Panasonic Group CEO Signals Determination to Decisively Implement Reforms in FY25 as Organization Enters Final Year of Medium-term Strategy

Panasonic Group CEO Yuki Kusumi held a Group Strategy Briefing on May 17 to mark the final year of the Medium-term Strategy announced in the fiscal year ending March 2023. Describing the current situation as “critical,” he announced that the organization would decisively implement reforms to improve profitability. This article introduces his thoughts on the Group’s strategic direction for the coming year.

During the briefing, you reviewed the position of the Group as it entered the final year of the Medium-term Strategy, and said that you viewed the situation with a “strong sense of crisis.”

As we announced in the Panasonic Group FY24 Earnings and FY25 Forecast, released on May 9, we have not achieved our targets for ROE¹ and cumulative operating profit, two of the three management indices in our Medium-term Strategy. In addition, many of our businesses—including those in investment areas—have yet to achieve sought-for levels of profitability, and we have failed to meet the expectations of our stakeholders. This is truly a critical situation.

¹ Return On Equity; an indicator of how profitable a company is

Of the three KGIs², we expect to achieve cumulative operating cash flow. After closely monitoring the Group’s performance for three years, my impression is that the management emphasis on operating cash flow has taken root and that some businesses have used reforms to get where they need to be and have improved their profitability. However, my original vision was for all of our businesses to have done this. Although market conditions had an impact, the inability to be competitive in some of our businesses, as indicated by our failure to achieve all three KGIs, is something that we take very seriously.

² Key Goal Indicators

In light of this situation, the Group has announced a new policy of rigorously managing each business based on cash and return on invested capital (ROIC)³.

During the briefing, I mentioned that in addition to cash, we will also be enforcing strict ROIC discipline going forward. This means determining the scenario we should use to grow—or restructure—each business, setting deadlines, and then meeting those deadlines. 

³ Return on Invested Capital; an indicator of how effectively a company uses its capital to generate profits

Under a new rule, every business is now expected to achieve WACC⁴ + 3 percentage points. Any business division that fails to achieve this will be subject to review by their operating company and will be given one year to meet the target. After one year, if the business continues to underperform, then Panasonic Holdings (PHD) will become involved.

⁴ Weighted Average Cost of Capital; the weighted average cost of equity for equity financing and of debt for borrowing

Even in situations where ROIC exceeds this level at the operating company or divisional company level, this is not necessarily the case when viewed at the business unit level. As someone who looks at the Group as a whole, I feel a sense of crisis here. 

Basically, we view our management units as business divisions, each of which is about the size of a listed company. Division directors must manage from that perspective. I would like to reconfirm that this approach has been communicated across the Group.

You also mentioned that by promoting transformation of the profit structure, “we will reduce the number of businesses with issues to zero by FY2027.” How do you intend to achieve this goal?

The definition of “businesses with issues” presented during the briefing is “a business with low growth potential and ROIC below WACC.” When ROIC is below WACC, it means that the value of funds borrowed from shareholders is being wasted—and that should never happen. We will eliminate these businesses by FY27. However, a variety of factors can contribute to creating a “business with issues”—for example, a business may be affected by current market conditions, a business may be behind in reforming its cost competitiveness (an indicator of competitive strength), or the business structure itself may be in a severe condition. If factors render the business structurally inferior to competitors in the same industry, then inorganic measures must be taken immediately, otherwise performance will be impacted by the quality of management. We will identify the cause of the profitability issue in each business and address the situation. 

Due to market conditions, relationships with distribution, and other factors, some businesses should be looked at using indicators other than ROIC and growth potential. However, even in these cases, continuing to incur significant losses is unacceptable for a business that is being conducted with capital entrusted to it by shareholders. We will determine if suitable scale can be maintained with the appropriate revenue stream. When it comes to tackling issues with a sense of urgency, some businesses are still not where they should be. For such businesses, PHD will make a decision and then act firmly and quickly, including drastically changing the management structure.

Could you tell us more about the concept of “Best-ownership perspective,” which joins “Relevance to Groupwide common strategy” and “Market position & competitiveness” as a strategic principle for business portfolio management?

“Best ownership” refers to the ownership under which stakeholders—employees, customers, suppliers, and affiliates—reap the most benefits. To achieve the “best ownership,” management must be able to address a business’ most critical issues, make the necessary growth investments even if the business needs to spend more cash than it can generate, and determine whether the business is well managed or not. Since not only PHD but also operating companies and divisional companies are owners of business divisions, they must make portfolio management decisions from the perspective of whether they are the best owners for their business divisions.

However, the Panasonic Group has a Basic Business Philosophy, and if each business operates in accordance with that philosophy, then they will surely improve. Former Chairperson Arataro Takahashi once asked, “Are we doing an unrivaled job? As a result of this effort, are customers choosing us? If it’s not profitable, immediate reforms must be made.” If the stagnation of the past 30 years can be attributed to the fact that each business is not managed in accordance with this approach, then I think many things need to be done before making the decision to “hold onto this and get rid of that.” 

If a business is not profitable, is it because PHD or the operating company is not the best owner, or is it because the business structure will not change regardless of who owns it? If it’s the latter, then it means that the business is being poorly managed by the ownership.

Also, in the past, there were many cases of business carveouts initiated because the business was “loss-making.” From the perspective of employee motivation, this is not the right approach. Only when each business is in a healthy state, performing at its best, can sound management of the business portfolio for the future be achieved.

Needlessly selling off businesses is not the objective of business portfolio management. The objective is to take the necessary steps before the business structure deteriorates due to competitive inferiority, not simply because a business has become unprofitable. One way to do this is to entrust the business to the best external owner, and carveout is not the only way to do this. We intend to maximize our contribution to customers through an approach that allows our employees to give full play to their abilities with peace of mind.

What is your outlook for the three growth areas of automotive batteries, air quality and air-conditioning, and supply chain management software?

Automotive Battery Business
With plug-in hybrids and hybrids being reevaluated over electric vehicles (EVs) in the North American market, the global trend toward EVs remains unchanged—although the pace of demand growth has slowed. If issues such as the supply of electricity from renewable energy sources and improvements to infrastructure—including high-speed recharging—can be resolved, then the shift to EVs will make steady progress, especially in areas related to passenger cars and “last-mile” commercial vehicles.

In the North American business, profitability is strong at the Nevada plant, but the Kansas plant is in the start-up phase and the capital investment will be commensurate. The Kansas plant is scheduled to begin mass production at the end of FY25, and is expected to be profitable from FY27. We are targeting double-digit ROIC in FY28 and beyond. Even without U.S. IRA⁵ subsidies, we will continue to pursue the goal of achieving our ROIC target as soon as possible.

⁵ IRA: Inflation Reduction Act

Air Quality & Air-Conditioning—Air to Water (A2W)⁶ in Europe
While it is true that market growth has been slower than expected, something that we could not have foreseen when preparing the Medium-term Strategy, there is a common understanding within the industry that this is an area that can be expected to grow steadily in the future—and we agree with that assessment. The critical issue is how to gain market share in each country. Every company is making their best effort; the approach we’re taking is to be the solution of choice for installers. Our immediate priority is to sharpen our operations so that the business can be profitable even when faced by unpredictable fluctuations in demand.

⁶ A2W: Heat pump hot water heaters

Supply Chain Management Software
While Blue Yonder is the main focus of our efforts in this area, we will continue to promote reforms by CEO Duncan Angove, who joined us in FY2023. Among the concrete results achieved to date was the release of the first Native SaaS⁷ product last year.

The supply chain management business, including Blue Yonder, is currently considering preparations for listing in the future. Although the timing has yet to be determined, we will make investments to gain competitiveness so that Blue Yonder’s corporate value will be properly evaluated by the capital market at the time of listing.

⁷ SaaS: Software as a Service—a service that allows clients to use software running on the service provider’s side via a network. 

Can you explain Panasonic Group’s unique approach to human capital management, one of the initiatives for strengthening the Group’s structure?

I have been speaking a lot about the importance of human capital management recently. Simply put, I believe in investing in people and taking measures to help them realize their potential. From the perspective of human capital management, we want our employees entrusted to us by society to realize 120% or 150% of their potential, and we want them to concentrate on work that creates practical value for customers. If we can accomplish this, then our financial indicators will also rise. This is our goal.

Today’s Panasonic Group has not yet reached that stage. Only by changing the way we work and asking ourselves, “How many people should be doing this job?” will the human resources entrusted to us by society be able to truly create value for customers and society.

Our current focus is on raising the awareness of each and every employee. In particular, middle management—the nexus between “management” and “employees”—must have a deep appreciation of the fact that “human resources are important capital for management,” and change how they think about human resources management. A change in the behavior of middle management will lead to a change in the behavior of each and every employee.

Earlier in this conversation I focused on management indices and businesses with issues, but I feel that the fundamental issue is about a “sense of crisis.” The old Matsushita Electric, back when I joined the company, felt a sense of crisis whenever it lost ground to a competitor. Everyone should feel a sense of urgency, especially since those responsible for management are in charge of people and capital.

Essentially, on the basis of our Basic Business Philosophy, each one of us is responsible for finding better ways to do our job, for taking on challenges proactively and resolutely, and for achieving even better results. As Morimasa Ogawa, who joined Matsushita Electric in 1955 and later launched our microwave oven business, once said, individual employees must have a strong sense of autonomous responsibility. This has been Matsushita’s basic philosophy since that time. The leadership of each business must always know if they are working firmly with a sense of crisis as managers and if they are able to see the business as a whole.

Finally, can you tell us how this strategy relates to initiatives under our long-term environmental vision, Panasonic GREEN IMPACT?

If we are to continue to enjoy “affluent lifestyles” in the future, and if industry as a whole is to maintain sustainable business activities, then addressing global environmental issues must be a top priority. We are committed to taking proactive action that allows us to be of service to society while growing our business—that is our basic approach.

In the environmental field, each company must fulfill its responsibilities, and we believe that Panasonic Group can do something to help. We understand that contributing to the resolution of global environmental issues is not an end in itself, but rather an unavoidable social issue that must be addressed as industry as a whole works toward the future. In fulfilling our own responsibilities, becoming more efficient is our competitive advantage, and we will not cut corners there. Meanwhile, CONTRIBUTION IMPACT and FUTURE IMPACT are areas where we can help other companies meet their environmental challenges. We treat these as profit-making business opportunities.

We do not want to become a company whose sole purpose is “to contribute to solving global environmental issues.” While focusing on the realization of “affluent lifestyles” for the future, we will address and solve the global environmental issues that are the basic premise of our goal of ensuring affluence for society. In this way, we will expand the breadth of our contribution to society. This is our basic approach to global environmental issues.