For the past 15 years, the Japanese economy has been relatively stagnant. This has rolled through to the performance of the gas companies. The structure of the Japanese industrial gases business has, however, changed significantly during this time. The number of major players has fallen from nine to four through consolidation.
The first major announcement was in 2003, when BOC's Japanese subsidiary (OSK) and Air Liquide's subsidiary (Teisan) merged their industrial gases business to form Japan Air Gases (JAG). This was followed in October 2004 by an even bigger merger, when Nippon Sanso Corporation (NSC) and Taiyo Toyo Sanso merged, forming an undeniable market leader in Japan - Taiyo Nippon Sanso Corporation.
According to president Matsueda, Nippon Sanso had realised that the company was not big enough to survive in the worldwide gases market. $quot;We were looking for a partner and chose Taiyo Toyo Sanso, who we decided would offer a positive contribution to a larger entity,$quot; he said. $quot;After the merger our market share in Japan reached 40 percent but, more importantly, the new organisation has increased both turnover and profits.$quot;
After the merger the new market leader was looking beyond the domestic market. Both of its predecessors had expanded into Asia and NSC had established an important position in the North American market. TNSC wanted to draw on these capabilities to become a market leader around the world.
gasworld caught up with President Matsueda in London. He had flown in following a Linde Nippon Sanso board meeting in Dresden, Germany. Linde Nippon Sanso is TNSC's electronics gases joint venture with the Linde Group and serves as an example of the corporation's global intent.
The 65-year-old economist was very upbeat about our industry and on TNSC's performance. The company has recently released its half-year financial results, which show both strong revenue growth and significantly improved profitability (see page 16).
$quot;Since the merger two years ago, Taiyo Nippon Sanso has been very successful,$quot; he said. $quot;We have increased sales and profits at a high rate. If you look at our performance for fiscal 2006, you will see that our net sales were $3.4 billion, operating profit was $232 million, recurring profit $236 million and net income $125 million, all significantly up from the previous year.$quot;
Although the figures look good, TNSC's goal is much higher. It aims to grow into a five billion dollar business over the next few years. Matsueda continued: $quot;Since the merger we have been focused on the global markets. We are developing the company overseas in order to become a true Asian-born global player.
$quot;We have set two fundamental policies. Firstly, we need to develop new business through effective use of cash flow such as M&A activity and capital investment. Secondly, we need to improve our industrial gas related operations by pursuing effective cost reduction and efficiency programmes, streamlining procurement (and logistics) and making use of synergies from integration and concentration.$quot;
Matsueda is confident that the initial target of Â¥450 billion (US$4.0 billion) is achievable next year. One reason for his confidence is the market upturn expected in Japan, where gas users in the field of semiconductors, flat panel display televisions and solar cells are investing in further production capacity. $quot;These customers are growing rapidly and making large investments. To follow their development we need to invest in developing special gases.
$quot;On the other hand we also need to invest more abroad, especially in the US and China and other Southeast Asian countries.
$quot;We want to grow sooner rather than later. Although at the moment the overseas market only represents about 20 percent of our total turnover, we aim to increase this by 50 to 100 percent in three years time. The US operations alone will represent one billion dollars - 20 percent of the business within that period.$quot;
Global 5000 - $1bn investment in three years
Global 5000 is Taiyo Nippon Sanso's primary strategic goal, outlined in its medium-term business plan: to achieve $5 billion in sales. To meet this target, the company will be expanding, enhancing its business operations and generating earnings through effective and efficient investment. $quot;We aim to launch unique new products and materials based on customers needs,$quot; Matsueda said. $quot;In addition, we will promote further efficiencies through continued review of business operations, including our affiliates, and enhance profitability through structural reform of low-profit operations.$quot;
TNSC's target for fiscal 2008 is to grow net sales by 13.3 percent, operating profit by an overwhelming 41.8 percent, recurring profit by 36.5 percent and net income by 38.9 percent. $quot;These numbers will mean very strong growth in our activities, an upward rise of nearly 40 percent all around,$quot; said Matsueda. $quot;In order to achieve this, we need to invest one billion dollars in three years. This will be split between capital expenditure and M&A activity.$quot;
Acquiring attractive targets is particularly important to TNSC because sales and profit from M&A occur immediately, changing the company's performance quickly. Investments in new plant and equipment take longer to mature.
First half results for fiscal 2007 show net sales approximating $1.9bn, a 16 percent increase over the previous year. Sales of gas and machinery have been particularly strong, showing an increase of $104 million on a non-consolidated basis. TNSC's US subsidiary, Matheson Tri-Gas, also showed a strong performance, recording a revenue increase of $39 million.
$quot;We expect our operating profit to increase by 48.6 percent to $157 million and net income by 48.6 percent to $82 million. Our gas business in the previous half-year was nearly $1.1 billion. This year the figure has increased to about $1.3 billion,$quot; said Matsueda.
Although TNSC has a dominant position in Japan, Matsueda believes there are still opportunities to make acquisitions within the country. $quot;There are many small distributors and local manufacturers that are of interest to us,$quot; he said.
However, TNSC also has an eye on the overseas markets. $quot;TNSC's main aim is to expand its US operations as well as those in China and other Southeast Asian countries,$quot; said Matsueda.
$quot;We are also already present in Europe through our electronics joint venture Linde Nippon Sanso. This is our only subsidiary in Europe and I think it's too late to enter or expand in the region now. We can serve our European customers in the fields of semiconductors, flat panels and solar cells through our joint venture.$quot;
TNSC is also a latecomer in China. $quot;We started our operations there just over ten years ago,$quot; said Matsueda, $quot;and set up as a small but specialised gas company. Now we are expanding our operation, looking at new opportunities for investment in China. We have three companies in the Shanghai area, including a special gas company, Shanghai Taiyo Nippon Speciality Gases, and a trading company, because Chinese regulations restrict gas imports.
$quot;The third business is a small on-site business that supplies nitrogen to Japanese customers in China. This will give us an opportunity to gain some orders from new worldwide companies in China. We hope to cater for new large Japanese and American customers in the country.$quot;
The year 2006 was busy for Taiyo Nippon Sanso, especially in terms of acquisitions. The company developed significantly in Europe and the US.
Firstly the company acquired Linweld, a medium-sized industrial gas producer in the US. TNSC didn't previously have anything in place in the Midwest; through the acquisition it gained a high market share in the area. TNSC aims to reduce Linweld's indirect costs. To improve profitability, it will install new air separation plants to produce bulk gases in-house.
$quot;From this position Linweld, through Matheson Tri-Gas (MTG), can expand its business to both east and west coasts, becoming a national company,$quot; said Matsueda, $quot;It is performing well and its profitability is good. Turnover is about $152 million, bringing our total US turnover after the merger to $750 million. With the synergies our US operations will obtain and the growth prospects for the country, MTG has a good possibility of becoming a one billion dollar business, representing a fifth of TNSC's turnover in the next few years.$quot;
Matsueda added that the company has to look for further expansion and acquire local distributors and suppliers. $quot;There are already some candidates on the table and we continue looking for new opportunities,$quot; he said.
TNSC also had an unexpected acquisition opportunity in 2006 arising from the merger between Linde and BOC. The purchase of Linde's helium contracts and assets in Russia, Poland and the US supported the company's focus on global expansion and growth through strategic new products and services.
Through the acquisition TNSC became the first Japanese company to deal directly with a helium producer. Matsueda said the company has tried in the past to achieve a wholesale position but failed. $quot;Luckily, due to the merger, the European and the US Federal Trade Commissions ordered Linde and BOC to sell some helium assets and businesses, which we successfully bought,$quot; he said. (see gasworld, November 2006, page 16).
$quot;It's a kind of strategic weapon and enables us to do business in many new areas and further develop our helium business.$quot;
MTG will control the business, expanding the company's European presence by establishing a subsidiary in Belgium. The acquisition also strengthens business operations in Japan and other East Asian countries and gives the corporation control of 10 percent of the world helium supply.
The Southeast Asian countries are also a target for significant expansion by TNSC. In South Korea, the company has recently completed the construction of a special gas filling plant, giving it four times its previous capacity. From there the company supplies gases to manufacturers of semiconductors in Korea and worldwide. $quot;We will supply gases for use by Korean and Japanese semiconductor customers in China,$quot; said Matsueda. $quot;We will also try to increase capacity and enhance capabilities to supply flat screen and solar cell customers in China and the US.$quot;
TNSC has recently enhanced its presence in Vietnam by expanding its production facilities in the south. Matsueda said the plant's demand has remained steady and TNSC is opening a new facility. TNSC's total share of the nitrogen market in Vietnam is about 60 percent.
TNSC's profitability significantly improved in the first half of 2006. This was partly due to higher volumes and utilization leading to higher profitability in production. Matsueda is confident that the company's three-year plan is realistic and that TNSC will become one of the world's leading gas giants.
$quot;The Japanese economy has been growing at two to three percent recently, which means four to six percent growth for us. Industries such as flat panel display manufacturers and solar cell manufacturers are enjoying above average growth and these factors are good drivers for more gas demand.
$quot;If global economic growth continues, the future outlook for the industry looks positive,$quot; he said.
$quot;I am very optimistic about the industry in general. Because our industry supplies many industries and customers, there are many new application possibilities to be realised. For example, a major opportunity comes from environmental issues. Gas companies are well positioned to address these.
$quot;I am confident that our $5 billion target will be met, driven by acquisition opportunities and general buoyant growth dynamics. We used to be number six in the world. Now is our time to catch up with the other majors and become a true Asian-born global player.$quot;
41 years and counting.....
President Hirosuke Matsueda is a rare breed of manager these days, having worked for a single company for 41 years and literally starting at the bottom he has made it to the very top of the industrial gases ladder.
He joined Nippon Sanso Corp in 1965 having majored in Economics at Keio University. His first job was as a sales clerk based in the Kawasaki office. He moved into corporate planning and technical development departments before he was posted to Singapore in 1985 as the MD of National Oxygen. This was not his first exposure to the international industrial gases business but was an important role in understanding the management of an overseas division.
Matsueda has been at the forefront of NSC's, and more latterly TNSC's, overseas development (spearheaded by Mr Nosaki in the 1980s). He, himself, admits that he enjoys the challenge of M&A activity and participating in joint venture discussions or fully blown acquisition activity.
While his actual international posting was limited to the 4 years in Singapore, he has enjoyed various internal postings within the Japanese gases business, responsibilities for on-site and plant sales both within Japan and overseas and growing head office responsibility before becoming a Corporate Executive Office in June 2000.
In 2003, Matsueda was promoted to Executive Vice President and was one of the main parties involved in the merger of Taiyo Toyo and NSC in October 2004. He has worked well with Mr Taguchi - former President and now Chairman of TNSC.
President Matsueda has one major desire - to see TNSC to become recognised as a truly international gases company and a serious top tier player in our business. Under his directorship, the company is certainly heading in the right direction.