EDITORIAL: Earnings reports sink

Japanese companies' earnings results for the year to the end of March 2009 are, as expected, disastrous, reflecting the devastating effects of what has been described as the worst postwar recession.

The combined ordinary profit of listed companies fell sharply and is expected to decline further in the year through March 2010.

It will be the first time in 11 years--since the banking crisis triggered by the collapse of the asset-inflated economy--for the ordinary profit of Japan Inc. to fall for two consecutive years.

The global credit contraction that started in the United States has decimated the markets for automobiles and home electronics. Demand has evaporated globally. Many CEOs may believe that their companies' earnings cratered because of a cause beyond their control.

But the late Konosuke Matsushita, the venerated founder of Matsushita Electric Industrial Co. (now Panasonic Corp.), once said, "A recession, a difficult situation, is a good opportunity to think about what is right."

What was wrong about the past management of Japanese companies? Some insight into this question can be obtained by drawing a comparison--albeit a little invidious one--between two Japanese companies: Toyota Motor Corp., which posted its first loss in 59 years, and Nintendo Co., which notched a record profit.

During the five years through last year, when the world economy was booming, Toyota increased its global sales at blistering annual rates of 6 to 10 percent, overtaking General Motors Corp. as the world's largest automaker.

Toyota, however, powered its breakneck sales growth mainly by making inroads into the U.S. market for large vehicles, which was dominated by the Big Three automakers.

This is an anachronistic market for gas-guzzlers. Small, fuel-efficient cars have been Toyota's traditional forte. It seems the company strayed onto a retrograde path in an intense drive to overtake GM.

To be sure, Toyota established its image as the leader in clean-car technology by launching the Prius hybrid in 1997. But the company has not demonstrated a passionate commitment to expanding this advanced market and making eco-friendly vehicles its principal revenue source.

Toyota's hybrid vehicles account for less than 5 percent of its global sales. If it had focused on boosting sales of its hybrids in the past 12 years, it might have avoided such a tremendous blow to its bottom line. It must now brace for an operating loss of 850 billion yen for the year to the end of March 2010.

In contrast, Nintendo has spun out some snazzy new products that have sold well worldwide, including the Wii home video game console, which is said to have revolutionized the entire video game concept.

With Nintendo's earnings performance solidly supported by a self-created market, President Satoru Iwata says a company's profitability "depends more on whether it can roll out innovative products than on economic conditions."

Nintendo's corporate philosophy has developed in the unique business environment in Kyoto, where the company is based.

Since the narrow Kyoto basin is crowded with businesses, small business operators need to be different to coexist and to avoid creating discord with their neighbors.

This climate provides a strong incentive for companies to seek growth driven by originality. Nintendo's innovative games amply illustrate the characteristic quality of Kyoto-based companies.

Rapid economic growth fueled by bubbles will not return to the world even after the current global downturn comes to an end. In a world of slow economic growth, creating new markets is crucial for a company's survival. This is a situation similar to the one in which Kyoto companies have traditionally found themselves.

While admitting a boom was good, Matsushita also said, "a recession is even better." That's because he believed an unprecedented difficulty, an unprecedented recession would produce unprecedented innovations.

Japanese companies are being sorely tested by an economic crisis that will cause their profits to plunge for two straight years. We hope they will use this predicament to lay the foundation for future growth.

--The Asahi Shimbun, May 16(IHT/Asahi: May 18,2009)