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Introduction
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Japan Freight Railway Co. (JR Freight) was the first Japan Railway (JR) group company to go into the red (in fiscal 1993). As a freight carrier and one of the seven companies established by the division and privatiza-tion of the Japanese National Railways (JNR) on 1 April 1987, we reached our seventh anniversary in fiscal 1994 facing difficulties in an uncertain economic environment.
Under these circumstances and to pave the way toward a better future, we are now making a company-wide effort to achieve the goals of Freight 21, our 10-year management plan formulated last November after more than a year of discussion.
This article describes the planning process and the direction our company is taking, based on the plan.
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Planning Process
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(1) Company profile
JR Freight is distinguished from the other JR companies by the fact that it is the only nationwide railway company, and the only company providing freight services. It is capitalized at ¥19 billion and is 100% owned by the government-owned JNR Settlement Corporation.
The company profile is given opposite.
(2) Going into the red
The trends in the business results and transport volume of JR Freight since its establishment are shown in Table 1 and Figure 1, respectively. We posted ¥6 billion to ¥7 billion in ordinary profit over 4 years immediately after our establishment, because of our efforts to improve management and reinforce sales activities. We also saw a 1.6-fold increase in the transport volume of containers (on a ton-km basis (4)) from the level at the company establishment.
However, our business results started deteriorating from fiscal 1991 when the Musashino Line was damaged by flooding. Our operating income (in particular, transport business income) in fiscal 1993 dropped by about ¥10 billion from the previous year, far below the initial target, due to the prolonged recession, several disasters (such as floods) and the impact of the unusually cold summer (including a very poor rice crop).
In September 1993, when we were sure of seeing a decrease in the transport volume and income, we formed an emergency management measures task force at our head office and each regional office to secure new sources of income by enhanced sales efforts and to cut overall expenses. However, despite our efforts, we registered an ordinary loss of ¥3.8 billion and current-term loss of ¥2.7 billion in fiscal 1993 and became the first JR company to go into the red (Table 2).
In the process of discussing the emergency management measures, we became very aware that a long-term approach, in addition to our effort to balance the budget each year, would be required to drastically improve management of our company. Consequently, we started drafting a long-term management plan, in parallel with implementation of the emergency measures.
(3) Challenges to overcome
The most important motive for making a long-term plan was our strong recognition that the real cause of the deficit was not the recession but lay in fundamental and inherent problems in our company since its establishment. These problems include:
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High operation costs
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Increase in capital cost to replace aging facilities. The increase was caused by the previous cut in capital investment by JNR to reduce its deficits.
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High personnel costs resulting from above-average age of employees (44.1 years).
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High costs due to inefficient transport system
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Lack of good-quality transport services and facilities
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Poor sales strategy and system
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We started examining ways to solve these problems and bring our operation back into the black.
(4) Measures to cope with potential demand
While the Japanese distribution industry is still facing a severe management environment, the demand for transport services will grow further in the 21st century, and greater expectations will be placed on our role. The industry has been exposed to severe price competition as a result of industrialized restructuring and recession. However, we believe that demand for rail transport will grow as social problems, including labour shortages and, environmental issues become more serious.
Modes of transportation are compared from the perspective of these problems.
Currently, trucks are the most popular means of transport in the Japanese distribution industry, but based on the data, the government has been promoting a modal shift from trucks to railways and shipping, and to expanding combined transport.
As shown in Table 3, JR Freight enjoys a bigger share as the transport distance increases. (The average distance of container-based transport is about 940 km.) Since our role will be more-and-more important in the context of the modal shift, we can boost future volume and income by taking the course outlined below.
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Table 1: Trends in Business Results
Table
Figure 1: Trends in Transport Volume
Table 2: Japan Freight Railway’s Settlement of Accounts in Fiscal 1993 (figures in ¥100 million, rounded to nearest whole number)
Table
Table 3: Modal Split by Distance (%)
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Basic Concept of Freight 21
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(1) Purpose
Freight 21 aims to develop our business by focusing on the advantages of railways and by developing other non-railway business.
We examined the following points in great detail.
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How to expand business while rationalizing costs?
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How to balance sound finances against capital investment in infrastructure, and in development of new business and services, for better efficiency?
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How to secure a skilled workforce with streamlined management?
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(2) Four major pillars
Based on the above questions, we calculated that the following four measures would be necessary.
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Enhance marketing.
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Reconstruct transport systems.
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Enhance sales capabilities.
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Improve cost competitiveness.
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Streamline operations.
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Reduce workforce while maintaining recruitment.
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Promote planned capital investment.
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Replace old freight cars and facilities.
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Invest in modernization.
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Raise low-cost funds.
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Expand and reinforce non-railway businesses
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Outline of Freight 21
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Freight 21 is outlined below.
(1) Major action plans
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Reconstruction of transport systems
Focus will be placed on mass, fixed-form and medium-to-long-distance transport making full use of the advantage of railways.
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Container-based transport
The transport systems will be reconstructed into systems centering on terminals to promote high-speed, direct transport. To this end, the train systems will be revised into three systems: 1. a high-speed, direct train system between big cities; 2. an express train system between terminal cities; and 3. a networked train system (Fig. 2). To improve the quality of transport services and expand the transport volume, efforts will be made to reduce the frequency of freight relay to other trains as much as possible (Fig. 3), introduce a parallel timetable (Fig. 4), increase the number of cars in a train and expand loading and unloading operations at the stations where freight departs and arrives.
At the same time, a wide-area delivery system will be established to concentrate freight at terminals from small and medium-size stations dealing with only a small amount of freight by using trucks or delivery trains.
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Freight car-based transport
A shift from freight car-based transport to container-based transport should be promoted to eliminate trains returning without freight. In addition, further restructuring measures should be taken to improve efficiency of train maintenance work.
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For large-volume freight such as oil, a direct transport system using consignors' freight cars will be established and expanded. Figure 5 shows the major focuses of the plan for reconstruction of the transport systems mentioned above.
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Major revision of sales policies
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Improvement of freight rates
The current system of determining freight rates based on agreements with customers will be drastically revised into a new easy-to-understand way to determine freight rates, according to market conditions and quality of trains; incentives will be introduced to further expand use of railway transport. In addition, we will request related government agencies to promote deregulation to establish a flexible freight rate system to cope with competition in the distribution industry.
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Reinforcement of sales
We will further reinforce sales activities through our sales offices by examining and understanding the trends in other transport firms and the demand for distribution services and by conducting advertising and publicity. We will also try to win the confidence of major consignors to secure stable and long-term customers, as well as actively explore new demand by promoting closer ties with transport firms using railways.
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Development of new products
To boost sales, we will promote development of new products and new transport systems, such as car racks and diversified containers for the JR group satisfying customers’ requirements and helping us compete with rivals (Fig. 6).
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Cut employee numbers to 7,000
We will actively promote cost cutting measures to improve competitiveness. To achieve the goal of 7,000 employees in the railway business division by the end of fiscal 2003, we will reduce the number of employees in administrative departments at the head office by streamlining business operations and further promoting measures to save labour and assign multiple functions to each employee. Such measures include:
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Revision of working systems, along with change in transport systems
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Revision of working systems, along with decrease in work volume by cut in number of engines and freight cars
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Revision of working systems by investment to promote efficiency
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Integration of business departments
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Expansion of early retirement system
To cope with the excessive work force generated by personnel cuts at the railway business division, we will expand and improve the early retirement system and the system to grant retiring employees leave of absence, as well as secure companies to which surplus personnel can be transferred. We hope to reduce the number of employees by 1,500 people through early retirement in four years from fiscal 1995.
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Expansion and reinforcement of related-business division
We will further expand and reinforce distribution-related businesses which we have already launched, as well as promote entry into new business fields. We aim to boost sales of related businesses from the current ¥13.5 billion, which accounts for a little more than 6% of our total sales, to ¥30 billion or more than 10% of total sales by fiscal 2003. The increase in sales will help boost our total sales, as well as create new employment.
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Improvement of entire group’s businesses
We will clearly define the roles and positioning of our affiliated firms in the Japan Freight Railway group to secure and expand the entire group’s transport volume and establish an efficient business operation system.
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Promotion of systematic capital investment
We will systematically replace old engines and freight cars and focus on investment to expand container-based transport, develop new products and modernize facilities. To this end, we will invest ¥330 billion in our railway business division and ¥130 billion in our related business division during the term of the plan.
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Maintenance of sound financial conditions
In addition to the enormous funds required for the capital investment mentioned above, we will require a large retirement fund. However, we will reduce our dependence on externally-raised funds as much as possible by self-supporting efforts to make full use of our own assets generated through business restructuring (including sale of assets), as well as allocate internal funds generated through management streamlining. Moreover, we aim to achieve sound financial conditions by further cutting capital costs and promoting use of diversified fund sources, such as low-interest public funds.
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Personnel development and activation of organisation
We will recruit new employees (200-300 people per year), based on our employment plan, and actively promote development of employees’ potential. We will also try to activate our work place by putting the right person in the right place, rewarding good conduct and delegating authority to those who are doing the actual work.
In addition, we will provide fringe benefits and a working environment that helps our employees find life fulfilling and the company worth working for.
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Figure 2: Plan for Container Train Networks
Figure 3: Plan to Cut Frequency of Relaying Freight
Figure 4: Introduction of Parallel Timetable
Figure 5: Major Focuses of Transport Reconstruction Plan
Figure 6: New Products and New Transport Systems under Development
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Achieving plan and plan objectives
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(1) Ways to achieve plan
The plan term is 10 years, because some time will be required to solve all the challenges mentioned above. The term will be divided into three step-by-step phases to produce satisfactory results. A clear objective, which must be achieved, is assigned to each phase.
Phase I (Fiscal 1994 - 1996):
Reconstructing railway business and expanding and reinforcing related businesses
This phase is viewed as the period of an emergency 3-year plan to drastically revise the timetable for container-based transport and promote direct transport between terminals to expand the transport volume. As far as goods that can be carried in containers are concerned, we will switch freight car-based transport to container-based transport, while promoting restructuring of freight car-based transport.
For the related business divisions, we will try to develop distribution-related businesses to help expand the railway business, and establish a new development promotion system to actively enter into new business fields.
Phase II (Fiscal 1997 - 1999):
Improving company-wide management foundation
The container transport capacity will be expanded by increasing the number of freight cars per train on the Tokaido Line. At the same time, new engines will be introduced to improve and speed up transport services. The restructuring of freight car-based transport will be completed, and the transport system for large-volume freight, such as oil, will be improved.
Through these efforts, we aim to turn the operation back into the black.
Phase III (Fiscal 2000 - 2003):
Solving challenges and establishing foundation of future growth
In this phase, management problems will be solved, and the foundation for stability and growth of our future businesses will be established. For container-based transport service, we will expand the system for direct transport between terminals, as well as improve the quality of services and boost the transport volume. For freight car-based transport service, a system for freight cars owned by consignors will be established.
Through these efforts, we aim to achieve the goals of reducing employees in the railway business division to 7,000, as well as post ¥235 billion in revenues for the railway business division and ¥30 billion in revenues for related business divisions.
(2) Objectives of plan
The numerical objectives of the plan are shown in Table 4.
(3) Progress of plan
As mentioned earlier, Freight 21 started from fiscal 1994. Although the plan was finally decided last November, individual action plans started earlier, because we spent more than 1 year determining the challenges each department at the head office and regional offices faces and discussing how to solve these challenges. We have set up the Freight 21 promotion task forces at the head office and each regional office to take a company-wide approach to steadily carrying out the plan and achieving individual objectives.
We also had serious discussions about the plan with the Japan Freight Railway Worker’s Union, and signed the “New Joint Declaration of Cooperation between Labour and Management” with the labour union prior to announcement of the plan. Under the declaration, both labour and management will join forces to ‘view the Freight 21 medium-to-long-range management plan as a starting point to reconstruct the company and suggest good ideas to secure employment and build a company that produces fulfillment for its employees through the process of achieving the goals set down in the plan.’
Last December, immediately after the announcement of Freight 21, we changed our train timetable. The move was the first step in reconstructing our transport system and promoting measures to drastically streamline operations. We also proposed that our retirement system should be revised to expand the choices for senior employees. We have already started recruiting people wanting to retire under the new system.
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Table 4: Objectives of Plan
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Major challenges related to achieving plan
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(1) Raising required funds
As mentioned earlier, a large amount of funds is required to achieve the plan. We will do our best to appropriate internal funds, including assets generated by restructuring of our business operations, but we will also request related governmental agencies to provide administrative and financial support, such as tax incentives, allocation of more funds from the Railway Development Fund, and increases in financing from the Japan Development Bank.
(2) Understanding and cooperation of JR passenger railways
It is indispensable to provide good-quality services to expand the transport volume of containers. Therefore, we will ask JR passenger railways for their understanding and cooperation concerning maintenance of rules on adjustment of timetables and rental fees for tracks underlying transport services. We will also examine the feasibility of jointly developing related businesses in the future.
(3) New shinkansen projects
The existence of freight transport services appears to be overlooked in discussions on new shinkansen lines. We will ask the Japanese government to take concrete measures allowing us to provide stable services in railway sections where new shinkansen lines will be introduced.
(4) Measures on narrow-gauge railway sections
The problems of narrow-gauge railway sections on trunk lines (for example, the Nagoya, Seikan and Keiyo districts) cannot be solved by us alone. Measures including administrative and financial measures, should be promoted based on the understanding and cooperation of all related parties.
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Photo: Freight Train Derailed in Great Hanshin Earthquake
(Transportation News)
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Conclusion
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As discussed, the purpose of Freight 21 is to establish a firm management foundation at Japan Freight Railway by quickly setting up a system to respond to demand for freight transport by rail in the future. To achieve the goal, we will take many new measures, including drastic reorganization of transport systems and expansion of the early retirement system. Implementation of these measures will require both company-wide efforts and understanding and cooperation by consignors, transport companies, passenger railways and related government agencies.
Freight 21 has just started. All employees of Japan Freight Railway will try hard to achieve the goal of putting the company back into the black.
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Postscript
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The Great Hanshin Earthquake occurred on 17 January 1995 when I was writing this article. The railways in the area have suffered unimaginably heavy damage, and it is difficult to say when they will be able to fully resume normal services. The Japanese economy has been heavily affected by direct damage from the quake itself but also by the hindrance to distribution in and through the Hanshin area.
The volume of transport by land passing through the area accounts for 25% of total transport volume in Japan, while that by rail forms 20% of the total volume. The break in the link between the Tokaido Line and the Sanyo Line at has stopped transportation between eastern and western Japan. Transportation has only been partially secured by using trucks and vessels between Himeji and Osaka and making a detour via the San-in district.
Our business operation will inevitably be damaged, and Freight 21 is off to a rocky start. So far, we are doing our best to resume our normal transport services by securing as much transport capacity as possible.
We are sure the basic framework and direction of Freight 21 will remain unchanged, but we may need to revise our risk management approach
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