Category: Asia

Source: Panasonic

Headline: Talking with Group CEO Kusumi: The True Meaning of Group Management Reform

On February 4, 2025, Panasonic Holdings (PHD) announced its third quarter (3Q) financial results for fiscal year 2025 (fiscal year ending March 31, 2025) and explained the group management reform that will be launched from FY3/26. Yuki Kusumi, Group CEO, announced a fundamental restructuring of the organization and cost structure that will allow the Panasonic Group to continue to contribute to society by helping people live better lives over many years while flexibly responding to major changes in society. We talked with him to learn more about his thoughts behind the announcement.

Can you provide an overview of the announcement and its background?
Based on a review of the current Medium-Term Strategy that has been the focus of our efforts for the past three years (since 2022), we outlined the vision of the Panasonic Group and explained to internal and external audiences the issues that need to be resolved right now and the details of the reforms that must be implemented without delay.
There are two main points. First, in order to resolve structural and intrinsic issues within the Group, we will embark on fundamental group management reforms centering on “fixed-cost structure reform and profit improvement by streamlining for leaner1 HQs and indirect departments,” “elimination of businesses with issues,”2 and “focus on Solutions,” seeking to achieve the following profit targets by fiscal year 2029 (fiscal year ending March 31, 2029): an ROE3 of 10% or greater and an adjusted operating profit margin of 10% or greater. Second, in order to contribute to the sustainable development of society and lifestyles that make effective use of the earth’s limited resources and energy, we have defined the globally competitive “Solutions area” as an “area of focus,” and the home appliance-centered “Smart Life area” and “Devices area” as “profit base areas.”
1 A business model that minimizes waste2 A business is defined as having “issues” if its Return On Invested Capital (ROIC) is lower than its Weighted Average Cost of Capital (WACC)3 Return On Equity; an indicator of how effectively a company uses the money invested by shareholders to generate profits
In addition to responding better to stakeholders, who viewed the content of our announcement spread across media and social media in a manner that included some misinterpretations and distortions, I would like to take this opportunity to reiterate Panasonic Group’s position.4
4 Blog Posts: Regarding some media reports on the television business and others (February 6, 2025), Regarding some media reports on the use of the Panasonic name and brand (February 6, 2025)
I made the announcement at a time when the final year of the current Medium-Term Strategy (FY2023–25) had not yet ended, and although many people viewed the 3Q financial results announced the same day as relatively positive—with increased revenue and profit on a non-consolidated basis excluding the Automotive Business5—many were also surprised by the announcement of major management reforms. The fact is, I am still not satisfied with the state of our business, and I continue to feel a strong sense of crisis. This is the background to my February 4 announcement.
5 Due to the transfer of shares in Panasonic Automotive Systems Co., Ltd., the company became a subsidiary of Star Japan Acquisition Co., Ltd., an equity method affiliate of PHD, in December 2024 and was therefore excluded from consolidated results.
Of the medium-term management indicators established under in the FY2023–2025 Medium-Term Strategy, we achieved our cumulative operating cash flow target of 2 trillion yen by the end of the third quarter. However, we are not expected to achieve our ROE or cumulative operating profit targets. While implementing the FY2023–2025 Medium-Term Strategy, we have seen some results and improvements in some areas, but we have also identified more pressing issues that need to be addressed.
As I have been saying since I became Group CEO, our Group has not been able to grow in terms of sales or profits for the past 30 years. Operating profit margin continues to hover around 5% and is not even close to a level that would satisfy our shareholders. We have not been able to set a new profit record since 1984—or 40 years ago. This means that even though each employee is working extremely hard, business management is not generating results that reflect their efforts. I take that responsibility very seriously. Today, we face a crisis that threatens the survival of the group, and I, and the group’s management team, have come to the conclusion that we need to grasp the helm with even greater resolve and determination. This is the background to this announcement.
Some people might ask, “Why are you introducing reforms that will impact employment when you’re already making a certain amount of profit?” It is true that in the past, our company has taken emergency measures such as reducing employment after posting losses. However, from my own experience, when you try to make changes while running a loss, you cannot provide a sufficient level of support to your employees. Moreover, having surplus personnel does not encourage bold, original ideas for improving efficiency. It also hampers the growth of employees, meaning that the valuable human resources entrusted to us by society cannot be utilized. This situation must be avoided. So, although it is a reform that our group has never experienced before, I believe that we must be determined to see it through.

You mentioned that certain issue have come to light. What points you are focusing on?
In the FY2023–2025 Medium-Term Strategy we have been aiming for growth by designating three business areas as priority investment areas: Automotive Batteries, air quality and air conditioning (A2W in Europe6), and SCM7 software. However, the European A2W market is currently undergoing significant changes, and the business environment for automotive batteries has changed significantly since the Medium-Term Strategy was formulated three years ago. Nevertheless, we believe that the EV market will continue to grow, albeit at a slower pace, and we will continue to invest in line with the needs of vehicle manufacturers. Now that major investments in SCM software have subsided, the company will enter an offensive phase from the second half of this fiscal year.
From the perspective of strengthening competitiveness, some of our operating companies have been able to turn their growth investments into profits, but many of them have yet to produce results. Three years have passed since we moved to an operating company structure, and as I will explain in more detail later, we have also identified major issues with the Group’s fixed-cost structure. With this in mind, I felt that we needed to take immediate action to reform the Group, so I decided to announce both internally and externally that we would begin implementing fundamental reforms before the end of fiscal year 2025.
6 Air to Water; heat pump hot water heaters7 Supply Chain Management

Under the conventional rolling approach to Medium-Term Strategy in our Group, fiscal 2026 should be the first year of the next Medium-Term Strategy, but we will not set the new strategy this fiscal year because we want to focus on the current management reforms and position FY2026 as a year for solving structural and intrinsic issues and solidifying our foundations. At the same time, we will accelerate business portfolio management (PFM) based on the three pillars of “streamlining for leaner HQs and indirect departments,” “elimination of businesses with issues,” and “focus on Solutions” while improving profitability by reforming our fixed-cost structure.
First, regarding the “streamlining for leaner HQs and indirect departments,” this is the issue of the fixed-cost structure that I mentioned earlier, and it means that we will significantly reduce costs at the HQs and indirect departments of each operating company and divisional companies, including Panasonic Holdings (PHD) and Panasonic Operational Excellence (PEX), which is responsible for PHD indirect functions. Focusing on HQs and indirect departments across the entire Group, we will identify the work that is truly necessary and optimize the number of personnel.
As a result of individual operating companies strengthening their indirect functions in line with the operating company system, the entire Group is now seeing an increase in fixed costs that is putting pressure on profits. Our top priority is to concentrate and consolidate operations, particularly in these indirect functions, and to modernize them. We have made progress in some areas over the past three years of challenge, and we will fix those areas where problems remain. When the decision was made to transition to an operating company system in 2022, based on my own experience as head of a business unit, I decided that it would be best to leave business operations to business leaders who were familiar with the actual situation on the ground, and I have sought for operating companies and business divisions to take the lead in improving our competitiveness. Although each operating company made great efforts based on autonomous responsible management and progress was made, we recognize that there were issues—including those related to governance—regarding the fact that we were unable to achieve numerical results. While the operating companies will continue to play a central role in the group structure, PHD will take a more active role in improving the profit structure and providing support as necessary. In some foreign-affiliated companies with autonomous responsible management, the PHD Head Office still exercises governance over headcount control, and we are considering this approach as well. As I mentioned earlier, if we have surplus employees, or if our human resources are trapped in such a situation, we cannot say that we are doing the right thing as a company that is entrusted with human resources by society and whose basic management policy is to “develop people and make the most of their abilities.” Managers within the Group must maintain a strong awareness that “society has entrusted us with people and money, so it is our role as a company to make the most of them.”
Second is “elimination of businesses with issues.” We will assess the feasibility of restructuring those businesses with low ROIC levels despite not currently being at the growth investment stage; businesses that are inferior to competitors and have no chance of regaining their competitiveness; and businesses that are simply in the wrong business conditions. For businesses where restructuring is not feasible, we will proceed with urgent reforms according to a firm deadline, accelerating our efforts to withdraw from them or transferring them to the best owner.
And as I mentioned at the beginning, third is “focus on Solutions,” the basic direction for the Group to take. We have reviewed the positioning of businesses that were designated as priority investment areas in our FY2023–2025 Medium-Term Strategy, and will now focus on the Solutions area. Furthermore, we will position the Devices area and the Smart Life area as the profit base, and we will clarify the roles of “focus” and “profit base” in each domain.

There are some globally competitive solutions businesses that have been developed under the relevant operating companies. Thanks to the technology and customer relationships that we have cultivated since our founding, these businesses now have a current scale of 3.5 trillion yen. In the future, the Solutions area will evolve beyond simply introducing products and systems to providing a full range of services—from consulting and operations to services—while maximizing customer value through long-term proposals and problem-solving. Under the “Panasonic Go” initiatives announced at CES in January, we will evolve our solutions business, connect with a wider range of customers, and create synergies across the entire Group. We will aim for growth in highly competitive global businesses, particularly in energy and SCM solutions, ultimately toward double-digit adjusted operating profit margins in each business.

As part of these reforms, it was announced that one of the operating companies, Panasonic Corporation (PC), would be dissolved. What is the intent behind this decision?
The intention of dissolving PC is to transcend the borders of the Lifestyle business and create synergies across the entire Group in the Solutions area.

PC was originally established with the aim of creating Groupwide synergies in the Lifestyle business, and five divisional companies were set up under its umbrella. However, the industry is changing rapidly, and problems that customers face are becoming more complex and sophisticated, making it difficult to address them within the scope of our Lifestyle business alone. In Japan, PC’s Electric Works Company and Panasonic Connect Co., Ltd. are currently strengthening their collaboration involving on-site solutions, and inquiries are starting to come in. Meanwhile, Panasonic Connect’s Blue Yonder and Hussmann, the US subsidiary of PC’s Cold Chain Solutions Company, have a number of common customers in the retail food sector, so we can look forward to creating new value in the food supply chain going forward. If we are going to speed up Group synergies like these, then we need to change to a system that addresses customer issues and social issues on a Groupwide basis, and this is why we have decided on dissolution. From the perspective of achieving technological synergies, Heating & Ventilation A/C Company and Cold Chain Solutions Company are scheduled to become a single operating company.
The divisional companies under the PC umbrella that will become new operating companies will contribute to accelerating Group growth by thoroughly implementing autonomous responsible management while maintaining an enhanced Groupwide perspective that includes creating synergies in the Solutions area.
In addition, competition in the home appliance business is intensifying not only overseas but also in Japan, and our overall competitiveness is on a downward trend, so we will use the technological and design capabilities that we have honed in China to achieve “Japan Quality” at global standard costs that can compete on the world stage and work to improve profitability. Because there is overlap in mass production design between China and Japan, we will start by working together with China to optimize Japan’s mass production development resources so that we can deploy products that make full use of China’s supply chain in each region and increase our cost competitiveness. Then we will improve operational efficiency and streamline domestic indirect departments, and thoroughly strengthen our domestic marketing structure to pursue net added value from a customer perspective while also improving efficiency and optimizing resources.

These management reforms are going to have significant impact. Looking beyond these reforms, what do you envision for the Group?
In fiscal 2026, we will focus on management reforms, and plan to begin virtual operation of the new system in the fourth quarter. Through the three initiatives mentioned above, we will reform our fixed-cost structure and improve profitability while accelerating business portfolio management, expecting to achieve cumulative operating profit improvement exceeding 150 billion yen in fiscal 2027 and 300 billion yen in fiscal 2029 relative to fiscal 2025.8 In terms of profit targets for fiscal 2029, we are determined to achieve an ROE of 10% and are aiming for an adjusted operating profit of 10%.
8 Forecast for adjusted operating profit as of fiscal year 2025 3Q
Utilization of data and AI will be essential to the successful completion of these reforms. We intend to thoroughly improve productivity across the Group, provide highly competitive solutions to customers in the Solutions area, and expand our software and AI solutions business to 30% of the entire sales by 2035. When used properly, generative AI can yield manyfold increases in the efficiency and quality of some tasks. AI Technology is constantly evolving, and it has become so ingrained in modern society that the next generation entering the workforce can be said to be generative AI natives. An organization that cannot truly master data and AI will not be able to lead the way in the future. To achieve this goal, the entire Group will work to transform its revenue structure and business model under PX—a Groupwide transformation project that also encompasses DX—and the Panasonic Go initiative that will form the core of this project.
We will also change the organizational culture. I have said many times before how important it is to keep making improvements and changing, but this has not yet taken root within our culture. There is a deep-rooted tendency toward following the established framework once a decision has been made. If we are going to improve the efficiency and quality of our work, then we must become an organization that is constantly changing, with each individual taking the initiative to make changes. I believe we need to advance to the stage where change is considered a virtue. To achieve this, it is extremely important that we avoid being constrained by deeply-ingrained behaviors and implement a strategy that will transform the company into an organization that is able to “UNLOCK” the potential of its employees.

The efforts and challenges of each and every employee, entrusted to us by society, will lead to the happiness of our customers around the world, and we will be recognized by society as an “indispensable entity”—this is what the Group should become through these reforms. Once these management reforms have been achieved, all Group employees will be able to take pride in the Panasonic Group as an “aggregation of highly profitable businesses” and an “aggregation of globally competitive businesses.” As our founder, Konosuke Matsushita, once said, “Difficult times provide a precious opportunity for further progress.” In order for the Group to achieve development that will lead to the next generation, we will work together with all our employees, acknowledging and understanding the significance of our efforts, and push ahead until these management reforms have been completed.