An interview with Keiichi Asai, President of KH Neochem
Due to the challenge brought about by climate change, we must re-think the way we live and conduct business. In order for the “green-switch” to happen, the private sector across the world must lead by example, by becoming eco-friendlier. How is your company contributing to creating eco-friendly solutions?
It is essential for companies to be environmentally friendly, especially those dealing with chemicals. At KH Neochem we have two business lines: basic chemicals and functional chemicals. The functional chemicals are mainly classified as refrigeration lubricant oil, cosmetic raw materials and electric materials.
The world's population continues to grow and is expected to increase from 7.6 billion to 9.6 billion by 2050; resulting in an expansion of the middle-class segment. This segment typically purchases refrigerators first, then air conditioning before purchasing a car. This makes the refrigeration lubricant market a promising area of business. Countries such as China, India and South America, whose middle-class segment is already growing rapidly, have an increased need for air conditioning due to their hot and humid climates.
Air conditioning units work the same way regardless of their size or purpose – residential, industrial or commercial. These air conditioners are composed of an outside unit which contains compressors and an inside unit. We supply base materials of the refrigeration lubricant oil for use in the compressors.
The characteristics which are needed for refrigeration lubricants are compatibility, miscibility and then durability with a particular refrigerant - because typically an outside unit is not maintained for ten to fifteen years.
One of the conventional refrigerants, R22, is being eliminated because it does have a significant impact on ozone deterioration. A current standard refrigerant, R410A, which does not deteriorate the ozone layer, is mainly used for the current residential air conditioners that we can buy in electrical stores. Mineral base lubricant oil for the compressor is no longer suitable for R410A in terms of compatibility and miscibility, so a need for synthetic chemical base lubricants arose. However, R410A refrigerant has a high GWP (Global Warming Potential) with a rate of 2080, which is higher than R22 with 1080 GWP. As the GWP of R410A is still relatively high, the new refrigerant, R32, is being introduced mainly in Japan. R32 refrigerant's GWP rating is 675; a third less than R410A.
At KH Neochem we produce raw materials for synthetic chemical base lubricants required for R410A and R32 and sell them to lubricant manufacturers, who then add additives and sell it as their own-brand refrigeration lubricant oil.
China has the largest number of air conditioning compressor manufacturers, as a percentage, they occupy 70% of the world's air conditioning market. They manufacture and supply compressors to many companies including Daikin, Panasonic and Mitsubishi. One of our strengths is that we produce raw materials for synthetic base chemical lubricants for R410A and R32. We are indirectly contributing to the protection of the ozone layer and global warming reduction by the production of these products.
With the expected growth of the middle-class segment, this type of refrigerant might be used even more. In the year 2016 about 90 million air conditioners were produced for residential use and this is expected to increase to 113 million in 2025, with 105 million using R410A or R32 refrigerant, so there is a big opportunity for business in this market.
KH Neochem was created in 1948 as Kyowa Hakko Co., Ltd., your company was Japan’s first organization mass producing acetone and butyl alcohol from syrup. Almost 70 years later, you have grown into a major player, with an international presence and a turnover superior to 80 billion JPY. Can you take us through the milestones of your company?
When our company was first founded as Kyowa Hakko Co., Ltd it had five lines of business; bio chemicals, pharmaceuticals, petrochemicals, food and alcohol (for drinking).
As a result of selection and concentration based on the Kyowa Hakko’s business policy, they decided to divide the business fields into two categories: bio chemical products and pharmaceutical products. The petrochemical division was sold to fund JIP, Japan Industrial Partners, which is a 100% private equity fund. The purchase occurred in 2011. My first task when I took office three years ago was to find personnel to manage the support and infrastructure business (e.g. general affair, IT, HR, IR, Public Relation).
This company was part of Kyowa Hakko, so functions such as personnel, general affairs, IR were all managed by the Kyowa Hakko staffs. We had excellent technological skills and good sales personnel but they were lacking in human resources, IT and also IRPR. I therefore recruited skillful employees to address the company’s gap. For example, our CFO is from UD Trucks now owned by Volvo. This mixture of different people really makes a positive influence to KH Neochem and gives it a hybrid effect. This workforce diversity is clearly a strength of ours.
This is a brief history but looking towards the future we aim to evolve. Our three-year plan is to globally expand chemical sales, enhance profitability of basic chemicals, and establish a base for the future. Establishing a base for the future is extending our operations to other areas, and more specifically Taiwan. Using our expertise and technology we will be forming a joint venture with Taiwan’s national company to produce Isononyl alcohol. Isononyl alcohol is a basic chemical used as raw material for plasticizes. Plasticizes is a product which softens PVC. It is used in a wide variety of products including cars, chairs, wallpapers and other household materials. We decided to invest new facilities for this product in Taiwan and aim to be in operation in 2020.
There is another product which makes up strong areas of our business. The product is 1,3 Butylene Glycol which is one of the important ingredients for cosmetics including face packs, hand cream and skincare products. It has a high moisture retention and is both hypo allergenic and anti-bacterial. We supply this product to not only Japanese cosmetic manufactures but globally including China and South Korea who are great fans of our product.
Internet shopping has brought the increase of product awareness and sales. Today, even people in remote areas can purchase face packs that contain our product, something that wasn't possible 10 years ago. If you are within a radius of 500 km from Beijing or Shanghai, you will be able to receive an ordered product two days later.
A survey has shown customers from Japan spend 130 dollars per year on skin care products, whereas Korea spends 114 dollars; China, 19 dollars; Malaysia, 19 dollars and India only one dollar. The low expenditure rate of China, Malaysia and India can rise, indicating that there is huge potential in skincare products. If you purchase high-end skincare products, most likely 1,3 Butylene Glycol (1,3BG) is listed as an ingredient. This component sells extremely well and is in high demand. We expanded capacity by 20% last October. Because the raw material of 1,3 Butylene Glycol is not easy to transport due to its dangerous characteristics, we have the advantage by producing this raw material by ourselves.
One of the products I am proud to have contributed to is 1,3 Butylene Glycol, which is used in skin care products. Only a few years ago, Japan had an expanse of Chinese tourists who purchased products such as cosmetics on a grand scale. In recent years though, this has somehow stopped. I believe that this is due to the democratization of the internet. Maybe in Mongolia or deep inland China, people have just started to use skincare products. I would imagine this to be the real magic of the internet. Japanese cosmetic skincare manufacturers are making a good number of sales in China.
From FY2016 to FY 2017, your revenue jumped from 80.2 to 86.3 billion JPY; simultaneously, your operating income also rose from 6.1 to 9.2 billion JPY. What will be your mid-term strategy to keep that momentum going?
Over the last three years, I have been focusing on moving our products from the commodity sector to the high-end market. The total net sales forecast is 88.5 billion yen for 2017 with basic chemicals and functional chemicals including electrical materials attributing to about 50% of the total sales. On other hand 70% of the profit will be generated from functional chemicals and electric materials. The profit from basic chemicals will be limited to only 30%.
The growth in the middle-class segment means that the refrigerant business will grow, regardless of Donald Trump's environmental remarks. Another contributing factor to growth is the explosion of purchase power from Chinese and Indian people who are trying new products such as face packs; in fact, today men are also trying such products.
With the expansion of 1,3Butylene glycol usage, our biggest concern is that a rival product will be released to the market with similar attributes of moisture retention, anti-bacterial and hypo allergenic qualities.
Another area of our company is the production of high purity solvents used for photoresist, which makes the semi-conductor. High purity solvents with high quality are needed for micro fabrication which allows the miniaturization of the semi-conductor circuit. The control of impurity such as metals is significantly required. The level of impurity for solvents is used to be rated by PPM (parts per million), then this changed to PPB (parts per billion). Now, photoresist manufacturers ask us to produce high-purity solvents which has impurity level by PPT (parts per trillion).
Our high-purity solvents contribute to the high quality of semi-conductor and electrical products in Japan. Key success factors are quality control and quality check which cannot be conducted without photoresist manufacturers. We have significant strengths in those areas since we have been working in this solvent business for more than twenty years and we are originally a conventional solvent manufacturer which supply products for ink, printing and paint.
With respect to the American market which is showcasing great changes in the AC market. In terms of semiconductor, it is the first manufacturer in the world. In this midterm strategy that you have to develop these products from your performance materials, what are your expectations for the US market?
Our primary role is to supply raw materials for refrigeration lubricant oil in the US, which contributes to the reduction of the ozone layer destruction and lower global warming potential. Another area can be high purity solvents which would be a good fit with semi-conductor for development of artificial intelligence. This area is expected to be increased.
Both nationally and abroad, your market is highly competitive, with industrial giants such as BASF and Noxell as well as local competitors wanting to get their share of the pie. What are the competitive advantages of KH NEOCHEM?
We have several competitors in each business area. The basic chemicals – INA (isononyl alcohol) for plasticizer raw material, which we are planning to produce in Taiwan – our competitors are BASF, ExxonMobil and Evonik. Only four companies including KHNC have technology to produce INA. As for 1,3 Butylene Glycol, three companies, including KHNC, are currently manufacturing it in the world. Our competitive advantage is low-cost management for production. We are making a lot of efforts to minimize operational cost, maintenance costs, indirect costs and energy consumption.
Another competitive advantage is our advanced technology. Our quality control expertise is of a very high standard and we have invested a lot in this business. These all contribute to our customer satisfaction, which in itself is a big competitive advantage.
Domestically, we cannot expect to increase our product demand due to the decreasing population. However, we have yet to really enter international market. We believe there are a lot of opportunities to sell our chemical products to the US and other countries.
Have you set an objective for your presidency that you would like to achieve before moving on?
My mission is to take this company to the international market. KH Neochem is presently perceived as a domestic company, and our reputation is limited within Japan with the exception of a small number of the US, Korean and Chinese customers. My three-year business plan during 2016 – 2018 includes expanding our core competencies to Taiwan, and other areas.
Japan has started to get maybe 3% - 5% of total GDP by investing money outside through interest and dividends. This trend will be continued. For example, approximately 50% of annual income for Japanese chemical companies is produced overseas and generated by means of interest and dividends. I will also be looking into investing Taiwan and obtaining dividends. Whenever we decide to penetrate a new market, we have three prime conditions to analyze. Number one is the size of the population; number two is literacy; number three is pro-Japanese attitude. Taiwan meets these criteria. In the future, I would like to develop our business in other areas.
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