TT-625 -- Why is Hitachi Merging with MHI? e-biz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, August 7, 2011, Issue No. 625


- What's New -- Why is Hitachi Merging with MHI?
- News -- Public mistrust in new rice harvest
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback -- Tradoria Really a Deal?
- News Credits

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Last week the Japanese commercial sector was abuzz with a
story broken by the Nikkei, that Hitachi and Mitsubishi
Heavy Industries were in discussions to merge their
businesses sometime in 2013. Apparently the two companies
are looking at a "merger of equals" and creating Japan's
second largest company after Toyota.

On the face of it, the merger is a bold and exciting move.
Both companies have core businesses that complement each
other and would go a long way to helping each other survive
in competition against GE, Siemens, and various Chinese
newcomers. However, Reuters has since come out with a story
that, after all the media speculation, both companies are
now possibly backing away from a merger discussion.

While on the one hand it is surprising that they can't take the
heat of the media spotlight, given that both firms are so
large and well known, on the other hand both have
backgrounds of being reticent engineer-driven businesses
suffused with history and pride, and the media speculation
hurts. Neither company wants to hear others, especially the
media, say what is an obvious reality, that with the
decline in the domestic sector and patronage by the
government, they have to reinvent themselves and go
international. The trouble is that their foreign
competitors run circles around them in terms of speed and

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[...Article continues]

Hitachi's reaction to the original Nikkei article says it
all. They put out a terse press release stating only "The
article is not based on fact."

Perhaps therein lies the problem. Traditional bedrock
companies in Japan are proud and feudalistic. This used to
be their strength -- commonality of purpose,
self-sacrificing employees, and no arguments about
decisions from the top. However, with the advent of the
information age, quality of response and reaction has
become more important than unwavering commitment and
persistence, and Hitachi in particular has suffered as a
result. Perhaps ironic given that the company is so
deeply involved in the IT industry.

Further, because of their deep commitment to national
priorities, from energy to armaments, both companies have
for decades been the nation's employers of choice and
trusted partners of generations of governments. The
problem now is that they have to divest themselves of the
notion of being providers to the Japanese nation and
instead get back to the core activities of being
businesses. When you're proud, that's hard to do.

The good news is that neither firm is "done for". Together
they would generate sales of JPY11.8trn, and employ 430,000
people. They are active in most countries of the world,
either directly or through agents, and they cover most
areas of manufacturing, energy, electrics, and IT. Most
importantly, they have strong brand names that can carry
the businesses into their next growth phase, should there
be one.

So why now?

Of the two companies, it is probably fair to say that
Hitachi is perceived as the weaker in terms of
competitiveness and financial performance. This is partly
due to its unwieldy size, partly due to its old fashioned
leadership style, and partly because it is not part of a
strong Keiretsu grouping with ready access to emergency
cash. The conglomerate was hard hit by the post-bubble
period but somehow managed to limp on for almost 20 years.
However, three years ago the company got further mauled by
the Lehman Shock, and it became obvious how weakened the
group had become. There was panic by shareholders at the
time, and its stock price plummeted from JPY800 to just
JPY200 in a matter of months. It didn't help that the firm
also lost a huge amount of money that year as well.

Things appear to have improved since then, and management
seems to be taking seriously the need for drastic changes.
It was around 2008 that we started hearing of radical ideas
such as sending hundreds of engineers to India and other
emerging economies, as the company committed to
internationalizing. Further, the hundreds of subsidiaries
started getting merged or cut, and as a result,
consolidated net profit for last year was JPY238bn -- the
highest for years. Still, they need to continue focusing on
profitability, which is currently around 3%. In comparison,
GE has a profit margin of around 30% for similar sales, and
Siemens in Europe comes in at around 14%.

There are plenty of other old fashioned behemoths needing
to merge, trim, and internationalize, and we're going to
see more of these announcements come up, whether or not
this Hitachi-MHI deal goes through. Speculation is that
Kawasaki Heavy Industries, IHI, and even Toshiba will have
to look at merging with someone else in order to compete
with Hitachi-MHI.

However, the company that we think most needs to be merged
with someone is NEC. More on them another day, but suffice
to say that while even Hitachi's share price has held
steady over the last 6 months, NEC has lost about 40% of
its value. Shareholders sense there is a sickness that the
company can't shake, and with an FY2011 loss of JPY12.5bn
they'd be right.

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+++ NEWS

- Public mistrust in new rice harvest
- Gaba about to be gobbled up
- Automakers struggling to find employees
- Korean alternative medicine draws thousands
- UK MOX plant closes down

-> Public mistrust in new rice harvest

The Agriculture Ministry has a big problem. Consumers are
dubious about the safety of the new season rice crop and
are instead stockpiling 2010 rice while they can. The
Ministry has said that it will check new season rice in two
stages, to ensure food safety, but nonetheless, rice
merchants all over Tokyo are running out of last year's
stock, reporting sales at double the normal levels. ***Ed:
Housewives can be fooled once, but not twice. Their logic
is simple: if thousands of cattle contaminated with cesium
can be "accidentally" sold into the food chain and that
cesium came from rice stalks used as feed, then the
chances are that the current rice crop from Fukushima
and surrounding areas might be contaminated as well.
Perception is reality.** (Source: TT commentary from, Aug 6, 2011)

-> Gaba about to be gobbled up

Medical-Education operator, Nichii Gakkan, has announced
that it will acquire Gaba, the high-profile English-language
conversation school, for JPY10bn. Nichii is offering a 53%
premium over Gaba's closing price on Friday. While Nichii
lost JPY2.3bn on its education sector last year (it is
much more successful in Health/Medical), Gaba in
contrast made JPY596m on sales of JPY7.57bn. ***Ed:
We're not sure that Gaba is going to fill the huge hole
that Nichii experienced in Education last year, but at
least the timing will be good to hop on to the
internationalization bandwagon.** (Source: TT commentary
from, Aug 6, 2011)

-> Automakers struggling to find employees

In an ironic situation, given the general high
unemployment in Japan and the joblessness of many
up in Tohoku, Honda and other auto firms are
complaining that they can't find enough factory workers.
Honda is looking for around 3,000 contract employees
and is using job placement companies to help in the
search. ***Ed: The problem is two-fold. Firstly the
positions Honda is offering, only pay
JPY1,200-JPY1,300/hour, which is not high enough to
make young unemployed people want to leave home and
the dole, and secondly, the government sent home in 2009
and 2010 tens of thousands of Brazilian nisei who otherwise
would have filled the gap.** (Source: TT commentary from, Aug 6, 2011)

-> Korean alternative medicine draws thousands

Maybe Japan should be taking a leaf out of South Korea's
playbook as far as medical tourism is concerned. While
Japan may get a couple of hundred heart patients a year,
according to the Korea Tourism Organization, in the first
half of 2011 6,246 Japanese tourists checked in for
treatment at nine Korean hospitals and clinics -- in
particular those specializing in Oriental medicine,
dermatology and plastic surgery. This is a 35.2% over last
year. ***Ed: A friend who went to one of these clinics tells
us that most popular on the alternative medicine side is
treatment for facial wrinkles amongst women in their 40's
and 50's. Nothing new under the sun...** (Source: TT
commentary from, Aug 6, 2011)

-> UK MOX plant closes down

A disaster half a world away has meant the loss of 600 jobs
for workers in Seascale, on the UK's Northwest Cumbria
coast. The Sellafield plant depended on Chubu Electric
Power (Chuden) buying MOX fuel for Chubu-region nuclear
reactors, and Chuden was in fact Sellafield's only major
contract client. The closure will have a major negative
effect on employment in the area and local unions are
understandably upset. However, the strong move away from
commissioning any further nuclear facilities by the Japan
government means that there is little likelihood of a
reprieve for the Sellafield workers. (Source: TT commentary
from, Aug 6, 2011)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to

*** In TT624 we wondered if Rakuten was over-extending
itself, especially since its Tradoria acquisition in
Germany brings the company to about US$1bn in acquisitions
in the last 18 months. A reader now wonders if Tradoria is
such a bargain in the first place.

=> Reader contribution:

Tradoria is Germany's leading online shopping mall? Not
really. and numerous other e-commerce platforms
like, or are bigger and receive
more traffic and customers than Tradoria. Have a look at for some traffic info on above mentioned
sites. clocks in at a measly 15,000 unique
visitors whereas easily surpasses 1 million
uniques a day ( 3m, 250k,

Also, tradoria had quite some negative press
( and customer experiences aren't so
great either ( Rakuten Inc. probably
chose to acquire Tradoria from DuMont Venture because
Rakuten's B2B2C business model is exactly what Tradoria
does. As you already pointed out in your "Internal" points
1 to 3, international business will be _very_ challenging
and different for Rakuten from the closed Japanese
environment. I say wait and see to Rakuten's broad-business
strategy, it might work in Japan but things will be
difficult internationally.

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