Why is Panasonic shutting down its factories in China?

Recently, Japanese electronics giant Panasonic has made a fuss about its factory closures, but it still has no intention of stopping, and the closures are still continuing. What suffered this time was the 15-year-old Beijing lithium battery factory.

On August 27, relevant personnel from Panasonic China confirmed the news that the Beijing lithium battery factory will be closed soon. She said, "Panasonic has completed the explanation to the workers on July 31 that the Beijing factory will stop production at the end of August and end production after September."

Behind the closure of factories one after another, Panasonic, which is transforming to a B2B model, is implementing profit structure reforms. Can reforms help Panasonic achieve its sales target of 10 trillion yen in less than four years?

Beijing factory closed

As one of the top four lithium-ion companies in the world, Panasonic has closed its Beijing lithium battery factory.

It is understood that this factory was established by Sanyo Electric in 2000. After Panasonic completed its merger and acquisition of Sanyo in 2009, it took over the factory.

The above-mentioned Panasonic China related person said that the Beijing factory mainly produces lithium batteries for mobile phones, digital cameras and tablet computers. But the market for these products is shrinking.

The person said, "Now the demand for the main products is declining, and the prices are also declining. In the face of market trends, we believe that the main market will be difficult to recover, so we closed the factory."

It is understood that this factory originally mainly produced mobile phone batteries for Nokia [Weibo]. But Nokia's mobile phone business was sold to Microsoft in 2014. The popularity of smartphones has also reduced the market demand for digital cameras.

It is reported that the factory’s sales in 2014 were only about 18 billion yen, but this figure has not been confirmed by Panasonic China.

Along with the closure of the factory, there will be layoffs of approximately 1,300 employees. The above-mentioned Panasonic China related person said that the placement of employees is currently under discussion. Because multiple individuals are involved, the placement progress cannot be determined, and the related costs have not been disclosed.

Despite the closure of the Beijing factory, the person also confirmed that Panasonic’s remaining battery factories in China are still operating normally. "The strategic position of Panasonic batteries has not changed."

It is understood that Panasonic has two lithium battery factories in China, Suzhou and Wuxi, which mainly produce lithium batteries for personal computers. In addition, Panasonic also has battery factories in Shanghai, Shenyang, Anyang and other places, but its business focus is different.

But obviously, Panasonic's lithium battery business has shifted its focus to higher-margin vehicle batteries and other directions.

In fact, Panasonic has already cooperated closely with the American electric car manufacturer Tesla [Weibo].

At the end of October 2013, Panasonic announced that it planned to provide 2 billion lithium-ion car batteries to Tesla in the next four years. The outside world predicts that Panasonic will get approximately US$7 billion in revenue from this.

In the first half of this year, Panasonic announced that it would invest 100 billion yen (approximately RMB 5.11 billion) in the automotive industry in fiscal year 2015. The investment will be mainly used to build a battery factory estimated to cost US$5 billion in a joint venture between Panasonic and Tesla in the United States.

Opportunities for B2B transformation

The Beijing factory is not the first factory that Panasonic has closed in China.

In February this year, Panasonic closed its LCD TV factory in Shandong and laid off about 300 people. Under the fierce price competition from Chinese TV manufacturers, this TV factory with an annual production capacity of less than 200,000 units is under great pressure. Earlier, Panasonic's plasma TV factory in Shanghai had been closed.

Behind the continuous closure of factories is Panasonic's ongoing profit structure reform. Panasonic has previously announced that it will reform departments with operating profit margins below 5%.

It is understood that Panasonic plans to increase the operating profit margin of the "Second Battery Division" that develops lithium battery business to 5.6% from 2% last year in fiscal year 2015.

The home appliance business is also the target of Panasonic’s reform.

The first quarter report for fiscal year 2015 released at the end of July this year showed that the operating profit margin of Panasonic's home appliance business failed to reach 5%. Among them, revenue of 599 billion yen fell 3% year-on-year. Operating profit of 23.8 billion yen fell 23% year-on-year.

Shifting its focus to the B2B market (commercial market) has become a weapon for Panasonic to increase operating profits.

After Kazuhiro Tsuga became president, Panasonic, in addition to making major reductions, also shifted its business focus to automotive batteries, solar energy and lighting under the B2B model.

Kazuhiro Tsuga set a sales target of 10 trillion yen for Panasonic in fiscal year 2018, the 100th anniversary of its founding. He once stated that the businesses with the highest growth potential are residential, automotive and industry-oriented "B2B solutions" businesses.

The above-mentioned Panasonic China related person also said: "B2B involves a wide range of business, and currently about 80% of Panasonic's revenue comes from B2B business."

Panasonic's senior executives no longer mention the low-profit home appliance business as a boost to performance, but this does not mean that Panasonic has given up on home appliances. Kazuhiro Tsuga stated that in fiscal year 2018, the proportion of home appliances in Panasonic’s revenue will drop to about 20%.

The B2B market has also become the direction of Panasonic’s home appliance business.

Take the air-conditioning business as an example. Panasonic has previously announced that its sales target for the air-conditioning business in fiscal year 2018 is 700 billion yen, an increase of 52% over the sales revenue in fiscal year 2014.

In an interview with Japanese media, Panasonic Air Conditioning President Mamoru Yoshida said that the key to achieving the goal is to expand the commercial air conditioning business. He said that the commercial air-conditioning sales target for fiscal year 2018 will double that of fiscal year 2014.

Panasonic’s Chinese home appliance business is also transforming into a B2B direction.

It is understood that in April this year, Panasonic integrated its home appliance business in China into the newly established Electrical Residential Equipment and Machinery Company of Panasonic Electric (China) Co., Ltd.

In addition to Panasonic's air conditioners, kitchen appliances, household appliances, environmental appliances and other businesses included in it, the company's goal is to provide more intelligent overall solutions.

In fact, the B2B model has improved Panasonic’s profitability.

The first quarter report of fiscal year 2015 shows that the company’s sales reached 1,857.8 billion yen, basically the same as the same period last year. While operating profit decreased compared with the same period last year, net profit of 59.5 billion yen increased by 57% compared with the same period last year.

However, some analysts believe that although the B2B business has a stable market and high profit margins, its commercial nature determines that its sales cannot expand as quickly as the B2C business facing ordinary consumers.

Can B2B help Panasonic achieve its sales target of 10 trillion yen on the occasion of its 100th anniversary? Let's wait and see