Long-term R&D vision produces high-tech materials with applications now heading to Asia and America

Toray invested $1 billion in a new carbon fiber plant in South Carolina last year, and more recently in Mexico, which resulted in an additional $2.6 billion supply agreement with Boeing. This serves as validation to the long-term management strategy that Toray has had throughout the years of a passion for carbon fiber, whereas a lot of other companies dropped out because of short-term profit concerns. What did you see in carbon fiber? Why did you believe in carbon fibers so much, and what are your expectations for this segment of your operations for the future?

Since carbon fibers were first invented in the 1960s we have continued research and development on carbon fibers for 50 years. Because of the characteristic of carbon fibers, being that they are strong, light and do no rust, we knew from the beginning that they would be an optimal for aircraft. We were determined to conduct R&D to pursue a good product. It’s true that there are new innovative materials, but because they haven’t been used, until then it is still not clear what they are most suited for. We must test the materials and find evidence of what they’re most suited for using. I joined the company around that time, when carbon fibers were invented and there was even a survey within the company, internally, to determine what people thought they were most suited to.

In testing and coming up with the best ways to use the material, we conducted research and development in conjunction with the users who would actually be using these materials, in order to complete the product and to come up with how we should process and how we should use the material. We have the knowledge about the material, but we needed to work with the users to come up with how they should be used and what they would like to see in the product. Regarding aircraft, it had been used for non-structural purposes already, but in terms of use for structural materials, safety is utmost, particularly with aircraft. We needed to spend a lot of time to appraise their function, their character. In the process of R&D of the material, we first made applications in the sports sector, such as fishing rods, tennis racquets, and golf clubs.

We provided this kind of use, and in doing so we were able to improve the technology and functions of the material. Particularly with using carbon fiber in fishing rods, as you know, fishing rods are about 15 meters long. They have to be light and held with one hand and so we had to develop high quality processing technology in order to create something so flexible, strong, and durable. Fishing rods could cost up to 1 million yen each.

With the revenue we received from the customers of this product, we were able to invest in our R&D efforts in order to create high quality products that could fulfill the conditions required for aircraft. It isn’t that we were operating for many years on a deficit with no applications; we were earning money by creating these products, like fishing rods and golf shafts, all the while honing our techniques, technology, and also earning money, which was put into R&D in order to reach our final objective for use in aircraft.

All of our materials that we handle have taken 30 to 40 years to be developed. The development itself would take between 10 to 20 years but for the business, in order to come up with appropriate applications, it takes 20 to 30 years all together.

Now you’ve already achieved this, you’ve understood the applications and the wide range of products that you can use it for. Is the next phase to roll it out?

Even in Japan, it would be impossible to develop a product with no application for many years incurring great deficits, but all of our management understood that developing an innovative material would take time. We took the strategy of finding various applications, while we honed our technology and earned money at the same time. Also, while aiming to achieve performance quality for our final objective, which was to be able to have the product, materials, used for the first level of structural purpose for aircraft.

I believe that that DNA of Toray is to develop innovative materials and then to put them to use for society. These developments include nylon, polyester, and a special polyester that looks glossy like silk called “Silook” etc. We have taken very seriously the task of coming up with appropriate applications for the materials.

For example, when the applications for nylon were still unclear to the general public, we promoted what they could be used for. For example, we invited Twiggy, the fashion model, to put on the stockings made of nylon, and Toni Sailer, the world-class ski player, who put on the skiwear made of nylon during the race. In this way, although we were not an apparel company, we made promotions towards potential customers in the apparel business, as well as to the general market. Now, we have produced our own carbon-fiber automobile, which is only a prototype for the moment, and which we have shown to CEOs and potential customers in the automobile industry. I believe that the DNA of Toray is that we have created markets to use the materials we developed in view of how we envisioned the product’s final form to be; because when we develop the products initially, their market does not exist yet.

While the innovation and commitment to long-term strategy is one of your biggest competitive advantages, arguably one of Toray’s most important competitive advantages is its corporate culture. I think many of our readers would be surprised and interested to learn that Toray’s stated business purpose is not only to just gain profit, but to “contribute to society through the creation of new value with innovative ideas, technologies and products.” Can you outline why contributing to society is so important to the future of Toray?

Our management style has been to create corporate management vision that spans 10 to 20 years, and then to create medium-term plans to implement this vision of every three years. What needs to be considered in the foundation of developing the long-term vision is how we expect society and demand to transform. When we developed our long-term strategy a few years back, we recognized that the issue of energy, particularly the reduction in the amount of oil produced in the world, would become a major issue for the international society. We believe that increasing our business operations in developing biomass and new efficient energies will contribute to society. Looking within Japan, we face various issues such as the low birth rate, medical issues, and the labor market issues.

Internationally, there is the increasing population and the medical needs that arise based on that. We feel that we’ll be able to contribute to overcoming and solving these issues by providing materials, and also this shall lead to growth of our company. Because what we produce are basic materials and not products like a car, which has a limited scope of application, we’re able to supply the society with various applications. We feel that it is our mission to identify what society needs and to provide innovative and high quality materials to address and respond to those needs. That has been our basic policy and it is also in keeping with our slogan of contributing to society through our innovative technology. Also, the materials that are already used in developing countries will have an increasing importance in emerging nations as well.

For application in those countries, it is imperative that we are able to offer them at a low cost, and so we have been developing technologies to produce them at a low cost and to supply them to those emerging nations, and thereby contributing to their development.

Toray is primarily a B2B company, but as you continue to grow internationally, especially in the emerging economies, are you working to maybe increase the profile and the brand recognition of Toray? Do you use maybe your Japanese roots as a brand in itself to be synonymous with excellence and high quality as you continue to grow and develop?

When speaking about the emerging markets and our provision of materials to the people of those markets, I mentioned earlier the importance keeping the cost down. I’d like to also mention that people’s standard of living in those countries is improving. It is said that in the Asian region, once the GDP per capita reaches over $3,000 there is an increasing demand for consumer products and medical products, and these kinds of markets open up. Once the GDP per capita reaches $5,000, demand for luxury items and items with added value will increase.

Even with clothing, there’s clothing that is just there simply to cover the basic needs. Then, there are the higher added-value products that provide good texture, for example, or feel comfortable even when you sweat. We aim to provide our materials to growing markets where the demand for these added-value and more luxurious items are growing. I just like to note that when we talk about GDP per capita, with countries with a lot of natural resources, the level would quickly come to, say, $10,000, but in the east Asian regions where the countries aren’t so dependent on these natural resources, their income are more based on consumer economy.

What opportunities do you see for Toray with the signing of the TPP, considering you already have some of America’s strongest, largest manufacturers, like Boeing, as clients – not only in America, but also in the Asia-Pacific region?

We have great operations overseas, including our customer Boeing in the United States, as well as customers in Malaysia and Vietnam. In Malaysia, mostly with fibers and textiles, and in Mexico we have just created a plant to produce carbon fibers. We expect a quite positive impact from the TPP signing, because in our growth strategy within our medium-term management plan, we have set our focus on expanding our operations in emerging regions, in the Americas and in the Asian region. So, because the TPP covers many of the countries in these regions, we have great expectations for it. There are still several issues that each country needs to address before the final issuing of the treaty. I hope that this will be issued as soon as possible.

Japan is going through an exciting time at the moment. In a period of global economic recession, Japan is making the difficult choices to reorient its economy. What would you say has been the impact of Abenomics on the manufacturing sector, and on Toray Industries specifically?

Although it is true that the economy of the world is still stagnant, countries like the US have recovered considerably and countries like China and other emerging nations, even if the economy might be more stagnant, they’re still a growing country, so we see much possibility. Abenomics consists of the three arrows, the first of which is monetary easing, and the second is agile fiscal policy. The monetary easing by the government printing money has led to the weakening of the yen, and because exports are very important to the Japanese economy, the weakening of the yen has contributed to improving the health of the major Japanese corporations. As for the impact on Toray, we have been operating overseas for 40 to 50 years.

We have developed a management system that is not affected by the foreign exchange. We have worked to develop the system and therefore we’re not so impacted by this. In Japan, we are considered the leader in advanced innovative research and development of chemical materials. We have been bringing this abroad and, at the moment, 70-80% of our products are produced overseas. With the weakening of the yen making Japanese exports more competitive in the world, the objective of Japan becoming more viable overseas has been achieved. Although our company is not directly affected by the foreign exchange, because our customers are affected by it, we have had received positive effects from the current trend; in this way we have benefited indirectly.

I feel what is important is that we are feeling the effect of the success of the first arrow, which is to improve the mind and to provide a shock effect, and we have been able to achieve this weakening of the yen. While this is in effect, it is important to actively pursue the other arrow, which is the growth strategy. Regarding this, there has been a lot of talk about Japan having suffered from six steps of difficulties, including the very high value of the yen, issue of taxes that are mostly corporate taxes, the corporate associations, the labor market, the restrictions from the environmental issues, the high cost of electricity, etc. These issues have not yet been resolved on a fundamental basis. When I speak about the fact that these issues have not been resolved fundamentally, I can give you one example.

Foreign exchange. At the moment, the exchange rate has settled into kind of appropriate levels by the weakening of the yen, but the foreign exchange is a result of the money gain. It is not a true reflection of the economy. Although the world’s GDP total is $77 trillion, the money invested in the world’s capital stock market is $200 trillion. This has led to volatile exchange rates with the fluctuation of the top currencies, leading to a very unstable situation, so if something happens in the US economy, the Japanese yen may become very strong again. We have not completely solved these six difficulties that Japan has. I believe that unless we actively pursue the growth strategy of overcoming these six difficulties and putting Japan on an equal footing in the international arena with our competitors, we will not be able to sustain this current economic recovery.

Abenomics aspires to make Japan’s economy more international and in many respects Toray is a case study of success for a Japanese company that is very successful domestically and now transforming into a global company. As you said, 70 to 80% of your products are manufactured internationally. What advice would you give to other Japanese CEO and Chairman who are interested in following Toray’s footsteps and aspire to create global companies such as yours? What are the secrets or the keys to internationalization for you?

There’s not really a secret that I can talk about, but because we’re manufacturing materials, we are different from assembly manufacturers. We produce the materials to enable them to put together products. For manufacturers that are making constructive things, they will try to do their production in the countries where labor is inexpensive. Once the labor cost rises, they’ll move elsewhere. For manufacturers of materials like us, by our very nature we must be rooted in the local. As we operate globally, our long-term perspective is to contribute to the local society’s development.

For example, in aspects like their level of technology, export, educational level, or human resources, we create production plants in order to contribute to the local society’s development and that is our long-term vision.

How would you like our American audience to perceive Japan as it leaves behind two decades of poor economic growth and deflation? What is the new brand of Japan?

I don’t think that the deflation and economic recession themselves are such major issues. As the international economy shifts more to the development of emerging nations, it is natural that inflation occurs, of course, and deflation occurs. If the developing nations are continuing to grow, there may be inflation, but the reality is that the countries with lower levels of development are developing more, and so we would be supplying products or materials to these economies. It is natural that costs will decrease and therefore lead to deflation, for example, with TVs or smartphones. For example, with the smartphone, the cost of a smartphone produced in Japan was 50,000 yen, but produced in Korea, they’re 30,000 yen, and in China, 10,000 yen, or even less, so this is a natural trend.

Deflation simply means reduction of cost, so it is not related to the growth of an economy. I believe that is important for us to supply materials to the areas of the world that are growing and to contribute to those economies. I don’t know if this is specifically about Japanese companies, but speaking for Toray, when the Nixon crisis occurred with US dollar, the government started printing money, which has led to the excessive expansion of the financial world. Now, the whole world is trying to figure out a way to control this excessively enlarged financial market. Also, the management styles of the major companies have been focused on short-term goals and capital gain.

Toray’s management vision has been to consider the company as a kind of organ, like a public organ for the benefit of society and to produce innovative materials to contribute to society’s needs. In order to develop these innovative materials, this requires time, but we have committed ourselves to taking this time to produce high performance materials that can be useful to society on a global scale. We also have a basic attitude or philosophy of thinking of the people as the foundation, which means to value the development of human resources and to stabilize employment.

We have sites all over the world, but in the US our US president said that the company has lower turnover rates in its personnel than the surrounding countries. I asked him why he thought this was the case and he said other companies seemed to operate on a financial capitalist philosophy, of thinking of the worker as economic consumables. In our company, based on our philosophy of thinking of the people as our foundation, we considered personnel cost as a fixed cost. By thinking of our personnel as a fixed cost, we put effort into raising the personnel performance by training our employees in order to increase their abilities, which will in turn lead to increases in their wages and, of course, will lead to an increased motivation on the part of the employees. Finally, this will benefit the company’s performance as a whole. We have been able to create this positive cycle. We operate on a 10 to 20-year plan span in developing our personnel and, of course, employees from each of our international sites have worked based on their local way of thinking about the work.

For example, the US has its own philosophy of working, because the employees understand that Toray will not easily lay off their employees when the economy takes a downturn. Instead, the company will make efforts to maintain performance in other ways such as keeping the costs down. The employees come to understand that the company values them and this has fostered a development of local senior management, who are able to carry out very solid management. In our various international operations, we’re seeing local people reach executive and senior management levels, not only in the US but also in Malaysia, Europe and China. These people share our values of thinking of our employees as the foundation of the company.

Thinking long term, thinking of the company as a public service, and the need for other companies to think about social contribution. This local top management has been able to unite with their employees in order to pursue positive operations, which led to profit. I believe that companies around the world used to think the way we do before it married this philosophy of financial capitalism. Before that time, I’m sure that even American companies thought of their employees as the basis of the company, and were united with their employees in order to improve performance and have this kind of management style, because this kind of management style is really rooted in human nature.

I feel that we, as a company, are able to spread this kind of management style globally. Also, the people who are actually doing business are feeling the negative effects of the money game and the attitude of pursuing short-term capital gains. I believe that Toray’s philosophy is being accepted and this kind of style is viable in the future.

In spite of what I said earlier, our company would not be able to continue thriving if we’re not able to develop new innovative materials. We put a lot of effort into our R&D work on the long-term span. About 30% of our investments go into R&D and this includes R&D and basic research on a span of 20 to 30 years. We separate our R&D into two different categories, one being department research (DR), which is the more short-term research regarding the products that are already available. The second long-term research is corporate research. We believe it is imperative for us to develop new materials in order for us to be accepted. In keeping with this, in order to achieve this, we implement our long-term management strategy and our valuing of human resources, that all comes together.