Japan's Quick Studies in Survival

Here's how a few Japanese blue chips are shaping up

Just 18 months ago, Shiseido Co. (SSDOY ), Japan's largest cosmetic group, looked like it needed a major makeover. Like many Japanese businesses, Shiseido had sought to dominate its market by blitzing customers with scores of product lines. The trouble was that Shiseido execs had little notion of what was selling. The company had warehouses full of unsold cosmetics, yet couldn't meet demand for some of its hottest items. The inefficiencies hurt: Over the past two years, Shiseido has lost more than $550 million.

Realizing they were in trouble, company execs last year swung into action. They cut costs, streamlined product lines, and--most important--improved inventory control. After installing a new computer network linking factories, sales staff, and 16,000 stores, Shiseido managers can now more accurately forecast demand. They have slashed inventory by a third from a year ago, helping land Shiseido back in the black. On Nov. 6, the company reported net profits of $81 million for the six months ended Sept. 30, compared with a $12 million loss a year ago. "We're showing other Japanese companies that it's possible to reverse a slide," boasts Seiji Nishimori, Shiseido's chief logistics officer.

Shiseido is one of a handful of Japanese blue chips that are honing survival skills to avoid sinking in the quagmire of Japan's decade-long economic swamp. In the process, these companies are getting more efficient and profitable--and are better able to compete in the global marketplace. Many are investing in new technologies to wring excesses out of operations and manufacturing. They're spinning off noncore operations to focus on their specialties. And all are improving cash flow and stressing research and development. The model: Toyota Motor Corp. (TM ), Japan's most profitable company. "Toyota concentrates on generating long-term cash flow to invest in R&D," says Keio University economics professor Masaru Kaneko.

Granted, for every Japanese success story there are dozens of "zombies." Every time such companies approach insolvency, they're kept afloat with new cash from banks--at the behest of a government fearful of unemployment and social chaos if they fail. Despite Japan's reputation for just-in-time supply management, "90% of the Japanese economy is made up of domestic companies that are low-tech and low-productivity," points out Masao Hirano, director of Japan operations at consultancy McKinsey & Co. By following the leaders, he says, the zombies "will change, too, but only gradually and with a lot of pain."

Japan's economic woes could still drag down even the successful companies. Most of them depend on foreign markets for the bulk of their sales. A swoon in U.S. consumer spending would dash the recovery of vulnerable high-tech businesses such as NEC Corp. (NIPNY ) and Toshiba Corp. (TOSBF ) Other concerns are a stronger yen, which would hurt profits, and rising energy costs in the event of war in Iraq. And the Japanese economy, now emerging from its fourth recession in a decade, could easily get sucked back into the quicksand.

No one is more confident of clearing all the hurdles than Fujio Mitarai. He's chief executive of Canon Inc. (CAJ ), the world's leading maker of copiers and laser printers. Few Japanese corporate bosses have done more in recent years to cut costs, shore up earnings, and improve cash flow. To boost efficiency, Mitarai scrapped assembly lines in all of Canon's 29 Japanese factories, replacing them with small squads of about a half-dozen employees who can do the work of 30 people under the old system. The shift enabled the company to reduce inventories of parts by more than 30% and close 20 of its 34 warehouses. Better, Canon increased earnings by 53%, to $471 million, in the most recent quarter. "Manufacturing is where most of the costs lie," Mitarai says. "We're much more profitable today because of these changes."

Corporate Japan can also take lessons from Sharp Corp. A pioneer in liquid crystal displays, Sharp has seen its once-dominant position challenged by Taiwanese and Korean rivals. So in recent years, company execs have ceded the low-margin market for PC monitors, concentrating instead on high-end displays for cell phones, handheld computers, and digital cameras. That's an area where Sharp maintains a technological edge due to its expertise with low-energy devices. And it is now building a $1 billion factory for large LCD panels which, it claims, will triple its productivity. "Sharp is ahead today because it's focusing on its core competence and investing in R&D," says Kun Soo Lee, industry analyst with WestLB Securities Pacific Ltd.

There's even hope for Japan's high-tech Goliaths. After a decades-long obsession with increasing sales and market share while ignoring profitability, industrial-electronics groups such as Toshiba, Hitachi (HIT ), and Fujitsu (FJTSY ) are struggling to downsize and reduce excess capacity. They should follow NEC's lead. The company was the first to spin off its money-losing memory-chip business and shutter aging plants. And it merged its profitable unit making chips for cars and the electronics industry into a new company, which will be better able to respond rapidly to semiconductor-industry fluctuations. The plan will let NEC concentrate on more profitable endeavors, such as developing new cell phones and building computer systems for corporate clients. "We were proud of our great technology, and [we] just pumped out products without thinking of our customers' needs," admits board member Kaoru Tosaka. "Now, we're emphasizing efficiency, profits, and clients."

Sony Corp. (SNE ), too, is getting a face-lift. Its consumer-electronics products are quickly becoming low-margin commodities that China can churn out for a fraction of the cost. So Sony is investing heavily in R&D to develop a new type of microchip to power not only its PlayStation video game console but a range of electronic devices such as wireless handheld computers. The chip will be far speedier than current processors and offer more realistic graphics and superfast game-playing over networks. It "will be a technology driver for our next-generation products and services," says Ken Kutaragi, president of Sony Computer Entertainment.

These are tough economic times, especially in Japan. But recession and global competition are creating some success stories, even as much of Japan falls farther behind. These leaders show that "by becoming better focused, [Japanese companies] can survive and even prosper," says Satoru Oyama, senior analyst with Lehman Brothers Japan Inc. The rest of Japan Inc. would do well to pay heed.

By Irene M. Kunii in Tokyo

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