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'We must create our own core competences'

01 Oct 1999

JR East Chairman Shuichiro Yamanouchi challenges current thinking on research, suggesting railways can no longer rely on suppliers to develop new products and processes. In this interview with Murray Hughes, Yamanouchi outlines a three-pronged strategy for survival while Japan's economy bounces on the bump stops

 

BACK IN JULY East Japan Railway sold another tranche of shares - the initial sale was in October 1993, when 2·5 million of the 4 million stocks were sold. Now 88% of the company's shares are owned by private investors, making JR East an 'almost truly private sector company'. As JR East is a domestic business, Chairman Shuichiro Yamanouchi is 'a little surprised' that about 12% of stocks are owned by people or companies outside Japan. This, he suggests, 'is because commercial performance is very good, the railway is a stable business and it is essential to the economy', and thus meets the 'indispensable' criterion for some investors.

Around 12 years have passed since Japanese National Railways was split into seven companies as the first step in a programme leading to privatisation, and July's sale signifies to Yamanouchi the 'end of the first stage'.

But majority ownership by private investors does not mean freedom of management. The control exercised by government is, as Yamanouchi delicately puts it, 'a little bit severe'. An annual plan of activities must be drawn up and submitted for authorisation every year. Nominations for the top management posts must be agreed by the minister of transport, and major transactions must be authorised by government. Yamanouchi hopes that 'these restrictions will be abolished when we move to 100% private ownership', but he cannot say when this is likely to be. Fares too are fully regulated. Despite these restrictions, Yamanouchi describes the latest share sale as 'a very significant step towards being a private company'.

JNR's legacy

Last year the JR companies clashed seriously with government over proposals to reduce the debt of the former JNR which was transferred to JNR Settlement Corp. Yamanouchi notes that the debt 'was not properly controlled by government'; interest payments were allowed to accumulate and the total debt continued to rise.

When government finally decided to tackle the problem, the outcome was 'unfortunate' for JR East, which was asked to pay an additional contribution in the form of pension fund fees. 'This has cost us ´75bn or about US$700m. Our profit last year would have been US$800m, but this was reduced to US$100m - surprising after paying such a large contribution.

'You have to remember that JNR was the worst company in the world, with losses amounting to US$40m a day. In 1997 the JR companies turned in a profit of US$5m a day. If you take all seven companies together as a single entity, JR is the fourth most profitable business in Japan after Toyota, NTT and Honda, so in my view the restructuring and subsequent moves towards the private sector are a big success.'

Yamanouchi adds that the three mainland JR companies contribute to the so-called Management Stabilisation Fund for the island companies (Shikoku, Hokkaido and Kyushu) and JR Freight 'to allow them to be profitable' by charging only marginal costs for track access.

To a question about the business outlook for JR East, Yamanouchi looks back to the honeymoon period after restructuring when traffic increased steadily for six years in a row. But the picture in the last four years is far less encouraging with stagnation evident in the volume of traffic. Passenger-km fell by 1·8% last year because of Japan's 'bad economic situation'.

Nor are things getting better. The first three months of the financial year that began in April are 'the same as in 1998 - that means that we have to be very prudent, and I am not at all optimistic about the future.'

Yamanouchi points out 'that economic growth has slowed to -2%, that the population is growing older and will actually start to decline in 2010. This is a basic problem for all service industries in Japan.'

Three-strand survival strategy

To cope with this bleak outlook, Yamanouchi has three strands to a fundamental survival strategy for the coming years. First is 'to redesign the railway. By this I mean we have to reconstruct the network in Japan. Old fashioned factories built 100 years ago cannot afford to compete, and it is the same with railways in the 21st century. Only modernised and high speed lines can compete, and that means that we have to accelerate reconstruction of the main network. The least profitable lines can no longer be part of our network.'

To illustrate his point, Yamanouchi highlights the success of the Nagano (Hokuriku) shinkansen which opened between Takasaki and Nagano in October 1997 in time for the Winter Olympic games. 'Despite the poor shape of the economy, rail traffic between Nagano and Tokyo grew by 30% in 1998.' This was an 'eloquent example of the usefulness of modern high speed lines'.

Yamanouchi also felt that railways must learn 'to co-exist better with other modes'. Again the Nagano shinkansen was the model. The station at Sakudaira was located on a greenfield site outside the city with parking space for 1000 cars. 'This is used by 700 cars a day, and 200 people have purchased monthly season tickets to Tokyo.'

The second strand is a further increase in productivity. Yamanouchi is fighting a constant war against costs, and he believes it is essential to run the railway with fewer people. Personnel costs represent one-third of the total, 'and somehow we must find ways to reduce this.' He sees plenty of scope for maintaining rolling stock with fewer people.

'Train maintenance is very traditional, old-fashioned and labour intensive, and new technology can be used to reduce these costs. For example, our latest trains have a completely new electronic information and data system, and the total length of cable is about half that on older cars. Our target is to halve the life-cycle cost of the first batch of Series 209 trains. The latest trains use a fully automated self-test procedure. This is a form of automated inspection activated by the driver simply pressing a button before the train leaves the depot. It is rather like the pilot going through pre-flight checks before take-off.'

Infrastructure maintenance swallows another third of the total costs. 'We must reduce this - there is so much infrastructure: track, rails, communications, stations, and our expenditure on maintaining it all is enormous. One way to achieve this is to adopt new technologies for signalling and train control, and to make better use of IT.' Smartcard ticketing is also firmly planned, and the whole of the JR East urban network should be equipped by the end of 2001.

The third strand in Yamanouchi's strategy is to develop other activities outside the railway business. 'The railway is very stable and profitable, but we cannot hope to develop it any more. So we have to diversify into other fields.' One model is provided by Japan's numerous private railways, which have moved into 'hotels, leisure equipment, shopping centres and other modes.' He cites the creation of Japan Telecom which is in a consortium with ATT and BT - 'with JR East owning a 20% stake, it is the most important subsidiary company in our group.'

More mini-shinkansen

JR East's modernisation programme has never actually stopped. Well under way for opening on December 4 is the conversion of the Yamagata - Shinjo route from 1067mm to 1435mm gauge. This will allow mini-shinkansen services to reach Shinjo, cutting the journey time from Tokyo by 30 min to 3h 30min, and eliminating the change at Yamagata.

Work is proceeding at 1 km/day, but the gauge conversion team achieved a record output of twice that on one occasion. Most of the track work had been completed, and a start on resignalling was made in July. Test running should start this month.

Construction of other shinkansen extensions or more mini-shinkansen routes is again a live topic in Japan. The stagnation of the economy has prompted 'animated discussions' among the political parties, with calls for acceleration of the existing programme to stimulate economic activity. 'The regions concerned are very eager to have their own high speed lines, especially after the success of the Nagano shinkansen. Compared with highway or airport construction - we have so many highways and airports - high speed railways are much more attractive for stimulating the economy. We are waiting for the political parties to conclude their negotiations, and we are hopeful that the projects will be accelerated.'

Work is currently in hand on the 179 km extension of the Tohoku shinkansen from Morioka to Aomori, while on Kyushu the 211 km line from Funagoya (50 km west of Hakata) to Kagoshima is under way. The next 59 km of the Nagano (Hokuriku) shinkansen from Nagano to Joetsu will be the next candidate, and this line will be extended to Komatsu via Toyama and Kanazawa.

Whatever the politicians may conclude, Yamanouchi is cautious. 'The most difficult problem is to find ways of financing new projects. We will refuse all projects which would increase our financial burden. We will contribute up to the level of profitability, but beyond that the general rule is that national government or local authorities have to pay.'

Expansion in Tokyo

JR East plays a vital role as a commuter railway serving the Tokyo region, and Yamanouchi is acutely aware of the need to make conditions more tolerable for the millions of passengers who crowd on to the trains every day. 'We recognise the need to improve the level of comfort, and we are running 100000 more train-km than in the first year after restructuring. We are providing more seats, but we cannot make a substantial improvement.' One way of buying more capacity would be to rebuild freight lines in the Tokyo area to carry passenger services, but this would require costly new connections.

Perhaps the most ambitious project is to build another 1067mm gauge link over the 6 km between Tokyo Central and Ueno stations, to give commuters from the Joban line direct access to the central area without having to change trains at Ueno. Yamanouchi observed that 'many politicians are interested in this project', especially as it could be built at the relatively low cost of US$200m thanks to provision made for it during construction of the Central - Ueno shinkansen link.

The half-price train

It was with commuter trains that JR East launched a long-term experiment in cutting the cost of rolling stock. The first example was Series 209, which was to be 'half the price' of a conventional EMU.

Yamanouchi had the idea 13 or 14 years ago - he has now been in the railway business for 43 years and was once JNR's board member for operations and rolling stock. 'One day in my home I reflected how we might improve our rolling stock activity, and how to motivate the engineers in the rolling stock and maintenance fields. When driving my own car one day, I suddenly recognised the big difference between automobiles and railway rolling stock. I change my car every three or four years, not because I can no longer use it, but because a new car is more attractive than the old one; better design attracts customers to purchase new cars.

'The railways continue to use old fashioned rolling stock for 20 years or more - and that is not attractive to passengers. It's also bad for the rolling stock companies. Meanwhile a great deal of time and money is spent on maintenance. So is the car model or the train model correct?

'Changing a train every three or four years is expensive, but it would remain attractive and maintenance costs would be low. Of course, this was only a theory, but it was a solution found by the customer and it represents a reality. I thought there must be a better way for railways.

'When I mentioned the concept to my colleagues, they all told me it was ridiculous. So I reflected again in my home. I had to confess that the purchase price of rolling stock was higher for JNR than for the private railway companies - and JNR was not eager to reduce costs. I believed that by negotiating with the suppliers it would be possible to reduce capital costs by 30%. By introducing a new design that did not have to last as long as traditional stock, I thought we could reduce construction costs by another 10%. The half-life would also increase demand for suppliers, so productivity would rise - allowing a further saving of 10%. That's the story of the half-price train.'

The first production Series 209 sets have been in service for about six years now, and Yamanouchi says 'I think it is going to work. The price was 30% less than the old cars, but we also cut weight by 30%. This will give lower energy costs. The big irony is that I think the trains will be able to last longer than the old ones - that's because of their stainless steel bodies, very simple equipment and components that are easily replaced.'

Research back in the fold

The half-life train may have been a product of Yamanouchi's imagination, but a measure of research was needed to confirm the hypothesis. What role did he see for research and development in tomorrow's cost-conscious and lean-mean railway?

'I have formulated some fundamental strategies for the long term. The railways have created the know-how of the business as it is today. In the past many railways considered that research should be carried out by supply companies in the private sector, so that the R&D capability was in their hands. I decided to change this.

'In the past Toshiba and similar companies were interested in the railway market, but their interest is much less now. That is because the market has changed completely. Rail business represents just 2% of the annual activities of Hitachi, and only 1% for Toshiba. It is just not big enough any more.

'Older managers spent time with or in the railway business, but newer managers belong to another generation whose interest lies elsewhere, in IT, telecoms and so on. In the coming years when suppliers may lose interest in the railway business, research will be our responsibility. We must gather the capability and know-how so that we are not dependent on suppliers.'

Citing a well-known management guru, Yamanouchi believed that the future of a company depends on its core competences. 'We must create our own core competences to ensure that in the future we have all we need to operate trains safely and punctually, supported by modern maintenance technology, which is another core competence.

'That is why I decided to have rolling stock assembled in our own factories, and why we are setting up different companies in strategic areas such as maintenance and consulting. By creating a group of core competence companies we must strengthen our own business.'