January 18, 2017

JR East sets out ambitious strategy for growth

Written by  Tetsuro Tomita
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JR East is a private company, so generating earnings is important. To grow earnings, we have to be hungrier and step up the pace of measures. In fiscal 2016, our business results were comparatively favourable. But at times like these, complacency is a danger. Treading water lowers employee morale and saps a company’s vitality.

To grow amid today’s dramatically changing business conditions, companies must aim for ambitious goals. For example, we will take advantage of our high-speed rail network to create new passenger flows. In the first fiscal year following the extension of the Hokuriku Shinkansen Line, total passenger traffic, including airline passengers, between the Tokyo metropolitan area and Kanazawa/ Toyama increased from approximately 5 million passengers to 8 million. Initially, we set an ambitious target, seeking to double passenger traffic to 10 million but in reality traffic grew 1.6 times. Nonetheless, we are steadily nearing our goal.

 

Tetsuro Tomita JR EastRather than simply having customers use Shinkansen services instead of aircraft, our goal is to increase overall passenger traffic, thereby invigorating regional economies and energising local communities. Significant potential remains that we can unearth by promoting Toyama and Kanazawa as well as areas beyond, such as Fukui and the Noto Peninsula, and by encouraging passenger flows across a wide area including Niigata, Nagano, and Gifu prefectures.

We also want to increase ridership between Tokyo and southern Hokkaido and between the Tohoku region and southern Hokkaido by exploiting the Hokkaido Shinkansen Line, which opened in March 2016. By straddling the Tsugaru Straits, the Hokkaido Shinkansen Line has brought the Tohoku region and southern Hokkaido much closer together. Not many visitors to Japan travel to the Tohoku region, but many of them visit Hokkaido. We believe that we can attract tourists from overseas to the Tohoku region by working with local communities to create new tourism routes.

Revenue from conventional lines in the Tokyo metropolitan area is the mainstay of JR East, accounting for approximately two-thirds of railway revenue. As well as competition with other modes of transport, competition between railway operators is becoming fiercer. In response, we aim to redouble efforts to ensure safe and reliable transport so that customers choose our services. By achieving this goal, I believe we can increase passenger flows, even in the Tokyo area, which is expected to see its working-age population and total population decline.

The life-style service business will play a significant role in growing revenue. Currently, non-railway business accounts for roughly one-third of the Group’s revenues, or approximately Yen 900bn ($US 7.9bn). Although we have described the railway and life-style service businesses as the two pillars of the Group, there has always been a sense that railways are the mainstay. In future, we must aim for an era in which the life-style service business drives the growth of the railway business. We therefore intend to make railway stations more appealing. In doing so, the surrounding towns will become more attractive, thereby attracting new passengers. We have enhanced shopping centres, office buildings, hotels, and businesses inside railway stations considerably, but if we fail to do anything further customers will begin to lose interest. With our sights set five or 10 years ahead, we have to adopt fresh approaches to developing railway stations. We are already redeveloping Tokyo, Shinjuku, Shibuya, Yokohama, Chiba, and Sendia stations, and we aim to accelerate such efforts and create further appealing spaces.

Financial targets

We aim to achieve operating revenues of Yen 2967bn and operating income of Yen 498bn by fiscal 2019. We will maintain ROA at the current level of 6% and ROE at the current level of 10%. We will also generate total consolidated cash flows from operating activities of approximately Yen 2 trillion, of which Yen 1.6 trillion is earmarked for capital investment. We want to realise a total return ratio target of 33% by continuing to pay stable cash dividends and using surplus funds to buyback and cancel shares.

We also want to reduce consolidated interest-bearing debt from the present level of approximately Yen 3.2 trillion to Yen 3 trillion during the 2020s. Although interest rates are unprecedentedly low or even negative, we cannot predict interest rates. Therefore, we will adhere to our existing approach of steadily reducing debt.

Of the Yen 1.6 trillion we have earmarked for capital investment, we will invest roughly Yen 1 trillion in maintenance and renewal. Further, we want to invest Yen 600bn of this amount in measures aimed at ensuring safe and reliable transport, including seismic reinforcement measures, safety measures for platforms and railway crossings, and disaster countermeasures.

During the next three fiscal years, plans call for approximately Yen 600bn of growth investment, which will cover such initiatives as redeveloping railway stations and introducing new trains. Given that we expect consolidated cash flows from operating activities to be comparatively plentiful for some time to come, we want to use them in effective, farsighted ways.

We have set targets for revenues and earnings at conservative levels because the economic outlook for Japan remains uncertain. Further, we plan to control costs steadily. Each year roughly 3000 employees will retire, which will reduce personnel expenses.

On the other hand, we face the problems of how to increase efficiency and compensate for a shortage of manpower. We intend to respond to the problem of growing numbers of retirees by increasing productivity through technological innovation, outsourcing operations, and utilising Group companies and partner companies.

Developing tourism into a robust growth industry has become a national mission in Japan. We will step up initiatives aimed at encouraging more tourists to visit the Tohoku and Joshinetsu regions and energise local communities through tourism.

The government aims to attract 40 million visitors to Japan by 2020 and 60 million by 2030, and has set visitor spending targets of Yen 8 trillion by 2020 and Yen 15 trillion by 2030. I think we should attract some of these tourists from the Tokyo - Kyoto - Osaka route to the Tohoku and Joshinetsu regions, while efforts to attract tourists from overseas to the Tohoku region are gathering a great deal of momentum.

Train Suite Shiki-Shima, a luxury sleeper and cruise train, will begin operations in May 2017. I want to exploit train services such as this to distribute information about new tourism resources on the sightseeing routes that they follow.

Next, we will expand the life-style service business in areas beyond rail. In Tokyo, we will develop the former site of the JR Shinagawa depot. By downsizing the railway yard between Shinagawa and Tamachi, we will free up a 13-hectare plot for development, equivalent to half the original area. Our goal is to develop this prime downtown location into a new gateway.

Technological innovation

Railways still have abundant scope for technological innovation, and I want to realise this potential. Currently, the applications for information and communications technology (ICT) are increasing steadily, and we plan to use ICT to enable completely novel approaches to maintenance. For example, using wireless train control systems, such as Advanced Train Administration and Communications System (Atacs), enables us to minimise signalling, communications, and other ground equipment, thereby reducing maintenance and costs.

Another example is the use of big data and the Internet of Things (IoT). We need to use the IoT to collect online data about the status of trains, tracks, and electrical facilities so that we can identify failure precursors. This will allow us to prevent accidents and increase efficiency by conducting condition-based maintenance.

In addition, we want to make more use of sensors and monitoring technology to facilitate disaster countermeasures and the safety of platforms and level crossings. Using such technology will enable us to detect earthquakes earlier, identify suspicious persons, take terrorism countermeasures, and identify signs of landslides rapidly.

Given the progress in developing hydrogen batteries and fuel cells that power automobiles, I think the development of fuel cells for trains is a natural progression. As for energy resources, we are already developing wind and solar power generation and other renewable energy sources, and we plan to innovate further.

I believe we can use robots to clean railway stations and provide customers with guidance information. Robots are an effective way of compensating for manpower shortages and increasing productivity.

I feel establishing targets and timeframes, and proceeding with technological innovation is absolutely essential. I would like to incorporate open innovation and work with outside manufacturers in Japan and overseas as well as universities to drive technological innovation forward. I want to make such initiatives the third pillar of our operations.

Lastly, we aim to create a workplace culture that enables our various talented personnel to fully realise their potential. We will continue to seek new overseas projects in areas such as high-speed and urban rail. We will send more than 600 employees a year overseas to study under short and long-term programmes or to receive a range of on-the-job training.

The percentage of female employees in JR East has risen to 11%, and female employees account for approximately 30% of new recruits. Moreover, we have more than 400 female managers. Given that half of our customers are women, I want to see female employees playing important roles in an even broader range of workplaces.

Beyond 2020, when initiatives in the life-style service business and overseas projects will have expanded our business area, it will be a good time to change as a company. However, our fundamental commitment to giving customers peace of mind through efforts to ensure safety and enhance service quality will remain unchanged. Exploiting an expanded rail network, we will take measures to increase inter-regional rail travel while promoting tourism and developing towns to energise local communities. We will also give priority to tackling overseas projects, technological innovation, and personnel development as we step up efforts to pursue our unlimited potential.

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