In the six years since assuming the role of president in 2017, I would say that our most significant achievements have undoubtedly been our independent business expansion in the Americas and the change in our capital structure. Independent business expansion in the Americas was a challenge I had been eager to tackle from the very beginning of my tenure as president. I had also considered the change in our capital structure, although a completely separate initiative, a move in the same strategic direction. That both opportunities to advance our business presented themselves within the same year was extremely fortuitous timing.
Our previous business setup in the Americas involved us handling product development and manufacturing while our partner, the American agricultural machinery major Deere & Company, handled sales and services. The partnership was long-standing, dating all the way back to 1983, but we had become keenly aware of the need to re-examine our relationship in light of changing market conditions and customer needs. We could see that it would be a challenge to advance business any further without a change in the status quo and felt a sense of crisis.
The needs of customers have changed considerably over the years and today manufacturers are increasingly being required to provide solutions that improve safety and productivity at construction sites, lower costs through better fuel efficiency and improve environmental performance. Finding optimal solutions that address these issues requires that we dig into the operational data of the machinery itself to then find ways to provide optimal proposals to the customer. In other words, we found that possessing and utilizing operational data is vital to discovering solutions to the issues our customers face. But in order to obtain this data, we needed to establish direct connections with dealers and customers, which we could not do while depending on Deere & Company for sales and services in the Americas, the world’s largest market. We therefore concluded that it would be best for us both to separate so that we could each target growth in line with our unique business strategies. Even so, determining the best way to dissolve our business partnership entailed considerable effort. From the start of negotiations, a handful of staff have been working practically every day, devoting their time to deliberations and negotiations.
Our relationship with Deere & Company began as an OEM supply relationship and it has lasted for over 30 years. It therefore took time for Deere & Company to realize that we were serious about ending our partnership and not merely using the threat of pulling out as a bargaining chip. The negotiations were indeed tough at times. If we could not reach an agreement, there was the risk the partnership would have to continue with lingering resentment on both sides. Through repeated discussions, we came to a mutual understanding that to grow globally, both of us needed to terminate this relationship.
Once we agreed that we would not cause any inconvenience to the dealers and customers who have been using products developed by Hitachi Construction Machinery and sold and serviced by Deere & Company after our partnership ended, discussions progressed at a more rapid pace. Of course, negotiations are bound to have sticking points. When these arose, it was helpful to return to this basic point and make compromises. Ultimately, we were able to reach a final agreement in August 2021 and the joint venture was dissolved as of February 28, 2022. Now that these difficult negotiations have finished, we are free to pursue our long-standing ambitions in the world’s largest market for construction and mining machinery.
On the other hand, the change in our capital structure entailed Hitachi Ltd. transferring 26% of its 51% stake in our company to HCJI Holdings G.K.*1, a joint venture set up by ITOCHU Corporation and Japan Industrial Partners, Inc., making it a principal shareholder. As Hitachi Ltd. proceeded with group restructuring, we had numerous discussions with its representatives about the growth strategy of our construction and mining machinery businesses. A major challenge for Hitachi Construction Machinery has been to build an independent framework in the Americas capable of directly providing products, technologies, and services to customers in a timely manner, as well as utilizing the operational data of machinery. Hitachi Ltd. also supported this endeavor, recognizing it as part of our growth strategy.
From the perspective of the Hitachi Group, although sales and profits in the construction and mining machinery businesses had been exceeding the Group’s overall targets for some time, these businesses also heavily impacted the balance sheet. This is attributable to the high unit prices of machinery and advances in our value-chain businesses (services, parts, rentals, used vehicles, remanufacturing, etc.), which require us to hold assets that inevitably weigh down the balance sheet.
To undertake independent business expansion in the Americas, the world’s largest market, Hitachi Construction Machinery needs a considerable number of service bases to cover the vast continent, sufficient inventories of products and parts and its own sales financing arm. All of this requires funds for growth. Considering Hitachi Ltd.’s desire to lighten its balance sheet and our desire for more freedom and flexibility to invest in growth, an agreement was reached to change the shareholding ratios. Meanwhile, our ConSite remote monitoring solution for construction and mining machinery—which is based on Hitachi Ltd.’s Lumada platform and uses digital technology to create value from data—is a perfect example of a service solution that contributes to problem-solving and business growth. Due to this and other strong technological relationships, as an equity-method affiliate of Hitachi Ltd., Hitachi Construction Machinery will continue to rely on the Hitachi Brand.
We commenced our independent business expansion in the Americas in March 2022, and, at an exceptionally opportune moment, were able to announce the change in capital structure in August of the same year.
*1: HCJI Holdings G.K. is now HCJI Holdings Ltd.
*2 Lumada is Hitachi Ltd.’s platform for providing solutions, services and technologies that employ advanced digital technology.