Having begun 2023 with a major rebrand, the century-old supplier of high-performance materials has embarked on a new, exciting chapter with big ambitions for global growth.
Japan, being an island nation, is very resource-poor, lacking oil, gas, and other minerals necessary for material production. However, if we look at material innovation, companies like Toray in Japan have made significant advancements. For instance, they supply primary structural elements for the Boeing 787, with approximately 35% of the airplane's components originating from Japan. In terms of the engine, Nippon Carbon plays a crucial role by providing silicon and carbon fibers as structural elements. Why do you think Japan has been so successful in materials despite its limited resources?
Well, it goes back to the original statement you made about Japan in the 70s and 80s, where it was known for producing super high-quality consumer brand products like the Sony Walkman.
Japan pioneered the miniaturization of technology, and it all began with the quality system mindset that was developed here. The rest of the world, including Europe and the US, has been trying to emulate what started at Toyota with the Toyota production system, focusing on quality processes, systems, and controls.
In my former company, we had to learn a lot about maintaining a quality product on the shop floor, especially when producing materials for a Japanese OEM, even if the production was happening in the United States. All the systems in between, from the material coming in the door to the end product, had to be managed with a quality system and mindset. This mindset was emulated by basic quality systems worldwide, all stemming from Japan. Whether it was automotive manufacturing at Toyota or the miniaturization of transistors and other advancements, it all started here in Japan. The Japanese manufacturing mindset, embedded with quality systems, extended to the production of materials used in products consumed by consumers, such as cars or electronics produced.
The infrastructure supporting major Japanese OEMs grew, and they began producing materials for companies outside of Japan, in Europe, and in the United States. Japanese quality became synonymous with reliability, and having a Japanese supplier meant confidence in on-time delivery without quality issues. This mindset shaped industries beyond consumer brands in Japan, building a supply chain that starts with basic materials and ends with the components of the final product. This mentality has been established in Japan for a long time, and the rest of the world is still catching up.
Although some Japanese consumer brands may have lost their way and market share to competitors like Korean and American companies, the core suppliers that supported those brands still exist and continue production. They operate not only in Japan but also in factories in Vietnam, Thailand, China, and the United States to serve their Japanese and global customer base.
You mentioned the tradition of Japanese products being synonymous with high quality, albeit often at a premium. However, the landscape has changed, and Japan has become more cost-competitive. Factors such as low-interest rates in Japan, rising interest rates in the US, and the decoupling between China and other nations have created a favorable environment for Japanese manufacturing to be cost-competitive globally. How have these macro events played out for your company?
Historically, we have been primarily focused on the Japanese market. However, we recognize the tremendous opportunities to expand and gain more market share with customers outside of Japan. To achieve this, we need to adopt a global mindset and become a leader on a global scale. This entails deploying resources strategically in different regions to cater to the needs of our Japanese customers while also penetrating new markets, such as North American and European OEMs.
We do some business, but we could do a lot more. We possess technologically advanced products that have great potential in these markets. We need to develop a forward-thinking mindset and establish the necessary infrastructure to capitalize on these opportunities.
We are aware of this requirement and are actively working to rectify the situation.
What is your outlook or expectations for the global manufacturing landscape over the next 12 to 16 months?
Let's take the automotive industry, for example. As the supply of chips becomes more stable each day, we are witnessing an interesting dynamic where there is an oversupply of chips in almost every area except for automotive. In the past five years, the number of chips in a car has quadrupled, and the world has struggled to catch up with that.
While this situation may seem confusing, we are gradually improving month by month, and there is still pent-up demand for automobiles globally. Automotive is unlikely to experience a major recession. Even if the United States doesn't reach 17 million units, maintaining a rate of 15 million units would still be satisfactory.
As supply chains stabilize and the excessive safety stock of materials in front of manufacturing stations diminishes, we may observe some fluctuations, but an economic backdrop with a manufacturing rate of around 14.5 to 15.5 million units is reasonable. On the other hand, the demand for chips in data centers, cell phones, and computers is a topic of discussion when it comes to a second-half rebound.
However, it is more hopeful than certain, as there is still excess inventory and no clear indication of significant new demand. Therefore, we have caution and conservative planning, assuming a soft second half of the fiscal year ending on March 31st, 2024. Therefore, we maintain a conservative outlook, preparing our business accordingly and managing our resources and supply chain prudently. It is important to be cautious and ready, considering the uncertainties of the market.
Proterial has nine different subdivisions. Among them are special steels, power electronics, and magnetic components. Could you give us a brief overview of what you are currently focused on? Which division do you see the most potential growth in for the midterm?
It's an interesting set of businesses. Our products are used in a variety of end products, but the automotive sector is our biggest exposure. Electronics, specifically broad electronics, is another significant area of exposure for us. Aerospace and our specialty steel division, which focuses on nickel-based alloys, are also important areas of focus. We believe we have some of the best assets in the world, but we are currently underpenetrated in these markets.
As a private company, we have allocated resources to enhance our capabilities and become a more impactful player in the global aerospace market. We recognize the potential of our underutilized asset base, which we consider second to none, and aim to transition our portfolio to capitalize on this opportunity in the medium term.
Our magnetic materials division is essential, especially for the production of electric vehicles that rely on rare earth magnets. Currently, we are conducting a comprehensive go-to-market study in collaboration with the main consortium. This study focuses on specialty steel, magnetic materials and power electronics materials business to ensure we are well-resourced and positioned to seize the opportunities in these areas. These segments demonstrate higher growth rates compared to traditional manufacturing businesses due to our exposure to the electric vehicle market.
Those are the kinds of areas where we really need to understand where the customer trends are going, where the volume trends are going, and make sure we have the right resources in the right places to be able to capitalize on that. However, the current geopolitical landscape necessitates a re-evaluation of our production and sourcing strategies. While we can continue to source materials from China and Japan for our Japanese operations, it is crucial for us to secure a reliable material supply in the US market.
We are exploring ways to gain more exposure to the North American market to align with the trend for decoupling from geopolitical considerations. Regarding rare earth elements, we are actively working on reducing our dependence on heavy rare earth and enhancing the productivity of magnets. This research and development focuses on reducing geopolitical risks in our supply chain and increasing our supply base and market share. At the same time, we have factories in China which we will continue to utilize.
Now turning to semiconductors, which is indeed a hot topic globally and especially in Japan. In the States, they have a $52 billion incentive package on the table. Intel is building two new fabs there and here in Japan we have got a new fab being jointly built in Kumamoto by TSMC and Sony. Just recently, Rapidus, a new Japanese operation in collaboration with IBM, will open up in Hokkaido for the two-nanometer nodes.
Can you give us your take on Japan as an ecosystem for developing semiconductors, and what advantage it has for you, as a Japanese firm, operating here?
Japan offers an advantageous ecosystem for semiconductor development in two key areas.
Firstly, the equipment used to manufacture semiconductors, which is a big opportunity. Our Mass Flow Controllers, specialty steel products, and Electric Wire & Cable are all things we supply today. We support both equipment manufacturers and chip makers by providing specialty steel, electric wires & cables, lead frame materials, and silicon carbide for the chip-making process.
Our relationship with customers in this domain is strong, and we constantly evaluate investment opportunities every quarter to meet the increasing demand, reduce lead times, and secure the supply chain. The second advantage of operating in Japan is the close proximity and collaboration with Japanese equipment manufacturers and chip makers.
This proximity enables efficient coordination and shorter lead times for securing equipment necessary for our materials production. Customers are coming to us probably earlier than expected because of the demand and the opportunities they see.
If I may ask about another one of your major business areas, which is the automotive industry, which is currently undergoing a transformative period. There's a lot of discussion about vehicle autonomy, and as we previously mentioned, the number of electronic components has quadrupled in recent years. Another less talked about but significant change is the change in materials. Whether we're talking about fully electric, hybrid, or combustion engines, all automakers are striving to make cars lighter. Consequently, the consumption of heavy ferrous metals like iron is decreasing, while lightweight structural materials like CFRP are gaining prominence. As a metal maker, how are these changes impacting your company, and what opportunities do you see?
In my previous role, I worked in the non-ferrous sector, specifically in aluminum auto body sheet production. Aluminum was displacing steel due to its better strength-to-weight ratio and favorable pricing. However, this is just one aspect of the overall puzzle.
Automakers are seeking materials that not only improve fuel efficiency but also contribute to a greater range of electric vehicles without compromising safety. They look to material suppliers as partners in achieving these objectives. For example, when it comes to electric vehicles, the weight of the battery and its secure installation are critical factors.
Ensuring the battery doesn't overheat and addressing safety concerns are areas where materials play a crucial role. In our specialty steel business, we focus on clad materials. For instance, we provide an efficient and stable negative electrode tab for batteries, reducing quality issues. This technology has allowed us to secure partnerships with OEMs for their battery platforms.
Through our ability to combine materials effectively, we offer benefits that alternative methods like welding cannot provide. This has stemmed from our experience working with customers, where we developed and adapted the technology for broader use. Such advancements benefit customers in the automotive field by extending the vehicle's range and reducing repair frequency compared to competing materials.
I'm curious to hear your perspective on the disruption happening within the automotive industry. Traditionally, the industry has had a hierarchical structure, particularly in Japan, with Tier 2 and Tier 3 suppliers working exclusively with a single client. However, with the transition to the next generation of vehicles, there's a trend toward more openness. For instance, there are discussions about large-scale manufacturers in China producing cars that are described as a skateboard – a battery on four wheels - while companies like Sony and Apple will produce a car on top. How do you think this disruption will impact your client base in the years to come?
This disruption brings both challenges and opportunities. Previously, customers chose to work with us not only because of sales relationships but also due to our technological capabilities.
Moving forward, we need to further develop our technical expertise to serve a broader market.
It used to be concentrated, where we could focus on Japanese automakers and fill our books of business.
However, now these automakers face competitive threats from Chinese producers or Emerging EV makers. As a result, we must be able to serve a much broader market with a highly technical sales organization. We need to create a hybrid approach where individuals possess commercial acumen while bringing significant technical capabilities to the customers.
To succeed in our materials business, we aim to become true partners to our customers, supporting them in addressing challenges and seizing opportunities. This involves collaborating closely with them, spending time in their labs, and jointly developing materials that offer high value to both parties. By doing so, we can avoid commoditization and leverage our substantial infrastructure investments.
Although we continue to explore independent innovation, our focus is on partnering with customers to help them solve issues they encounter in the field, be it in the aerospace, automotive, or battery manufacturing sectors. We strive to become their trusted technological partner.
One of the first changes we saw you make when you took office was separating the technology and R&D divisions into two separate divisions. Could you run us through why you decided to do that? And what benefits do you expect to come from it?
Proterial has a long history of practicing outstanding manufacturing on an individual product, business, and site basis. Under the new organizational enhancement measures, the Company implemented two major reforms, namely a shift to a business unit structure and the establishment of the new Manufacturing & Engineering Division. These reforms will enable us to more precisely capture market changes and needs on a global basis, as well as to better address market needs through standardized and optimized manufacturing practices across the globe. Working in concert, the business units and corporate departments will achieve operational excellence and deliver high-quality products to more customers throughout the world than ever before.
When it comes to research and development, many companies continuously experiment in their labs. As a larger company, you also have the power to pursue acquisitions and integrate new technologies into your business model. Can you tell us about the types of technologies you're looking to expand in? What kind of M&A activities do you see as being critical to your company moving forward?
Currently, we are deeply focused on optimizing the go-to-market strategies for several of our businesses. This will determine where we need to develop new capabilities. We will assess whether to build those capabilities in-house or seek mergers and acquisitions that align with our existing business.
The key focus of our M&A activities would be to enhance our scale, broaden our capabilities, and strengthen our position in the value chain. Our aim is not necessarily to acquire entirely new technologies but to identify opportunities for strategic additions that complement our current business.
Regarding the change in the organizational structure of Proterial in April 2023, we noticed that each unit would report directly to the CEO. Could you explain why you made this change and how it differs from the previous structure? What are your expectations in terms of execution over the coming years?
The purpose of this change is to ensure that our resources are as close to our assets and customers as possible. The previous divisional structure created additional layers and bureaucratic processes that slowed down decision-making.
In today's rapidly evolving markets, speed and agility are crucial for executing our strategies effectively. With the new structure, decision-making is streamlined, accountability is increased, and there is no place for anyone to hide. Business unit leaders now work directly with the CEO, providing me with first-hand insights into our teams and their daily challenges. I value being present in the field, engaging with customers, and understanding the experiences of our employees on the shop floor.
By fostering a global manufacturing mindset, we can address inconsistencies and drive manufacturing excellence across our organization, and it's one of those areas where both the Bain consortium and myself recognized there was a great opportunity.
As you come from the West into a Japanese organization, I expected that this would be a very well-run manufacturing organization, and there are pockets of excellence, but it is very inconsistent. At my previous company, we used the Alaris operating system, and at Proterial we will apply this thinking to define what manufacturing excellence looks like to us.
How do we operate the factories every day? What does the standard work look like? What kind of resources do we have in the organization?
That kind of problem-solving is done on a day-to-day basis. All of that has to be defined and driven into our operations since we can create efficiency as a result. It hasn’t been consistently applied across the organization.
Whether I walk into the plant in Thailand or the United States or Japan, I want it to have the same look and feel and activity-based approach as how we run the shop floor.
What you mentioned reminds me of the interview we conducted with Olympus just a few months ago. Their former president, who transformed the company in a similar way to what you're doing, divided it into business units that directly reported to the CEO through a small management team. They also sought outside advisors to enhance the company's responsiveness. Japan has a hierarchical culture where employees might be hesitant to communicate with higher-ups.
How do you manage this in your day-to-day operations? Have you faced any pushback? How do you drive cultural change within the company?
Managing the cultural aspects is about showing up and being present. I visit the shop floor and engage with employees involved in Kaizen activities.
We discuss the problems they've solved, the outcomes achieved, and the key performance indicators we're monitoring to drive results.
It's important to ensure that the improvements resulting from Kaizen activities bring tangible benefits, such as reducing changeover times.
By consistently showing up and paying attention, we create a culture of continuous improvement. However, the challenge lies in scaling this approach throughout the organization. We follow a "what, how" model, where the manufacturing group and corporate team define how we do things. Meanwhile, the business units are responsible for deciding what products to make and which customers to serve.
The corporate team consists of subject matter experts in lean transformation who provide effective training to the people in the field. Our goal is not to have a large corporate team running Kaizen projects but to ensure alignment and develop the capability within the organization to execute them.
This approach drives productivity, efficiency, quality, better yield, and better results for both the business and the customers. I'm interested to hear your thoughts on how Japan is perceived by the international investment community now.
Currently, it's certainly in the limelight, as Warren Buffett recently acquired a 7.4% stake in the top sogo shoshas and has mentioned plans to increase it to 10% in the coming years. We really love that, because it says that our new ownership group was ahead of Warren Buffett in recognizing that there are tremendous opportunities in Japan, and there's great technology. There are great assets.
Japan probably has fallen a little bit behind in terms of reputation from a productivity standpoint, so there's the ability to come in and have an impact right on the shop floor and to create earnings there, but then you look at taking that quality and taking that technology and serving a broader customer base over the next 10 years, and there's a tremendous opportunity for Japan Inc to really reinvigorate itself in the world.
Bain Capital’s acquisition of Proterial was the second-largest private investment takeover in Japan's corporate history. Could you elaborate on what are the advantages of being a privately run organization besides being more adaptable and flexible?
Well, the first advantage we've mentioned is that as a privately run organization, we are not bound by the quarterly or annual clock.
We have the freedom to make decisions that are in the long-term best interests of the business. An example of this is our aerospace initiatives, where Bain consortium has provided us with industry-leading resources.
These professionals work with us daily at our Yasugi and Okegawa works, identifying gaps and devising plans to improve our yield on certain alloys. These improvements directly translate into bottom-line benefits. As a private company, we can take on business opportunities even if they initially impact our margins. We understand that these investments will pay off in the long term and contribute to our aerospace strategy.
In the past, as a public company, it was challenging to make such decisions due to the pressure of immediate results and meeting margin expectations. Being privately owned allows us to invest strategically and prepare for a successful future, even if it means short-term margin compression. Our privately held status also grants us the flexibility to allocate resources and capital according to our priorities.
We can conduct market studies and determine where to focus our investments and resources. Some of these resource investments may not yield immediate returns but will benefit the business in the third and fourth years, aligning with our long-term strategy.
As we continue to implement our global manufacturing changes and shift resources, we anticipate increased productivity and a broader, global business portfolio. Sectors like aerospace, which require significant assets, present excellent growth opportunities.
With the demand for aircraft rebounding, we are well-positioned to capitalize on these opportunities. Our exposure to aerospace also contributes to a higher valuation for the business in the long run.
Why did you think it was so important to change your name from Hitachi Metals to Proterial at the beginning of the year?
Firstly, Hitachi, as the previous owner, preferred not to have a company not under their ownership using the Hitachi name.
Additionally, we wanted to avoid paying brand fees associated with the Hitachi name.
The name change provided a unique opportunity to rebrand the business and differentiate ourselves from Hitachi's diverse portfolio.
While we respect the history of the original Hitachi Metals business, the new name allowed us to focus on our core business and showcase our commitment to providing the attention, capital, and resources necessary for success. As a privately owned company, we have full control over our destiny and can shape our future according to our vision and the best interests of the business.
In my past, I've had the opportunity to acquire orphaned businesses, and when you can acquire an orphaned business and bring it into an environment, you understand what they do and reinvigorate the whole organization. Our nine businesses are our only focus, as opposed to Hitachi and many different businesses.
Today our management team and board are only concerned with driving forward our business. The decision to change the name to Proterial was driven by the team at Proterial.
They analyzed the business, culture, and future aspirations, resulting in the choice of the new name.
This name change symbolizes our rebranding efforts and sets the tone for our new chapter under the ownership of the Bain Consortium.
It created a great opportunity for the organization to rally behind the name change and the ownership change at the same time.
It was rare for a company to have that chance, so we believe the name change was a good decision.
I didn't have any input into the name, but words like professional, proactive, progressive, and “Proterial” combine “pro-” with the word “material.” embody who we have been and whom we want to continue to be. It was a unique and great opportunity for us.
The new name, Proterial, has a more international sound compared to Hitachi Metal. As we discussed earlier, one of our priorities is to penetrate markets where we have historically been underexposed.
When we reviewed the latest financial results for the fiscal year 2021 to 2022, we noticed that the United States of America and Europe were the highest-growing markets, with approximately 30% revenue growth each. It's important to note that some of that growth was due to exchange rates but can you elaborate more on your business there and why it continues to grow?
We have significant businesses in the United States, such as Waupaca, which is a $1.2 billion business. When translating the revenue back to our local currency, the exchange rate fluctuations had a considerable impact.
Nonetheless, our focus remains on determining how we can export to or locally supply those markets.
We have also undergone turnarounds in some of our businesses in the second half of 2022.
As a result, we have seen opportunities to increase earnings, turning some previously loss-making businesses into break-even or profit-making ones.
Our intensified focus and attention have had a positive impact. Waupaca is an example of a business that faced difficulties in 2020 and 2021 but started gaining traction. By refocusing the business on shop floor tactics and implementing process changes, we achieved progress.
Additionally, as a materials company, we have introduced a price sliding system to deal with the surge in raw material prices. This pricing strategy has contributed to our success thus far, but there is still room for improvement. Moving beyond inflation pass-through, we aim to change our pricing mentality to emphasize value.
Our organization has invested effort in this area, ensuring we understand the value we provide to customers. In Japan, we have engaged in discussions with customers regarding price increases.
We've also done a lot of work to really get the organization focused on understanding that in Japan, pushing through a price increase, whether it's inflation related or just because we've earned it, is of vital importance as there has been no inflation in the country for the last 10 years. We’ve had some very different conversations with customers about that.
Historically, businesses commoditize themselves too early in the product lifecycle.
The things we do must be reflected in the price, which is reflective of the quality and value of the product. This value extends beyond product performance to include aspects like quality and delivery performance.
If we were to interview you again on your last day as president of Proterial, what goals or ambitions would you like to have achieved?
For me, culture is of utmost importance in our organization. It begins with people and extends to operational excellence and growth. Safety is the starting point, followed by the cultivation of a strong culture. I firmly believe that a great culture can surpass any strategy.
When combined, they become an unbeatable force.
Looking back, I would like to have created a culture of accountability, where everyone feels ownership of the results. We would collectively own the customer, and the P&L, and work together to solve problems and identify them more efficiently. Being able to create this culture would mean successfully delivering our strategy, satisfying our customers, and achieving strong financial performance. Culture is the fabric that defines this business, and leaving behind an organization that understands the significance of culture and how we work together would be a great legacy.