Japan's chemical industry transforms towards specialties

Japan at a crossroad

05 November 2007 00:00  [Source: ICB]

Globalization has forced Japan's chemical industry to undergo significant change. Will the shift to higher value-added specialties bring long-term prosperity?
Yutako Sato/Guest Columnist/ The Chemical Daily

JAPAN'S CHEMICAL industry stands at a crossroad in terms of its strategic direction and structure. The industry has made substantial changes in the past 15 years, adjusting both the mind-set and the emphasis of corporate portfolios to increasingly favor specialty value-added products. However, it is far from clear that it has done enough.

The unavoidable restructuring of the commodity petrochemical business, given the tough global competition expected in this sector in the medium term, can at best be described as half complete.

At the same time, despite their initial successes and strong growth profiles, the new value-added businesses are falling short of high hopes that they will prove to be the next-generation replacement for the much slimmer commodity businesses most companies expect to maintain in the long term.

In this context, the fast growth and dynamic markets of neighboring Asian economies, particularly China, are not only providing opportunities for Japan's growth and overseas expansion, but are also throwing into sharper contrast the need for far-reaching strategic change at home.

THE LOST YEARS

The process of restructuring and change in the Japanese chemical industry in the past 15 years has been shaped first by the so-called "lost 10 years" of the 1990s, when the Japanese economy stagnated, and then by the downturn of the early 2000s.

Corporate results were hard-hit, prompting many companies to adopt the umbrella strategy of "selection and concentration." This saw a general tendency to depart from the long-standing business model of offering a comprehensive range of all products from integrated production sites, to instead focus on areas of strength with the aim of restoring revenues and profitability.

For most companies, this has meant switching their focus from core commodity petrochemicals to more profitable, fast-growing value-added specialty chemicals.

The trend is illustrated by the two megamergers of the 1990s, which saw Mitsubishi Chemical formed from the merger of Mitsubishi Kasei and Mitsubishi Petrochemical in 1994, and Mitsui Chemicals from the merger of Mitsui Toatsu Chemicals and Mitsui Petrochemical Industries, in 1997.

The past 10 years has also seen the consolidation of downstream commodity polymer operations in Japan, where far-reaching restructuring has seen surplus production facilities shut down and the number of players sharply reduced in the polyethylene (PE), polypropylene (PP), polyvinyl chloride (PVC) and polystyrene (PS) resin sectors.

At the same time, the need to replace these traditional commodity businesses with higher added-value products has led to new businesses in sectors such as electronic materials, where several Japanese chemical companies have developed world-leading positions based on rapid growth in demand for applications such as liquid crystal display (LCD) televisions, personal computers, mobile phones, games machines, and digital home appliances.

There is no doubt that the changes implemented represent difficult decisions and decisive implementation of the resulting strategies. As Asahi Kasei president Shiro Hiruta points out: "Japan's chemical industry didn't just sit by and watch during the lost 10 years."

The transformation of the past 15 years represents a major departure from long-established norms. In the past, chemical industry strategy was centrally steered by the government, while companies had typically taken decisions to increase capacity in response to increasing domestic growth.

Companies had never needed to change the industry's fundamental structure in response to maturing domestic downstream sectors, nor the need to differentiate themselves. Until the 1990s, it had been possible to survive without taking the risk of embarking on a unique, company-specific strategy.

The "selection and concentration" strategy of the early 2000s was the first real industry-wide attempt to change the fundamental structure of the Japanese industry. The recession of 2000 made it clear that the mature domestic market could not support so many companies manufacturing similar products.

To survive, companies had to identify their strengths and concentrate resources where they had an advantage. They also needed to expand throughout Asia.

However, there is still more to be done. At present, the only company that has clearly positioned petrochemicals as a core business is Sumitomo Chemical. Other chemical companies need to replace commodity petrochemicals at the core of their portfolios with higher-return businesses as soon as possible.

That said, the petrochemical portion of most companies' businesses still accounts for 50% or more of total sales, so in practice, they are unlikely to make a quick decision on how to effect this transition.

This has been a particular issue since 2004, as the upturn in the petrochemical cycle has seen profits in these businesses soar to record highs, providing a further reason for hesitation.

THE FIRST MOVER

Since the 1970s, Sumitomo Chemical has tended to follow a different path from many of its counterparts. When Japan was enjoying strong growth at home, Sumitomo Chemical chose to expand into Asia rather than in the domestic market. The completion in the fourth quarter of 2008 of the Rabigh integrated refinery and petrochemical complex in Saudi Arabia, a 50/50 joint venture (JV) with Saudi Aramco, has substantially reinforced its global position.

Sumitomo Chemical's strategy emphasizes its existing strengths as an integrated chemical business. "We have accumulated a wide range of technologies in fields including petrochemicals, inorganic chemistry, and life sciences. Hybrid chemistry, a fusion of these technologies, is the source for further growth," explains Sumitomo Chemical president Hiromasa Yonekura.

Mitsubishi Chemical also includes petrochemicals as an equal part of its current portfolio, but differs from Sumitomo Chemical when it elaborates its vision.

Newly appointed president and CEO Yoshimitsu Kobayashi explains: "We will stay the course with our current business model based on three main sectors - petrochemicals, functional chemicals, and health care." The new priority for investment, he says, will be bioscience, health care and functional materials, rather than petrochemicals.

Other companies have thrown themselves more aggressively into the "selection and concentration" approach. Mitsui Chemicals, Showa Denko and Asahi Kasei have all decided to restrict petrochemical investments to products for which they have a clear, competitive advantage, and have indicated they intend to quit the commodity end of the sector altogether in the long term.

Showa Denko declared it would no longer be an integrated chemical producer as far back as the 1990s, when it divested control of its polyolefin business into a JV. CEO Kyohei Takahashi points out that its remaining petrochemical business has been transformed from "a target for restructuring into a cash cow." It is now a competitive operation, integrated from refining to a healthy and fast-developing acetyls business, he says.

Mitsui Chemicals decided to focus its petrochemical business on propylene and aromatics-based products, following the collapse of merger negotiations with Sumitomo Chemical in 2003. "We will continuously strengthen these products as stable cash cows in the medium run, and focus on the growing market mainly in Asia," says Kenji Fujiyoshi, Mitsui Chemicals president and CEO.

Asahi Kasei Chemicals president and representative director Taketsugu Fujiwara explains: "We have determined to become a top company in the areas of our expertise. Acrylonitrile [ACN] is one of them. From now on, the priority will be product competitiveness."

The second challenge facing Japan's chemical majors is to globalize their core businesses. In the past, Japan promoted its overseas economic position through the competitiveness of its downstream manufacturers of appliances, cars and business machines.

The chemical industry was structured to support this downstream competitiveness, and has traditionally only moved product or production overseas in support of Japanese electronics or automotive manufacturers.

So although Japanese chemicals and materials have long been widely used worldwide, the market growth and positioning has been achieved by the Sonys, Toyotas and Matsushitas of this world, and not by the chemical companies themselves.

Japan's chemical companies must therefore mostly be considered novices in developing an overseas position. Although many have increased their overseas-to-domestic sales ratios in recent years, this reflects the growth of their downstream customers overseas.

A notable exception is Shin-Etsu Chemical, which has established its position as the world's largest manufacturer of both semiconductor wafers and PVC resin.

A key to its success was its decision at a very early stage - in the 1970s - to promote business growth in the US. It is an unparalleled achievement for a Japanese company to report record sales and profits for 12 consecutive years. President and CEO Chihiro Kanagawa has now given the go-ahead for a large-scale investment in the US PVC-related business and to increase output capacity for 300mm (12-inch) wafers in Japan.

An additional boost to globalization efforts has come with the relationships developed between Japan's chemical companies and electronics manufacturers in China, South Korea and Taiwan, based on Japan's expertise in electronic materials.

Typical examples of successful products in electronics are JSR's photosensitive spacers and photoresists, and Kuraray's polyvinyl alcohol (PVOH) films. Both companies are well aware of the challenges to their positions.

"To survive, development of highly functional and value-added products in the speciality area is imperative," says Yasuaki Wakui, representative director and president of Kuraray, who is pushing its global strategic business with Poval PVA as the mainstay. "Amid intensifying global competition, we will specialize in the business of competitive-edge products. The key is to become a specialty chemical company."

Yoshinori Yoshida, representative director and president of JSR, echoes this message: "In cutting-edge fields such as semiconductors and liquid crystals, we need to earmark sufficient time for basic research and offer new concepts to customers," he says.

"It will become increasingly difficult to stay at the leading edge of the field, and those who cannot afford to keep up will be left behind. As our in-house research resources are limited, we intend to build up productive academic-industry alliances to ensure we continue to grow."

Financial year 2006 results for leading Japanese companies (yen 100m)

	Sales	Change (%)	Operating profit	Change (%)	Net income	Change (%)
Mitsubishi Chemical Holdings	26,228	8.9	1,286	-3.8	1,003	17.3
(Petrochemicals)	12,464	14.6	282	-16.4	-	-
Sumitomo Chemical	17,900	15	1,396	15.6	939	3.5
(Petrochemicals)	5,391	10.9	236	31.8	-	-
(Basic chemicals)	3,140	24.4	135	24.4	-	-
Mitsui Chemicals	16,880	14.6	917	56.2	523	18.5
(Petrochemicals)	5,599	15	454	85.5	-	-
(Basic chemicals)	5,535	17	110	-49.5	-	-
Asahi Kasei	16,238	8.4	1,278	17.5	686	14.9
(Asahi Kasei Chemicals)	7,526	14	520	28.4	-	-
Shin-Etsu Chemical	13,047	15.7	2,410	30.1	1,540	33.9
(Organic and inorganic chemicals)	7,084	11.3	1,067	11	-	-
Tosoh	7,813	20.4	603	27	285	3.5
(Petrochemicals)	2,323	20.6	140	9.3	-	-
Showa Denko	9,145	12.6	687	20.2	288	84.3
(Petrochemicals)	3,354	11.4	164	24.8	-	-
Ube Industries	6,556	10.1	469	11.1	220	37.5
(Chemicals and resin)	2,104	19.7	137	-8.1	-

Source: published company results financial year 2006 indicates year to March 31, 2007 (except Showa denko - to December 31, 2006)

For more on the Japanese chemical industry, go to www.chemicaldaily.co.jp

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