AFREX: the only heat-exchanger specialty manufacturer in Japan

In the last 25 to 30 years, Japan has seen the rise of regional manufacturing competitors who have replicated Japanese monozukuri processes but taken advantage of cheaper labour costs, pushing Japan out of mass-industrial markets. Yet, we still see many Japanese firms maintain leadership positions in niche B2B fields. How have Japanese firms been able to maintain their leadership despite this stiff regional competition?

Before I answer your question, let me introduce myself a little. I joined this company 13 years ago, I used to work for major enterprise before I moved here. I had some ideas about SMEs from that major enterprise’s perspective.  When I worked at major enterprise, I used to be a technology adviser for South Korea and China companies where I educated some of the local employees and transferred the know-how to them.

As you mentioned, mass-production markets have been dominated by our regional competitors such as China. Japan cannot keep up with them due to the size of market. They have already taken over the manufacturing of household electronics such as refrigerators and air conditioners. However, as you know, Japan is a Galapagos Island. That is why we were able to improve and enhance our detailed technologies and also the technologies needed for niche fields. That is how Japanese SMEs have survived despite the fierce regional competition. Even though the Japanese market has little prospect for further growth, we are able to maintain our competitive advantage because of our accumulated technology.

When it comes to the cooling and heating industry in Japan, we have cold winters and hot summers. This kind of environment result in this industry actively. we were able to improve and enhance our cooling and heating technologies. Also, with regards to the food industry, Japanese people eat a lot of raw food and enjoy the taste and flavour of it. That is why we have advanced cooling and freezing technology here in Japan. It may have been established in western countries first, but cold chain popular throughout southeast Asia. And Japan companies have the most advanced technology to support it. That is why we on the leadership of producing cooling unit and components, which are used in a wide variety of application.

In the next 15 years, one third of the Japanese people will be over the age of 65, presenting two major challenges for firms. The first is a labour crisis and the second is a shrinking domestic market. What are some of the challenges and opportunities that this demographic shift is presenting for AFREX?

In Japan, there are a lot of small companies that specialize in cooling and heating technologies. However, those companies are struggling to grow because they do not have unique technologies or they are not able to produce at a cheap cost. We are trying to cooperate with those firms through different methods such as joint ventures, alliances and business partnerships. That will help us to improve the scale of their business.

When it comes to the overseas market, we have the top cooling and freezing technology for the food industry. We would like to expand this technology to Southeast Asia, as we anticipate that they will have more and more frozen food in that region. We would like to bring our devices and technology to that region, so that we can expand our market share there.

Speaking about the demographic challenges in Japan, of course as you mentioned, it is getting harder and harder to hire new people, especially talented young graduates. As a result of this, the working population has been declining for the past 20 years. We are trying to hire more female employees, and also, we would like to hire elderly employees as well. We are committed to diversity at this company and we would like to have people of all ages and both genders working for us. We are also actively looking for talent overseas and we have hired a lot of Chinese employees. You can hear the Chinese language being spoking as you walk around this factory.

We know that your products can be divided into four main segments. They are the heat exchanger field, the applied products field, the piping field, and the sheet-metal working field. Which product segment are you currently focusing on and which one do you believe has the most potential for future growth?

At this moment, the heat exchanger field is the axis of our business. Also, as I mentioned, our products are used in a wide variety of niche fields. In these niche fields, it is difficult to find a lot of customers and the unit price of heat exchanger is low. As a result of this, we are trying to supply the products in units, instead of in parts.  In conclusion, increase added value is more efficient.

These are the markets that we cover. It starts with air conditioners and refrigerators, and other heating and cooling devices. We also have environmental test equipment and agricultural equipment. As I have mentioned, the area of heat exchangers is the axis of our business. Our applied products area utilizes the technology that we accumulated in the heat exchanger field and we conduct B2B business through this technology. The pipes and sheet-metals that are used for the heat exchangers are also a core business for us. Most of our products are produced in Chinese factories.

There are a lot of different niche markets for our end user’s commodities who are using our parts and units. However, we do not want to pursue those commodities, as if we do, we will have conflict with our customers. Therefore, we prefer to continue to focus our operations on our four core businesses. To continue to grow in those areas, we need to refine our technologies for freezing system. That is why we established this R&D centre.

Your company produces a lot of heat exchangers, which are very important to air conditioning systems. However, there are certain challenges when it comes to heat exchangers. These include rust, corrosion and deterioration due to age, as well as premature metal failure. We know that you provide high-quality exchangers for many air conditioning systems. How do you overcome those challenges when it comes to heat exchangers?

We use copper in a lot of our products, however, the price for copper has doubled. The technology to convert copper to aluminium is urgently needed and we are now working on the development of this conversion to aluminium. That is why we are trying to manufacture a completely new type of heat exchanger using a new manufacturing method. It is our goal to launch this new product for mass-production two years from now. To that end, we established a demonstration factory in Shiga.

AFREX provides environmentally friendly heat exchangers which are suitable for new refrigerants as well as flammable refrigerants. Can you tell us a little more about your environmentally friendly heat exchangers and what other initiatives are you employing to reduce your environmental burden?

We would like to contribute to an eco-friendly society with our units and heat exchanger so that we can reduce the environmental burden. If we reduce the usage amount of Copper and Aluminium in our products, and if we enhance our technology which can be more energy efficient, then we can reduce our CO2 emissions and save energy and limited resource. That is how we are trying to contribute to the environment.

We are also trying to upgrade the refrigerants used in our units. We have two work direction now. One is to restrain ozone damage and another one is to reduce CO2 discharge. If there has a gas leak, since they are flammable, it is going to be very dangerous. To address this issue, we produced a seamless type of heat exchanger without any joints. That allows us to minimize the risk of gas leakage.

We also have unique simulation technology. When you want to use a new refrigerant, you need to upgrade everything both hard and soft so that it can respond to it. In order to address this, we have simulation technology, which allows us to analyse the performance of the new heat exchanger and provide data which can be used in production design to our clients.

Not only do you develop high-quality products, but in 2018, you launched your R&D centre for product development which utilizes state-of-the-art equipment. Four years on since its launch, how has your R&D centre enhanced your research capabilities?

When we set up this R&D centre, we did not have a lot of equipment and we had only a few people working here. However, now, we have about 20 engineers working here and we hire more people each year. Since our capital is limited, we are unable to increase the quantity of equipment.

Our R&D centre has contributed a lot to our business, especially when it comes to the unit business. We have had a lot of tie-up development with our clients. Some of our clients outsourced the development for the units to this centre and it has grown to be an engineering business by itself.

If we focus on the international perspective, your company is known for providing high-quality heat exchangers, but you also have operations in China and Thailand, where there is a very big difference when it comes to engineering skills and equipment, when compared to Japan. This can have an adverse effect on the outcome of the final product. How have you been able to ensure the standard of quality in your products in your overseas operations?

That is an issue. Due to COVID-19, we were unable to visit our local facilities overseas. We only had two meetings with the local employees and there were actually a lot of issues that we needed to address. Under the background of predicted block economy, supply chain would be a big problem. the logistics disruptions were a big challenge for us, especially in April and May of this year, when Shanghai was under lockdown. It was very difficult. As a result, a lot of Japanese clients requiring us to produce same production in domestic and local factories so that we are able to reduce the risk. We are trying to respond to these changes. That is why we decided to set up a factory in Thailand this year. We used to rely solely on China, but we have now split our production capabilities between China and Thailand so that we can hedge the risks.

It is very difficult to educate the local employees due to the difference in culture. However, we dispatched some of our Japanese employees to there.

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You have already explained how you are working with local companies in Japan in the heating industry, through M&As and joint ventures. Are you looking to apply this internationally as well?

If any company wants to have a partnership with us, we do not hesitate to negotiate with them. The reason why we established a factory in Thailand is because there are a lot of Japanese companies already operating there. With a local presence, we can expand our communication with local companies. The same goes for China as well. If we are able to find a potential partnership, we would like to actively engage with that kind of company and educate the local employees so that we can expand our market share.

Moving forward, are there any other countries or regions that you have identified for further expansion into?

Since last year, we have done three major projects and have made a lot of investments into those projects. The first project was an M&A in Gunma. The second was the establishment of our factory in Thailand and the third project was our demonstration factory in Shiga. For the time being, we would like to stay focused on these three projects. After that, we will look to further expand our operations.

In order to further grow the business, we need more money, and we also need more people, especially for management and young talents.

Imagine that we come back three years from now, for your company’s 95^th year anniversary, and have this interview all over again. What would you like to tell us? What are your dreams for this company, and what goals would you like to have accomplished by then?

As you have mentioned, we will celebrate our 95^th year anniversary three years from now. However, we would like to consider ourselves a young company as we changed our name and reorganized the firm 12years ago. We are still young. We have a midterm plan targeting 2025, with several goals. The first is to be a leading company in the heat exchanger industry. We would like to consolidate our sales revenue up to JPY 15 billion. We would also like to enhance our corporate value and we aim to become a company why is speak highly by society.

We achieved JPY 5.8 billion in sales last year. This year, the target is JPY 8 billion.

I would also like to mention another important goal that I have for the future of the company. We have hired a lot of young talent, and I want them to grow personality when working with us. This personal growth will lead to the company’s growth. To that end, I think that education for people is very important. As I mentioned, I used to work for major enterprise and I learned a lot from the philosophy provided there. One of the philosophies that I learned is that manufacturing starts with creating people, or hitozukuri. As you mentioned, countries such as China and South Korea have replicated Japanese monozukuri, and are manufacturing products, but it is very difficult for them to replicate hitozukuri.

In Japan, we still have a permanent employment system, but actually, 30% of new talent leave a company within three years of being hired. Therefore, it is very important to focus on engagement with employees. We want to help our employees achieve their life goals. To do so, we are focusing on our employees’ education. We have three important training frameworks. Mirai training is for management. Junior Mirai training is for young talents and practical training is for monozukuri. We focus on the ownership and independence, as we believe that this will lead to engagement. That is very important for the future of this company.