CEO Message

Becoming a Global Leader in theSocial Innovation Business
Hitachi will transform rapidly to achieve the innovations required by the times.
Reaching a record high for the second consecutive year, fiscal 2018 adjusted operating income* at Hitachi came in at ¥754.9
billion, with the adjusted operating income ratio for the year meeting the Mid-term Management Plan target of 8%. Total Hitachi,Ltd. stockholders’ equity on the balance sheet during the period covered by the plan was up approximately ¥500 billion, backed
by the Company improving its ability to generate cash. Having achieved a V-shaped recovery after recording losses of ¥787.3
billion in fiscal 2008, Hitachi is now moving into a new stage of development.
* Adjusted operating income is defined as total revenues less cost of sales and selling,
general, and administrative (SG&A) expenses.

Toshiaki Higashihara
President & CEO

Returning to Our Roots

Reaffirming Our Strengths Based on the Lessons of the Past
In 2020, Hitachi will celebrate the 110th anniversary of its founding

loss ever for a Japanese manufacturer, with stockholders’ equity of

as a manufacturer of electrical machinery.

about ¥2–¥3 trillion being adversely impacted to fall at about ¥1

In all that time, one of the biggest turning points was thetrillion. Hitachi had been called an “unsinkable giant” in the past, somanagement crisis. The Company at the time posted the largest

how did things become so bad that it found itself being ridiculed as

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The Hitachi Group Value Creation Story“a sinking giant”? I believe this situation came about due to there

So the question is how best to create a growth strategy. Facedbeing no real sense of crisis at the Company. That said, afterwith truly dire conditions, we decided to “return to our roots.” Since

posting this huge loss, management did move to rebuild itself andits founding, Hitachi has focused on contributing to the improvement

spur an earnings recovery through a major reshuffling of theof people's lives by following a corporate philosophy based on the

Company’s businesses and reforms to Hitachi’s corporate

desire to “contribute to society through the development of superior,

governance structure.

original technology and products.” Established as a manufacturer ofHaving witnessed the Company’s struggles, I learned thefive-horsepower induction motors, Hitachi has not only developed its

importance of simultaneously implementing “peacetime structuralability to create products, but has honed its abilities in control andreforms” and a “sustainable growth strategy.” Crafting bold andoperational technologies (OT) in the more than 100 years it has

decisive strategies when an emergency arises is one thing, but if, inoperated as a manufacturer, as well as its knowledge in information

periods of relative calm, a company is not looking likely to become atechnologies (IT) over the past 50 years. Hitachi's strengths lie in its

world-class competitor, its leadership needs to take steps, including

ability to combine OT, IT, and its products to create new value andshrinking or withdrawing from struggling businesses. I have taken toprovide solutions that meet the needs of its customers and society.

heart the lesson that if a business fails to act boldly and with speed,

I believe the creation of an organization that makes full use of this

there is a very real risk of it not being able to survive, especially instrength allows us to contribute to the resolution of various social

these uncertain times.

issues, which in turn contributes to sustainable growth at Hitachi.

Completing the V-Shaped Recovery

Initiatives to Improve Profitability and Achieve Our Mid-term Management Plan Targets
I became Hitachi’s president and COO in 2014 and president andto see issues that were previously difficult to see, and with the ability to

CEO in fiscal 2016, when we launched the 2018 Mid-term

make quick management decisions, I soon began to see results.

Management Plan. Hitachi was unable to achieve the income ratio

In terms of our growth strategy, we launched Lumada, whichtargets in its 2015 Mid-term Management Plan, and we wereincorporates the sum of our technological knowhow, in May 2016,

determined not to let that happen again during the period covered byand established a system providing digital solutions throughout thethe new plan. So what was the best way to achieve our minimumgroup. Lumada is Hitachi's advanced digital solutions, services, andadjusted operating income ratio target of 8% and the creation of atechnologies for turning customers' data into insights to drive digitalstructure supporting margins in the double digits?

innovation. Lumada-based revenues have already expanded to

Our first move, launched in April 2016, was to overhaul our

12exceed ¥1 trillion.

organizational structure. This involved dividing up our large in-house

While promoting the reshuffling of our businesses, including the salecompany system into small business units, allowing us to clearlyof listed subsidiaries, we are also actively working to incorporate

identify the challenges and issues in each business. While enacting

businesses within the group that could be expected to generatemeasures aimed at spurring improvements in low-profit businesses,

synergies with Lumada. As examples of this, in 2017 we acquired air-

we also shrunk or withdrew from businesses where these measurescompressor firm Sullair, which has a global footprint especially inappeared unlikely to work. Our efforts to tighten project management

North America, and we aim to complete the acquisition of ABB’s

and review fixed costs on a companywide basis contributed to a

power grid business in the first half of 2020. The intent of the ABB

reduction in unnecessary costs, and we lifted on-site awareness of

power grid business acquisition is the greater provision of innovative

cash flow by making the cash conversion cycle (CCC) a key

energy solutions through an expansion in global sales channels. And

management indicator. I believe the organizational overhaul allowed us

to take it one step further, we also aim to incorporate the philosophy

Hitachi Integrated Report 2019

CEO Message

and know-how of this globally successful company into Hitachi increating greater value on a global scale as it moves into its nextorder to spur further positive changes. I believe acquisitions of thisgrowth stage.

type can provide Hitachi with a stepping-stone toward its goal of

The View after Rebirth

Exploring the Purpose of Our Business
If I were to summarize the 2018 Mid-term Management Plan, I would

A look around the world shows an unending series of changes

say its biggest achievements included instilling a shared sense of

impacting people’s lives. These include resource shortages andcrisis in employees throughout the Company and fostering a growing

climate change, demographic changes brought on by the aging of

focus on income and cash. These changes resulted in Hitachisociety, and the issues accompanying urbanization. Amid such an

achieving its Mid-term Management Plan target for an adjusted

environment, there are growing efforts around the world, including

operating income ratio of 8%, as well as a growing perception that

the Society 5.0*1 initiative in Japan, to resolve through innovation the

Hitachi as a global company should naturally produce incomesocial issues outlined in the United Nations Sustainable Development

margins in the double digits, and that the Company should be a

Goals (SDGs). Hitachi’s corporate philosophy for the past 109 years

global leader in the Social Innovation Business.

has been to “contribute to society through the development of

After having achieved a V-shaped recovery, is it really necessary

superior, original technology and products” and if each of its 300,000

for the Company to push income ratios to 10% or higher? I have for

employees around the world can find satisfaction in resolving social

some time been saying, “Show me the cash!” to our employees, inand environmental issues through advancing the Social Innovation

part as I feel it is necessary to focus on what comes before profit.

Business and broadening the field of related activities, I believe it

In this sense, I will never forget the first factory manager at Omika

would surely contribute to continued growth for Hitachi. Of course, it

Works with whom I worked after joining the Company quoting fromis important to improve economic value, but I also believe it is

Yuzo Yamamoto’s novel, A stone by the Roadside. A line in theimportant at the same time to improve social and environmental

novel essentially says, “There is only one you and you have only one

value. We aim to pursue this goal based not only on leadership fromlife, so if you don’t really use it, are you really human? Have yourthe top, but also through bottom-up participation from employees

really lived?” To apply that to today, if you spend more than half yourwho find real purpose in their work. If we can accomplish this, I

life at work, then it is through that work that you have the opportunity

believe Hitachi will be all the stronger for it.

to feel the happiness of people and society. It is through the job infront of you that you can help people and society. In other words, I
think contributing to building social and environmental value is amajor driver behind our personal growth and our job satisfaction.

*1 Society 5.0 expresses a new idea of society and related efforts to achieve this, as advocated by the Japanese
government. The aim is to develop the economy while addressing societal issues by deploying AI, IoT, robots
and other forms of advanced science and technology to make use of various data creating an affluent,human-centered society. The name refers to the evolution of a fifth form of society, continuing from the huntergatherer, agrarian, industrial, and information societies.

A Vision for a New Leap Forward

Aiming to be a Global Leader in the Social Innovation Business
The modern age has been called the era of VUCA (Volatility,

we value, and on the standards we use when making decisions. With

Uncertainty, Complexity, Ambiguity), where it is increasingly difficult to

Hitachi, these are grounded in our corporate mission and our values,

predict the future. This is why it is important to maintain focus on what

which are based on the concepts of “harmony, sincerity, and a

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The Hitachi Group Value Creation Story

pioneering spirit.” For historical perspective, Namihei Odaira, who

I also believe employees should do more than just fulfill the goals offounded Hitachi at age 36, noted that the motors and generators heleadership and that they should also focus on how their work can

repaired at the copper mines in what is now Hitachi City, Ibaraki

contribute to improving social and environmental value. Whenever I

Prefecture were all imported from abroad, and that Japanese industry

engage in direct communication, I am continually pushing for this

could never develop if people in the country didn’t learn to make thesekind of shift in the mind-set of our employees. The approach is notdevices on their own. With that idea, he founded Hitachi alongside a

based on instilling a sense of crisis, but rather on raisingnumber of fellow engineers. I believe the founding of the Company

awareness of the importance of social and environmental

was largely the result of Mr. Odaira’s desire to change Japan andcontribution.

contribute to the development of society and the country as a whole.

Expressing sentiments such as “today we were able to supply

That kind of drive still exists in Hitachi today. Our focus is not only on

safe water to people in the area” and “we contributed to theeconomic value, revenues and income, but also on using innovation totreatment of cancer patients,” our 300,000 employees worldwide

resolve the many challenges facing society. We believe that Hitachi

are well aware of their contributions to the environment andshould be synonymous with Social Innovation Business, and withsociety, as well as their connection to society in their daily work. I

that kind of presence, we hope to widely contribute to society as

believe that this builds motivation in our employees, and througha global leader. Even though times have changed, I believe thethe combined efforts of all, it contributes to the creation of higher

founder’s spirit continues to guide our management as part ofsocial and environmental value, and ultimately economic value for

Hitachi’s unchanging values.

the Company.

I believe global leaders must have a clear vision of what theyshould be and that they should take the lead in creating history.

Charting a Path to Growth: Launching the 2021 Mid-term Management Plan

Realizing Our Three Values and Establishing Goals for the Future
Our 2021 Mid-term Management Plan, launched in April 2019,

blocks coming together to form a unique structure, we can provide

focuses on simultaneously improving social value, environmental

a variety of solutions, such as energy management, human flow

value, and economic value, and establishes five business sectors

simulations, and autonomous driving solutions, in a unique(IT, energy, industry, mobility and smart life) for the creation of social

customized package to meet the specific needs each customer.

innovation. To put it differently, these are areas in which Hitachi can

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An example of this is the Copenhagen Metro project, for whichmake use of the technological know-how it has built up through its

Hitachi is supplying 24-hour driverless trains and related systems.

many years of developing social infrastructure. Moreover, in each of

The Dynamic Headway solution used in testing these systems

these business sectors, Lumada can be used as a common

focuses on train station congestion, using data from mounted

platform to achieve the goals of improving people’s quality of life

sensors to measure fluctuations in the number of passengers(QoL) as well as corporate value at our client companies.

arriving. Based on this information, the system then optimizes theStrengthening Lumada, which can accelerate innovation, is key tonumber of trains in operation. Hitachi’s efforts are focused on

growth moving forward. Indeed, the creation of multiple reusable

solving customer issues by combining solutions such as humansolutions in each of the key business fields can lead to theflow simulations, automated timetable generation, and operational

resolution of issues that cross industry and geographic boundaries.

management optimization as customizable blocks. Amid the trend

The image of toy blocks provides a good analogy for better

toward growing urbanization, better public transportation isunderstanding. As with the variety of colors and shapes of a child’s

increasingly required to prevent traffic congestion and create

Hitachi Integrated Report 2019

CEO Message

comfortable public spaces, and given that the Copenhagen Metro

it is contributing to improvements in social, environmental andproject also optimizes operational efficiency and conserves energy,

economic value.

Accelerating Innovation to Spur Growth

Building an Innovation Ecosystem with Lumada at Its Core
So the question now is how to strengthen and evolve Lumada. I

all over the world to create new ideas alongside Hitachi

believe this requires the building of an “innovation ecosystem” that

researchers and designers.

accelerates collaboration with business partners, universities,
research institutes, and customers around the world.

We are also actively working on initiatives designed to contributeto the acceleration of innovation around the world. These efforts

The Company is already working with research institutions andinclude acting as a supporting partner to start-ups as they create

domestic universities such as the University of Tokyo to create

new innovations, and establishing a corporate venture capital fund.

solutions to social issues. As example is the “Hitachi The University

We will continue to work toward improving the social,of Tokyo Laboratory.” We are also focused on expanding theseenvironmental, and economic value of our customers by creating

kinds of collaborative relationships to include overseas universities,

an ecosystem for co-creation and establishing Lumada as theresearch institutions, and customers. In April 2019, Hitachi

driving force behind the accelerated development of the Social

launched the collaborative creation project Kyoso-no-Mori at its

Innovation Business.

Central Research Laboratory, inviting customers and partners from

Building a Global “Delivery” System

Front-Line Personnel with the Hitachi DNA Hold the Key to Success
After focusing on solutions to customer issues and assessing“sincere” efforts for our customers and partners, and even should

feasibility and profitability, the framework for building on

they fail, they will never give up on their “pioneering spirit.” I believe

Lumada’s foundation is now complete. There are already about

securing and fostering frontline personnel exhibiting these650 Lumada customer cases, and we believe this shared basequalities is a key to our success.

will assist us in providing solutions that truly satisfy our

By combining the common solutions accumulated throughcustomers. However, for the sake of our customers, I believe it

Lumada, we can customize solutions for customers in different

is vital to develop front-line personnel who can provide evenparts of the world. Moreover, to strengthen our front-line humanhigher-added-value solutions. Hitachi’s collaborative efforts with its

resources so that we can realize this kind of “innovation

customers are not based on a vertical relationship, with one party

ecosystem,” we are not only training in-house employees, but

acting above the other, but instead are based on side-by-side

also actively recruiting personnel from outside the Company.

cooperation with the aim of improving social value. It’s

Given that cultures and business practices vary according toimportant for those involved to always think with a sense ofregion and country, we are working to cultivate humanownership and be at the forefront of discussions. If the direction of

resources in each of those areas. As an example, we havethe organization or team is different, our employees will work together

been able to secure human resources in areas such as

in line with the final decision in the spirit of “harmony”, leaving aside

California’s Silicon Valley who are not only talented andtheir previous opinions. Moreover, they will put forth their mostexperienced, but share a deep commitment to harmony,

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The Hitachi Group Value Creation Story

sincerity, and the pioneering spirit that make up the Hitachi

more background diversity there is, the better. I believe humanfounding spirit.

resources recruited from around the world will be instrumental in

I worked at the Omika Works in Ibaraki Prefecture for aboutsharing Hitachi’s values and resolving the social issues impacting our

29 years after joining the Company in 1977. The plant wascustomers. I have high expectations as well as great confidence

created in 1969 to house the combined control departmentsin this effort.

that were split off from the Hitachi and Kokubu plants, and forsome time after I was assigned to the facility, there was still alot of talk about from which of the original plants you came.
That said, my time there allowed me to experience the creationof a shared culture, as gradual integration brought with it thespirit of building a “Greater Omika” plant. In my opinion, theTotal Growth Investment of ¥2.5 Trillion

Aggressively Pursuing Growth Opportunities While Maintaining an Eye on
Capital Costs
Hitachi will invest more aggressively in growth, including M&A, overI believe an acceleration in the Social Innovation Businessthe next three years from fiscal 2019 to fiscal 2021 as part of its

requires Hitachi to further improve the level of trust it enjoys from

effort to become a true global leader. More specifically, we target asociety. With this in mind, we will promote compliance, quality

total investment of ¥2.5 trillion during the period, including about

assurance, and safety by utilizing digitalization and Lumada to¥1 trillion for the already announced acquisition of ABB’s power

reduce manual tasks.

grid business. Growth investment will be focused on the IT and

Based on these efforts, our fiscal 2021 earnings targets include

industry sectors, where we will enact unprecedented investment inaverage annual revenues rising organically by more than 3%, an

both human resources and R&D. To carry out large-scale

adjusted operating income ratio above 10%, and cumulative

investment, we will use financial leverage to reduce capital costs

operating cash flow for the three years greater than ¥2.5 trillion.

(WACC) and improve ROE, while at the same time fostering

Moreover, we target ROIC of above 10%, with the overseas

management awareness of capital efficiency by establishing return

revenue ratio climbing from 51% at present to better than 60%.

on invested capital (ROIC) as a new KPI.
Hitachi will also strengthen its business foundation to accelerate
development of the Social Innovation Business. In addition tooperational reforms based on data accumulated thanks toadvancements in production systems and business processes, aswell as the promotion of digital transformation by expanding thescope of Lumada’s in-house use, we are working to reduce fixed
costs and improve efficiency in sales and indirect operations.
Maintaining an awareness of what is appropriate for a global
company, we will continue to work toward improving profitability,with a gross profit margin*2 target of 30% or higher and an SG&A
ratio*3 target of under 20%.

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Hitachi Integrated Report 2019

*2 Gross profit margin: The percentage of gross profit to revenues.
		[(revenue – cost of sales)/ revenues] x 100*3 The SG&A ratio:
The ratio of the sum of all direct and indirect selling expenses and all general andadministrative expenses to revenues. SG&A expenses/revenues

CEO Message

Keywords for Survival in the Age of Data Capitalism:

Speed, Trust, Transparency and Customer Perspective
There is a paradigm shift taking place as we move from the age ofvalue and resolve social issues.

products to the age of digitalization and the importance of speedy

Of course, an opportunity is only an opportunity if we are properly

management continues to grow. Conversation at both the World

prepared to take advantage of it. With a venturing spirit backed byEconomic Forum in Davos at the beginning of the year and the G20

the Company’s “contribute to society” mission and its corporate

Summit in June centered on Data Free Flow with Trust (DFFT), withphilosophy grounded in “Harmony, Sincerity, and a Pioneering Spirit,”

the expectation of improvements in private information banks andeach of our employees is committed to building a relationship of trust

national databases. While the free trade of cross-border datawith our customers and the wider society. Moreover, with the higher

requires trust, I believe there can be no trust without transparency.

goal of contributing to a better world, Hitachi and its employees willIn this age of data, Hitachi, with its sensors and analysis

continue to work tirelessly to quickly provide solutions tailored to thetechnologies essential for data collection, will likely find morecustomer’s needs. I believe these efforts will lead to more

opportunities to promptly provide customers with solutions, andopportunities for Hitachi to become a global leader in the Social

should encounter more opportunities to both improve economic

Innovation Business.

Pursuing Dialogue with Stakeholders to Further Their Understanding of
Hitachi’s True Value
Communication is essential in building relationships of trust withIn regard to shareholder returns, Hitachi targeted a low

external parties. It has been said by some that Hitachi’s share price andconsolidated payout ratio of 20%–30% during the period covered bymarket capitalization are rather low, and when looking back, it certainly

the 2018 Mid-term Management Plan, and it paid dividends at thisappears that shareholder returns have for a long time not been at alevel except in fiscal 2018, when after-tax net income waslevel of which we could be proud. Given these circumstances, I

particularly low due to transitory factors. Our goal moving forward isstrongly believe it necessary to bolster communication with those in

to increase dividends paid to our shareholders to a higher level.

the capital markets to deepen trust. There are likely a substantial

Based on the “Hitachi Social Innovation is Powering Good”

number of stakeholders who still have the impression of Hitachi as a

campaign tagline that launched this year, we will strive to provide

manufacturer of heavy electrical machinery, something carried oversocial, environmental, and economic value in line with our efforts tofrom many years ago. However, the Company is undergoing rapid

contribute to enhanced value for our corporate customers and anchange, and that change is likely to accelerate moving forward. With

improved quality of life for people in general. We thank you and look

the goal of improving stakeholder understanding of Hitachi as it

forward to your continued support as we move forward.

stands now, as well as its future course, we will continue to work toincrease opportunities for communication while simultaneously

September 2019improving transparency, including in the disclosure of ROIC,
adjusted operating income, and revenues by sector.

Toshiaki Higashihara
President & CEO
Hitachi, Ltd.

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