Online Extra: Q&A with Canon's Fujio Mitarai

The CEO talks about how he used American business practices to turn the company around

Canon Inc. (CAJ ) has always been more global, more focused, and much more profitable than the average Japanese tech behemoth. But under the direction of Fujio Mitarai, president and chief executive since 1995, the world's leading maker of copiers and printers has emerged as a model for others in Japan to emulate. Canon (CAJ ) achieved record profits and sales in 2001, while conglomerates like Toshiba (TOSBF ) and Fujitsu (FJTSY ), which churn out hundreds of product lines, fell into the red.

Mitarai, who spent 23 years in the U.S. building up Canon's North American operations, introduced cash-flow management and other American business practices to improve profitability. He spoke about these and other reforms in a recent interview with BusinessWeek Tokyo Correspondent Irene M. Kunii. Here are edited excerpts of their conversation:

Q:

After spending much of your career in the U.S., what was it like to return to Japan in 1989?

A:

I knew how business was conducted in Japan, having traveled back and forth over the years while running Canon USA. But I myself had changed. I found Japan too irrational, particularly in how business is conducted and the attitude people have toward pay. For example, even if the economy is bad, unions demand basic wage hikes.

The thinking is that companies here have a social obligation to provide salaries. This dates back to the early post-World War II days, when Japan's biggest problem was how to resolve unemployment at a time of high inflation. The government was too weak to do much, so companies took on the responsibility of providing jobs. This continued even after the country became wealthy.

Q:

What has been your biggest achievement since taking over Canon?

A:

Japanese tend to put sales and market share first. They make many products with the aim of raising sales. But then profits decline, and companies find themselves falling into debt.... I changed the mindset at Canon by getting people to realize that profits come first.

Q:

What did you do specifically?

A:

I started by closing down money-losing divisions, like PCs, typewriters, LCDs, optical data-storage cards. These four divisions generated 30 billion yen [$225 million] in sales and 10 billion yen [$75 million] in losses. By doing this, I changed the company's basic philosophy.

Then I introduced cash-flow management. I scrapped our tradition of relying on loans and bond issuances, and instead raised our own cash for investment. We were able to increase cash by raising net profits and cutting operational costs through measures such as inventory reductions. To raise net profits, I cut costs drastically. I changed our manufacturing system. We switched from using conveyor belts to the cell production system [putting workers in "cells," or clusters, resulting in higher productivity]. As a result, we were able to cut labor costs and factory-floor space, and reduced the warehouses from 34 to 14.

In 1995, our loan-dependency rate was close to 35%, and now it's down to around 10%. Our shareholder equity ratio went from 33% to 51%. So this is how I improved Canon's financial situation. While business has been good in our overseas markets, we've had to deal with a strong yen until recently. Even so, we still managed to raise profits.

Q:

What's in store for Canon over the next five years?

A:

I've improved quality up to now, but I'd like to expand on this. Canon's two basic polices are diversification and globalization. Japan has been our production base for goods sold globally. But with Japan aging rapidly, it will be difficult to create new business here. Fortunately, Canon USA has 12,000 employees. My idea is to utilize our organization in the U.S., and the cash that is generated there, to develop new lines of business. For that purpose, I plan to do M&A [mergers and acquisitions] in the U.S. and Europe.

Q:

You're not thinking of moving into PCs like Hewlett-Packard?

A:

No, not again. We have an office in Silicon Valley and are looking into next-generation electronics in the area of imaging, for example. Our operations in the U.S. and Europe handle mainly sales, but over the next five years, or 10 to 20 years, this will change.

Q:

What will happen to manufacturing in Japan?

A:

In the 1970s, Japan moved into the U.S. turf with its televisions, cars, chips, and steel. But if you think about it, the only business Japan destroyed was the U.S. television industry. I don't think Japanese industry will disappear because of an onslaught [from Asian competitors]. I'm sure that high tech will survive in Japan. High-end production will remain in the country, while the low end will move to Asia.

Q:

Why are the big electronics manufacturers having so much trouble these days?

A:

Hitachi, Toshiba, and others are suffering from structural problems. They all make the same products, so profits are low. This is a long-term problem. Looking at the short term, they were unlucky because they got hit by an overproduction of PCs. Then cell phones boomed, but fizzled out much earlier than anyone had expected. Again, these same companies were hit with excess inventory. They were left with too many chips that were designed to go into PCs and cell phones.

Companies like Sony (SNE ), Hitachi, Toshiba, NEC, and Fujitsu all have great technology and are basically sound operations. I think they'll recover eventually, as will the Japanese economy.

However, I think we need more professional managers with an understanding of international business. The market is global, so from now on, managers must think of the world as one market. I myself learned on the job, but Canon is sending its managers for training overseas.

Q:

What kind of company will Canon be 10 to 20 years from now?

A:

We're an information-technology-imaging company, so it's difficult to predict where we'll be in 10 to 20 years. We'll be constantly improving ourselves, looking for new businesses, and dominating the markets that we're in. Whatever field we enter, we'll emerge as the front-runner.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE