Executive Interview

Establishing a High Profit Structure


The JFE Group aims to capitalize on the potential afforded by the consolidation of operations formerly undertaken separately by Kawasaki Steel and NKK, and will strive to fully demonstrate the synergy effects derived through the enhanced structure of Group businesses. The result will be more sophisticated technological capabilities, higher profits and a stronger balance sheet, which will help the Group post new milestones in growth and development.




Q: The JFE Group got off to a favorable start because the process of consolidating operations was incredibly smooth. What contributed to this successful first step?

A: When Kawasaki Steel and NKK agreed to pursue the consolidation of operations, the two of us stated our firm resolve to make this business integration far more than a simple survival tactic to eliminate competitors and raise procurement capabilities for raw materials through the merits of expanded scale. Our ultimate objective was to create a strong enterprise with the capacity to lead the global steel industry. Why did we consolidate? Because market changes, particularly global realignment among steelmakers and a downward trend in domestic steel prices, have fostered a heightened sense of impending crisis that envelops Japan's steel industry as a whole-not just Kawasaki Steel and NKK.

We both recognized the benefits of laying the groundwork for the new group structure prior to consolidation because a structure geared to higher profits and business development from the start was a precursor to immediate growth.

 

Two issues to be addressed were of immediate importance. First, how were we going to strengthen the balance sheet and boost profitability? And second, what approach would nurture a cohesive attitude quickly among two sets of employees, each of which had subscribed to the ideals and objectives of different companies with distinct corporate cultures?

We drafted several measures that were essentially designed to fortify group profits but had a corollary impact on employees. One of the first items on the to-do list was the closure of blast furnaces-strategic symbols of steelmaking. We decided to close two blast furnaces and, from a perspective of what would be best for the JFE Group, we picked two at Kawasaki Steel facilities rather than one from each company. This bold decision caused a sensation both within the Group and at other steelmakers, and encouraged employees to embrace necessary reforms and acquire a JFE Group perspective.

This development paved the way for subsequent rationalization measures-either closure or amalgamation of downstream production lines.

When demand still exists for a certain product, a steelmaker cannot simply halt production, even if utilization of that particular manufacturing line is only 50%. However, the consolidation of two companies' steelmaking operations, as in our case, provides an opportunity for change. Everyone expects a newly formed company will stop or streamline activities at certain facilities to eliminate overcapacity and resulting production line redundancy.

 

At the JFE Group, we can rid ourselves of surplus equipment and thereby raise productivity. Over the next three years, we expect to idle 15 production lines, which will trim overall capacity by about 3.5 million tons.

 

On personnel and organizational fronts, we pursued measures to integrate prevailing unwritten rules and corporate cultures ahead of consolidation so that employees at Kawasaki Steel and NKK would be free of old perceptions and procedures and more comfortable with new formats when operations under the JFE Group umbrella actually began.

 

First, we established common operating systems for the neighboring Chiba and Keihin steelworks as well as for Kurashiki and Fukuyama, and brought adjacent steelworks under the supervision of one works director. Then, with these locations merged into the East Japan Works and the West Japan Works, we implemented a personnel reshuffle in April 2003 that dramatically switched production line managers between the two steelworks.

 

These measures were effective not only in integrating the respective corporate cultures, but also in accelerating comprehensive cost reduction efforts by combining the production know-how of the two companies.

 

We've touched upon several measures that played a part in the smooth consolidation of operations. Based on these measures, we identified important issues regarding post-consolidation equipment and facilities as well as personnel and organizational structures for the JFE Group early on. We also prioritized issues that would benefit the Group the most. Timely decisions were definitely a key to our successful consolidation.



The consolidation of operations was executed extremely smoothly, earning high marks from all quarters, including capital markets.

Q: Please describe the JFE Group's organizational structure.

A: In September 2002, the JFE Group became the first major manufacturing enterprise to adopt a holding company system in Japan.

 

In April 2003, the operating divisions of Kawasaki Steel and NKK were regrouped according to business segment and reorganized into five segment-based companies-JFE Steel, JFE Engineering, JFE Urban Development, Kawasaki Microelectronics and JFE R&D-under JFE Holdings.

 

The primary merit of such an organizational structure for operations in each business segment is the enhanced capacity to formulate business execution schemes perfectly suited to the specific characteristics of each business. Each company has been given considerable authority in charting its own course, and we expect this latitude to expedite the development of strategies attuned to market trends and client needs in each segment and to accelerate capital investment decisions.

 

Since accountability for business results accompanies broader authority to manage operations, each company will undoubtedly pursue activities with a keener eye toward profitability and efficiency. JFE Holdings complements the efforts of the five operating companies by acting as a lean headquarters for the Group and assuming overall responsibility for planning strategies, monitoring and hedging risk, and preparing corporate communications for external use.

We established a business execution system that allows us to create strategies meticulously geared toward each business segment.

Q:The Group embarked on its first medium-term business plan in April 2003. Tell us about it.

A: The First Medium-Term Business Plan is the Group's inaugural blueprint for profit growth. It runs from April 2003 through March 2006 and describes operating guidelines as well as goals to achieve. The content of this plan clearly indicates the JFE Group's future direction.

As mentioned earlier, a top priority for the JFE Group is to bolster the balance sheet and enhance profitability. We placed this priority in the primary objectives of the plan, and to achieve our goal, we have spotlighted two tasks: (1) the expansion of free cash flow through higher profits, primarily by raising operating efficiency at production points, and through the sale of idle assets and careful selection of capital expenditure programs; and (2) a dramatic reduction in debt.

 

We established financial targets to be reached by March 2006 and will now draw on the concerted efforts of the entire Group to meet these numerical goals: consolidated ordinary income of ¥250 billion-more than twice the level for the period under review-return on sales of 10.0% and return on assets of 9.0%. We will also strive to lower debt outstanding to ¥1,600 billion, down about ¥450 billion.

 

 

Financial Targets in the First Medium-Term Business Plan (Consolidated basis)
  Year ended
March 31, 2003
(Actual)
Year ending
March 31, 2006
(Target)

Ordinary income(billions of yen) ¥104.6 ¥250
Return on sales(1) (%) 4.3 10
Return on assets(2) (%) 3.7 9
Debt outstanding (billions of yen) 2,057.1 1,600
(1) Ordinary income/net sales x 100
(2) (Ordinary income + interest and discount expenses)/ total assets x 100

The plan articulates six common objectives for the Group: (1) reinforce groupwide management capabilities; (2) cement a reputation as a technology-based organization; (3) promote fair personnel and labor management policies; (4) cut procurement costs; (5) execute thorough environmental management; and (6) resourcefully apply information technology (IT). We outlined management structures for each segment and are encouraging the companies to double their "only one" and "number one" products. From a technological perspective, "only one" refers to items that no other company provides and "number one" refers to items that are the most competitive. We also want each operating company to streamline personnel and reduce expenses.

 

We have allowed each operating company to define its own approach to achieving common objectives. Please refer to "Review to Operations" for information on operations in each segment.

 

The employees of the JFE Group will work steadily as one toward the stated goals of the First Medium-Term Business Plan and open a new chap ter in the history of corporate growth.

The feeling of familiarity that pervades the Group will grow with everyone working together toward the same goal.

Q: Your financial targets require assumed variables, such as foreign exchange rates and steel prices. How did you determine these factors?

A: We took a rather conservative stance on the assumed data needed to calculate financial targets. Steel prices, for example, are expected to rise, but we applied the level that prevailed in the second half of the period under review. The JFE Group has an annual export surplus of about $1.5 billion, but we applied a rate below ¥110 to the U.S. dollar. And interest rates, which have a big impact on debt, are likely to increase an annualized 0.5 percentage point above those for the year ended March 31, 2003, so we decided on a six-month TIBOR*1 of 1.5% and a five-year long-term swap rate*2 of 3% for the year ending March 31, 2006.
* TIBOR: The Tokyo Interbank Offered Rate. An interest rate published by the Japanese Bankers Association that lending banks apply to short-term funding transactions with other banks in Tokyo. TIBOR is the benchmark rate for fund procurement using floating interest rates.
*2 Long-term swap rate: A fixed interest rate that is exchanged with a floating interest rate for a predetermined period in financial markets.
The long-term swap rate is the benchmark rate for fund procurement using fixed interest rates.

Q: What kind of corporate group do you want the JFE Group to become?

A: We would like the JFE Group to function as a technology trailblazer-that is, a manufacturing group supported by excellent technologies and growing, branching out as never before.

Globalization has influenced every industry, not just steel, and price wars have become increasingly fierce. One of the most indispensable keys that corporate Japan can have for unlocking growth potential in this challenging business climate is technological expertise-capabilities that no other company possesses. But it is equally important to have a varied selection of high-performance products and be among the first to commercialize them. For manufacturers, technological expertise will become an asset of exponential value.

The JFE Group inherited Kawasaki Steel's and NKK's outstanding technological capabilities, which contributed significantly to the nation's growth for many years. Consequently, we possess a huge range of "only one" and "number one" technologies and products. Prime examples from our steel sheet lineup are high tensile-strength (HITEN) steel sheet and surface-treated sheets, while in the production of steel plates, we boast technology that cools steel faster than any other plate mill in the world. Our engineering operations feature a high-temperature gasifying and direct melting furnace capable of incinerating waste with zero impact on the environment. In eco-energy operations, we are leading a project to synthesize dimethyl ether (DME) as well as other efforts to develop alternative energy sources for the 21st century. These initiatives have drawn extremely high praise from industry watchers.

We will integrate and then reinforce JFE Group technologies. Concurrently, we will draw on the talents of Group members to address goals in the First Medium-Term Business Plan that hinge on the creation of more technologies and products in the "only one" and "number one" categories. We will pioneer leading technologies and tackle new businesses, such as eco-energy.

Adhering to our philosophy of steadfast contributions to society, we will support the global community with the world's most innovative technology.

The JFE Group will boast "only one" and "number one" products. We will achieve significant growth using our wealth of outstanding technologies.

         

Kanji Emoto
Chairman and Co-CEO, JFE Holdings
1958 Joined Kawasaki Steel
1995 President and CEO, Kawasaki Steel
2001 Chairman, Kawasaki Steel
2002 Chairman and Co-CEO, JFE Holdings
Member of the Board, Kawasaki Steel
2003 Chairman and Co-CEO, JFE Holdings
      
Yoichi Shimogaichi
President and Co-CEO, JFE Holdings
1958 Joined NKK
2002 Representative Director and Chairman of the Board, NKK
2002 President and Co-CEO, JFE Holdings
Director, NKK
2003 President and Co-CEO, JFE Holdings