Anyone who believes that the rower of the boat cannot rock it as well has not met those who run Japanese shipbuilder Kawasaki Heavy Industries.
Late last week, as part of a sharp downward revision in future earnings, the company hinted that it would shut its offshore vessels division. This would be big news — Shozo Kawasaki founded KHI 138 years ago to build ships — but it will not make a big difference. Moving more operations outside of Japan will.
KHI makes not just ships but machinery such as aerospace equipment, gas turbines and motorcycles. More than half of profits come from aerospace; shipbuilding was expected to lose money this year.
Looking at the revision — operating profits cut in half from ¥70bn — the damage from a stronger yen represents the primary cause. Almost 60 per cent of revenues come from outside Japan. Those from the US and Europe have been rising at mid-teen percentage rates annually, far better than the 1 per cent KHI gets from its home country.
KHI does make some of its goods abroad, such as rolling stock and jet skis, but it needs to do more to balance its currency risks. To be fair, its joint venture in Brazil to produce offshore drilling equipment may have been agreed with this goal in mind. Instead, a global depression for oil services coupled with the Petrobras corruption scandal killed off any hopes for a profitable business.
The Japan-based offshore marine division has become the target for change, even though the unit’s drag on profits is small. Decade-high profits in shipbuilding evaporated in 2013. Group profits, driven by aerospace, have doubled since then. Even so there is little love for KHI. That is partly because of its shipbuilding unit, which on Nomura’s forecasts will lose money until at least March 2019.
Whether KHI scuttles its offshore division is unimportant. What it really needs is to diversify its manufacturing base to more overseas locations.
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