Japan's Tech Giants Go Under the Knife

NEC, Toshiba, and Fujitsu are hacking costs. Is it enough?

When Koji Nishigaki became CEO of NEC Corp. (NIPNY ) 2 1/2 years ago, Japan's top chip- and computer maker was bloated and losing market share. Nishigaki knew he'd have to impose drastic measures. And by Japanese standards, he did. Nishigaki cut NEC's workforce by 15,000, or 10%. He streamlined management, unloaded some unprofitable businesses, and introduced the kind of transparent decision-making that is as rare in Japan as shareholder value.

End of story? More like a work in progress. Nishigaki now has to find dramatic new ways to cut costs--fast. Two years ago, he was fighting the effects of Japan's slowdown. Now, Nishigaki is feeling the heat from a global tech recession. As a result, NEC finds itself sitting on piles of unsold memory chips. "This IT recession is so tough," he says, "it's forcing us into another round of restructuring."

Nishigaki has plenty of company. Since he announced another series of cost cuts in July, Toshiba Corp. and Fujitsu Ltd. have unveiled their own restructuring plans. Hitachi Ltd. is expected to follow suit soon. Like NEC, they are all suffering declining earnings due to falling demand for a wide range of info-tech devices. These over-diversified giants are usually able to cushion losses in one area with gains in another. But now, they've been hard hit by an unprecedented slump in chips, computers, cell phones, and telecommunications equipment. NEC, Toshiba (TOSBF ), and Fujitsu (FJTSF ) are all expected to post losses this fiscal year (chart).

The question is, do their restructuring plans go far enough? They sound impressive: Nishigaki's latest plan calls for NEC to trim 7% of the costs of its semiconductor operations. That translates into the elimination of 4,000 chip-related jobs, 2,500 of them in Japan, and the consolidation of some factories--all by next March. By early fall, Nishigaki says he will lay out a more sweeping plan that over the next six months will result in additional job cuts and plant closures in the semiconductor and other divisions. On Aug. 20, Fujitsu said it would ax 16,400 jobs--5,000 of them in Japan--by next March. A week later, Toshiba said it will cut its Japanese payroll by 17,000 by 2004.

BIG PICTURE. The problem, say analysts, is that Japan's electronics companies are focusing on cutting costs when they should be reinventing themselves. Right now, these vertically integrated dinosaurs make everything from hard-disk drives to submarine cables. "CEOs should be asking themselves: `Which businesses should I focus on to win? Which business should I exit altogether?"' says Michael Garstka, a vice-president at consultant Bain & Co. in Japan.

In fact, the timing couldn't be better for a thorough rethink. Memory-chip prices are down 90% over the past year. As a result, Japanese chip plants are operating at around 70% capacity. Meantime, Japanese tech workers earn 30 times more than their Chinese counterparts. And that's not the only problem. To survive growing competition from Korea and Taiwan, Japanese tech companies are outsourcing or shifting production to China and Southeast Asia. But they've yet to come up with a solution to prevent a hollowing out at home. NEC's Nishigaki thinks the choice is simple: "Japan must shift to high-end, value-added production. Only then will structural reform succeed." Maybe the major cuts being announced will mark the start of that painful process.

Another reason to watch the progress of the electronics makers is to gauge their impact on the Japanese economy. With unemployment at a record 5%--higher than in the U.S.--NEC, Fujitsu, and Toshiba will just add to the jobless numbers by eventually eliminating thousands of jobs. Although most of the electronics companies' cuts will come through attrition and buyouts instead of outright layoffs, cutting these positions will still result in fewer slots for job seekers to fill.

If the electronics giants fix themselves by cutting divisions and jobs en masse, investors and lenders will favor them at the expense of other Japanese industries, which will feel pressure to pare down, too. "This is the start of a restructuring wave that could spread to other sectors," says Merrill Lynch & Co. senior analyst Hitoshi Shin. Such protected industries as banking, retail, and construction all badly need to slim down. If they emulate the electronics makers and announce major job cuts of their own, Japan's system of lifetime employment, already worn at the edges, could finally come unglued.

Many eyes will be on NEC's Nishigaki. No one in the IT industry has worked harder to revamp his company for the new age. Nishigaki was the first to approach a Japanese rival, Hitachi, as a joint-venture partner to produce commodity memory chips. In August, he forged an alliance with another rival, the Matsushita Electric Industrial Co. (Panasonic) consumer-electronics group, to develop video and other software for next-generation cell phones. That will free up resources to develop the kind of value-added businesses Nishigaki is targeting. Instead of simple memory chips, NEC will develop system chips for cell phones, PDAs, autos, and game machines. It will also push innovations in microcomputers, mobile phones, optical storage devices, and network services.

Sounds good, but analysts are clamoring for more consolidation measures first. "I think there has to be a more drastic restructuring of chip operations, for starters," says Yoshiharu Izumi, an industry analyst at UBS Warburg in Tokyo. NEC currently operates nine chip-manufacturing plants, seven of them around Japan. Samsung Electronics, by comparison, operates two worldwide--one in Korea and another in the U.S. Nishigaki will sell off some plants to contract manufacturers and convert others to system-chip production. But he's not about to pull out of chip production altogether.

"LOW-LEVEL." If the prospects for NEC are less than bright, they're downright gloomy for the likes of Fujitsu and Toshiba. Fujitsu President Naoyuki Akikusa hopes to transform his company into a global software-and-services provider along the lines of IBM. But there's one hitch in this plan: Fujitsu has made little progress in capturing market share in Europe and the U.S. despite heavy investments in the local units. Meanwhile, Akikusa appears to have no plans to shut down any of Fujitsu's four main divisions: computer hardware, communications, chips, and software and services.

Toshiba President Tadashi Okamura, who took the job a year ago, grabbed headlines with his announcement of wholesale job cuts. But Okamura failed to point out where Toshiba, heavily reliant on chip and notebook-PC sales, will find its next engine of growth. "This is low-level restructuring," scoffs Merrill Lynch's Shin. "They're mistaken if they think they'll return to profit just by cutting costs." What's required for Japan's fabled electronics titans is nothing less than a makeover from the ground up.

By Irene M. Kunii in Tokyo

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