Hitachi Construction Halts $1 Billion Expansion Plan


Hitachi Construction Machinery Co., the world's largest maker of giant excavators, will freeze a $1 billion plan to expand production in China and other emerging markets as the deepening global recession damps demand.

The two-year, 100 billion yen investment in capacity expansion will be put on hold, Chief Executive Officer Michijiro Kikawa said in an interview. Industrywide demand for excavators is on pace to fall 25 to 30 percent in the six months to Mar. 31, and may slide another 20 percent next fiscal year, he said.

"I've never before experienced seeing sudden, simultaneous drops in worldwide demand," the chief executive said. "New investment won't be implemented until we can foresee how the market will recover."

The effects of the global financial turmoil have spread to China and emerging nations, where Hitachi and rival Komatsu Ltd. previously expected sustained growth to mitigate sales declines in the U.S., Europe and Japan. As recently as Oct. 28, Hitachi was expecting 26 percent growth in China sales this fiscal year.

Now Hitachi has suspended a plan to boost output capacity in China by 25 percent to 15,000 units after the excavator market there shrank 50 percent in November and 37 percent in December from prior year levels. China¡¯s 4 trillion yuan ($585 billion) stimulus package, which aims to expand road and railway infrastructure, won¡¯t likely benefit the industry as quickly as executives at Hitachi initially hoped, with the market expected to shrink next fiscal year, Kikawa said.

Shares Decline

Hitachi Construction Machinery slid 10 percent at the 3 p.m. close on the Tokyo Stock Exchange, the biggest decline in two months. The stock has fallen 64 percent in the past year, compared with a 40 percent drop in the Nikkei 225 Stock Average.

Asia's two largest makers of earthmovers are halting overseas expansion and shedding temporary jobs, and their bigger U.S. rival Caterpillar Inc. is cutting executive pay as much as 50 percent to pare costs.

The company forecast industrywide demand for excavators will shrink 15 percent to 17 percent in the year to March 31, worse than the 6 percent forecast in October, Kikawa said in a Jan. 9 interview in Tokyo. Demand may slide 10 percent to 20 percent in the next fiscal year, with "no sign of a recovery," he said.

Construction of a third Hitachi Construction plant in India, previously slated to start operations next year, was also put on hold, he said.


Prior to the financial crisis, construction and mining booms in Asia had fueled demand for excavators, wheel loaders and dump trucks built by Hitachi and Komatsu. Kikawa initially targeted a sixth year of record profit for the year to March 31. The company increased investment by 25 percent to 200 billion yen for the four-year period through March 2011, Kikawa said in a Sept. 12 interview.

Kikawa decided to halt expansion after spending half of the total planned investment in the past two years, he said.

Komatsu will also freeze investment on capacity expansion in the year starting April 1 and limit spending to areas such as facility maintenance and safety, Chief Executive Officer Kunio Noji said in a Dec. 19 interview in Tokyo.

Cost Reduction

Hitachi Construction Machinery is eliminating as many as 900 posts held by temporary workers at its largest domestic plant in Tsuchiura, northeast of Tokyo, by the end of March, Kikawa said. Production lines at the plant are shut four days a week, and regular employees are taking more time off as the company has reduced output there to rates about 50 percent below normal in an effort to shed excess inventories, Kikawa said.

The CEO will take advantage of falling demand for steel, used in excavators, cars and ships, as a bargaining tactic to cut prices of the alloy. Kikawa will seek to cut prices of steel plates to at least the fiscal 2007 level, he said. Hitachi Construction Machinery accepted 40 percent price increases in plates in the first half when they needed more of the material to build machines.

"Of course, we'll have to bring prices down from the rates we paid up until now," Kikawa said. "A drop in demand and a stronger yen is a big blow to our business. We must cut costs on materials."
Source: Bloomberg Muse
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