* This article is edited from “Integrated Report 2024.” Click here for the full report.
Over the past 30 years, the Company’s market capitalization has stagnated, with the shares recently trading at a P/B ratio of less than 1.0x. What kind of issues do you see regarding the situation that we have not been able to enhance our corporate value over the long term?
Tsuga: One known issue has been that we have not been able to create major business pillars to support the Group. When I took over as president from my predecessor, then-President Otsubo, in 2012, the Company was perceived by the public to be a home appliances company, but in reality, it was a company manufacturing digital TVs as its main product. We had invested heavily in panels and semiconductors to establish significant pillars of business, but rapid commoditization and increasingly intense competition made it difficult for us to sustain these businesses. A similar situation played out in the mobile phone business, which forced us to wind down our mainstay business in the digital AV sector. At that time, society was experiencing a period of tumultuous change, and what society expected of us had also changed, which is why we needed to embark on a transformation. So, we concentrated our investments in the automotive and battery businesses in order to shift from B2C to B2B and strengthen our approach to environmental issues. In 2021, we completed the acquisition of Blue Yonder, which allowed us to take ownership of a subscription-based business. Even though our current automotive battery and supply chain management software businesses are not yet big enough to be called pillars that underpin growth of the Group, I certainly feel that they have the potential to become just that in the future.
Sawada: Before I assumed my position as an outside director, my image of the Company was riddled with questions. For example, with as many as some 40 businesses each with net sales of around 200 billion yen, I wondered how all of the Group’s businesses are managed. I also thought surely it would not be easy steering such a giant corporation in a positive direction. Having served as an outside director for four years now, there are two things I am concerned about with respect to my initial impression. The first is that a globally leading growth business worthy of being called a pillar has yet to be created. I feel this is one of the reasons behind the long-term slump in corporate value. The automotive batteries, supply chain management software, and other businesses the Group is currently focused on must definitely be developed into growth businesses to become the mainstay pillars of the Group. The other thing is that among the many different businesses of the Group, the weaker ones are overshadowed by the stronger ones, making it difficult to get a view of the overall picture of the Group. The weaker businesses bring down the overall average, which I feel has contributed to the external perception that the Company has not fully realized its growth potential. Also, I often question whether there is enough passion in the Group’s employees, which might be one reason behind the factors I have just mentioned. The employees are generally honest, talented, and thorough, but up ahead I want them to build on these capabilities and increase their drive to decisively win the competition and become the best in the world at what they do. I feel that this aspect of the Group’s corporate culture is also a reason for the lack of rapid progress, so I expect the entire Group to take action with even greater passion.
Tsuga: Your comment about passion bears reference to the fact that the Company operates numerous businesses. For example, while we might command a high share of the home appliance market in Japan, the sheer number of our products makes it unclear which ones we are focused on. Accordingly, the awareness of having to get the better of the competition in each individual business tends to weaken. It will not be easy, but we need a business structure and a mechanism to increase the passion of employees.
Capital market participants often point out that a conglomerate discount has been applied to the value of the Panasonic Group. Are there any issues you are aware of in relation to the current business structure and how Group synergies are generated?
Tsuga: As we look to create synergies, it is important that we clearly understand what society expects of us. For instance, if society expects us to make contributions in the field of generative AI, giving shape to how the Group could achieve that will lead to the creation of synergies. On the other hand, trying to create synergies simply by combining existing businesses will prove challenging. We must seize on what society wants from us and respond with a future-oriented approach; otherwise, our efforts to combine or add different elements will prove ineffective.
Michitaka Sawada, Outside Director of Panasonic Holdings
Sawada: When it comes to synergies, I feel that combining similar business lines or those with the same time horizon will never lead to the creation of synergies. Bringing together things that are different can produce something novel that never existed before. This is the initial stage of synergy creation, but it tends to be overlooked sometimes. If we accurately capture and expand on that, I believe it will lead to the creation of synergies. I should also add that even if there are multiple superior technologies at one operating company, combining them will only yield limited results. Efforts to create synergies must traverse multiple operating companies and involve different companies beyond the Panasonic Group.
Tsuga: I feel that our ability to create new businesses has weakened. In the past, the R&D departments of the head office played a central role, for example, by actively driving developments to create pillars for the Group, mainly in the business fields of digital TVs, DVDs, and mobile phones. Now, our focus is on automotive batteries, but since batteries have a strong element of one-purpose technology, it is hard to create synergies in terms of technology. In these kinds of businesses, we intend to generate synergies by combining layers of different elements, such as software and data.
Sawada: In order to identify seeds for synergies, having an idea of what the end goals are is key. To that end, the Company needs to actualize the Group’s vision and ensure that everyone is heading in the same direction. There may be some new perspectives in the viewpoints of solving global environmental issues and realizing the well-being of people worldwide, which are Groupwide common strategies.
What factors were behind the transition to the operating company system and how does the holding company approach its monitoring of the operating companies?
Tsuga: There were several factors that prompted the change to the current company structure, but I consider the definitive moment was during the consideration of the Blue Yonder acquisition. For a manufacturer like the Panasonic Group, Blue Yonder’s business was rather difficult to understand, and several members of the management team voiced their opposition to the acquisition. To strengthen our offerings of system solutions, Blue Yonder was certainly essential. However, within the Panasonic Group, such a large organization at the time, those involved in system solutions supported the acquisition, while those not directly related to that business opposed it, leading to a division of opinions. Owing to that situation, I realized that, under the then-company structure, there were limitations to rapidly making forays into new areas of business. Furthermore, because the Group as a whole lacked a clear understanding of our competitors, we transitioned to the current operating company system and established the holding company in order to strengthen the competitiveness of each business.
Kazuhiro Tsuga, Director, Chairperson of the Board of Panasonic Holdings
Sawada: Given that the operating companies are independently responsible for their own management, the holding company’s monitoring involves the rigorous evaluation of each entity. You could say that the current Board of Directors of the holding company has been able to monitor the operating companies from various angles owing to the wide-ranging points of view of its outside directors, including frontline and forward-looking perspectives. As such, if the operating companies fail to change and they remain the same in five or 10 years from now, there is no way you could say that we have closely monitored them. As the outside directors do not interact with the operating companies on a daily basis, it is no easy task to pick up on the key discussion points while engaging in monitoring. Nevertheless, this is a necessary skill required of the outside directors of the holding company. Also, it is important for business management to be able to leverage trends in society to their own advantage. When you are being buffeted by headwinds, you need to weather the storm and limit the damage, but when a tailwind is blowing, you need to take full advantage and make significant progress. The ability to discern and capitalize on these situations is crucial. For the Board of Panasonic Holdings, it is imperative that we thoroughly monitor whether the CEOs of the operating companies are leveraging these trends to their advantage. In particular, we need to pay close attention to operating companies undertaking large-scale investments.
Tsuga: In 2019, we established China & Northeast Asia Company under then-Appliances Company (now the Lifestyle segment). This entity enabled us to shore up our business in China, and continues to deliver favorable results even today. It is poised to quickly achieve success if the prevailing trends shift favorably in the future. Since the winds of change are not always blowing in one direction, it is vital that managers are capable of deciding what kind of action to take in anticipation of the future when the wind is blowing from various directions.
Sawada: The damage suffered by misjudging the winds of change and the damage from missing the opportunity to ride those trends are significantly different. Misjudging a trend typically results in a one-off loss, but failing to jump onboard a trend will mean being rapidly outpaced by the competition, making it difficult to catch up later on. This leads directly to crucial missed opportunities.
In terms of business portfolio management, what discussions take place at Board meetings and what role does the Board play in determining the Group’s long-term goals and overall direction?
Tsuga: The Board did not used to engage in systematic discussions about business portfolio management, but under Group CEO Kusumi’s leadership, we have started to have more structured discussions. In the past, some of the businesses we carved out were successful, such as healthcare and semiconductors, and looking back, those businesses had core technologies or strengths. For businesses that are structurally disadvantaged and lack core strengths, we need to take measures in some way or another, which might mean a wind-down, for example. That the Board is now prepared to take action and discuss and make decisions on business portfolio management tells me that we have made significant progress because I know what the situation was like before.
Sawada: While the approximately 40 businesses in the Group do need to be categorized along multiple axes, simply placing them on a board and confirming their positions does not constitute business portfolio management. It is important that the Board clearly formulates a vision for the Group going forward and then transforms the Group through business portfolio management to achieve that vision. Without this notion, discussions would be preoccupied with questions like what should be done with unprofitable businesses and businesses whose best owner is not Panasonic.
Tsuga: I consider envisioning how we will achieve a “layering up” in our focus areas of Lifestyle and Environment is a key point in the leadup to full-blown business portfolio management. We will continue to have these discussions going forward.
Sawada: We discussed business portfolio management multiple times at Board meetings in fiscal year ended March 31, 2024 (fiscal 2024) and a wide range of opinions were expressed. Having an exchange of opinions from various angles is beneficial in the early stages of a discussion, and there is little doubt that the members of the Board have engaged in vigorous discussions. Those discussions made me realize again that business portfolio management is a means to an end, and that our purpose is to decide on a future vision for the Panasonic Group. Also, to avoid discussions that lead to nothing more than empty theories, the Board must set clear timelines and put plans into action.
The Group is currently investing heavily in automotive batteries and supply chain management software. How is the holding company supervising the operating companies that are executing these major investments?
Tsuga: The Board has engaged in lively and fast-paced discussions about automotive batteries and there is a sense that all Board members are convinced the right decisions are being made. On the other hand, I feel that further discussion and monitoring by the Board is needed regarding A2W (air to water) heat pumps in the air quality & air-conditioning business. There have been many opportunities for discussion about Blue Yonder, but the Board has not yet fully grasped the situation, and will therefore need to properly monitor this matter with a view to achieving medium- to long-term growth.
Sawada: We have a solid grasp of the automotive batteries situation because the technology is clear-cut and we have a visible timeline. There is significant enthusiasm behind this business, so as long as it does not go off track, it should lead to positive results. Still, a calm perspective is also needed. This is because it is a business that will take a considerable number of years to develop, from the investment decision through to factory operations coming online, and there is a possibility that EV trends in society could change during that period. This is why we must proceed with caution. Also, software businesses like Blue Yonder have different ways of competing in the market compared to ordinary manufacturing businesses. Owing to the acquisition of One Network Enterprises, in addition to Blue Yonder’s sizeable framework, we will be able to get closer to the customers, so the combination of the two companies is expected to be effective. This is my own feeling, but if we saddle these three growth areas with the expectation of delivering short-term results to steer the direction of the Group, it might be difficult to achieve sufficient outcomes within the limited time available. The holding company should throw its support behind the accumulation of results in existing businesses in the short term and allow a bit more flexibility in the three growth areas so that initiatives can be implemented over the longer term. At present, there seems to be an excessive burden of expectations and an overemphasis on short-term business growth and profit generation.
From what perspective was the share transfer of Panasonic Automotive discussed by the Board and how was the decision made?
Tsuga: It was a big decision to transfer an operation company, but the Board passed the resolution without any disagreement. The automotive industry is currently going through a period of major change and responding to it would require major investments, but there were limits to the Group’s ability to execute such investments. Group CEO Kusumi, Group CSO Sumida, and myself, all of whom have experience in the automotive business, fully understood this situation. Also, another major factor was having outside directors on the Board who are well-versed in the automotive industry, which helped the Board understand some future prospects of the industry.
Sawada: When the matter was presented to the Board, my feeling was “Are we really doing this?” and “This is a bold move.” Various thoughts crossed my mind, such as what might happen to the Panasonic brand and the motivation of employees, but I ultimately supported the resolution. The reason was clear. As Chairperson Tsuga just mentioned, Chairperson Tsuga, Group CEO Kusumi, and Group CSO Sumida, all experienced in the automotive business, brought this matter to the Board with thorough understanding. If someone with little experience in the automotive business had tabled the proposal, I would have expressed various opinions as an outside director. Business portfolio management is an instrument, and while I was conflicted about whether the option of finding the best owner this time was truly the best, I voted in favor for the motion after sensing that the Company’s executives were determined to see it through.
What do you think is needed to further enhance the effectiveness of the Board of Directors?
Tsuga: The outside directors and outside Audit & Supervisory Board members have come to understand the Panasonic Group and its many businesses quite well. I feel that this has helped improve the effectiveness of the Board. To further enhance this effectiveness up ahead, I believe it will be necessary for the Board to thoroughly discuss the next medium-term plan. I will lead such discussions to formulate a medium-term plan that everyone fully understands and agrees with.
Sawada: Given the high expectations of the Panasonic Group’s stakeholders, how the Board guides the Group in a direction that meets those expectations will be key. The next medium-term plan should be realistic, not superficial or theoretical. The Company should demonstrate to stakeholders that it can achieve what it has committed. Also, the Board needs to discuss matters from various perspectives, not just a single viewpoint. The composition and selection of Board members, the setting of agenda items, and the facilitation of discussions are also important. Only by achieving such goals the Board can be considered to be meeting the expectations of stakeholders.
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