As Sumitomo Densetsu strengthens its international presence, the company has shifted more of its focus to renewable energy projects and the construction of data centers.
The last Japanese construction boom occurred more than 50 years ago, before the 1964 Tokyo Olympics. Since then, demographic changes have resulted in increased demand for maintenance and decreased need for new construction projects. As a company focused on the social infrastructure of electricity, how do you see the current and future needs of the Japanese construction industry?
In 2022, construction demand is strong in both the public and private sectors, with a market size of 63.4 trillion yen. Public investment is particularly brisk, with the government spearheading disaster-resistant construction projects and Japan's national land resilience. While these projects will continue for at least the next few years, there is a view that in the long run, demand for conventional construction will decline.
With the introduction of the New Normal, such as non-contact offices and medical facilities, a new type of construction business has emerged and this business is booming. Demand for energy-saving measures and energy-efficient renovations, such as self-consumption solar and wind power generation, is increasing as we move toward a carbon-neutral society. At the same time, the need for data centers and telecommunication infrastructure such as AI, IoT, and 5G is increasing as we enter an era of digital transformation.
Please elaborate on the types of projects and issues you are currently working on.
Our business plan is based on a five-year medium-term vision and annual budget. At the camp held this year, where the management team gathered to discuss management issues, we had a vigorous discussion on the theme of what businesses we can expand our business for the next 10 years. Among them, we spent a lot of time discussing business opportunities related to DX and carbon neutrality.
We discussed a lot about DX and carbon neutrality, how they can be put to practical use, and what kind of technologies we need to develop to provide optimal services. As a result, our business model has always been to work as a subcontractor for general contractors on construction projects, but in addition to that business model, we are now taking the initiative to propose to our clients new approaches to energy conservation and renewable energy installations, in addition to construction work. We are now taking the lead in proposing energy conservation and renewable energy installations to our clients.
When it comes to companies that use renewable energy, most rely on the government's feed-in tariff (FIT). It was introduced in 2012 and since then the government has gradually reduced the number of subsidies through these tariffs. What do you think about this? Also, how do you think Japan's renewable energy industry can develop and progress in a way that is less dependent on government feed-in tariffs?
As you mentioned, the renewable energy sector was booming with the FIT, but now it is declining. However, the Japanese government as well as our company are actively working to achieve carbon neutrality. The service we offer to our customers is not to utilize FITs, but to generate power for their own consumption. We propose a comprehensive service that includes not only the construction and installation of solar panels, but also the provision of storage battery systems to store the electricity generated by our customers.
Our parent company, Sumitomo Electric Industries, has redox flow storage batteries, which are excellent large storage batteries that store electricity generated. We intend to propose systems that use these batteries.
Sumitomo Densetsu's portfolio can be divided into four main segments. Power Construction, General Electrical Construction, Information and Communication Construction, and Plant HVAC Construction; can you give us an overview of each segment and some of the projects they are involved in?
Since Sumitomo Electric Industries, our parent company, is a wire and cable manufacturer, our Power Construction Division is working on the power infrastructure and renewable energy businesses by teaming up with its cable technology development capabilities and our engineering capabilities. We have particularly high expectations for the growing renewable energy market and hope to capture significant business through synergies with Sumitomo Electric Industries.
Electric power companies in Japan are important customers for overhead and underground power transmission lines. Each of these electric power companies has a direct group company that performs electrical work. Since each electric power company has its own electrical equipment construction company within its group, we cannot be the number one partner, but we would like to be the number two partner for all electric power companies by taking advantage of our strength as an electric wire manufacturer.
In electrical work in general, our strength lies in our commitment to quality and service, which we provide consistently from design to construction and maintenance. While our costs may not be that different from those of our competitors, our strength lies in our ability to provide the highest quality to our customers.
As for the telecommunications sector, we are not a manufacturer of telecommunications equipment, so we can choose the best types of equipment and systems available on the market. This is highly appreciated by universities and hospitals.
The plant HVAC sector is still in its growth phase, so we do not yet have a strong position in this area. However, we are cooperating with leading HVAC manufacturers and have established joint ventures to sell HVAC equipment and design and install systems.
Japan's energy grid suffers an annual loss of 5%, equivalent to the loss of five nuclear power plants. We know that Sumitomo Densetsu offers high-quality, reliable power transmission technology, including overhead, underground, and substations. How can your transmission technology help reduce this energy loss?
Since we are a construction company, the development of new technologies to reduce transmission losses is the responsibility of the power companies and cable manufacturers. To minimize transmission losses, for example, the new interconnection line from Hokkaido to Honshu has switched from conventional AC transmission to the ultra-high voltage DC transmission that has become the standard in Europe. Preparations are underway for the introduction of ultra-high-voltage direct current at 500,000 volts, which is already in place in the United Kingdom and will soon be introduced in Japan.
You provide advanced DX-based technologies through Sumitomo Densetsu Cloud Solution (commonly known as SEM Cloud), a unique cloud service developed by your company. How are you using the SEM Cloud service? How do you think digital technology will change and evolve the construction industry?
We are using a cloud system developed in 2018 to facilitate the digitalization of internal operations and provide integrated construction and ancillary services to our customers on the system. Services currently provided to customers using the cloud include facility management and inventory management systems that utilize IoT and sensors to monitor the status of facilities and equipment. We also have a DX initiative within the company and are working to improve operational efficiency with IT that can be used anytime, anywhere.
One area where you can see this in action is on construction sites. The role of the field representative is to ensure the smooth operation of the construction project, including labor management as well as material procurement. However, half of the field representative's time is spent on paperwork, as various reports must be prepared for the client and the general contractor. The concern is that all this paperwork takes up so much time that the real work of overseeing quality and safety is neglected. In fact, the number of required documents is increasing, and if left unchecked, this field representative role is becoming a major problem at every construction site because of the paperwork involved.
There are many applications and software available that can be packaged and applied to documentation. By synchronizing this documentation software with our SEM Cloud system, we are trying to establish a scheme where data can be shared internally and documents submitted to our clients can be automatically generated. Currently, it is in its first phase and that is our first goal as our mid-term strategy will continue until 2024. The second phase will focus on leveraging data and using the data collected to change business operations. We want to find overlooked needs and connect them to the business.
Next, I would like to ask you about your company's overseas business. Please give us an overview of your overseas business and its strengths.
Regarding overseas operations, we entered the market earlier than our peers and currently operate in six countries, including five in Southeast Asia (Indonesia, Thailand, the Philippines, Malaysia, and Vietnam) and one in China. From these bases, we also provide services for projects in Cambodia and Laos.
Our main customers are Japanese companies with overseas offices. Our main business is electrical and HVAC work for factories and offices, and our overseas subsidiaries provide high-quality work that cannot be replicated by local competitors.
With the current economic development in the Southeast Asian market, there is an increasing demand for high-quality construction work from local companies in addition to Japanese companies. Especially in Thailand and Indonesia, where we have our bases, orders from local companies have been increasing greatly, and we are working to expand orders.
In addition, we have recently been focusing on data centers. Since electrical work for data centers is more complicated and higher-spec than office work, we dispatch experts with extensive experience in data center construction from Japan to the region to provide training and technical support.
Imagine we do this interview again three years from now. What are your goals for Sumitomo Densetsu?
This is a difficult question. In our company, safety, quality and compliance are prioritized above all else and take precedence over profit. We often remind our employees of that fact and they share our mindset.
But the fact is that construction companies like ours face safety issues all the time. We want to achieve a transformation into an accident-free company. My main goal is to ensure that our employees, staff, and subcontractor employees arrive at work safely and return home safely. It is something people take for granted, but something we must ensure and take seriously.
I believe that Sumitomo Densetsu is one of the most profitable companies in the industry, but we are not among the top five in terms of size or order value, and when I do this interview again in three years, my goal is for our company to be among those top five companies. We would like to lay the foundation for the next generation to be able to aim for the No. 1 position in the industry.