Shifting the balance

21 October 1996 00:00  [Source: ACN]

The chemical industry is one sector of Japanese economy most open to foreign investors, but foreign companies control only an estimated 10% of the market. Andrew Mollett investigates

THE shift in heavy western investment to countries in the Asia-Pacific region such as China, Thailand, Malaysia and Indonesia tends to mask the underlying importance still attached to the Japanese market by Europe's major chemicals players.

'Japan is still the second largest chemicals market in the world and by far the largest one in Asia. Moreover, it is set to remain so for some time yet,' says Hans Kast, president of BASF Japan.

Most European chemical companies have not, as is often inferred, abandoned their Japanese ambitions. Instead, they have been adjusting their intentions for the Japanese market to suit its developing maturity and the increasing sophistication of its customers.

This has led not only to a noticeable change in their product mix towards higher value-added products, but also to a determination to make the most of the opportunities provided by the shift of production on the part of Japanese manufacturers into cheaper countries in the region.

'The days of big growth are over for Japan,' says M Kato, president of ICI Japan. 'Costs are uncompetitive and there are too many players in all sectors of the industry. This, in turn, is leading to two things: firstly, rationalisation; and secondly, new strategic alliances with domestic and foreign partners.

'If foreign companies play their cards right, they can greatly benefit from this reorganisation in the Japanese chemicals industry.'

Indeed, the early and mid-1990s have seen a rapid growth by European chemical companies in tie-ups with Japanese counterparts.

'This period has been a turbulent and depressing one for Japanese chemical producers, and while European companies have not been immune from the troubles, they have been quick to use the opportunity to expand their presence in the market through alliances of various sorts with domestic operators,' says Tommy Tang, senior chemicals analyst at Merrill Lynch in Tokyo.

Although the chemicals industry is one sector of the Japanese economy most open to foreign investors, it is estimated that foreign chemical companies control only around 10% of the market.

'With the local industry trying to work out how best to restructure their operations to fit the new climate - and not very successfully, I might add - there are still plenty of opportunities for foreign chemical companies in this market,' says Clyde Unno, partner at Andersen Consulting in Tokyo.

Japan is also vital for European chemical companies' pan-Asian strategy in terms of R&D. 'Japan is an excellent place from this point of view: it offers a sophisticated and high-tech environment that allows us to quickly grasp opportunities for higher value-added goods in the rest of the region as demand for such products develops,' says BASF's Kast.

But while all agree that Japan remains a vital market, the way it fits into European chemical companies' pan-Asian strategy varies considerably.

Over the last ten years, Hoechst has been aggressively expanding its presence in the Japanese market. In 1987, the group consisted of nine companies with an annual sales turnover of Yen130bn (US$1.1bn). It now consists of 19 companies with a turnover of Yen30bn.

Many of these companies are joint ventures with Japanese companies. They include Hoechst Diafoil, a joint venture with Mitsubishi Chemical, which produces polyester film; Polyplastics Co, a joint venture with Daicel, to manufacture polyacetal and other engineering plastics for the Japanese and Asian markets; Hoechst Tokuyama, a joint venture with Tokuyama to produce chemicals for detergents; and a joint venture with Teijin to make polyester monofilaments.

'Such joint ventures allow us to both expand our presence in the Japanese and Asian markets and to reach economies of scale,' says Rüdiger Barth, president of Hoechst Japan.

Barth adds that while there have been no direct talks with any more local companies, 'we are investigating possible areas where we could set up new alliances, thus allowing us to enter new fields or to develop synergies in existing fields'.

Meanwhile, the global restructuring of Hoechst's operations has led to the creation of three core companies in Japan: Nippon Hoechst Marion Roussel - its core organisation for its pharmaceutical activities; Hoechst Schering AgrEvo KK - for pesticide and herbicide production; and Hoechst Japan Ltd as its core industrial activity. Each of these companies operates independently from one another.

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'These core companies reflect those areas of business that we want to develop in Japan,' says Barth. He is confident that the group's new structure will strengthen its position as a leading chemical and pharmaceutical company in Japan. It aims, for example, to capture 5% of the local pharmaceutical market by 2000, thus becoming one of the top five pharmaceutical companies in Japan. Hoechst Marion Roussel ranks seventh in Japan, with cumulative sales of Yen160bn.

But Japan also plays a vital role in the company's overall Asian strategy: two of its core businesses - pharmaceuticals and agriculture - have their Asian headquarters in Tokyo.

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'Japan serves as a platform for regional development and co-ordination, for gathering market intelligence and initiating contacts, as well as providing highly trained and experienced employees for the whole region. At the same time, our research activities in Japan, though integrated into our worldwide R&D, are of special significance to Asia,' says Barth, adding that last year alone, Hoechst spent some US$160m on R&D in Japan.

During the late 1980s and early 1990s, ICI-Zeneca embarked on a massive spending spree in Japan in an attempt to become a major player in the pharmaceutical and chemical sectors.

However, ICI's demerger with Zeneca in 1993 has left it in a weak position vis-à-vis Japan. 'A large part of the problem lay in that following the demerger, we were left with a poor product portfolio - largely acrylics, polyester, paints, explosives and polyurethanes - which Japan is already well catered for. As a result, we have seen consistent losses for the past 5-6 years. Moreover, we are still unlikely to break even this year, although I'm hoping that we will do so in 1997,' says Kato.

'Our split with Zeneca caused some very big changes and we have had to radically restructure our operations and redefine our strategy,' he adds. 'Due to sluggish demand in Japan for its products, ICI is betting heavily on serving Japanese customers moving into Asia. This is a very large business, and is our key target.

'Therefore, we are no longer interested in becoming big in Japan, although there are still some niche markets we can serve. However, our presence here remains vital if we are to make the most of the growth opportunities in the region on the back of companies shifting production to outside of Japan.'

As a result of the demerger, ICI last year closed down its R&D centre at Tsukuba, reduced its staff by around 30%, and shifted its emphasis onto value-added areas such as PEN film, which it markets but does not manufacture in Japan. Last year, it also boosted production of polyester film at its Ibaraki plant by 18% to 8300 tonne/year at a cost of Yen100m.

Earlier this year, it announced that it is to start exporting to China HFC-134a produced at its plant in Mihara in a joint venture with Teijin. It initially plans to export between 1000-2000 tonne/year. It has also entered into a 50:50 joint venture with Nippon Polyurethane Industries to produce MDI in China.

'Such agreements are of benefit both to us and our partners, and we will continue to talk to Japanese parties that might be of interest to us,' says Kato.

Unlike ICI and Hoechst, Bayer's strategy is to view countries as single market entities. 'As a result, Bayer Japan concentrates almost exclusively on the domestic market and, by and large, we have little business outside of it,' says Knut Kleedehn, president of Bayer Japan.

'We believe that this approach allows us to keep a much closer eye on movements in the market and react much quicker to them.

'Nevertheless, clearly in certain areas - most notably in agrochemicals and pharmaceuticals - what happens in Japan, particularly in terms of product development, will affect other countries in the region.'

Like Hoechst and BASF, Bayer has ambitious plans for Japan. It aims to be among the top ten pharmaceutical companies as well as the third largest agrochemical company in Japan by 2000.

'With a lot of agrochemical companies on the verge of bankruptcy, we have a good opportunity to increase our presence here. In the pharmaceutical sector, we have been making the most of the efforts by the Japanese government to encourage more R&D, and last year spent Yen18bn on a new research centre at Kansai Science City.'

Kleedehn stressed that expansion into these area could not be made at the expense of other areas of activity, such as chemicals. 'I do not expect to see any major changes in our product mix ratio.

'Our aim is to attain a Yen300bn turnover by 2000, as compared with Yen225bn last year. Moreover, this target does not include any new M&A (merger and acquisition) activity that might take place between now and then. But since our intention is definitely to look for new alliances and joint ventures with local partners, this figure should be even higher,' says Kleedehn.

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'One area of real interest to us in terms of possible new alliances is the pharmaceutical sector, given that some Japanese companies have an excellent product range. However, they generally are not well represented outside of Japan, which is where we can help them.'

Another area where Bayer is keen to expand its presence is polymer resins for rubber and plastics industries.

'Basically, we are aiming at the top end of the market - we're not really interested in basic chemicals,' Kleedehn says.

BASF Japan's role in the group's overall pan-Asian strategy, meanwhile, sits somewhere between Hoechst's and Bayer's. 'While we are obviously here primarily to serve the local market, we are used to supporting our group's Asian markets in areas where either we have big-scale plants or in areas where we can provide technological support,' says Kast.

Exports from BASF Japan last year accounted for 10-15% of total sales. 'This figure is unlikely to change dramatically in the foreseeable future,' says Kast.

What may change in the future is the volume of imports of raw materials from other Asian production sites. For instance, the group is looking into a number of new petrochemical sites in India, China and Malaysia.

None of these will be operating before 2000. However, imports already account for 36% of total production and Kast says that this figure could be close to 50% in the future.

Meanwhile, like its European competitors, BASF is actively chasing the lucrative pharmaceutical market and has set itself an ambitious target: 1% of this highly fragmented market by 2000.

Last year, sales from health, nutrition and other related products accounted for 12% of BASF's total sales of Yen117bn.

This is expected to show a sharp increase this year, following BASF's acquisition of a majority stake in local pharmaceutical company Hokuriku Seiyaku in April.

Last year, it also linked up with local agrochemical manufacturer Nisso to form Nisso Agro Co.

Under the deal, BASF distributes its products - largely herbicides and pesticides - in the Americas, while Nisso controls the distribution network for Asia and Japan.

Its expansion in these areas, says Kast, means BASF will have a much more balanced portfolio, fairly evenly divided between plastics and fibres - mainly higher value-added products such as polyurethanes, foam plastics and engineering plastics, dyestuffs and finished products, chemicals - principally intermediates such as butanediol and aromatics, and health, nutrition and agrochemical products.

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