Kawasaki Heavy Industries, Ltd

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Kawasaki Heavy Industries, Ltd.

Kobe Crystal Tower, 1-3, Higashikawasakicho 1-chrome, Chuo-ku, Kobe 650-8680
Japan
Telephone: (078) 371-9530
Fax: (078) 371-9568
Web site: http://www.khi.co.jp

Public Company
Incorporated: 1896 as Kawasaki Dockyard Co., Ltd.
Employees: 29,651
Sales: $10.3 billion (2003)
Stock Exchanges: Tokyo Osaka Nagoya
Ticker Symbol: KWHIY
NAIC: 336412 Aircraft Engine and Engine Parts Manufacturing; 333611 Gas Turbines (Except Aircraft) Manufacturing; 541330 Industrial Engineering Services; 336611 Ship Building and Repairing; 336510 Railroad Rolling Stock Manufacturing; 336991 Motorcycles and Parts Manufacturing; 336312 Gasoline Engine and Engine Parts Manufacturing; 332312 Fabricated Structural Metal Manufacturing; 331111 Iron and Steel Mills; 234930 Industrial Nonbuilding Structure Construction

Kawasaki Heavy Industries, Ltd. was one of a handful of firms that helped propel Japan into the modern industrial world, playing a major role in the automobile, aircraft, power plant, and heavy-machinery industries as well as in shipbuilding. It was one of the world's leading shipbuilders for much of the 20th century, although in the latter half of the century it developed an equally strong reputation for its motorcycles and lawnmower engines. Long a diversified company, Kawasaki has survived numerous challenges to its shipbuilding business over the course of its history, from the drastic and apparently permanent slump that overtook the shipbuilding industry after the 1973 oil embargo, to the emergence of intense competition from South Korean shipbuilders. The company has managed to stay afloat amid these trends by continually evolving into a multifaceted manufacturer of rolling stock, aircraft, and industrial plants.

Late 19th-Century Company Origins

Shipbuilding gave Kawasaki its start in the world of heavy industry. When Japan emerged from two centuries of isolation in the mid-1800s, its first need as an island nation was to develop a modern shipbuilding industry. The Meiji government at first attempted to run its own shipping lines, but when that effort failed, the government offered considerable subsidies and favorable leasing terms to anyone who cared to try to imitate the sleek Western steamship designs. Shozo Kawasaki was only too eager to accept the challenge. Born in 1836, Kawasaki had survived two maritime disasters as a young man. He attributed his survival to the technical superiority of Western ships in which he had been sailing, and decided to devote his life to bringing such innovations to Japanese shipping. In April 1878, he accordingly borrowed ¥30,000 and leased harbor land in Tokyo from the Japanese government to begin his own shipbuilding company. Kawasaki hired a bright young engineer and opened for business, but he soon discovered that Japanese shipping lines were reluctant to abandon their ancient sailing vessels and traditional style of doing business. After a long wait the new firm finally received its first order, for the 80-ton Hokkai Maru, and Kawasaki invited thousands of business and government leaders to view its christening. This early venture succeeded in announcing the company's arrival in the burgeoning Japanese industrial sector.

Before long Kawasaki had as much work as he could handle. When the Meiji government began divesting major shipbuilding facilities, it offered one to Kawasaki, who happily moved his operations from Tokyo to Hyogo in 1886 and named the company Kawasaki Dockyard. With the Sino-Japanese War of 1894 spurring demand for ships, Kawasaki went public in 1896 as Kawasaki Dockyard Co., Ltd. Its first president was 31-year-old Kojiro Matsukata, and Kawasaki himself remained with the company only as an adviser. Matsukata immediately ordered the construction of a new, vastly larger dry dock, which, upon completion in 1902, solidified Kawasaki's position as one of Japan's leading shipbuilders. At the same time, Matsukata bought up adjacent land and began a series of larger construction slips, increasing the company's building capacity from 6,000 to 31,000 gross tons. Both moves enabled Kawasaki to take advantage of various state subsidies with which the Japanese government encouraged industrial growth, but in a country lacking an industrial economy, it remained difficult for Kawasaki to get materials and parts. In most cases company engineers had to manufacture whatever they needed themselves, an inefficient but educational method of building modern steamships.

Expansion and Diversification in the Early Decades of the 20th Century

In 1906 Kawasaki opened a new factory to produce a variety of rolling stock—railroad cars, locomotives, and related parts. This was only the first of a series of such diversifications. The firm was soon not only building ships and railroad cars but also supplying its own steel plates and castings, as well as taking orders for large civil-engineering projects such as bridges. By the end of World War I, Kawasaki had, in addition, established itself as a maker of airplanes and automobiles, as it sought to keep pace with its heavy-industry rival, Mitsubishi. Kawasaki turned the relative backwardness of the Japanese economy to its advantage: it used the government's enforced education in the industrial arts to expand into new technologies as they found their way to Japan. This process accounts for the breadth of Kawasaki's current interests, and is similar to the development of other Japanese heavy-industry giants.

In the meantime, Kawasaki's shipbuilding business flourished. In 1907 the company introduced its first marine turbine engine, and shortly thereafter adopted German diesel technology. A chunk of the company's business involved naval contracts, like the 1905 construction of Japan's first submarine and the 1910 delivery of a 5,000-ton cruiser. These projects solidified Kawasaki's relationship with the Japanese navy, and in particular its role as a leading builder of submarines and antisubmarine aircraft. After weathering a brief recession, Kawasaki and Japanese shipbuilding as a whole enjoyed a boom during World War I, when the Allies turned with increasing frequency to the Japanese for their shipping requirements. The jump in orders raised production to 12 times the prewar high, with Kawasaki finishing 35 ships in 1918 alone and creating an entirely new class of standardized freighters weighing between 6,000 and 9,000 tons each. These stock boats were highly successful.

The postwar recession in shipbuilding proved to be unusually harsh. In addition to the natural decline in orders, an Allied-sponsored arms-limitation agreement of 1921 forced the cancellation of several large warships still in Kawasaki docks. Perhaps worst of all was the company's failure to cut production of stock boats quickly enough. The excess boats were unsold, and despite rapidly expanding business in its steel, aircraft, and civil-engineering divisions Kawasaki was soon in serious financial trouble. A 1927 bank run left the company without working capital and forced a major restructuring: the rolling stock division was spun off as a separate entity; about 20 percent of the company's 16,000 employees were permanently laid off, and longtime President Matsukata retired to be replaced by Fusanosuke Kojima. These decisions had no sooner been reached than the Depression struck in 1929, necessitating a second round of bank negotiations and corporate reductions.

War pulled Japan out of the Depression in 1931, when that country invaded Manchuria. Along with plentiful government subsidies, the growing need for warships quickly reinvigorated Kawasaki. Between 1937, when China was invaded, and the 1945 Japanese surrender, Kawasaki's employees produced 109 warships, including four aircraft carriers and 35 submarines. Midway through the war the Japanese government essentially took control of the shipbuilding industry, establishing a set of six standard warships to be built under their direction as needed. It was a period of intense productivity at Kawasaki, which also supplied the war effort with aircraft from the newly founded Kawasaki Aircraft Company. Merchant shipping picked up as well. Japan's need for oil spurred the introduction of what would later grow into the supertanker. Kawasaki had built 21 of these by the end of the war in August 1945.

Rapid Growth in the Postwar Era

Losses suffered by Kawasaki at war's end amounted to more than ¥1.7 billion, and the company once again required a major restructuring. It shed its steel division—which, as Kawasaki Steel Corporation, remains one of the country's foremost steel producers—and wrote off much of its debt. At this juncture Kawasaki was composed only of the shipbuilding, engine, and electrical machinery divisions of the original entity, with rolling stock, aircraft, and steel all operating as separate companies.

Employment at Kawasaki had immediately dropped to less than 25 percent of its wartime peak, and the company was saddled with unpaid-for ships. The Kawasaki docks were still largely in one piece and functioning, however, and the company achieved prodigious postwar growth. For the first few years little was built, but with the growing perception of Communist China as a threat, the Allies encouraged Japan to rebuild its economy.

In August 1947 the Japanese government adopted the Programmed Shipbuilding Scheme, by which it directed the construction of new ships as needed while providing funds to the shipping lines to help them cover the purchase price. The scheme, which remains in effect, gave the shipbuilding industry the capital needed to restore productivity.

Company Perspectives:

The corporate philosophy of the KHI Group is to draw on its broad base of advanced technologies to create new value in product offerings that work modern-day wonders on land, at sea, and in the air and contribute to economic and social development around the world. To attain the goals of its corporate philosophy, the fundamental management policy of the KHI Group is to work to increase customer satisfaction by providing superior products and services—differentiated by technology and the strength of the Kawasaki brand—that increase its enterprise value and respond to the expectations of its shareholders, customers, and employees and the communities it serves.

Thus fortified, Kawasaki resumed operations at all of its plants. Japan's shattered infrastructure promised work for a company with Kawasaki's construction capabilities, and its machinery, steel, and engine divisions were soon operating at full throttle. In particular, the Kawasaki steel division opened three new works and took the lead in Japanese sheet steel production. The shipbuilding business was flooded with more orders than it could handle.

Beginning with the Korean War in 1950 and continuing through to the oil embargo of 1973, Kawasaki and the rest of Japan's shipbuilders enjoyed nearly unbroken success. By the mid-1950s Japan had become the world's leading shipbuilder—a remarkable achievement for a country broken by war only ten years earlier—and as the national economy surged toward eventual world leadership, Kawasaki flexed its muscle in several fields. Growing oil dependence of industrialized countries created a lucrative market for supertankers, and Kawasaki was soon expert in building these largest of all ships. At the same time, Kawasaki was also filling construction orders for everything from a cement plant in Malaysia to a baseball stadium in Koshien, Japan, while improving its technical expertise in engine and machinery design. Many of the latter improvements were the results of working agreements with leading European and U.S. firms, as Kawasaki pursued its policy of international cooperation. The company early formed alliances with Escher Wyss of Switzerland and IMO Ltd. of Sweden, and later worked with aeronautical giants Lockheed, Boeing, Hughes, and Messerschmidt on a wide variety of civil and military projects.

Withdrawing from Shipbuilding in the 1970s

In 1969 the present Kawasaki Aircraft Heavy Industries was created by the reintegration of Kawasaki Aircraft and Kawasaki Rolling Stock with the original parent, Kawasaki Dockyard. The newly formed conglomerate suffered a blow in 1973 when the Arab oil embargo brought supertanker orders to an abrupt halt. In the years that followed, Japanese companies began a steady withdrawal from the shipbuilding field, and Kawasaki and the other big makers began shifting their energy to more promising, and less competitive, endeavors. The diversity of Kawasaki's portfolio at the time was one result of this massive shift. By the mid-1970s, shipping accounted for less than 10 percent of the company's revenue, lower than sales of leisure products such as motorcycles and jet skis. Its shipbuilding business began primarily to involve military and more exotic varieties of commercial vessels, as Kawasaki sought to avoid direct competition with Korea, the new price leader in merchant shipping.

In contrast, Kawasaki's machinery and construction division grew into the company's largest. Here Kawasaki built everything from factory robots to an ethylene plant in Bulgaria, and also offered bridges, tunnel-boring machines, and breederreactor research. Almost as large was the aircraft division, which undertook a significant number of projects for the Japanese Defense Agency and the national space program. In rolling stock, Kawasaki supplied the New York subway system with a set of stainless steel, graffiti-proof cars, while continuing to deliver some of Japan's fastest railroad trains. Add to these three divisions the company's old standby, as well as its newest addition—ships and leisure products—and investors saw a corporation capable of supplying modern civilization with most of its industrial needs.

New Strategies for Evolving Economies: 1980s–90s

In the 1980s, to counteract the negative impact of the declining yen on its export business, Kawasaki shifted its emphasis to the domestic market. By the early 1980s revenues from exports had dropped from 50 percent to 25 percent of the company's total sales. This shift in focus eventually paid off, and by 1990 Kawasaki was enjoying profit levels it had not seen in almost 15 years, with net earnings exceeding ¥20 billion for the first time since 1977, a 25 percent increase over earlier expectations. One major reason for the company's success was the surprising turnaround in its shipbuilding segment. In the face of a marked increase in global demand for new ships, the division had secured more than ¥100 billion worth of new contracts in the past year alone. Overall, Kawasaki Heavy Industries received more than ¥900 billion in new orders in the first three months of 1990, a 20 percent increase over the previous year.

Key Dates:

1878:: Shozo Kawasaki opens Kawasaki Tsukiji Shipyard in Tokyo to build Western-type oceangoing steel.
1886:: Kawasaki moves operations to Hyogo and incorporates the company as Kawasaki Dockyard Co., Ltd.; Kojiro Matsukata is appointed as the first president of the new company.
1896:: Company goes public as Kawasaki Dockyard Co., Ltd.
1906:: Kawasaki opens a new factory, Hyogo Works, to produce a variety of rolling stock—railroad cars, locomotives, and related parts.
1950:: The company spins off its steel division as part of a broad restructuring.
1969:: Kawasaki Aircraft Heavy Industries is created by the reintegration of Kawasaki Aircraft and Kawasaki Rolling Stock with the original parent, Kawasaki Dockyard.
1975:: Kawasaki becomes the first Japanese motor vehicle producer to produce motorcycles in the United States.
2002:: Kawasaki Shipbuilding Corporation and Kawasaki Precision Machinery Ltd. are established as wholly owned subsidiaries.

Although the global shipping industry fell into a major slump in the mid-1990s, Kawasaki's shipbuilding division managed to remain profitable. Indeed, in 1994 Kawasaki Heavy Industries was the only leading Japanese shipbuilder to see a net earnings increase for the first half of the fiscal year. The company took further steps to firm up its market position in January 1995, when it struck a major agreement with its longtime strategic partner in China, the China Ocean Shipping Co. Under the terms of the contract, the largest in Kawasaki's history, the company would build six containerships worth more than $83 million apiece. Among the largest vessels of their kind ever built, the containerships would each span nearly 1,000 feet in length, and have a cargo capacity of more than 5,000 20-foot containers.

Still, the long-term profitability of new shipbuilding contracts remained in doubt. The industry-wide trend toward over-capacity, combined with aggressive competition from shipbuilders in South Korea, left Kawasaki struggling to earn consistent profits with its ships. The company once again announced higher than expected profits in mid-1996, but its shipbuilding sector saw an overall loss. Although market fluctuations briefly drove the shipbuilding line into profitability in the second half of 1996, by the following year it had entered a definitive, prolonged slump, forcing the company to ponder a more radical approach to the problem.

A New Business Model for the 21st Century

The company incurred losses in fiscal years 1999 and 2000, much of these connected to restructuring costs, as well as to slumping revenues in its aerospace and general machinery divisions. By May 2000, with its shipbuilding segment in serious debt, Kawasaki began to consider whether or not it should spin off the division. At the same time, the early years of the 21st century witnessed a growing trend toward consolidation in the Japanese shipping industry. Clearly, the company had several routes it could take.

In April 2001, hoping to preserve some stake in its shipbuilding operations, the company entered into an agreement with Ishikawajima-Harima Heavy Industries Co., to form a joint shipping venture by May of the following year. Under the terms of the deal, the companies planned to reduce operating costs by between ¥7 billion and ¥8 billion per year, with an eye toward achieving profits of ¥4 billion to ¥5 billion by 2004. By the fall of that year, however, the companies abruptly terminated the deal, citing difficulties coming to acceptable terms.

For 2001, higher sales and reduced operational costs helped Kawasaki earn ¥6.28 billion, its first profit in four years. Perhaps more significant, the company's shipbuilding division enjoyed net gains of ¥5.6 billion, compared to losses of ¥1.7 billion the previous year. Part of the turnaround came from increased demand for the company's liquefied natural gas carriers. Although Kawasaki saw another significant profit increase in 2002, it fell back into the red the following year. While much of this abrupt turnaround came as a result of a cut in the company's deferred tax assets, the slide was in part due to the continued volatility of the global shipbuilding industry. With the future of this time-honored division in question, in 2004 it remained to be seen how the company would come to a long-term resolution of the problem.

Principal Subsidiaries

Kawasaki Shipbuilding Corporation; NIPPI Corporation; Kawasaki Thermal Engineering Co., Ltd.; Kawasaki Motors Corporation Japan; Kawasaki Precision Machinery Ltd.; Kawasaki Safety Service Industries, Ltd.; Kawaju Shoji Co., Ltd.; Kawasaki Setsubi Kogyo Co., Ltd.; Kawasaki Heavy Industries (U.S.A.), Inc.; Kawasaki Rail Car, Inc.; Kawasaki Robotics (U.S.A.), Inc.; Kawasaki Motors Corp., U.S.A.; Kawasaki Motors Manufacturing Corp., U.S.A.; Kawasaki Construction Machinery Corp. of America; Canadian Kawasaki Motors Inc.; Kawasaki do Brasil Industria e Comercio Ltda.; Kawasaki Aeronautica do Brasil Industria Ltda.; Kawasaki Heavy Industries (U.K.) Ltd.; Kawasaki Precision Machinery (U.K.) Limited; Kawasaki Robotics (UK) Ltd.; Kawasaki Heavy Industries G.m.b.H.; Kawasaki Gas Turbine Europe G.m.b.H.; Kawasaki Robotics G.m.b.H.; Kawasaki Heavy Industries (Europe) B.V.; KHI Europe Finance B.V.; Kawasaki Motors Europe N.V.; Kawasaki Machine Systems Korea, Ltd.; Wuhan Kawasaki Marine Machinery Co., Ltd.; Shanghai Cosco Kawasaki Heavy Industries Steel Structure Co., Ltd.; Nantong Cosco KHI Ship Engineering Co., Ltd.; Kawasaki Heavy Industries (H.K.) Ltd. (Hong Kong); Kawasaki Motors Enterprise (Thailand) Co., Ltd.; KHI Design & Technical Service Inc. (Singapore); Kawasaki Motors (Phils.) Corporation; Kawasaki Heavy Industries (Singapore) Pte. Ltd.; P.T. Kawasaki Motor Indonesia; Kawasaki Motors Pty. Ltd. (Australia).