Hitachi’s Acquisition of GlobalLogic: “Real-time connection between management and the frontline will be a major strength”, but there are also concerns
On March 31, 2021, Hitachi, Ltd. decided to acquire GlobalLogic, a U.S. digital engineering services company. The acquisition is scheduled to close at the end of July 2021, subject to regulatory approvals and other conditions.
The total acquisition price is expected to be US$9.6 billion (approximately 1,036.8 billion yen)
Hitachi to Acquire GlobalLogic, a Leading U.S.-based Digital Engineering Services Company
“Connecting management and the field in real time”
In the press conference, President Higashihara expressed his view that the future will be an era in which “real-time connection between management and the field will be a major force,” “field information will be used as management information, and management decisions will change field equipment in real time.
The true value of DX is not the digitization of each business, but the innovation of processes by linking them across organizations and companies to fundamentally solve issues and create new value for each company and society.
In order to achieve this, Hitachi recognized “the importance of having a single Chip-to-Cloud company to solve complex issues” (Vice President Tokunaga), and needed to supplement the company’s insufficient experience in agile development, edge and embedded software. It was necessary to supplement the company’s experience in agile development, edge and embedded software.
With this move, Hitachi will strengthen Lumada with the aim of becoming a customer partner that can propose agile development solutions to management and social issues, rather than focusing on traditional mission-critical and contract-based businesses.
Promote internationalization of business
Previously, 70% of Lumada’s business was in Japan.
The acquisition of GlobalLogic’s strong customer base of over 400 companies was an important factor in the company’s decision to expand its business overseas.
Some are concerned about success
On the other hand, there are some who are concerned about the success of this acquisition due to the huge amount of money involved (1 trillion yen) and the fact that Japanese companies have not been very successful in acquiring foreign companies in the past.
Hitachi describes GlobalLogic as “a leading digital engineering services company with 20,000 employees,” and says it expects to achieve sales of US$921 million (99.5 billion yen) and EBITDA of 23.7% in fiscal 2020. But that’s still only about 1/90th the size of Hitachi’s sales.
On a per-employee basis, revenue is US$46,000 (about ¥5 million), and after subtracting EBITDA, the cost per employee is only $35,000 (¥3.8 million).
The company has grown through a series of acquisitions, and according to Wikipedia, most of its acquisitions have been Indian offshore development companies, except for recent ones in Slovakia, Poland, and Israel.
In other words, GlobalLogic is a low-cost distributed agile development company with personnel mainly from India and Eastern Europe.
At the press conference, Hitachi said that they have “many senior engineers” (Mr. Tokunaga), but we need to be careful if they can continue to grow with this business model.
As for the company’s “strong customer base of more than 400 companies,” from what I can see on their website, most of the projects are related to a part of the company’s business and do not seem to expand access to the people responsible for company-wide transformation in large companies.
It will not be easy for these customers to accept the value of Lumada.
What is the strategy for the future?
Considering all of these circumstances, what kind of strategy will Hitachi need to adopt to make this acquisition a success?
As President Higashihara pointed out, it is important to be able to propose and provide solutions that are connected across the entire company. Hitachi will strengthen the value of the Lumada platform by building an organization and sales structure capable of proposing total solutions to its top customers and by leveraging the development capabilities acquired through this acquisition.
On the other hand, a single Hitachi company cannot cover all of a customer’s operations. Integration that is consistent and communicative with other systems and existing systems is an essential requirement.
Specifically, it is important that Lumada complies with global standards, that each solution is modular, and that each is internationally competitive.
Hitachi is also promoting the Lumada Alliance Program, and it is important to further promote these programs to expand the ecosystem.
These will provide an opportunity to offer new solutions to customers who are already using other companies’ solutions.
Addressing the Engineering Chain
This presentation focuses on the so-called “supply chain” process, from order placement to production, sales, and service.
On the other hand, it does not specifically mention the “engineering chain” from product planning to design and development in the manufacturing industry, and the coordination of these processes, but it is important to address this as well.
To compensate for this, a collaboration with PTC Japan was announced last year (2020).
However, this announcement appears to be a limited partnership with PTC Japan.
It may be necessary to enter into or expand similar partnerships with other PLM vendors overseas.
In addition, partnerships with global IT vendors and consulting firms may be formed to promote collaboration with entire companies and local governments.
Based on the above, a realistic strategy would be to first establish a track record in Japan and then expand it to the rest of the world.
Summary
As we have seen above, Hitachi’s strategy is to shift its business from the traditional focus on contract development of systems for domestic customers to a business that generates profits by proposing value to customers around the world, in order to increase sales and improve profit margins.
The key to success will be the modularization of each solution and maintaining the competitiveness of each solution at the global level, while taking advantage of the development capabilities acquired this time, as well as building a framework for Lumada’s compliance with international standards, expansion of the ecosystem, and collaboration with the engineering chain.
