Rescuing NKK

Opinions of 1998 differ at NKK. Some say that orders for steel in that year were the lowest ever. Others say only that the order book was the lowest for 19 years. Whoever is the winner in that hairsplitting contest, it is incontrovertible that NKK, Japan’s second largest steel supplier, had the worst year in the company’s history — making a net loss of some ¥50B (US$368M).

What happened in 1998? To NKK the hit was not entirely unexpected. The company’s business is very largely invested in steel, which provides it with some 65% of its income, while the remainder is in the provision of specialist engineering services.

Despite some large orders — the company won, and has continued to win, contracts to supply steel plates for China’s Three Gorges Project, for example — the company’s order book was not full enough to support its more than 15,000 staff. The engineering services division could not solve the company’s problem, as it also experienced a downturn in 1998, of some 7%. And although the company has invested in overseas markets, only 30% of its business arises from outside Japan and the recent downturn in the Japanese economy had left it very exposed.

The situation was clear to NKK, and it was not unique — other Japanese steelmakers were suffering in much the same way. NKK had already decided it was necessary to reduce staffing levels and generally make economies, but it was too little, too late.

Now, however, the Japanese economy has begun to show some signs of improvement, and NKK has started to implement a rescue plan which is intended to bring it back into profitability within a year.

Back on track

NKK released its ‘profitability improvement plan’ for FY 1999 on 24 May, when it was presented to investors and analysts. The company admits that the initial reaction was wary, but within NKK management there is optimism over the plan, which the company expects will turn it into the only one of Japan’s biggest steel companies that will show a profit this year.

NKK believes the financial market is not impressed by special credits that provide one-off profitability without solving a company’s long term problems. Instead, the profitability improvement plan is intended to improve the company’s ‘income before special charges’. This is to be achieved by a programme of staff reductions and company restructuring to reduce costs and withdraw from unprofitable businesses.

The staffing reductions that had already started have been stepped up throughout 1999. Under the Plan the company’s original 15,300 employees (as at September 1998) will be reduced by March 2000 to 11,400. Most cuts will fall in the steel division, where the 9100 staff will fall to 6400. The engineering division, in contrast, will be reduced from 3400 to 2600. The company believes most of the reduction can be accomplished voluntarily, and by early retirement programmes.

The second part of the Plan refers to business strategy. In an effort to concentrate on its core profitable businesses NKK plans to reorganise its electronic devices operations. It will withdraw entirely from stainless steel sheet production, focusing more closely on products in areas where it holds a strong market position and on new products like its titanium-clad steel sheet. Within the steel division, the company plans to reorganise and streamline work at its Keihin and Fukuyama facilities, where it plans to reduce purchasing costs, streamline production processes and reduce the costs of outsourcing.

Finally, under the Plan the company will react better to the market. It has already reorganised its overseas business structure, and has closed overseas offices like the one in Amsterdam. It also plans to withdraw from unprofitable but highly competitive businesses like chemical and power plants.

Uncertainty still clouds the future of NKK — the company’s ship-building business is vulnerable to worldwide shipping levels and ultimately depends on healthy economies in exporting and importing countries, for example. Nevertheless, with the Profitability Improvement Plan well under way the company expects to ride out the worst year in its history with extra income of around ¥47.7B (US$350M). In FY99, if all goes according to the Plan, NKK will be back in profit — albeit a small profit of around ¥2B (US$15M) 12 months after it hit the worst year in its history.