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CEO Message
Updated on 2 December, 2024
Solid results for the fiscal year ending March 2024
As a requirement of our medium-term management plan "VISION 2025," which is our next step in solidifying our management foundation, the first priority is to align our perspective with that of our shareholders and investors and promote management that is conscious of external perspectives. We have responded head-on to the demands of the equity markets, and have decided to optimize our business portfolio and capital allocation to maximize our corporate value, while also incorporating a sustainability strategy as a major pillar.
As a result, in the fiscal year ending March 2024, the Communications Systems Business, which we positioned as a growth driver, maintained its strength throughout the year, driving the entire company. Additionally, the overseas OEM business in the M&T Sector also performed well, resulting in an increase in sales across the company compared to the previous fiscal year, and a significant increase in core operating income, which represents earnings from the core business. This marks the highest profit since the business integration in 2008.
Thanks to improved business performance and the effects of flexible shareholder return measures implemented during the period, we were able to achieve results that significantly exceeded our targets, even though it was the first year of the "VISION 2025."
I believe this is a clear reflection of the evaluation by shareholders and investors of the approach we have been advocating to redefine our business portfolio and our vision for future growth business.
Progress on key business objectives of "VISION 2025"
Strengthening crisis management and business foundations through the challenges faced since assuming his position
I became CEO in 2019, and with the unexpected impact of COVID-19, I prepared for this to be the biggest challenge since the management integration, and launched an urgent countermeasure project. First and foremost, we have taken steps to freeze or significantly reduce investments and expenses. In the event of a company emergency, it is a cardinal rule of management to increase on-hand liquidity. The main focus was on thoroughly curbing cash outflows, and we strongly promoted this as a Group-wide initiative as our top priority.
Subsequently, despite the disruptions to supply chains and logistics caused by intermittent lockdowns in cities around the world and semiconductor shortages, we made a break from having excess inventory (i.e., excess purchasing) and instead reduced our product inventory to the bare minimum in order to continue running our business. This has resulted in a comprehensive improvement in cash flow across the entire company. In addition, by not holding excessive inventory, the company was able to practice "subtractive management" (i.e., management without holding) by significantly reducing waste loss, eliminating unrealized profits, and increasing the turnover ratio.
Through this thorough company-wide urgent countermeasure project, the visualization of fixed and variable costs was rapidly achieved down to the last detail. In a time of crisis, the core management figures for the entire company were made visible, including not only the break-even points of each department, but also waste, tacit knowledge, and even abnormal values, which led to the strengthening of the company's current management foundation.
Looking back, we can say that making the difficult decision to respond to the sudden external pressures and changes created a sense of crisis and tension throughout the organization, and enabled us to break away from the ties of the past, which marked a major turning point for our company.
I am convinced that a corporate group that overcomes difficulties and achieves change will inevitably become stronger, and that a company cannot be sustainable unless it is strong.
The ability to generate sustainable profits:
A proven track record and expectations for the future
The share price is the equity market's assessment of the company and is the President and CEO's report card. As we work in the world of capitalism, we cannot deny the equity market. I strongly take to heart the message that management must take a serious look at the share price, and that share prices would not rise through superficial IR tactics or superficial polishing.
There is a proverb that says that "The strong one doesn't win, the one that wins is strong" (Franz Beckenbauer, Germany).
I believe that the greatest mission of a President and CEO is to simply continue to produce results. Shareholders and investors invest in a company with high expectations for its future, but these "expectations for the future" are based on the current business and are built upon a future that is an extension of the past and present. In other words, only when you produce solid results can your future be evaluated. It is obvious that no sturdy house can ever be built on shaky foundations.
While past performance is important for expectations for the future, the probability, persuasiveness, and growth rate of future profit growth are also important factors. A company's overall attractiveness spanning its past and future is reflected in its evaluation. The increase in corporate value is a good state that should occur as a result, and in the long term, it is impossible for share prices alone to become detached from reality. In short, the ability to generate sustainable profits is the key.
When looking to the distant future, I believe that a company's sustainability can be achieved by managing its business with a simultaneous focus on two opposing priorities; the ultra-long term, which focuses on the balance sheet, and the ultra-short term, which focuses on management from the perspective of the income statement, which is constantly chasing the numbers in front of you.
Management with an awareness of capital costs:
Aim to promote ROIC management
As someone responsible for steering the management of the entire company, I believe my most important role is to optimally allocate management resources from a group-wide perspective in order to achieve sustainable growth over the medium to long term. In addition to ROE (return on equity), we consider ROIC (return on invested capital) to be an important KPI in terms of business profitability and capital efficiency, and we use it as an important tool for resource allocation.
The benefit of ROIC management for the JVCKENWOOD Group is that it enables management of equity operations for each of our diverse business units and measures the earning power of each business based on its actual capabilities, in other words, after-tax operating profit. And by verifying whether ROIC exceeds WACC (weighted average capital cost)*, it is possible to thoroughly manage operations with an awareness of capital costs.
* 6.35% (based on March 31, 2024)
To spread "ROIC management" throughout the Group, it is important that each employee understands the structure of ROIC's denominator (invested capital) and numerator (earnings) and actually think about and act on the basis that it is their own responsibility as to how to optimize this relationship in order to increase profitability. For example, when it comes to invested capital, which is the denominator, are there any unnecessary assets, equipment, or excess inventory when considering capital efficiency? What is the timeline for them to turn into cash? Is the work that you currently carry out as a matter of course actually contributing to increasing corporate value?
By visualizing the factors that make up ROIC, such as cost, labor costs, and promotional expenses, which are fluctuating factors in profitability and efficiency, you can become conscious of whether you are working from the customer's perspective. We believe that the greatest benefit of ROIC management is that it promotes the "metabolism" of technologies and business, improves profitability by measuring capital efficiency, and creates new value.
Shift management resources to strong business based on redefinition of business portfolio
The idea behind the business portfolio, simply put, is to increase the possibility of growth by not getting involved in business that have no chance of success and by concentrating resources in areas of strength.
We have positioned the Communications Systems Business as a driver of medium to long term profit generation because it ensures an extremely high rate of return on capital investment from the perspective of ROIC management.
First, the competitive structure of the professional wireless industry impacts the creation of sustainable profitability. Michael Porter defines five forces* as those that have a significant impact on medium to long term profitability in his theory of competitive strategy and our Communications Systems Business has a distinct competitive advantage in many respects, including the limited number of players in the industry, high barriers to entry, and a lack of substitutes.
Additionally, the market for professional radio systems is showing a steady growth trend. Currently, momentum for disaster prevention and crisis management is rapidly increasing in countries around the world, and the demand for professional wireless is showing a tendency to expand globally. Additionally, in North America, the switch from analog to digital wireless is also driving demand growth.
Our Communications Systems Business entered the professional wireless market in the 1980s and has enjoyed a solid track record and trust for over 40 years. Our greatest strength is the high reputation we have earned from our customers thanks to our long history of providing high quality, high functionality, and customized solutions to suit their needs.
The functionality and quality level of the tri-band radio "VP8000," which was introduced to the market in January 2023, has been highly praised by dealers and customers as being among the best in the industry, and the Company is winning an increasing number of bids in the North American public safety sector. In addition, this fiscal year is having an increase in personnel in the Communications Systems Business by approximately 100 people through both internal transfers and new hires, thereby strengthening our product lineup and sales capabilities.
At the same time, we also made the decision to transfer our new medical business in our healthcare business, which had been a challenging area, and to terminate our business in professional video cameras. By accelerating the transformation of our business portfolio in this way and allocating management resources appropriately, we will work to strengthen the JVCKENWOOD Group's fundamental competitiveness.
* five Forces: Competition among industry players, barriers to new entry, threat of substitutes, bargaining power of buyers, bargaining power of sellers
What we expect from VCS, the hub of value creation:
A dynamic place of creativity
In order to realize our medium to long term value creation, we constructed a new building in 2024 in our Head Office & Yokohama Business Center. Value Creation Square (VCS) will be completed, consolidating the business and technical departments that were previously based in different locations and providing an office environment that enables hybrid working.
By concentrating personnel at VCS, we will increase the fluidity of our engineers, and engineers with different levels of experience and intelligence will be able to provide each other with constructive feedback and work together toward our lofty goals. In some cases, new ideas may emerge from interactions with external players from different industries by sharing and objectifying different subjective views.
Creativity is difficult to achieve alone, and it can be said to be the product of an accumulation of work that is far from sophisticated, made in the context of relationships between people. It is important to visit the site, listen to the voice of the market, and practice "customer-centric design management." We hope to create a dynamic space of creativity where complex phenomena and issues can be elevated and advanced to new heights, sparking innovation.
Further advancement of governance
The Company implemented governance reforms in 2015 and has since established Nomination and Remuneration Advisory Committee, an External Director of the Board has served as Chairperson of the Board.
I feel that better governance leads to more stable management and improved management capabilities. I am convinced that the role of the Board of Directors is to lead corporate transformation.
We aim to continually improve the effectiveness of the Board of Directors by identifying issues based on the effectiveness evaluation we conduct every year, but there is no end goal when it comes to governance. We need to boldly push forward with governance reform by constantly identifying changes in the external environment, such as discovering potential risks and creating opportunities for innovation, while also appropriately and flexibly steering the Company toward sustainable growth while examining the wide-ranging business issues facing the Company.
One of the most important requirements for Board of Directors is agenda setting. In order to deepen our discussions in a more strategic and substantive way, we must put these issues on the table from the perspectives of, "What are the important agenda items for JVCKENWOOD?" and, "What are the themes that are truly important for the future of JVCKENWOOD?" It is easy to spend a lot of time on individual cases, leaving little time for truly important management issues, which end up being put off until later. As CEO, I will be deeply involved in setting the agenda and will use this as a trigger for corporate reform, while also seeking the broad insight of our board members in order to build the Company's competitive advantage.
The relationship between management and the board cannot be viewed in a uniform manner as one of execution and oversight. While maintaining an appropriate level of tension, we will continue to foster constructive and open discussions about the management challenges facing the JVCKENWOOD Group and what its future shape should be, aiming to further improve effectiveness and further enhance governance.
Fostering a vibrant corporate culture
The rebroadcast of NHK's Project X program, "Sidelined Employees Created a Global Standard: VHS and the Determination to Turn Things Around" which was based on the Victor Company of Japan, Limited (JVC) at the time, attracted many viewers with its story of engineers who had been relegated to passive roles but continued to fight against the barriers facing their company, and made the power of Japanese manufacturing (monozukuri) known to the world. That feat is still talked about today. We are now in the Reiwa era, and the term "corporate warrior" has become difficult to use. However, we must not forget that the "enthusiasm and unyielding spirit" that pooled Japan's wisdom to take on the world, and its great achievements, were a glory achieved by many unsung heroes. Not only was technology developed, but the strength of the employees working in production and sales was astonishingly strong even by global standards.
The JVCKENWOOD Group has valuable technological assets and intellectual property in the fields of sound, visual, and wireless that it has cultivated over its long history.
The challenges for "Change for Growth" does not lie in formulating strategies, It must be ensured by a strong ability to carry it out at all costs. I believe that by embracing great ambition and giving it my all, we can open up new paths.
Based on our corporate philosophy of "Creating excitement and peace of mind for the people of the world," we visit the field, understand real needs, and strive to differentiate ourselves thoroughly in order to turn dreams into reality. We would like to foster a vibrant and lively corporate culture that enables the creation of sustainable innovation.
