Weathering the storm

30 October 2000 00:00  [Source: ACN]

Japanese speciality chemical producers have found a successful formula to survive recent crises, reports Prema Viswanathan

Japan's speciality chemical producers appear to have weathered the Asian crisis far better than their counterparts in the region's commodity chemicals sector. Their performance has also fluctuated less than that of many western specialities majors, whose bottom lines have not picked up as analysts expected, despite recent efforts at consolidation and restructuring.

Analysts attribute the Japanese players' success largely to their agility in juggling product portfolios and markets. Their success is also attributed to cost cutting through restructuring and outsourcing their operations, innovative R&D activities, and initiatives in forming alliances geared to yield immediate and lasting benefits.

'Many Japan-based speciality chemicals firms such as Shin-Etsu Chemical, Kao Corp, and Dainippon Ink and Chemicals (DIC) have fared well in terms of globalisation in comparison with their western counterparts,' says Tokyo-based Yosuke Ishikawa, the director of SRI Consulting.

Their success contrasts with the difficulties faced by global players like Clariant, Degussa-Hüls, and others, says Ishikawa. Their mergers and acquisitions (M&A) designed to improve financial performance and hone competitive edges have failed to yield positive results, he adds.

One reason Japanese producers have been more successful in their survival strategies is that they have opted for more market-oriented consolidations aimed at cashing in on cutting-edge technologies, say analysts.

A telling example is Shin-Etsu's announcement early this month that it will form a 50:50 joint venture with GE Silicones. The two companies expect their joint venture facility in Southeast Asia for the manufacture of silane-monomers and siloxanes, to become operational in April 2003. 'The demand for silicone products in Asia is expected to grow rapidly in the future. The joint venture will allow both companies to build a world-class production facility in a cost-effective way with the latest technologies,' says a Shin-Etsu source.

The Japanese specialities major plans to increase its investment in electronic materials, projected to be a boom business in the future. 'There has been a sudden recovery in demand for electronic devices, driven by increased demand worldwide for personal computers and mobile phones. As a result, net sales for the electronics materials segment during 1999-2000 rose by 2.6% compared to the previous year, to Yen220.1bn (US$2.02bn),' says the source.

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Because it has a leading position in the semiconductor silicone business, and since 50% of its US$6.4bn revenue comes from overseas operations, Shin-Etsu was right to increase its focus in this area, says a specialities analyst. It is the largest producer of silicone in Japan and the fourth biggest worldwide.

Another leading Japanese specialities producer, Kao Corp, has also tided over the Asian crisis through its focus on overseas operations and its concentration on core consumer and skin-care products.

'Kao has been actively developing its overseas chemical operations since the establishment of a manufacturing and sales base for amine-derivatives for household products in Spain in 1970,' says a Kao spokesman. As a result of the strategy, its overseas sales account for around 50% of total net sales.

In line with this strategy Kao set up its European regional headquarters in Barcelona, Spain, in September 1999 to oversee its operations in Germany, Spain and France in business areas such as oleochemicals, flavours and fragrances, and detergents.

Last month the company strengthened its Asian operations by establishing a new affiliate, Kao Consumer Products (Southeast Asia) Co, 'to better monitor the Southeast Asian market,' says a company source. As a result of its strategy, Kao's net profit for the year ending 31 March 2000 rose 50.2% from the previous year to Yen52.1bn, on the back of net sales of Yen846.9bn.

Diversified fine chemicals producer DIC has been focusing on R&D and internal restructuring to minimise costs and increase profitability. As a result net profit for 1999 rose to Yen9.2bn from Yen7bn the previous year, although net sales fell to Yen984bn from Yen1022bn in 1998, because of the difficult market environment in Asia. Overseas sales of speciality plastics and compounds, however, were up 8.7% in 1999. 'Overseas conditions were generally favourable, supported by stable growth in the US and Europe and signs of a return to normality in the parts of Asia hit by the currency crisis in 1997,' says DIC Chairman Takemitsu Takahashi.

In line with a longer-term strategy to expand into ethical pharmaceuticals, the company last year reached an agreement with prominent Japanese pharmaceutical producer Chugai Pharmaceutical Co. This involves the extension of joint R&D related to a promising new anti-allergy drug developed using DIC's original chemical synthesis technologies.

Trading houses have also enhanced their emphasis on speciality chemicals. Marubeni's speciality chemicals segment contributes 32% of its total trading volumes - the highest among its various product segments and higher than the 29% each contributed by plastics and petrochemicals.

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The most recent Marubeni project in this sector is a Yen5bn venture capital fund it set up late last month for investment in new companies in the high growth areas of information technology, medical healthcare and biotechnology. It plans to issue an initial public offering for a venture capital company in two to three years.

Says a Marubeni source: 'We designated IT and medicine as core business some time ago and have become aggressively involved in these areas. The fast pace at which technology has been advancing in these areas has made it necessary for us to cultivate companies which are capable of developing advanced and promising technologies and business models. And we realised it is better to do this while the companies are still in their infancy.'

Marubeni's strategy of expanding its agrochemicals operations continues unabated and it is confident of reaping longterm benefits once the Asian recovery gains momentum and demand picks. In keeping with this focus, Marubeni last year established the wholly-owned Agrovista France to provide vineyards with agrochemicals.

Marubeni also announced last year that it has plans to purchase four agrochemical marketing companies in France by 2001. The first acquisition is expected to be Socaf SA, followed by three companies in the Bourgogne, Languedoc and Loire vine-growing regions. This will give Marubeni control of at least 10% of the French market, says the company. It is considering similar acquisitions in Italy and Spain. In 1998 it acquired the Premier Corps and Crop Care Group in the UK.

Marubeni is targeting sales of US$300m in the European agrochemicals market for 2000, through such acquisitions.

In the US, it has set up a separate company called Marubeni Speciality Chemicals.

The trading major is also prioritising other overseas markets. As part of its Vision 2000 Restructuring Plan, it has been focusing on China and Southeast Asia for regional distribution and sales of products. The focus in Central and South America and the Commonwealth of Independent States is on resources development and promotion of social infrastructure projects. The emphasis in South Africa is on overall expansion to disperse risks and diversify.

The speciality chemicals segment has been finding favour not merely among players which have traditionally focused on this sector. Weakening margins for commodity chemicals worldwide during the Asian crisis and the perennially cyclical behaviour of petrochemicals have driven petrochemical producers in Japan to shift their focus to speciality chemicals.

Mitsubishi Chemical, for example, has been increasing its investments in life sciences and fine chemicals. As part of this strategy, it launched its Life Sciences - Business Initiatives Department early this month. Says a company spokesman: 'Through this department, the company intends to speed up the launch of new businesses in the group's life sciences field, some of which will use the research results of the Mitsubishi Kasei Institute of Life Sciences. We believe life science will become an important field within the group in the future.'

Fuelling the shifting focus is the projected growth in net sales and profit of pharmaceuticals. In the year ended 31 March, 2000, Mitsubishi Chemical's pharmaceutical division contributed net sales of Yen1.1bn, expected to increase to Yen1.35bn in the year ending 31 March, 2001. The division's operating profit is expected to more than double in the same period to Yen100m from Yen48m. With such strong growth prospects, Mitsubishi Chemical believes its focus on speciality chemicals and life sciences will yield big dividends.

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