Foreseeing no market growth in Japan's future due to the falling birthrate and the aging population, Hitachi Ltd. is hitching a ride aboard its rail business operations overseas. 

Hitachi's focus is paying off, with the annual sales figures likely soon to top the 1 trillion yen ($6.23 billion) mark.

The Japanese electronics giant has expanded the scale of its rail business through a succession of corporate acquisitions in Europe, where there is a very large market.

The company has been particularly eager to expand into Britain, the birthplace of the railways. 

The company's overseas operations now account for 80 to 90 percent of Hitachi’s overall sales from the segment.

Proceeds related to systems, which support the operation of train services, are likely to surpass those from the manufacturing of rolling stock, the previous mainstay of Hitachi’s rail business.

Hitachi Rail Ltd., a Britain-based subsidiary of the conglomerate, on May 31 completed the acquisition of the signaling and other related businesses from Thales SA, a French defense and electronic equipment giant, for 1.66 billion euros (283 billion yen, or $1.78 billion).

The businesses acquired, which include operations related to traffic control systems and to control devices for rolling stock, will serve as a foothold for Hitachi’s new venture into France, Germany, Canada and other markets.

Adding the operations acquired from Thales, which are worth 200 billion to 300 billion yen a year, will allow Hitachi’s annual proceeds from the rail business to exceed 1 trillion yen for the first time in fiscal 2024.

The buyout has also added a workforce of 9,000, many of them with expertise in digital technologies, to the Hitachi Group, thereby helping to expand the overall coverage of Hitachi’s operations.

Hitachi’s rail business, which started out with locomotives, has famously produced a number of train car products for Shinkansen and limited express train services.

Hitachi’s Kasado Works in Yamaguchi Prefecture, where rolling stock is manufactured for both Japanese and overseas clients, has a history of more than a century.

The company’s rail business, however, has totally changed in style during the last 10 years or so. Hitachi now deals in so extensive a range of rail-related operations that it no longer has to rely on manufacturing rolling stock alone.

2 MAJOR BUYOUTS, CHANGE IN BUSINESS MODEL

In 2005, 2012 and 2014, Hitachi won orders in Britain for large-scale projects that combined rolling stock manufacturing and maintenance checkups for high-speed rail services.

Maintenance inspections, which involve long-term business commitments, serve as a stable revenue base that is seldom affected by how many orders are received for rolling stock manufacturing.

In fiscal 2013, Hitachi’s annual sales from the rail business totaled less than 200 billion yen, with overseas operations accounting for only about 40 percent of that amount.

In 2015, however, Hitachi acquired AnsaldoBreda SpA, an Italian rolling stock manufacturer.

The buyout expanded Hitachi’s market coverage at a stretch because another group company based in Italy, which dealt in signaling, had one of the biggest signaling manufacturers in the United States, and a French manufacturer of high-speed rail systems, both under its umbrella.

The signaling business, whose coverage includes automatic train stops and driver advisory systems, tends to produce higher profit ratios than rolling stock manufacturing.

The larger the proportion that signaling accounts for in the rail business as a whole, the higher, therefore, the overall profitability.

With the Thales acquisition, non-rolling stock operations, including signaling, now account for 70 percent of Hitachi’s rail business in the value of orders received.

And that trend is also in line with Hitachi’s group-wide focus on data management businesses.

Hitachi officials are hoping to draw on the company’s data management expertise to improve rail maintenance efficiency and to implement “mobility as a service (MaaS),” a concept that refers to using information technology to combine different means of transportation.

The MaaS measures currently being considered include a system for unified settlement of transportation fees across an entire city.

NO LONGER A 2ND-TIER PLAYER

By sales figures, the world’s leading rail manufacturer is China’s CRRC Corp., which has an overwhelming hold on domestic projects in the country.

The runner-up is Alstom SA of France, which has acquired the rail business of Canada’s Bombardier Inc., and Germany’s Siemens AG comes in third place. Siemens, Alstom and Bombardier were previously called the world’s “big three” rail manufacturers.

Hitachi has been in the group of second-tier rail manufacturers lagging far behind the three industry leaders.

Hitachi has long competed against rivals Alstom and Siemens in Europe. The latest acquisition from Thales, however, gives Hitachi an opportunity to break free from the lump of second-tier players and close the gap behind Siemens.

Hitachi announced plans for the acquisition in 2021, but European Union authorities intervened by citing competition concerns.

Hitachi addressed those concerns by selling off some of its own business arms, which, however, caused completion of the acquisition process to be delayed from the initial schedule.

EXECUTIVE LAUDS JAPAN’S TECHNOLOGIES

Giuseppe Marino, a senior vice president of Hitachi and CEO of the conglomerate’s Railway Systems Business Unit, spoke to reporters during an interview session on June 19.

Marino said that the buyout of Thales’ signaling and other related businesses has doubled Hitachi’s engineering capabilities from the pre-acquisition levels. He added the buyout will also bring about synergy effects worth about 10 billion yen (on a profit basis) in the years to come.

Marino, a native of Italy, previously worked for AnsaldoBreda. He now doubles as Hitachi Rail’s group CEO.

With the latest acquisition, Hitachi’s rail business now has 11 manufacturing bases both in Japan and abroad and a total workforce of 24,000 or so in more than 50 countries and regions.

Marino said that Hitachi has been working to introduce digital technologies and generative artificial intelligence systems into its rail business plants.

Preparations are under way to set up a new plant in the U.S. state of Maryland. Marino said the plant will open early next year and will showcase Hitachi’s capabilities and digital technologies.

Marino emphasized that, even though operations overseas now account for the majority of Hitachi’s rail business, Japanese technologies lie at its starting point, and the company will continue to draw on them effectively.

He said, specifically, that technologies developed in Mito, the capital of Ibaraki Prefecture, are being used in the company’s products.

The remark was a veiled reference to a train pack product of a new type that entered into service in Italy last year. Trains of the product line can switch between the three power sources of electricity, batteries and a diesel engine.

Marino said he believes that Japan has railroad technologies that are among the best in the world and also has a powerful ecosystem of technologies that support development work.

He noted, however, that Hitachi also has a pool of technologies and experiences that have been developed by various companies it has acquired.

He said Hitachi will draw on the best of those experiences to focus on designs and engineering for next-generation products that the company will be able to offer worldwide.