate realities. The roots of Japan Inc.'s problems run deep--they are as ingrained as Japan's keiretsu system of complex loyalties and share cross-holdings. The only hope is that the recession grows so severe that it finally demolishes this model, leaving companies susceptible to global market forces sweeping Japan. Then, perhaps, some new bosses will have a chance to achieve what others failed to do.

HEAVY LOSSES. And the trend to dump bosses could spread quickly. In March, when 15 debt-burdened banks get the first injection of $67 billion in public funds, the money will arrive with government pressure to shake up management. The stronger banks are expected to urge keiretsu partners, as well as other companies they deal with, to restructure. "After the banks are reformed, we'll see a lot of shake-ups in the boardrooms of the companies that they deal with," points out Merrill Lynch's Kondo.

The stress is already most evident at the top electronics companies. It began last June, when Takashi Kitaoka quit as president of Mitsubishi Electric Corp. Then came nec Chairman Tadahiro Sekimoto. At Hitachi Ltd., President Tsutomu Kanai moves to the chairman's office in March. Apart from Sekimoto, who resigned abruptly last October after nec was implicated in a defense-procurement scandal, the reasons for their removal are the same: heavy losses and no clear strategy to stem them.

Among the electronics giants, the immediate problem is clear enough. They have continued to overproduce despite recession and tougher competition from East Asian interlopers. But the miscalculations were spawned by the company structure itself--and a corporate culture traditionally unconcerned with shareholder value. For years, these manufacturers diversified aggressively, adding divisions to grab market share at the expense of profit. As long as the economy prospered, government contracts and orders from keiretsu partners were reliable. Sustaining the system was one essential rule. Keiretsu stockholders never meddled in each other's affairs--which kept outside controls on management to a bare minimum.

Problems were inevitable once the good times stopped rolling. Sekimoto, the former chairman of nec, is credited with building a market leader in chips, computers, and communications gear. "But he grew so powerful that no one dared oppose his decisions, even if they were wrong," says Naoki Sato, an industry analyst at hsbc Securities in Tokyo. Last year, Sekimoto put more money into Packard Bell nec Inc., nec's U.S. unit, despite losses and a falling market share in personal computers. This year, nec will spend $625 million restructuring the company and $425 million more to buy out Packard Bell's burdensome European operations.

Faults in the corporate culture also led to sluggish responses to market changes. Hitachi was long Japan's front-running chip and computer maker. But over almost nine years as president, Kanai failed to turn a technological lead into a top spot in the market. "Hitachi has lost its edge and doesn't stand out in any main business," says Masaharu Akutsu, a technology expert at the independent Mitsubishi Research Institute Inc. "The same can be said for Mitsubishi Electric."

Former Mitsubishi Electric President Kitaoka initiated an ambitious reform program after taking over in 1992. He cut management at headquarters by 30% and gave more power to division chiefs. But he failed to track changes in the semiconductor market, the profits of which went to pay his restructuring bills. By the spring of 1998, Kitaoka was staring at the hefty losses that would force him out.

TOUGH JOB CUTS. There are some encouraging signs that the next generation of leaders are serious reformists. Mitsubishi Electric's new president, Ichiro Taniguchi, has agreed with Toshiba Corp. to merge electric motor businesses. And, say company execs, moves are under way to ink a potentially far-reaching international alliance. At nec, incoming ceo Koji Nishigaki has plans to accelerate decision-making and spin off unnecessary businesses. Cutting 15,000 jobs will reduce the workforce by 10%. The new president of Hitachi, Etsuhiko Shoyama, intends to divide it into 10 companies that will have to post steady profits or get shut down. Eventually, the survivors will be managed independently in a holding-company system.

Corporate Japan is increasingly aware that it is desperately short of skilled, decisive executives mindful of shareholders. Many managers cite Jack Welch, the highly regarded chief executive of General Electric Co., as a model: ge may resemble a Japanese behemoth in its proportions, but Welch runs it like a small company--cutting away management layers and keeping communications open. But can Welch's principles be applied to a Hitachi? "There is no Jack Welch in Corporate Japan," says Yoshiharu Izumi, director of equity research at Warburg Dillon Read (Japan). "Even if there were, he probably wouldn't go down well."

It was different once. Hajime Unoki, a former Sony Corp. exec who restructured audiovisual components maker Aiwa Co., recalls the strong leaders who built the electronics sector after the war. There was nec's Kazuhiko Kobayashi, Katsuhige Mita at Hitachi, Sony's Akio Morita and Masaru Ibuka--legends in the industry. But they bred no successors. Takashi Kiuchi, a managing director at Mitsubishi Electric, points to postwar education. "Japanese study in school, but they're not taught anything about leadership," Kiuchi says. "So we lack the professional people needed today."

Japan Inc. has pulled itself out of problems before--and could do so again. But first, managers must begin to pay heed to investors and find out what their front-line troops are up against. Perhaps if enough gray heads roll, a new generation of tougher-minded managers may emerge that will take these lessons to heart.

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