Matsushita's Long March

It still has a lot of restructuring ahead

Every January, the chief executive of the Osaka-based Matsushita Group (MC ), the world's largest consumer electronics conglomerate, calls a management policy meeting to brief senior staff on the year ahead. This year, some 630 managers piled into the main lecture hall at Matsushita's global training center, while a further 34,000, scattered around the globe, watched by satellite hookup. All were eager for some good news after a painful year of restructuring, during which President Kunio Nakamura shuttered several factories and ushered thousands of workers out the door.

They were in for a rude awakening. Business was so bad, declared Nakamura, that he had decided that the parent company would take control of five of its listed subsidiaries--even Matsushita Communication Industrial Co. (MCI), the company's star cell-phone arm. His aim was to slash costs by centralizing research, development, and marketing. The troops knew what that meant: more plant closures, layoffs, and salary cuts. "It's extremely unfortunate," Nakamura said. "But we have to take responsibility for the deterioration of our business."

Things have never been this bad. Not since its founding in a humble Osaka tenement in 1918 has Matsushita Electric Industrial Co., with its Panasonic and National brands, been in the red--until this year. Last month, the group said it expected to post a net loss of $3.4 billion in fiscal 2001, ending Mar. 31. Like other Japanese tech giants, Matsushita is taking a hit because of the global slowdown and falling prices at home. But, as Nakamura points out, the company's problems are largely of its own making. It churns out thousands of products but hasn't produced a megahit in decades. Three of its four main divisions--consumer electronics, home appliances, industrial equipment, and devices--lost money in 2001.

Thanks to Nakamura's reforms, Matsushita's future looks a little brighter. While $2.7 billion in restructuring costs contributed to the red ink, they will help Matsushita achieve a modest recovery. Nakamura expects to reap $1.8 billion in savings in 2002 because of such reforms. He's hoping that growing sales of DVD recorders, digital TVs, and flat-panel displays--mostly in Japan--will help achieve a return to profitability by the third quarter. To improve prospects, Nakamura backloaded onto the 2001 books some of the costs of restructuring, inventory reduction, and product launches in the months ahead. "His strategy is to use any means possible to increase revenue in the coming year," says Merrill Lynch Japan senior analyst Hitoshi Kuriyama, who welcomes any methods to jump-start growth. "That's risky, but at this point anything positive will help the company." He predicts that in fiscal 2002 Matsushita will make a net profit of $270 million on sales of $53 billion, up 1.3%.

The road to recovery won't be easy, though. Matsushita has a lot riding on its next Internet-ready cell phone for NTT DoCoMo, Japan's largest wireless carrier. A successful launch in Japan--expected in April--could pave the way for sales in Europe and the U.S. Yet last year, Matsushita was forced to recall a pricey handset it developed for DoCoMo's popular i-mode mobile Net service because of a software glitch. The fiasco prompted Nakamura to fold MCI, the wireless unit, into the parent. "We have to produce cell phones that are as bug-free as our home appliances," Nakamura says. "This is one area where we can lead."

Matsushita is also counting on selling a lot of high-margin digital TVs at home, where it has a 50% share. Matsushita's advantage is that it makes many of the key components: optical pickups, system chips, and displays. At the same time, Matsushita is launching a high-end DVD recorder, priced at $700, that it hopes to pair with the digital TVs in time for the World Cup soccer games to be held in Japan and South Korea in June. "Products like this represent less than 20% of our sales, but they will pull the company forward," says the 62-year-old Nakamura.

Nakamura has been on a mission since taking over as chief executive in June, 2000. He started by reorganizing management and placing the company's 30 divisions into four distinct groups with centralized research and development. He's now dismantling a cherished lifetime-employment system, which Konosuke Matsushita, the legendary company founder, introduced to Japan before World War II. Last year, 13,000 employees, or 10% of the Japanese workforce, volunteered for early retirement. The buyouts cost the group $1.3 billion, but it expects to save $920 million this year as a result. Nakamura has also closed several plants, including a cell-phone factory in Britain, and is in the process of consolidating three factories in Japan. He doesn't rule out more closures later this year, and top execs will take a pay cut that will save the company $385 million.

In the next six months, Nakamura and his lieutenants will be merging the five subsidiaries with the parent. The aim, says Nakamura, is to eliminate duplication of products and improve allocation of R&D, something investors have been clamoring for. MCI, the cell-phone unit, has put up to 18% of its annual sales toward the development of costly third-generation (3G) phones--and even then found itself short of funds. With Matsushita now in charge of R&D allocation, it can direct more funds to key growth areas such as 3G phones. In the consumer market, the parent company, along with such subsidiaries as Kyushu Matsushita, Matsushita Kotobuki, and JVC, have been churning out duplicate digital cameras, camcorders, and home appliances. Nakamura aims to narrow the product categories to 14.

Inside Matsushita, there's probably no one better suited to turning the giant around. Nakamura, a tall, athletic man with a fondness for history and strategy, earned a reputation as a cost-cutter when he revamped U.S. operations in the mid-'90s. On returning to Tokyo in 1997, he was put in charge of consumer electronics and managed to make all of Matsushita's China subsidiaries profitable in just two years.

Can he do the same for a sprawling group with operations in 44 countries? Already, he's off to a good start, but investors are demanding more. Analysts want Nakamura to fold money-losing JVC into the parent. They say he also should boost outsourcing and shift more work to low-cost China, where Matsushita has 39 plants. "Nakamura has done a good job so far, but he needs to do more," says analyst Kun Soo Lee of WestLB Securities Pacific Ltd. in Tokyo.

Counting on a big jump in digital-TV sales may not be the answer. Digital satellite broadcasting, which will provide 100 channels, high-speed Internet access, and interactive entertainment on crystal-clear screens, is not yet ready to take off. Instead, Matsushita--and Nakamura--could use a hit along the lines of a Sony Walkman or a Nintendo GameBoy. And while Nakamura is betting on its Panasonic cell phones to create a global brand, it's losing share in Japan to NEC. Matsushita is about to launch a new i-mode model that it hopes will help it regain No.1 share in Japan. But in the current recession, new phone shipments have fallen 66% from the previous year. Lower costs, better products, more pain: Matsushita's restructuring isn't over. Not by a long shot.

By Irene M. Kunii in Tokyo

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