Hitachi Construction Machinery
Corporate History & Strategy

Immediately after the end of the war in 1948, the Japanese government treated national reconstruction from war damage as an urgent priority, launching full-scale public civil engineering works including river improvement. The Ministry of Construction was promoting mechanization of civil engineering, and approached domestic heavy machinery manufacturers about manufacturing power shovels needed for river improvement work. In 1948, the Ministry of Construction placed an order with Hitachi, Ltd. for two power shovels, which became the starting point of Hitachi's entry into the construction machinery business. At the time, no manufacturer in Japan had a track record of mass-producing shovels, and the country was dependent on American-made construction machinery.

Meanwhile, Hitachi, Ltd. was being forced to convert from military to civilian production following the end of the war. During wartime, the company had been engaged in the design and manufacture of machinery such as vehicles, cranes, and tanks, and possessed accumulated technical expertise in heavy machinery development. Shovel design was handled by the transport equipment design section and production by the mining machinery section in a cross-departmental structure, with development proceeding by repurposing existing technical resources for construction machinery. The metalworking and mechanical design expertise cultivated through military production was the foundation that technically enabled entry into construction machinery.

In May 1949, Hitachi, Ltd. completed the mechanical shovel 'U05' and delivered it to the Ministry of Construction's Kisogawa Works Office. The U05 was deployed for river civil engineering improvements, establishing an operational track record as a domestically produced shovel. Through orders from the Ministry of Construction, Hitachi gained technical knowledge of construction machinery manufacturing and an understanding of operational challenges, providing the foundation for business decisions toward mass production of construction machinery.

Based on the delivery track record of the U05, Hitachi, Ltd. decided to mass-produce construction machinery. In September 1950, the mass-production model shovel 'U06' was developed, and production commenced in earnest at the Kameido plant (Tokyo). While the U05 had been positioned as essentially a prototype, the U06 was designed for mass production, signifying the transition of Hitachi's construction machinery business from the development phase to the business phase.

Throughout the 1950s, the Japanese government promoted mechanization in the construction industry, implementing policies that made ownership of construction machinery a condition for public works bidding. As a result, demand for construction machinery for civil engineering expanded structurally, and Hitachi's construction machinery division progressively expanded its production scale. Starting from shovels, the company broadened its construction machinery product lineup, and Hitachi, Ltd. established a structure for operating its construction machinery business as a division of a comprehensive electronics manufacturer.

The construction machinery business, which began with the small-scale order of just two shovels from the Ministry of Construction, was commercialized by leveraging Hitachi, Ltd.'s heavy machinery manufacturing technology. By 1955, the company had established 'Hitachi Construction Machinery Service' specializing in after-sales service, and the development of a business structure spanning manufacturing to maintenance progressed, forming the business foundation for what would later become independent as Hitachi Construction Machinery. Hitachi's construction machinery business was one example of a business that expanded from government demand during the postwar reconstruction period.

Hitachi, Ltd.'s construction machinery business faced financial challenges arising from its sales model as it strengthened its nationwide expansion from the 1950s onward. The primary users of construction machinery were small and medium-sized construction contractors who lacked the financial capacity to purchase expensive equipment outright, making installment sales (payment in installments) the de facto standard transaction format. Between 1962 and 1964, Hitachi, Ltd. established six regional sales companies covering Osaka, Tokyo, Kyushu, Tohoku, Chubu, and Hokkaido, promoting nationwide expansion through installment sales.

However, the expansion of installment sales led to the accumulation of accounts receivable. As of October 1970, 80% of new construction machinery sales were on installment terms, and Hitachi Construction Machinery held accounts receivable for approximately 2 years per sale. Borrowings from financial institutions backed by Hitachi, Ltd.'s debt guarantees reached a cumulative total of 13.4 billion yen, with financing forced at interest rates 0.75 to 1.25 percentage points above the prime rate. On the P&L side, interest expense compressed profits, while on the balance sheet, the equity ratio continued to decline.

As sales companies were added, operational overlap emerged with the existing after-sales service company, Hitachi Construction Machinery Service. Accordingly, in April 1965, Hitachi, Ltd. consolidated Hitachi Construction Machinery Service and the six nationwide sales companies to establish Hitachi Construction Machinery Co., Ltd. Hitachi Construction Machinery was launched as a sales subsidiary with Hitachi, Ltd. holding the majority of shares, building a structure that operated new equipment sales, used equipment sales, parts supply, and after-sales service as an integrated unit.

However, as of 1965, Hitachi Construction Machinery was exclusively a sales company, and construction machinery manufacturing continued to be handled by Hitachi, Ltd.'s Construction Machinery Manufacturing Division. The structure of manufacturing and sales being operated by separate legal entities posed constraints in terms of rapid decision-making and market responsiveness, remaining as a structural challenge for enhancing the competitiveness of the construction machinery business. The integration of manufacturing and sales would not be realized until the relaunch of Hitachi Construction Machinery in 1970.

With the establishment of Hitachi Construction Machinery, a unified nationwide sales and service structure was put in place, and construction machinery unit sales maintained an upward trend. Installment sales backed by Hitachi, Ltd.'s creditworthiness had the effect of lowering the barrier to construction machinery adoption for small and medium-sized construction contractors with limited financial resources, functioning as a competitive advantage in sales.

On the other hand, the expansion of installment sales structurally deteriorated Hitachi Construction Machinery's financial constitution. The ratio of accounts receivable to total assets continued to rise, as did dependence on borrowings. The structural contradiction of expanding sales causing receivables to swell and finances to deteriorate was exactly what occurs when a manufacturer effectively takes on financial functions—and Hitachi Construction Machinery was forced to operate with this dual structure from its very inception. This financial issue would carry over as a critical management challenge even after the relaunch of the new Hitachi Construction Machinery through the 1970 manufacturing-sales integration.

In the late 1960s, Hitachi, Ltd.'s construction machinery division faced changes in the competitive landscape surrounding its mainstay products. In the construction machinery market, a technological transition from mechanical shovels to hydraulic shovels was underway, and demand for the mechanical shovels in which Hitachi had strengths was structurally shrinking. In the hydraulic excavator segment, Komatsu was rapidly expanding its share, and Hitachi's construction machinery division found itself at a competitive disadvantage against Komatsu.

Meanwhile, the agricultural machinery (tractor) business, which had been expected to be a revenue source second to construction machinery, was also in difficulty. Although factory land had been acquired in Tsuchiura in 1961 and tractor production commenced, the sales bases of established manufacturers such as Kubota, Yanmar, and Iseki were solid, and Hitachi's tractors were unable to establish sufficient market traction. Far from complementing the construction machinery division's performance, the agricultural machinery business faced no prospect of investment recovery.

In this business environment, the structure of construction machinery manufacturing and sales being operated by separate legal entities came to be recognized as a management constraint. Under the separated structure where manufacturing was handled by Hitachi, Ltd.'s Construction Machinery Manufacturing Division and sales by the Hitachi Construction Machinery established in 1965, rapid response to market changes and integrated manufacturing-sales decision-making were difficult. The judgment formed among Hitachi, Ltd.'s management that integration of manufacturing and sales was inevitable in order to address intensifying competition.

In 1969, Hitachi, Ltd. decided on a policy of integrating construction machinery manufacturing and sales. Specifically, the newly established Hitachi Construction Machinery Manufacturing (Kensei) in 1969 absorbed the former Hitachi Construction Machinery established in 1965, changing its trade name to Hitachi Construction Machinery. The merger occurred just 11 months after Kensei's establishment, and while Kensei was the surviving entity legally, the reorganization was substantively aimed at integrating the manufacturing and sales divisions.

In executing the merger, the valuation method for factory land became an obstacle. The land of the Adachi plant (Adachi, Tokyo) and the vast Tsuchiura plant had developed a large gap between book value at acquisition and market value, and a merger at market value would have required massive capital procurement. However, the former Hitachi Construction Machinery had seen its equity ratio decline due to financial deterioration from installment sales, making additional capital procurement difficult. Therefore, a tax law exemption permitting book-value transfers was utilized, and to meet the conditions, a total of 6.4 billion yen was borrowed from four financial institutions (Industrial Bank of Japan, Sanwa, Fuji, and Dai-Ichi) to repay debts to Hitachi, Ltd.

On October 1, 1970, the new Hitachi Construction Machinery Co., Ltd. was launched. The business foundation at launch comprised 3 production facilities, 12 branches, 45 sales offices, 27 branch offices, and 21 service centers, achieving an integrated structure from manufacturing to sales and service. The pre-listing shareholder composition was 98.7% Hitachi, Ltd. and 1.3% Chuo Shoji, operating as effectively a wholly owned subsidiary of Hitachi.

The new Hitachi Construction Machinery faced a challenging financial situation from launch. Of total assets of 59.6 billion yen, accounts receivable from installment sales comprised 47%, and borrowings for installment financing were also substantial. The equity ratio was a mere 6.4%, meaning the company began operations with extremely limited buffer against insolvency.

Business performance deteriorated rapidly from immediately after launch. In the semi-annual accounts for September 1971 and March 1972, the company fell into recurring losses for two consecutive periods (cumulative 2.81 billion yen), and the equity ratio declined to 1.8% by the end of FY1971. A cooling of construction machinery demand due to economic recession, combined with a delayed response to the technological transition to hydraulic excavators and difficulties in the agricultural machinery business, resulted in performance hitting bottom before the effects of the manufacturing-sales integration could materialize.

The relaunch of Hitachi Construction Machinery through manufacturing-sales integration was a management decision made amid the convergence of deteriorating business conditions and a fragile financial constitution. While the rationale for organizational restructuring through integrating manufacturing and sales was clear, the effects did not translate into short-term performance, and the figures of two consecutive periods of losses and a 1.8% equity ratio immediately after launch demonstrate that the manufacturing-sales integration was merely a starting point, not a solution to the management challenges.

Having been launched through the 1970 manufacturing-sales integration, Hitachi Construction Machinery operated a two-site production structure comprising the Tsuchiura plant (Tsuchiura, Ibaraki Prefecture) and the Adachi plant (Otanida, Adachi, Tokyo). However, the Adachi plant was located approximately 1 km from JR Joban Line's Kameari Station, and as surrounding residential development advanced, there was little room for plant expansion. While expansion of production capacity was needed to meet growing hydraulic excavator demand, such expansion was physically difficult at the Adachi plant given its proximity to central Tokyo.

Additionally, construction machinery manufacturing involves numerous processes from parts machining to assembly, and a production structure dispersed across two sites generated inter-process transportation costs and management overhead. To escape the loss-making constitution from immediately after launch, consolidation of production facilities for efficiency gains was recognized as a management priority. The Tsuchiura plant, with its vast 528,000 square meter site, was suitable as the consolidation destination.

In August 1972, Hitachi Construction Machinery announced the closure of the Adachi plant and consolidation of production at the Tsuchiura plant. In May 1974, approximately 13.5 billion yen was invested to expand and rationalize the Tsuchiura new plant, establishing an integrated production system from parts machining to assembly. The Adachi plant was closed in November 1974, and the 120,000 square meter site was sold to the Japan Housing Corporation. The site was redeveloped as the Otanida Housing Complex (11 buildings total), with land sale proceeds from the factory site applied to investment funds for the Tsuchiura new plant.

The closure of the Adachi plant and consolidation at the Tsuchiura plant was a site restructuring approach common among manufacturers of the era—selling urban factory land to secure investment capital for suburban mass-production facilities. Through this production consolidation, Hitachi Construction Machinery established a production base capable of accommodating increased hydraulic excavator production, departing from the two-site dispersed structure of its early days.

Throughout the 1980s, Hitachi Construction Machinery sought overseas markets as the growth axis for its mainstay hydraulic excavators. While it had secured the second-place position domestically behind Komatsu, narrowing the gap with top-tier manufacturers such as Komatsu and Caterpillar required sales expansion in advanced markets (North America and Europe). However, Hitachi Construction Machinery possessed no overseas sales network, and its brand recognition in local markets was limited.

Developing overseas markets independently would require substantial upfront investment and an extended timeframe for establishing sales offices, building service networks, and gaining brand recognition. Hitachi Construction Machinery in the 1980s did not possess such investment capacity and lacked the management resources to enter overseas markets directly like Komatsu. Accordingly, Hitachi Construction Machinery chose a strategy of securing sales volume through partnerships with leading overseas construction machinery manufacturers, gradually building the foundation for its overseas business.

The premise of this strategy was the product competitiveness of Hitachi Construction Machinery's hydraulic excavators. The hydraulic excavators, which had earned recognition in the domestic market for their low breakdown rates, possessed sufficient quality for OEM supply to partners. The judgment was to forgo self-branded expansion and instead secure volume through partners' sales networks.

In 1983, Hitachi Construction Machinery partnered with U.S. major agricultural machinery manufacturer John Deere and commenced OEM supply of hydraulic excavators. Deere's core business was agricultural machinery, with construction machinery positioned as a diversification business, so Hitachi Construction Machinery supplied excavators via OEM and secured sales volume in the North American market through Deere's sales network. In 1988, the joint venture 'Deere-Hitachi Construction Machinery' was established to commence local production in the United States, aimed at avoiding trade friction.

For the European market, in 1986, Hitachi Construction Machinery partnered with Italian major automaker Fiat, building a structure to supply hydraulic excavators to Fiat's construction machinery brand. In the same year, a joint venture was established in the Netherlands with Fiat-Allis, commencing local production in Europe. This enabled Hitachi Construction Machinery to form a 'Japan-U.S.-Europe tri-polar structure,' with Japan as its base, leveraging Deere's sales network in North America and Fiat's in Europe.

OEM supply through partnerships with both Deere and Fiat expanded Hitachi Construction Machinery's overseas business in a short period. By around 2000, overseas sales including locally produced units reached 130 billion yen, a dramatic leap from the export division's scale of approximately 2 billion yen in the early 1980s. By leveraging partners' distribution channels, an overseas expansion with significantly reduced investment burden compared to building a proprietary sales network was achieved.

While OEM-based overseas expansion contributed to volume growth, structural limitations also became apparent. Since distribution went through partners' sales networks, the Hitachi brand did not penetrate to end customers, making it difficult to secure pricing power. Additionally, due to the nature of OEM contracts, expansion into downstream businesses such as maintenance and service was restricted, and the structure of ceding ongoing post-sale revenue opportunities to partners became entrenched. Even as the scale of overseas revenue grew, the ceiling of OEM in terms of quality of earnings came to be recognized.

From the 2000s onward, Hitachi Construction Machinery gradually shifted its basic overseas expansion policy from OEM dependency to independent expansion. In 2001, it decided to dissolve the partnership with Fiat and commenced building its own sales network in Europe, and in 2021, the North American joint venture partnership with Deere was also dissolved. The two-stage strategy of learning the market through OEM and then switching to self-branded sales once management capacity was built represents a rational choice for a company that lacked the resources for independent overseas entry.

However, the transition from OEM to self-branded sales carries the risk of a temporary decline in sales volume lost from the partnership channel. Whether the company's own sales network could be established quickly enough after partnership dissolution would determine the success or failure of the transition, making the design of the transition period and the scale and timing of investment strategically critical. In Europe, this transition was executed gradually over approximately 2 years, and in the dissolution of the North American relationship with Deere, the participation of Itochu Corporation was enlisted to accelerate distribution channel development.

The partnership with Fiat, concluded in 1986, had enabled Hitachi Construction Machinery's entry into Europe, but it contained structural challenges. Through OEM supply via Fiat's sales network, the Hitachi Construction Machinery brand did not penetrate European construction sites, and securing pricing power and after-sales service revenue proved difficult. A structure dependent on the partner's sales terms became a structural constraint on Hitachi Construction Machinery's ability to autonomously expand its business.

Around 2001, Fiat moved to strengthen its partnership with Kobelco (Kobe Steel's construction machinery brand), and the relationship with Hitachi Construction Machinery reached a turning point. With Fiat's prospect of securing hydraulic excavator supply from Kobelco, conditions were set for Hitachi Construction Machinery to make the decision to dissolve the partnership. Recognizing that OEM dependency placed a ceiling on European business growth, the company shifted its policy toward building a self-branded sales network.

In 2001, Hitachi Construction Machinery established the European Business Promotion Division and decided to dissolve the partnership with Fiat. To avoid disruption, the actual dissolution was set for 2003, with a 2-year transition period secured. In 2002, the Amsterdam plant was established in the Netherlands to build local production capability, and approximately 6 billion yen was invested to establish dealer networks across European countries.

Product lineup gaps were addressed through a partnership with Furukawa Machinery, supplementing product categories where Hitachi Construction Machinery was underrepresented with Furukawa's products. Since departing from OEM carried the risk of a temporary sales volume decline, the design aimed to minimize transition-period gaps through simultaneous investment on three fronts: local production, sales network, and product expansion.

Following the dissolution of the Fiat partnership, Hitachi Construction Machinery's European business transitioned to self-branded operations. Maintenance and service revenues that could not be captured during the OEM era became available, and improvements in sales pricing accompanied growing brand recognition. In FY2007, just before the Lehman shock, European operations recorded revenue of 167.2 billion yen—an all-time high—far exceeding the scale achieved during the partnership era.

The European track record of independent expansion demonstrated that departing from OEM dependency does not necessarily sacrifice volume growth. The achievement of record-high revenue within 4 years of the partnership dissolution was the result of market knowledge accumulated through OEM combined with the three-front simultaneous investment that minimized transition gaps. This European experience also served as a precedent referenced in the 2021 decision to dissolve the Americas partnership with Deere.

Entering the 2020s, Hitachi, Ltd. accelerated the restructuring of its group management, systematically reviewing the investment format for listed subsidiaries. In April 2020, Hitachi Chemical was sold to Showa Denko, and in April 2021, the divestiture policy for Hitachi Metals was announced. Hitachi Chemical, Hitachi Metals, and Hitachi Construction Machinery were the largest in terms of revenue and profit within the Hitachi Group, known as the 'Big Three of Hitachi,' and the treatment of these three companies became the focal point of Hitachi, Ltd.'s capital policy.

At Hitachi, Ltd.'s June 2021 shareholders' meeting, Chairman Toshiaki Higashihara stated explicitly that a conclusion on listed subsidiary Hitachi Construction Machinery (Hitachi's holding ratio: 51.42%) would be reached within FY2021, choosing between 'sale or acquisition.' The resolution of the parent-subsidiary listing was also a market demand from the perspective of shareholder interests, and the treatment of Hitachi Construction Machinery was framed as a binary choice between making it a wholly owned subsidiary or divesting.

In January 2022, Hitachi, Ltd. announced a policy of selling approximately 26% of Hitachi Construction Machinery shares. The buyer was 'HCJI HD LLC,' jointly invested 50-50 by Itochu Corporation and Japan Industrial Partners, with a partial rather than complete divestiture format. After the sale, the shareholder composition became HCJI at 26.00% as the largest shareholder and Hitachi, Ltd. at 25.42% as the second-largest shareholder.

Through this sale, Hitachi, Ltd. transitioned Hitachi Construction Machinery from a subsidiary to an equity-method affiliate, dissolving the parent-subsidiary listing. Meanwhile, by maintaining a 25.42% stake, Hitachi continued to incorporate Hitachi Construction Machinery's performance into its consolidated accounts through equity-method investment gains and losses. The intermediate choice of neither complete divestiture nor full subsidiary conversion was a compromise to meet market demands for parent-subsidiary listing dissolution while maintaining an equity stake in a revenue source too valuable to relinquish.

As a result of the sale, a shareholder structure was formed in which Itochu Corporation, Japan Industrial Partners, and Hitachi, Ltd.—three parties—hold influence over Hitachi Construction Machinery. Since HCJI is a 50-50 investment by Itochu and Japan Industrial Partners, there are effectively three stakeholders. With Hitachi, Ltd. continuing to hold 25.42%, it cannot be definitively stated that effective control has fully transferred, and stakeholder interest alignment may influence management decision-making.

On the other hand, Itochu Corporation's participation holds strategic significance for Hitachi Construction Machinery's overseas business, particularly the development of the Americas market. Hitachi Construction Machinery dissolved its joint venture partnership with Deere in 2021 and was confronted with the need to build its own distribution channels in the North American market. A general trading company's global network and local business infrastructure are expected to compress the time and investment required compared to building distribution channels independently. The change in capital structure carried an aspect beyond merely dissolving the parent-subsidiary listing—it was a capital policy linked to a transformation in overseas strategy.