Tuning into a Turnaround

Kenwood's high-end systems have reversed its fortunes

Just a year ago, Kenwood Corp. looked like yet another Japanese company struggling to stay afloat in a deflationary sea. A leading brand in car stereos and a favorite of audio buffs worldwide, Kenwood had bet big on new businesses such as cell phones, but it never got the formula right and was losing scads of cash. Compounding the problem, Kenwood -- like many Japanese companies -- relied on bank loans instead of the capital markets to fund investment. That worked during the boom years, when inflation drove up the value of assets, but in the slow-growth 1990s it hurt the company's balance sheet. By 2002, Kenwood was carrying nearly $1 billion in debt and had seen three straight years of losses.

Then along came Haruo Kawahara. The 64-year-old Toshiba Corp. veteran had helped U.S. investment firm Ripplewood Holdings revive other distressed Japanese firms. After Kenwood's shareholders recruited him as president a year ago, he kicked off one of the fastest restructuring programs ever seen in Japan. In six months, Kawahara reduced Kenwood's global workforce by 45%, to 4,855, including a one-third cut in Japanese employees. He cut management pay by 15%, showed many senior execs the door, and promoted staff eager to implement reform. And he closed or streamlined factories in seven countries. It was painful, but "restructuring is the key to Kenwood's survival," Kawahara says.

Now, Kenwood is on the mend. For the fiscal year ended Mar. 31, the company reported $35.9 million in profit, its first in four years and the highest since 1989. Sales tumbled 25%, to $1.9 billion, but that's because Kawahara closed down Kenwood's money-losing cell-phone and low-end stereo lines and a business making optical gear for CD players. Investors are piling in, driving Kenwood's shares to $2.45, more than double their price when Kawahara came on board.

If he can keep it up, Kawahara may soon be known as a homegrown version of Carlos Ghosn, the French-Brazilian troubleshooter who turned around Nissan Motor Co. Restructuring may sound like textbook stuff, "but in Japan it has been extremely difficult to implement," says Prem Samtani, an analyst at New York hedge fund Sofaer Global Research Ltd. "Kawahara is an impressive leader."

Kawahara brings decades of experience to Kenwood. At Toshiba, he developed control systems for nuclear power plants. He picked up U.S.-style management skills in the mid-1980s while heading Hartford (Conn.)-based International Fuel Cells Corp., a joint venture of Toshiba and United Technologies Corp. Then in 2000, he went to work for Ripplewood, overseeing the merger of Nippon Columbia's Denon audio-equipment business with that of Marantz Japan Inc. to create D&M Holdings Co.

At Kenwood, he has been putting all his skills into practice. Lesson One: Use equity, not debt, to fund investments. "Shareholders don't ask for debt repayment, but banks do," says Kawahara. Three months after taking over, he negotiated a debt-for-equity swap with lenders that helped him cut debt by 27%, to $683 million, as of Mar. 31. He also raised funds by selling shares to investors such as Merrill Lynch & Co. and Sparx Asset Management Co., a Tokyo-based equity fund. "He's a very determined and very professional CEO, a rarity in Japan," says Sparx President Shuhei Abe.

Now, Kawahara is focusing on Kenwood's strength: audio technologies. He's developing high-end sound systems for home theaters -- which he expects to take off as digital broadcasting spreads. Kenwood also hopes to dominate the market for car stereos based on hard-disk drives that can carry both navigation information and a library of thousands of songs.

Kawahara isn't finished cutting fat at Kenwood. By trimming inventory and shifting more production to contract manufacturers, he expects to reduce annual costs over the next two years by an additional 30%, or $320 million. Kawahara's goal: make Kenwood debt-free and cash-rich by 2006. "I'm confident I can turn this company around," says Kawahara. Japan Inc., hungry for local heroes, is eagerly waiting to see if he's right.

By Irene M. Kunii in Hachioji, Japan

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