CHEMICALS AND PERFORMANCE TECHNOLOGIES
The Japanese
Chemical Industry:
Finding the Right Path
kpmg.com/chemicals
KPMG INTERNATIONAL
b | The Japanese Chemical Industry: Finding the Right Path
KPMG’s Global Chemicals and
Performance Technologies Practice
• Market leading audit presence
• Integrated global network
• Recognized thought leadership position
• Commitment to the industry
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Foreword
We would like to offer our deepest condolences
to the Japanese people and particularly those
who have been personally affected by the terrible
events of March 11th, 2011. Our thoughts are with
you at this time.
Mike Shannon
Global Chair, Chemicals and Performance Technologies
Impact on the
chemical industry
As we were due to go to print, Japan was rocked by the terrible events related to
the earthquake and tsunami of March 11th, 2011. The initial impact on the Japanese
chemical industry was equally devastating, with plants closed across the country
and a number of key end market customers, most notably in the automotive
industry also shutting down production. In addition, chemical producers were
faced with the ongoing impact of rolling power blackouts in the areas under the
management of Tokyo Electric Power. However, the response of Japanese chemical
manufacturers attests to the resilience of the industry.
While the medium term domestic demand outlook remains highly uncertain, there
is likely to be a longer term opportunity for Japanese chemical manufacturers to play
a central role in the post-disaster reconstruction process.
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Executive Summary
Beginning is easy –
Continuing is hard.
— Japanese proverb
The global chemical industry appears to be on track for solid gains in 2011, with
worldwide production expected to increase by five percent.1 The question for the
Japanese chemical companies is how much of this good news will apply to
them – and how much to their competitors.
After decades of brilliant achievements and growth, the Japanese chemical industry
now struggles to maintain its position in the marketplace. Dependent on sluggish
domestic markets, weighed down by overcapacity and over-diversification, impeded
by a traditional business culture, and faced with increased competition from China
and the Middle East, today’s Japanese chemical companies find themselves in an
increasingly precarious position.
Indeed, to say that the Japanese chemical industry is at a crossroads is not an
understatement. Change is required by Japanese companies; not cautious,
incremental change but swift and radical change affecting their very structure,
culture, and long-term strategies. This will not be easy or straightforward. With
their eyes on the future, Japanese company leaders must make tough decisions
that include:
• A rigorous process of rationalization to eliminate unprofitable facilities and
business units
• Asset swapping to generate scale
• Consolidation through mergers and acquisitions (M&A) to drive a new focus
on core business
• A stronger push into overseas operations, especially through joint ventures
in emerging markets
• A continued commitment to research and development (R&D) and innovation
to support new growth areas.
Like their counterparts in the US and Europe, Japanese chemical companies have
access to well-developed facilities, strong client relationships, a highly trained
workforce and significant levels of intellectual property (IP). They also enjoy
proximity to rapidly growing markets in Asia. With a firm commitment to change,
the Japanese chemical industry may regain competitive advantage in today’s
growing markets.
Paul Harnick
Global Executive
Chemicals and
Performance
Technologies
1
Mike Shannon
Global Chair
Chemicals and
Performance
Technologies
Chemical Demand Improvement to Continue in 2011, ChemWeek, December 3, 2010
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Contents
Introduction to the Japanese Chemical Industry
Size and Characteristics
Key Players
Recent Trends
2
3
4
6
Key Challenges Today
10
Overcapacity10
Rise of the Middle East and China
11
Comparisons to Europe
14
Structural Issues
16
Diversification17
Domestic versus Global Strategies
18
Change in Perspective
Chronic Overcapacity and Inefficiencies
Support for Employees
Rising Protectionism
Uncompetitive Downstream Industries
Solutions for Change
Asset Swapping
Geographical Expansion Rationalization
Focus on Core Business
R&D and Innovation
20
20
20
20
21
22
23
23
24
24
25
Conclusion26
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2 | The Japanese Chemical Industry: Finding the Right Path
Introduction to the Japanese
Chemical Industry
Japan struggled through a
“lost decade” that in fact
continued into the 2000s,
and the chemical industry
steadily lost ground.
To understand the Japanese chemical
industry, we need to consider both
its amazing post-war growth and its
relative decline in recent decades as a
global player.
In 1959, Japan, the US and Western
Europe, known as the Triad, controlled
the global chemical industry. Supported
by expanding markets, low prices for
feedstock, a highly trained workforce,
major investments in plants and
extensive research, the Triad produced
almost all chemical exports worldwide.
For Japan, the chemical industry was
only one more example of a period of
astonishing growth and productivity.
Within two generations after World
War II, Japan had become a powerhouse,
the world’s second largest economy.
“Japan, Inc.” was considered the
very model of how to do business,
and Japanese manufacturing and
management methods were carefully
studied and adopted by companies
everywhere.
2
3
By the 1990s, however, the combined
share of global chemical exports from
the Triad had fallen to two-thirds.2 Japan
struggled through a “lost decade”
that continued into the 2000s, and the
chemical industry steadily lost ground.
From 2000 to 2007, the average
operating profit of all Japanese chemical
companies declined from 6.4 percent to
2.8 percent.3 By 2009, Japan accounted
for only 8 percent of global chemical
shipments.
Faced with chronic challenges, the
question today is whether the Japanese
chemical industry can survive by
honoring the spirit of change and
innovation that served it so well for
decades in the 20th century.
Kent and Riegel’s Handbook of Industrial Chemistry and Biotechnology, James Kent, ed., 11th edition, 2007
Industry Review Japan: Consolidate or Lose!, Roland Berger Strategy Consultants, 2009
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The Japanese Chemical Industry: Finding the Right Path | 3
Size and Characteristics
Geographic breakdown of global chemical shipments*, 2009
Country/Region
Sales (US$ billion)
China
635
Japan
286
United States (US)
674
Central and Eastern Europe
123
Latin America
217
Western Europe
894
Other Asia-Pacific
390
Others
212
Central and
Eastern Europe
4%
Latin America
6%
Others
6%
US
20%
Western Europe
26%
China
19%
Other Asia-Pacific
11%
Japan
8%
*The term ‘shipments’ is equivalent to ‘value of output’
Note: Chemical industry sales include sales from basic chemicals, specialty chemicals, agricultural chemicals, pharmaceuticals and consumer products.
Source: American Chemistry Council, 2010
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4 | The Japanese Chemical Industry: Finding the Right Path
Sector-wise breakdown of Japanese chemical industry sales in 2009
Sub-sector name
Sales, 2009 (US$ billion)
Base Chemicals
140.4
Pharmaceuticals
80.3
Specialty & Fine Chemicals
42.9
Agricultural Chemicals
2.1
Pharmaceuticals
30.2%
Base chemicals
52.8%
Specialty & fine
chemicals
16.2%
Agricultural chemicals
0.8%
Source: Japan – Chemicals, Datamonitor, September 15, 2010
The Japanese chemical industry is the second largest
industry in the country and the world’s fourth largest in
terms of shipments, totaling US$286 billion in 2009.4
The industry can be divided into four general areas of
production:
• Base chemicals that include petrochemicals, their
derivatives and basic inorganics. Produced in large
volumes, they are sold as commodities to manufacturers
in the chemical industry or to other industries.
• Specialty and fine chemicals that are intended for
specialized use and produced in lower volumes than
base chemicals. Examples include ingredients used in
adhesives, additives, plastics, coatings, paints and inks,
crop protection, dyes and pigments.
• Pharmaceuticals including both basic pharmaceutical
products and pharmaceutical preparations.
• Agricultural chemicals that include pesticides and chemical
growth agents such as synthetic fertilizers and hormones.
4
Key Players
The chemical industry in Japan is dominated by a small group
of major corporations, most of which are highly diversified
with a large number of subsidiaries. All have strong alliances
with other companies through their membership in keiretsus
(companies with interlocking business relationships and
shareholdings). Japanese industry leaders include the
following:
Mitsubishi Chemical Holdings (MCH) is Japan’s largest
chemical concern. MCH and its network of subsidiaries
manufacture petrochemicals, pharmaceuticals, functional
materials and plastic-based products, specialty chemicals,
carbon and a range of products used in the electronics
industry.
Sumitomo Chemical includes over 100 subsidiaries and
affiliates operating in six business sectors. The company
produces basic chemicals, petrochemicals and plastics, fine
chemicals, IT-related chemicals, agricultural chemicals, and
pharmaceuticals.
American Chemistry Council, 2010
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The Japanese Chemical Industry: Finding the Right Path | 5
Mitsui Chemicals is a leading
manufacturer and supplier of valueadded specialty chemicals, plastics
and materials for the automotive,
healthcare, packaging, agricultural,
building, and semiconductor and
electronics markets.
Shin-Etsu Chemical produces over
4,000 silicone-related products that
meet user needs in a wide range of
industries, including electric/electronics
manufacturing, the construction
industry, the auto industry, cosmetics
and toiletries, and the chemical industry.
Toray develops products using organic
synthetic chemistry, polymer chemistry
and biotechnology. Key manufacturing
areas include aromatic fine chemicals,
high-functional catalysts, specialty
chemicals, chiral compounds and other
products.
Asahi Kasei Corporation provides
innovative solutions based in chemistry
and materials science to a diverse
range of markets including fibers,
chemicals, consumer products, housing,
construction, electronics, and health care.
The Japanese chemical
industry is the second
largest industry in the
country and the world’s
fourth largest in terms of
shipments.
Hitachi Chemical prioritizes four key
business fields with high growth potential
– telecommunications and displays,
environment and energy, life sciences
and automobiles and transportation
infrastructure.
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6 | The Japanese Chemical Industry: Finding the Right Path
Recent Trends
Annual GDP growth rate (%) for China, EU, Japan and US
Country/Group
2005
2006
2007
2008
2009
2010F
2011F
2012F
China
11.3
12.7
14.2
9.6
9.1
10.5
9.6
9.5
EU
2.2
3.5
3.2
0.8
(4.1)
1.7
1.7
2.1
Japan
1.9
2.0
2.4
(1.2)
(5.2)
2.8
1.5
2.0
US
3.1
2.7
1.9
0.0
(2.6)
2.6
2.3
3.0
F = Forecast
Source: International Monetary Fund, World Economic Outlook, October 2010
Producer’s Shipments Index — Japanese Manufacturing Industries & Chemical Industry
115
110
Index (2005 average = 100)
105
100
95
90
85
80
75
Manufacturing Industries
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
70
Chemicals (excl. pharmaceuticals)
Source: Ministry of Economy, Trade and Industry, 2010.
Source: Japan Chemical Industry Association, 2010
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The Japanese Chemical Industry: Finding the Right Path | 7
0.013
0.012
0.011
0.010
0.009
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
0.008
Jan-08
Exchange rate (JP¥ to US$)
Yen to US dollar exchange rate (January 1, 2008 – October 25, 2010)
Source: Oanda.com, accessed on October 25, 2010
Japanese chemical industry monthly output, September 2008 – August 2010
6,537
6,500
Thousand tons
6,000
6,179
5,916
5,849
5,818
6,057 5,993 6,124
6,169
6,029
5,811 5,771
5,641
5,572 5,556
5,500
50%
6,662
40%
5,945
30%
5,503
5,452
5,214
6,259
5,214
4,925
5,000
20%
4,664
4,500
Change (%)
7,000
10%
4,000
0%
3,500
(10%)
Chemical Production
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
3,000
Year-on-year growth
Source: Ministry of Economy, Trade and Industry (METI), Japan, 2010
Note: Chemical industry output includes production of fertilizers, industrial sodium chemicals, industrial inorganic chemicals, pigments, catalysts, aromatic hydrocarbons,
cyclic intermediators, industrial organic chemicals, plastic materials, synthetic rubber, soap, synthetic detergents, surface-active agents, cosmetics, paints and
printing inks.
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8 | The Japanese Chemical Industry: Finding the Right Path
More than the US and Europe, Japan was hit hard by the global
recession. The country suffered a two-year decrease in GDP
growth, including a 5.2 percent decrease in 2009. Reflecting
this decline, chemical shipments began to drop in January of
2008, and the Japanese petrochemical market fell steadily
throughout the year, one of the sharpest drops in history. The
Ministry of Economy, Trade, and Industry (METI) estimated
domestic ethylene production sank 11.3 percent in 2008.5
By Q1 2009, Japanese naphtha crackers were operating at
around 70 percent of capacity. In addition, 11 ethylene facilities
reported a total loss of US$2.4 billion for fiscal 2008. Out of the
six leading chemical companies in Japan, two reported losses
at the operating level and four at their bottom line.6
In 2009 and into 2010, the situation improved. The average
operating rate of ethylene facilities in Japan increased from
around 80 percent in April of 2009 to over 90 percent in May
of 2009, and these rates have not dropped as of the middle
of 20107. This increase has been mainly driven by growth
elsewhere in Asia, especially China. Japanese exports such
as LCD films and engineering plastics were supported by the
Chinese government’s stimulus package, which boosted
sales of automobiles and domestic electrical appliances such
as LCD TVs.
As of September 30, 2010, profitability or improved earnings
have been reported by several leading Japanese chemical
companies.8 However, year-over-year growth rates in
production still show little increase, mainly because of
sluggish domestic markets that are still recovering from
unprecedented declines during the recession. The Japanese
automotive industry is a prime example. In 2008, the
headlines told a grim story – “Toyota Expects Its First Loss in
70 Years.”9 “Suzuki to Cut Japan Output by Additional 30,000
Units.”10 “Honda slashes profit forecast.”11 Although these
automotive giants are recovering based on strong demand in
emerging countries such as China and India, sales have not
returned to pre-recession levels,12 and this situation continues
to trouble Japanese chemical companies.
Overall, the Japanese economy is not expected to return to a
GDP annual growth rate of 2 percent until the end of 2011.13
However, the government and financial institutions are
taking steps that may have a positive impact on the chemical
industry. In October of 2010, the Bank of Japan cut interest
rates to zero and bought private sector assets in an effort to
curb deflation.14 These efforts are in line with government
policies to bring down the value of the yen. Although
Japanese chemical companies sell approximately 80 percent
of output to domestic markets, they look forward to better
control over a rising yen that may have a positive effect on
exports, especially as Japan’s LDPE exports, for example,
plunged 29.6% in the first eight months of 2010 compared
to the same period a year earlier.15
5
Japan Petrochemicals Report 2010, Business Monitor International
Japan’s chemical industry shifts to prepare for a new reality, ICIS, October 15, 2010
7Ibid.
8 Major Japanese Firms Report Improved Earnings and Sales, ChemWeek, November 12, 2010
9 New York Times, December 22, 2008
10 Bloomberg, December 22, 2008
11 CBC News, December 17, 2008
12 Japan: Positioning for Recovery, ChemWeek, May 2, 2010
13Ibid.
14 Japan’s ‘extraordinary’ move to zero, ReportonBusiness.com, October 6, 2010
15 Obscured by Clouds, Platts Horizon, Winter 2010/11
6
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The Japanese Chemical Industry: Finding the Right Path | 9
Overall, the Japanese economy is not
expected to return to a GDP annual
growth rate of 2 percent until the end
of 2011.
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10 | The Japanese Chemical Industry: Finding the Right Path
Key Challenges Today
Overcapacity and the growing presence of the Middle East
and China are issues faced by chemical industries around the
world. Japanese chemical companies have addressed these
issues in part by production cutbacks and joint ventures with
Chinese and Middle Eastern companies.
Overcapacity
Ethylene supply/demand balance, 2009 (in thousand tons per year)
China
Japan
US
Europe
Middle East
Global
Ethylene production
capacity1,2
14,737
7,279
NA
31,783
20,266
139,963
Ethylene production3,2
10,697
6,913,
22,610
NA
NA
NA
Ethylene demand1,2
24,476
6,367
NA
26,486
4,030
108,407
NA: Not available
Source: 1. Future trends in global demand for and supply of petrochemical products, METI, May 14, 2010
2. Japan Petrochemical Industry Association, 2010
3. Output Declines in US, Europe, Chemical & Engineering News, July 5, 2010
Overcapacity remains a worldwide issue that will not go
away, even with rising demand in emerging markets.
Between 2009 and 2011, about 14 million tons of ethylene
is expected to come on-stream, a 15 percent increase in 18
months.16 In 2010, global demand growth is expected to
reach about 4.4 million tons, while capacity is expected to
increase by about 10 million tons.17
In Japan, overcapacity has been a serious issue since the
1990s. Domestic demand has either declined or failed to
increase for a large number of petroleum based products.
16 Petrochemicals,
17Ibid.
Ethylene capacity in Japan has remained constant over the
past decade while demand has decreased by 2 percent
annually.
Japanese producers are taking steps to mitigate declining
domestic demand and the likely loss of exports. They are also
rationalizing capacity (see Section 3.1) and moving away from
commodity chemicals toward higher-end products. No net
capacity growth is planned for olefins and aromatics in Japan
through 2020.18
ChemWeek, March 26, 2010
18Ibid.
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The Japanese Chemical Industry: Finding the Right Path | 11
Rise of the Middle East and China
World natural gas costs
$1.25
Russia
$0.75
North Africa
$3.60
Ukraine
$2.00
Indonesia
$5.75
Canada
$0.80
Venezuela
$1.50
Argentina
$5.00
US
$7.60
West Europe
$2.50
Trinidad
$0.75
Middle East
$7.65
Japan
Source: JP Morgan Chemical primer, June 2008; US Energy Information Administration, 2010
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12 | The Japanese Chemical Industry: Finding the Right Path
Japan will likely see a sharp rise in competition from the
Middle East as large-scale petrochemical projects in
Petro Rabigh and Eastern Petrochemical (Sharq) come
on stream in Q4 2010.
Ethylene plants in Japan
Ethylene plants in Saudi Arabia
Company
Location
Idemitsu Kosan Co Ltd
Ichihara
Idemitsu Kosan Co Ltd
Capacity
(tons/year)
Capacity
(tons/year)
Company
Location
374,000
Al-Jubail Petrochemical Co
Jubail
810,000
Tokuyama
623,000
Al-Jubail Petrochemical Co
Jubail
800,000
JX Nippon Oil and Energy Corp
Kawasaki
460,000
Al-Jubail Petrochemical Co
Jubail
800,000
Keiyo Ethylene Co Ltd
Ichihara
740,000
Al-Jubail Petrochemical Co
Jubail
830,000
Maruzen Petrochemical Co Ltd
Ichihara
520,000
Eastern Petrochemical Co
Jubail
1,300,000
Mitsubishi Chemical Corp
Kashima
375,000
Jubail Chevron Phillips Co
Jubail
300,000
Mitsubishi Chemical Corp
Kashima
453,000
Jubail United Petrochemical Co
Jubail
1,450,000
Mitsubishi Chemical Corp
Mizushima
450,000
Rabigh
1,300,000
Mitsui Chemical Inc
Ichihara
617,000
Rabigh Refining and
Petrochemical Co
Osaka Petrochemical
Industries Ltd
Takaishi
450,000
Saudi Ethylene and
Polyethylene Co
Jubail
1,000,000
Sanyo Petrochemical Co Ltd
Mizushima
500,000
Saudi Kayan Petrochemical Co
Jubail
1,480,000
Showa Denko KK
Oita City
675,000
Saudi Petrochemical Co
Jubail
1,300,000
Sumitomo Chemical Co Ltd
Ichihara
415,000
Saudi Yanbu Petrochemical Co
Yanbu
860,000
Tonen Chemical Corp
Kawasaki
515,000
Saudi Yanbu Petrochemical Co
Yanbu
920,000
Tosoh Corp
Yokkaichi
527,000
Yanbu National Petrochemical Co
Yanbu
1,300,000
512,933
Average capacity of Saudi Arabian ethylene
plants
Average capacity of Japanese
ethylene plants
1,032,143
Source: ICIS, accessed on October 22, 2010
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The Japanese Chemical Industry: Finding the Right Path | 13
Issues involving overcapacity cannot be separated from the
current rise of the Middle Eastern and Chinese chemical
industries.
The Middle East region has about 67 percent of the world’s
oil reserves and 45 percent of all natural gas reserves, the
largest such reserves found anywhere. The availability of
these resources provides the chemical industry in the Middle
East with both energy and feedstock at relatively low prices.
Companies like Saudi Basic Industries Corporation (SABIC)
currently pay only US$0.75 for one million British Thermal
Units (BTUs) of natural gas compared to the average market
price of between US$7 and US$8 in developed countries.19
Even allowing for the increasing use of mixed feed and the
expected ethane price increase of between 50 percent to
100 percent in Saudi Arabia in 2012, the cost advantage of
Saudi producers will remain significant. This advantage is
exacerbated by the economies of scale available to the new,
highly efficient, world scale plants being constructed in the
Middle East. The average ethylene cracker in Saudi Arabia, for
example, is more than twice the size of similar units in Japan.
Backed by a dependable supply of feedstocks as well as
significant cash reserves, Middle Eastern countries have
made huge investments to increase capacity in both upstream
and downstream production facilities (principally in the form
of world-scale, integrated complexes). More than 19 million
tons per year of ethylene capacity will come on-stream in the
Mideast by 2015, according to SRI Consulting.20
The region is already becoming the leading producer for a
range of petrochemicals and plastics, including ethylene
glycol (EG), polyethylene (PE), and polypropylene (PP). EG
capacity will increase in the region from 6.2 million tons per
year in 2009, to 8.8 million tons per year in 2014, raising its
share of the global total from 28 percent to 32 percent over
the five-year period.21
Japan will likely see a sharp rise in competition from the
Middle East as large-scale petrochemical projects in Petro
Rabigh and Eastern Petrochemical (Sharq) come on stream
in Q4 2010. In a study by Japan’s Ministry of Economy, Trade
and Industry on global supply and demand for petrochemicals,
the Middle East is forecast to have a surplus in ethylene
derivatives of 17.5 million mt in 2014, almost double the
2008 figure of 9.1 million mt, part of which will undoubtedly
flow to Japan. In response, many Japanese companies have
discontinued or cut back production of commodity products
such as PE, EG and styrene that are not competitive with the
ethane-gas fed products from the Middle East.22
As for China and its impact on the Japanese chemical
industry, the numbers speak for themselves. In 2005, global
chemical shipments from China surpassed those of Japan,
and the margin for China increases every year. In Q3 of 2010,
China displaced Japan as the world’s second largest economy
in terms of GDP. Already the largest producer and market for
polyvinyl chloride (PVC) and many other products, China is
expected to overtake the US as the largest chemical producer
in the world within the next decade.23
Like companies in the Middle East, the Chinese chemical
majors benefit from huge amounts of government support
and funding. At the same time, Chinese companies face
critical challenges in terms of poor logistics, tight raw
material supply and the lack of advanced technology for
downstream products. Accordingly, the industry will continue
to need access to technologies and resources possessed by
companies in established markets, particularly at the specialty
end of the chemicals value chain.
While Japan recognizes the threat of growing competition
from China, Japanese chemical companies also recognize
the market opportunities available in such a large and rapidly
growing economy, which is on their doorstep.
19 American
Chemistry Council, October 2008
in ‘Reinforcing Leadership in Petrochemicals,’ Chemical Week, November 23, 2009
Influence Continues to Grow, Chemical Week, November 7, 2009
22 Japan’s chemical industry shifts to prepare for a new reality, ChemWeek, October 15, 2010
23 World chemicals market: Asia gaining ground, Deutsche Bank Research, July 2008
20 Quoted
21 Mideast
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14 | The Japanese Chemical Industry: Finding the Right Path
Comparisons to Europe
As mature industries in developed regions, the Japanese and European chemical industries share a number of similarities.
At the same time, Japan can perhaps look to Europe as a model for a more rigorous approach to consolidation, and the
development of global strategies for future growth.
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The Japanese Chemical Industry: Finding the Right Path | 15
Chemical Sales: Japan, Europe and China
350
3.5%
300
7.6%
6.5%
0.8%
2.7%
4.6%
4.5%
5.0%
3
(3)
250
(9)
(17.8%)
(15)
200
150
9
Sales growth (%)
Chemical sales (US$ billion)
Japanese chemicals sales, 2005-14F
288.5
298.5
300.8
323.6
265.9
283.2
290.8
304.2
317.9
333.9
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
2014F
3.3%
2.9%
3.2%
3.5%
3.7%
Chemical sales (US$ billion)
(21)
(27)
Sales growth (%)
F=Forecast
Note: Chemicals sector consists of base, consumer, pharmaceutical, specialty and fine chemicals.
Source: Japan – Chemicals, Datamonitor, September 15, 2010
900
850
800
750
700
650
600
550
500
4.6%
7.1%
0.1%
(14.3%)
751.8
786.8
842.4
843.3
722.9
747.0
769.1
793.8
821.4
851.8
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
2014F
Chemical sales (US$ billion)
9
6
3
0
(3)
(6)
(9)
(12)
(15)
(18)
Sales growth (%)
Chemical sales (US$ billion)
European chemicals sales, 2005-14F
Sales growth (%)
F=Forecast
Note 1: Chemicals market consists of base, consumer, pharmaceutical, specialty and fine chemicals
Note 2: Europe consists of Western Europe and Eastern Europe. Western Europe comprises Belgium, Denmark, France, Germany, Italy, the Netherlands, Norway, Spain,
Sweden, and the United Kingdom. Eastern Europe comprises the Czech Republic, Hungary, Poland, Romania, Russia and Ukraine.
Source: Europe – Chemicals, Datamonitor, September 15, 2010
Chinese chemicals sales, 2005-14F
22.0%
24
21.6%
21
17.4%
14.9%
14.1%
18
13.2%
12.9%
13.1%
10.2%
12
345.5
421.4
512.3
588.4
648.4
761.2
868.2
983.1
1,110.0
1,255.9
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
2014F
Chemical sales (US$ billion)
15
9
Sales growth (%)
Chemical sales (US$ billion)
1,400
1,200
1,000
800
600
400
200
0
6
Sales growth (%)
F=Forecast
Note: Chemicals sector consists of base, consumer, pharmaceutical, specialty and fine chemicals.
Source: China – Chemicals, Datamonitor, September 15, 2010
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16 | The Japanese Chemical Industry: Finding the Right Path
Over the past 20 years, European (and US) chemical
companies have followed a basic trend toward product
consolidation through M&A, helping them to generate
scale and improve efficiencies.
Chemicals index share price performance
1.6
1.4
Index (1 January 2007 = 1)
1.2
1
0.8
0.6
0.4
0.2
MSCI Europe
01/09/10
01/07/10
01/05/10
01/03/10
01/01/10
01/11/09
01/09/09
01/07/09
01/05/09
01/03/09
01/01/09
01/11/08
01/09/08
01/07/08
01/05/08
01/03/08
01/01/08
01/11/07
01/09/07
01/07/07
01/05/07
01/03/07
01/01/07
0
FTSE Japan
Source: Datastream, accessed on October 26, 2010
Structural Issues
Chemical companies in both Japan and Europe recognize the
need to streamline operations and replace ageing plants and
their supporting infrastructure.
KPMG analysis shows that European petrochemical capacity
may decline dramatically in the coming years. According to
recent estimates, 40 out of 200 crackers worldwide are likely
to become uneconomic by 2015, and approximately 14 out of
these 40 will be in Europe. The closure of these plants would
correspond to the loss of 26 percent of total cracker capacity
in the EU. Similarly, 10 out of 17 European ethylene glycol
plants may become uneconomic, corresponding to 65 percent
of total European capacity.24
In Japan, the competitiveness of naphtha crackers, which
are relatively old and small in scale, remains problematic.
Japanese chemical makers rely on imported naphtha as their
main feedstock, whereas the global trend led by the Middle
East is towards cheaper ethane feedstock.25 Japanese
companies are traditionally reluctant to close plants, but other
solutions are being developed. Recently, Asahi Kasei and
Mitsubishi Chemical agreed to unify their naphtha crackers in
the Mizushima industrial zone of Kurashiki, Okayama, helping
to establish a more efficient configuration for production and
management.
Similarly, Mitsui Chemical and Idemitsu Kosan have unified
their cracker operations at Chiba. Such forward thinking
strategies need to be the norm rather than the exception if
the Japanese chemical industry is to continue to successfully
compete on the world stage.
24KPMG
25Op
analysis
cit. Japan Petrochemicals Report 2010
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The Japanese Chemical Industry: Finding the Right Path | 17
Diversification
Diversification in the global chemical industry
Sumitomo Chemical
Mitsubishi Chemical
Akzo Nobel
Huntsman
LANXESS
Dow
DuPont
Bayer
Mats.
Clariant
BASF
Basic
chemicals
Celanese
ICI
Bayer
DuPont
BASF
Dow
Hoechst
Agriculture
products
Chemical
specialties
Syngenta
Bayer
Health
Bayer
Crops
Pharmaceutical
products
Pharmacia
2010
Sanofi
Aventis
1980
Petrochemical
products
Oil and gas
Source: KPMG analysis, 2010
Over the past 20 years, European (and US) chemical
companies have followed a basic trend toward product
consolidation through M&A, helping them to generate scale
and improve efficiencies. In contrast, Japanese chemical
companies have remained, for the most part, highly
diversified, with business units supporting a wider range
of products.
Unable to compete with cheap feedstocks from the Middle East
and looking for ways to consolidate and reduce overcapacity,
many European chemical companies are tightening their
focus on high-end specialty chemicals. This strategy has yet
to be widely adopted by Japanese companies, most of which
continue to support hundreds or even thousands of products
across the chemicals value chain.
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18 | The Japanese Chemical Industry: Finding the Right Path
Domestic versus Global Strategies
Chemical subsidiaries outside home region
Mitsui Chemical
12
Shin-Etsu Chemical
13
Toray Industries
15
Sumitomo Chemical
17
Mitsubishi Chemical
17
ExxonMobil Chemical
22
Bayer
25
Air Liquide
35
Evonik
41
DuPont
42
PPG Industries
51
The Dow Chemical Company
87
BASF
98
Akzo Nobel
130
0
20
40
60
80
100
120
140
Number of entities
Source: Annual Reports, 2009
Chemical revenues outside home country
35,000
30,964
28,685
25,000
21,912
20,000
16,188
15,000
5,575
4,209
4,120
3,142
2,860
2,714
Mitsui Chemical
6,606
5,000
Toray Industries
6,863
Mitsubishi Chemical
9,587
Shin-Etsu Chemical
10,748
10,000
Sumitomo Chemical
Sales 2009 (US$ billion)
30,000
Evonik
PPG Industries
Air Liquide
Bayer
Akzo Nobel
DuPont
BASF
ExxonMobil Chemical
The Dow Chemical
Company
0
Source: Annual Reports, 2009
Note: Home country for European companies designated as Europe
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The Japanese Chemical Industry: Finding the Right Path | 19
Japanese chemical majors have relatively few
subsidiaries outside the country. In contrast,
BASF has almost 100 subsidiaries and Akzo Nobel
approximately 130 subsidiaries outside Europe.
One area where Europe and Japan differ
significantly is in their approach to global
expansion. The chemical industries in
both countries export approximately
20 percent of their output. However,
the European majors are making a
stronger push to increase their presence
overseas, especially in emerging markets.
Japanese chemical majors have relatively
few subsidiaries outside the country.
Sumitomo and Mitsubishi, for example,
each have less than 20. In contrast, BASF
has almost 100 subsidiaries and Akzo
Nobel approximately 130 subsidiaries
outside Europe. European chemical
companies also post greater total
sales from overseas. Even for leading
companies like Sumitomo, foreign
sales are significantly less than those
generated by European companies such
as BASF, Bayer and Air Liquide (as well
as US giants such as Dow, ExxonMobil
Chemical and DuPont).
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20 | The Japanese Chemical Industry: Finding the Right Path
Change in Perspective
At this point in history,
Japanese enterprises
generally lag behind
their US and European
competitors in terms
of profit growth – just
9 percent in Japan
compared to 22 percent
in the US and 28 percent
in Europe.
If current trends continue, Japanese
chemical companies run the danger
of becoming an “island industry,”
plagued by reduced profits,
inefficiencies, growing trade barriers
and a chronic inability to compete with
foreign competitors. To combat this,
Japanese companies as well as their
management and employees will need
to fundamentally adapt their outlook to
embed a number of business practices
used by U.S. and European competitors.
Chronic
Overcapacity and
Inefficiencies
At this point in history, Japanese
enterprises generally lag behind their
US and European competitors in terms
of profit growth – just nine percent in
Japan compared to 22 percent in the
US and 28 percent in Europe.26
For the Japanese chemical industry,
profit margins may continue to be
affected by chronic overcapacity
and inefficiencies. US and European
companies have streamlined operations
through M&A, but this approach is still
resisted in Japan. “Mergers within
Japan of any size have always been
difficult,” states Peter Young, president
of Young & Partners, an investment
bank.27 “Acquisitions can sometimes
be difficult in Japan”, said Kazuo Sasaki,
president of Mitsubishi Gas Chemicals
in a recent interview. “Each company
has its own culture and it can be difficult
to bring operations together.” Japanese
companies need better consolidation
management techniques to avoid
strategic inconsistencies and problems
with integration. In larger terms, the
Japanese business culture must
overcome traditional attitudes that place
a premium on stability and continuity
regardless of the consequences.
Without significant consolidation and
M&A to reduce what is now a large
number of relatively small plants,
Japanese companies will become
increasingly uncompetitive against
Chinese and the Middle Eastern
competitors where world-scale
facilities are becoming the norm.
Support for
Employees
Japanese companies still prefer to
reduce payroll and increase operational
efficiencies through attrition and
redeployment. This encourages
employee loyalty. Retention rates among
workers remain high, and the workforce
shows little sign of mobility or job
switching. However, the strong social
pressure against layoffs make it harder
for chemical companies to adopt a more
rigorous approach to consolidations,
divestitures, plant closures and other
rationalization that might improve their
competitive position.
Rising Protectionism
The Asia Pacific Economic Cooperation
(APEC) Council recently agreed to
establish a free trade agreement
in the region.28 However, tensions
remain high among members, with
China warning that protectionism was
rising. Indeed, China is extending its
antidumping measures for five years on
ethanolamine imported from Japan.29
26 Op.
cit. Industry Review Japan: Consolidate or Lose!
chemical joint ventures could trump mergers and acquisitions, ICIS, October 19, 2009
28 Amid economic strains, APEC trumpets free trade, Reuters, November 14, 2010
29 China Extends Antidumping Measures on Ethanolamine Imported from Japan, Malaysia, Taiwan, and U.S., ChemWeek, November 17, 2010
27 Japanese
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The Japanese Chemical Industry: Finding the Right Path | 21
Rising trade barriers would have a severe
effect on the Japanese chemical industry,
hindering its entry into emerging markets
while threatening imports of feedstocks
from the Middle East.
Conversely, if structural change
remains elusive and if competitiveness
of the Japanese chemical industry
continues to be eroded, will Japanese
chemical companies themselves
seek protectionist support from their
government to lock out lower cost
foreign competition, reinforcing the
concept of the industry as an island?
Although appealing in the near-term,
protectionism rarely results in long-term
stability and growth, and it can lower
the ability to compete globally. Further,
protectionism may have serious longterm negative consequences for the
global chemical industry, the Japanese
chemical companies and the Japanese
industries that depend on the Japanese
chemicals industry (downstream
industries).
tackle the challenges with which it
is currently faced, and retreats into
isolation, its competitiveness may
be damaged to such an extent that
it is no longer able to effectively and
efficiently provide the solutions to
drive the broader base of Japanese
industry. Rather, the Japanese
chemical companies will be left
behind by the broader base of
Japanese industries that will have
succeeded in internationalization
with a cosmopolitan spirit.
Uncompetitive
Downstream
Industries
With slow growth and overcapacity
continuing and the potential for
protectionism to lock out foreign
competition, the impact of an “island
industry” may have devastating
consequences for key downstream
industries in Japan. The automotive
industry, for example, is currently more
beholden to the chemical industry than
ever to develop light weight composites
and alternative fuel cells to support
the next generation of vehicles. If the
Japanese chemical industry fails to
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22 | The Japanese Chemical Industry: Finding the Right Path
Solutions for Change
Japanese Petrochemical Industry Restructuring Announcements in 2009 – 2010
Product
Company
Details
Ethylene/
propylene
Joint venture (JV) to be set up from April 1, 2011 for unified cracker operations at Mizushima
Mitsubishi
Chemical and Asahi
Kasei
Mitsui Chemicals
JV formed for unified cracker operations at Chiba
and Idemitsu Kosan
Polypropylene
Japan
Polypropylene
Close 90,000 ton/year plant at Kashima in May 2011; close 79,000 ton/year plant at Ichihara in
June 2011
Prime Polymer
Close 90,000 ton/year plant at Ube in March 2011
Polyethylene
terephthalate
(PET)
Mitsui Chemicals
and Teijin
Merge PET operations
Benzene
Asahi Kasei
Close 300,000 ton/year plant at Mizushima in 2012
Ammonia
Asahi Kasei
Close 320,000 ton/year plant at Mizushima in 2012
Caprolactam
Mitsubishi
Chemical
Exits business; closed 60,000 ton/year plant at Fukuoka in March 2010
Styrene
Mitsubishi
Chemical
Exits business; to close 371,000 ton/year plant at Kashima in March 2011
Purified
terephthalic
acid
Mitsubishi
Chemical
Close 250,000 ton/year plant at Ehime in December 2010
Closed 100,000 ton/year plant in Okayama in May 2010
Polyvinyl chloride V-Tech
(PVC)
Close all PVC, vinyl chloride monomer and chlor-alkali plants by March 2011
Polystyrene (PS)
PS Japan
Close 85,000 ton/year plant at Yokkaichi in 2011
Japan Polystyrene
JV (Mitsui Chemicals and Sumitomo Chemical) dissolved and plants closed in September 2009
Mitsubishi
Chemical
Exits PS Japan JV
Mitsui Chemicals
Closed 55,000 ton/year plant at Nagoya end-2009
Bisphenol A
(BPA)
Source: ICIS
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The Japanese Chemical Industry: Finding the Right Path | 23
Although Japanese chemical companies have lagged behind
companies in the West in adjusting to new business realities,
many companies have already taken significant steps to
increase their competitive advantage through restructuring,
joint ventures, consolidation, foreign investments and new
research.
Asset Swapping
In 2009, MCH and DSM Engineering Plastics agreed to swap
assets, with the Dutch company acquiring MCH’s Asian
polyamide operations and the Japanese company gaining a
polycarbonate presence in Europe.30
Under the agreement, DSM is compounding polycarbonate
at its Genk, Belgium facility for MCH; MCH in turn is
compounding polyamide in Kurosaki, Japan for DSM. For
MCH, the swap offers a stronger foothold in Europe, which
is where the bulk of DSM’s polycarbonate business has been
realized.
While historical cultural differences between Japanese
companies may make similar ventures difficult in Japan itself,
identifying mutually beneficial swaps can enable companies
to rapidly build scale in core areas, while divesting non-core
areas to a competitor who can, in turn, give these areas the
attention and focus they would not have received under
existing management and strategy.
30 DSM,
Geographical Expansion
Many Japanese companies have taken steps to partner with
Chinese and Middle Eastern companies. Mitsui Chemical and
China Petroleum & Chemical Corp (SINOPEC) announced
a joint venture in November of 2010 for the construction
of facilities for the production of ethylene-propylene-diene
terpolymer (EPT). The new plant will have production
capacity of 75,000 tons per year, where metallocene catalyst
technology is expected to be adopted for the first time in
China. This will be the largest EPT plant in the world.
Also in November of 2010, Shin-Etsu Chemical announced
a joint venture with Jiangsu Fasten Hongsheng Group Co.
and TKH Group from the Netherlands. The three companies
plan to build a factory in China for optical fiber preform in the
Jiangsu Province city of Jiangy. Producing the equivalent of
eight million kilometers of optical fiber a year, the plant is
expected to begin operating in the second half of 2011.
In the Middle East, Sumitomo Chemical is partnering with
Saudi Aramco to develop Petro Rabigh, one of the largest
integrated refining and petrochemical complexes ever to
be built at one time, with over two million tons of olefins to
be produced each year. With Chinese and Middle Eastern
chemical companies continually searching for proprietary
technology to support their expansion down the value chain,
Japanese chemical companies need to do more to capitalize
on their historical technological advantage to develop joint
ventures which provide access to low cost feedstock and high
growth markets.
Mitsubishi Chemical swap PC, PA business units, PlasticsToday, May 29, 2009
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24 | The Japanese Chemical Industry: Finding the Right Path
Japanese chemical companies must
identify those chemical products in
which their historical technological
advantage will provide a long term
competitive advantage.
However, Japanese chemical companies still lag behind their
Western peers with respect to geographic expansion. BASF,
for example, operates 23 wholly owned subsidiaries and 16 JV’s
in Greater China, generating revenue of more than €4.1 billion
in 2009. In the Middle East, Dow Chemical operates a number
of JVs with Petrochemical Industries Company of Kuwait which
date back as far as 1995.
A lot of this stems from the historical reluctance of Japanese
companies to invest outside of Japan. In order to overcome
the above disadvantage, Japanese companies need to
seriously study how to make use of redundant workers in the
context of globalization of their businesses, particularly with
respect to the management and operation of new overseas
ventures. Another big issue to consider is how to utilize
and integrate foreign workers in companies as Japanese
companies generally do not like the concept of buying people.
Rationalization
MCH is discontinuing the production of styrene monomer at
Kashima and of vinyl chloride monomer (VCM) at Mizushima.
The company had already divested its Singapore operations
where it made styrene through a toll arrangement with AngloDutch major Shell at Seraya and Ellba.
Mitsui Chemicals has reduced capacity and consolidated
production of ethylene oxide (EO), EG, bisphenol A and
ethylene-propylene terpolymer (EPT). It also plans to reduce
its PP capacity. In a similar development, Showa Denko is
downsizing its ethyl acetate operations due to the mature
domestic market. Based on this and other measures, its
current production capacity is 150,000 tons per year,
half of its former capacity.
The challenge for the Japanese chemical industry is to be more
agressive in its identification and rationalization of unprofitable
facilities, enabling management time and investment capital
to be focused on those areas which will be competitive for the
long-term.
31 Op.
This is an area where the US chemical industry, in particular,
has displayed leadership. Despite the cost advantages of US
Gulf Coast ethane (and latterly, shale gas), over 80 chemical
plants were permanently closed during 2009 as US chemical
companies sought to exit uncompetitive commodity chemical
markets and focus their long term business strategy on
science and technology based chemical products. Dow
Chemical, LyondellBasell, Eastman Chemical and Huntsman
are among those who have closed commodity chemical units
over the last two years.
Focus on Core Business
To reduce overcapacity, streamline operations and increase
profits, Japanese chemical companies are focusing more on
core business units.
“Japanese chemical firms are buying in the specialty products
in which they are already strong, including upstream and
downstream in the chain,” says Tetsuya Fujii, managing director
of investment bank Lincoln International.31 He cited a 2009
deal where Sekisui Chemical acquired US-based Celanese’s
polyvinyl alcohol (PVA) resins business for US$173 million.
In a similar move to core businesses, Shin-Etsu plans to improve
its position as a leading manufacturer of semiconductor silicon
wafers by expanding the capacity of its Shirakawa plant.
However, further action is required. As we have already
seen, the trend in the West over the last fifteen years has
been for all but the biggest (BASF, Dow) traditional chemical
conglomerates to fragment into smaller entities focused on
particular areas of the industry. Meanwhile, Japanese chemical
companies continue to operate across the full spectrum of the
chemical value chain which in many instances, denies them
sufficient scale to compete. Japanese chemical companies
must identify those chemical products in which their historical
technological advantage will provide them with a long term
competitive advantage (solar panels and Li-ion batteries for
example) and develop a strategy to build scale and global
presence, while exiting other areas considered non-core.
cit. Japanese chemical joint ventures could trump mergers and acquisitions, ICIS, October 19, 2009
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The Japanese Chemical Industry: Finding the Right Path | 25
R&D and Innovation
Patent applications by country: 2006 – 2009
500,000
Number of Patent
Applications
400,000
300,000
200,000
100,000
0
United States
of America
Japan
China
Republic of
Korea
European
Patent Office
Germany
Russian
Federation
India
Patent Office
2006
2007
2008
2009
Source: WIPO Statistics Database, June 2010
Japanese companies continue to undertake a number of
initiatives to increase their competitive advantage through
research.
Sumitomo’s technology strategy will focus the company’s
R&D efforts on high-growth areas such as the environment
and energy and life sciences, combining technologies in
different areas to develop new products.32
In addition, technological innovation from Japanese chemical
companies is helping automakers develop environmentally
friendly electric vehicles (EVs), reduce their production costs
and increase mileage through the use of low-weight plastics
in place of metal.33 For example, fenders and back-door
panels, door handles, emblems, and air intake manifolds
are all now using plastic parts instead of steel. In the future,
Japanese chemical companies might help automakers
replace even the metal used for the chassis with carbon-fiberreinforced plastics.
Such advances, if successfully productized will help to
support the long-term competitiveness of the Japanese
chemical industry.
32Japanese
33 Japan’s
Firms Launch New Business Plans, ChemWeek, March 14, 2010
automakers and chemical companies boost cooperation, ICIS, October 15, 2010
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26 | The Japanese Chemical Industry: Finding the Right Path
Conclusion
The Japanese chemical industry stands
at an historic crossroads. Following two
‘lost’ decades and faced with the rise of
low cost competition from the Middle
Eastern and Chinese competitors, the
industry is beset by overcapacity, low
profitability and low growth.
With developing trends in the global
chemical industry demanding adaptability
and dynamism, Japanese chemical
companies are struggling to react, with
business practices such as keiretsu
and ringi (collective decision making),
which have served them so well for half
a century, suddenly proving a barrier to
change.
One vision for the Japanese chemical
industry in the future, shows an
ageing industry beset by overcapacity,
protected from global competition by
trade barriers, struggling to provide the
necessary solutions for downstream
Japanese industry.
However, if the leaders of Japanese
chemical companies can drive a period
of change focused on rationalizing
unprofitable facilities, developing an
increased global presence through
beneficial joint ventures, developing
future strategy around core business
areas where long term competitiveness
is protected by historically-strong
Japanese technological advancement,
the industry that emerges will be more
suited to conquering the challenges
presented by the global chemical
industry of the 21st Century.
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The Japanese Chemical Industry: Finding the Right Path | 27
If the leaders of Japanese chemical
companies can drive a period of change ...
the industry that emerges will be more
suited to conquering the challenges
presented by the global chemical industry
of the 21st Century.
© 2011 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
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Ikue Hayashi
KPMG in Japan
T: +81 35218 8744
E: ikue.hayashi@jp.kpmg.com
Corporate Finance
Arihiro Yanagisawa
KPMG in Japan
T: +81 35218 6704
E: arihiro.yanagisawa@jp.kpmg.com
In South America
André Coutinho
KPMG in Brazil
T: +55 21 2183 3179
E: acoutinho@kpmg.com.br
Global Marketing
Ashley Lewis
KPMG International
T: +1 417 777 3787
E: ajlewis@kpmg.ca
kpmg.com/chemicals
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Publication name: The Japanese Chemical Industry: Finding the Right Path
Publication number: 110242
Publication date: June 2011