The Japanese industrial group regards promoting digital solutions as the “No 1 priority”, President and CEO Keiji Kojima said, stressing the importance of investing in skilled staff for digital transformation.
“Although the world’s economic difficulties continue, new growth will arrive when we overcome the current situation,” he said.
The company stands out as Amazon reportedly has cut around 10,000 employees while Facebook parent Meta announced 11,000 job cuts recently and Twitter has slashed 50% of its workforce.
Hitachi intends to raise its digital transformation staff on a consolidated basis to 98,000 by March 2025, up 31,000 from the end of fiscal 2021. The company set aside ¥500 billion (US$3.69 billion) for strategic investment, primarily in the digital field, over the coming three years.
GlobalLogic, a US software developer Hitachi acquired last year, bought a Romanian peer in November to bring 1,100 new workers into the group. Hitachi will continue acquisitions to accelerate its hiring.
Hitachi’s Lumada platform, which uses technologies such as artificial intelligence and Internet of Things systems, is the foundation of the group’s digital transformation strategy. Lumada improves the quality and profitability of products and services in IT, energy, railways, infrastructure, equipment and other businesses owned by Hitachi.
Hitachi aims to chalk up ¥2.7 trillion, or nearly US$20 billion, in Lumada-related revenue in fiscal 2024 – up 90% from fiscal 2021 – on a consolidated basis excluding listed subsidiaries the company plans to sell. The digital transformation strategy will serve as the core of Hitachi’s growth, as the business is to account for 27% of consolidated sales revenue, up from 17%.
However, the revenue target cannot be achieved by the planned workforce increase alone.
“In the digital business, the number of engineers equals sales revenue,” Kojima said.
As revenue per capita from the Lumada service totalled ¥21 million in fiscal 2021, the planned increase in digital engineers would lift revenue to just over ¥2 trillion. Sales revenue per engineer needs to be hoisted by ¥7 million to clear the target.
Lumada’s penetration rate – the ratio of sales via the platform to total revenue – in main business segments offers clues on how to improve this work efficiency. The ratio is 34.6% in IT, along with 25.3% in infrastructure and other industrial work and 12.2% in the environment segment consisting of electric power and railway facilities. But it stands as low as 0.7% at Hitachi Astemo, the automotive parts unit.
In the April-September period, earnings before interest, taxes and amortization (EBITA) accounted for more than 10% of sales revenue in the IT and industrial segments where Lumada has high penetration. But the ratio was only 1.3% at Astemo.
Hitachi is prodding Astemo to promote a shift to parts production for electric vehicles so as to facilitate its digital transformation. Equipment sales as well as demand for updating systems through the internet are expected to increase in the EV sector.
The parent dispatched 170 digital experts in its group to Astemo in spring 2022 and will spend 300 billion yen on EV-related research and development by fiscal 2025, looking to quadruple sales of EV parts and other products in the electrification business to more than 400 billion yen.
The stock market is paying close attention to moves at Astemo.
“The outcome of digital transformation through the shift to EVs will serve as a litmus test to predict the position of Lumada in the auto industry,” said an official in charge at a Japanese asset management company.
Hitachi is “starting to become resistant” to changes in the economy due to the company’s structural reforms, said Kota Ezawa at Citigroup Global Markets Japan.
When Hitachi announced April-September results, the group raised its operating profit forecast for fiscal 2022 to ¥753 billion, up 2% over the previous year. Of eight leading Japanese electric and electronic equipment manufacturers, only Hitachi and Sony Group upgraded their profit projections at that time.
But Hitachi still lags overseas rivals in earning power. Its ratio of operating profit to sales revenue was 7.2% in fiscal 2021. This trails the 10% in terms of earnings before interest and taxes at Germany’s Siemens in the year through September and the 19.8% operating margin at ABB of Switzerland in the year ended December 2021.
Lumada’s EBITA-to-revenue margin is high at 13% – 7% on a consolidated basis. Hitachi could improve overall profitability if the penetration of Lumada rises at Astemo and other segments.
Hitachi’s stock price has stalled at the 7,000-yen level, failing to top 8,000 since 2000. The number of foreign corporations holding Hitachi shares is hovering around 1,100 without signs of a further increase.
To lure new capital from foreign investors, Hitachi needs to show it can generate stable profit as a “digital transformation company”.