Japanese manufacturing giants Hitachi Ltd and Mitsubishi Heavy Industries Ltd are to start merger talks, reports said yesterday, as they look for growth beyond a shrinking domestic market and battle a strong yen.
The two companies have combined annual sales of more than ￥12 trillion (US$155 billion) and the move would create a Japanese industrial behemoth and one of the world’s biggest infrastructure firms.
Kyodo news agency and other media quoted sources saying the two firms aimed to integrate infrastructure businesses, such as railways and power stations, in early 2013.
The news boosted shares of the two companies. Hitachi closed up 1.72 percent at ￥471 and Mitsubishi Heavy Industries was up 3.43 percent at ￥361.
“With opportunities for the social infrastructure business expected to expand, especially in emerging countries like China and India, the two Japanese companies on their own do not have sufficient management resources to compete globally,” said Yukihiko Shimada, an analyst at SMBC Nikko Securities. “If they can complement each other in this aspect and effectively merge their operations, there will be a positive synergy.”
The companies declined to confirm the reports, despite Hitachi president Hiroaki Nakanishi telling reporters in Yokohama, near Tokyo: “We will negotiate a merger from now,” according to Kyodo.
Hitachi said in a statement that the merger talks were not “what we have decided or announced,” while Mitsubishi Heavy said it had not decided on the move or planned to do so.
Analysts say further consolidation is needed in a Japanese corporate space that has too many companies making the same products, compared with the likes of South Korea and its industrial champions such as Samsung.
Earlier this year, Japan’s biggest steelmaker Nippon Steel Corp and third-ranked rival Sumitomo Metal Industries Ltd said they were working toward a merger that would create the world’s second-largest steel firm by next year.
Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management, said “there is a very strong sense of crisis” between Hitachi and Mitsubishi.
“It’s positive that these talks are happening when the companies are on the brink of losing their competitiveness,” he said.
The continuing crisis at the Fukushima Dai-ichi Nuclear Power Plant has raised uncertainty over the future of their atomic power businesses, while the strength of the yen has made it more expensive for exporters to produce their goods domestically.
The yen has been hovering near its highest level since World War II in the past weeks, prompting Japanese authorities to step into the market to weaken it.
Hitachi, Japan’s largest maker of electrical machinery, said last week its net profit plunged 96.6 percent to ￥2.9 billion in the April-to-June quarter, citing the impact of the March 11 earthquake and tsunami.
It has been facing pressure to curb some of its unprofitable lines and focus more on core businesses.
It said on Wednesday that it was considering shifting all television production to foreign outsourcing firms by March next year as part of a broad strategy to increase profitability.
Mitsubishi Heavy is Japan’s largest heavy machinery manufacturer, with product lines ranging from ships, nuclear power plants, aerospace and engines. It is also Japan’s largest military contractor.