First established in 1956, Hanshin Metalics has been supplying materials and parts to manufacturers in the industrial machinery sector for the better part of 70 years.
Japan’s manufacturing center is very interesting. It is devised in a pyramid style, with very big corporations at the top, and a lot of medium-sized chusho kigyos that manufacture various components. As such, when it comes to the procurement of certain steel products, these chusho kigyos sometimes have difficulties sourcing directly from large steel manufacturers, because the steel makers only provide a certain amount that may be too big for some companies. We know that your company specializes not only as a trader, but also with metal working functions, in helping these firms. Could you tell us about your role within Japan’s industrial structure? How do you create the connection between steel products and medium-sized makers?
There are some dominant companies in the market, and there are many SMEs in a pyramid-shaped structure. I am not sure what the structure of the market looks like in other countries, but that is exactly what it looks like in Japan. Typically, small and medium enterprises (SMEs), which can produce parts at lower costs than large enterprises, manufacture components and deliver them to large enterprises, which then assemble the parts. This also helps large companies concentrate on marketing, design of products, assembly, and quality assurance. Since large companies are often publicly listed, they tend to be slow in making decisions to invest in new equipment. There are cases where smaller companies can get business opportunities by making quick decisions about investing in new equipment. In a sense, many large companies rely on the investments of these smaller companies, and as a result, they are able to hedge their risk against economic fluctuations. Our company purchases materials from steelmakers and delivers finished products to our customers, including those SMEs in the fastest and most cost-effective way possible. That is our role.
Your company has evolved into a firm that both combines the network of a trader, with your direct relationships with big steel makers, with the skills of a metal working firm with your own metal processing and other processing capabilities. Could you run us through your history and the evolution of your company? Why did you decide to combine these two functions?
We often refer to the production flow as a river, and as we handle the materials, at the very beginning of the finished product, we are capable of seeing the production flow from the upstream. From where we stand, we see a very long flow from the materials to the finished products. There are many steps involved, and we are trying to maximize the efficiency of the flow. For example, if a machine is to be made from special steel, many grades and sizes are required. There are many steelmakers who manufacture these products. If these steelmakers were to deliver special steel directly to processors, the quantity would be too small for the steel mills, and if each steelmaker were to deliver a small lot to each customer, the transportation can be very inefficient. That is why we act as a hub to cater to different needs and maximize the efficiency of transportation of materials. The same applies to each process. For example, rather than each company taking a small amount of steel to a heat treatment company and picking it up after treatment, we can minimize the cost by sending steel in bulk to our heat treatment processor and sending the required quantity back to our customers.
If a major manufacturer is located in Osaka and wants to request processing from a supplier in Shikoku, the transportation cost will be significant. We are expanding our sales area and have the advantage of being able to connect different areas with our internal logistics network.
In addition, when a major company requests machining work from a subcontractor, the big company may ask that company to perform all of the various machining operations. However, there is often a mixture of processes that the subcontractor is not capable of or not good at. In such cases, we select the best option from suppliers who can perform various types of processing through our supply chain. In this way, we, as a trading company, consolidate materials, processing, heat treatment, and logistics to improve overall efficiency.
From an industrial perspective, the Covid-19 pandemic has been a very difficult period. We saw production and demand drastically drop at the beginning of 2020, when the pandemic first hit. What was the impact of the Covid-19 pandemic on your business, and why do you think you had such positive results during these past two years?
There are some industries that were hugely affected during Covid-19. For example, there is a shortage of semiconductors right now, and a lot of production lines have been stopped. Also, as you mentioned, there were some impacts on the automobile industry as well. Compared to hotels, restaurants, and tourism-related industries, which were hit hard, our industry, especially in the Kansai region, our main market area, was not affected as badly. Though Covid-19 itself is an unfavorable situation, our sales have been growing steadily. This was true even before the outbreak of the pandemic. The reason for this is our willingness to expand our business into new areas and develop new customers, resulting in the increased sales over the past years.
What new fields are you looking to penetrate, and what type of companies are you looking to expand your services to?
One of the new areas we have begun to focus on is the aerospace industry. We have also expanded our sales regions through the industries that we have been doing business in, such as construction machinery and machine tools. Initially, we focused on selling our materials in the Kansai region, including Kyoto, Osaka, and Hyogo prefectures, but we have gradually increased the area and expanded our business. Today, we also sell materials in the surrounding areas, such as Nara, Okayama prefectures and Shikoku area. We are developing more and more new customers in those areas and using our expertise to sell materials. In addition, we focus on more value-added services by offering not only materials but also machined products. Whereas 15% of our sales used to come from processed products, last year that number increased to 25%.
One of the things that we have been seeing as a result of the Covid-19 pandemic has been huge inflation around the world. As such, the USA has been rising interest rates in a very aggressive manner. A direct impact of this was the weakening of the Japanese Yen. On one hand, this means that procuring basic raw materials like steel is becoming increasingly expensive. On the other hand, it means that for companies that export their processed products from Japan to other countries, the final cost of the products for clients has been reduced. What impact do you foresee this big currency depreciation having on your business?
Prices of raw materials have risen significantly in Japan as well. The increase is as much as 30%. However, from the finished product, the cost ratio of materials is approximately 10%. The remaining 90% is generated in processes such as machining. Therefore, I believe that the exchange rate situation is a good windfall for companies exporting products overseas.
We export materials to Indonesia and China. We see this exchange rate situation as an advantage and an opportunity to increase exports of machined parts to other countries such as the U.S. and Europe. For example, parts for wind power generation and machine tool parts are our next targets.
I want to ask you about your activities in the aerospace industry and the material change taking place there. Now heavy ferrous metals like iron are being replaced with composites such as CFRP for example, as well as lighter-weight metals such as aluminum and titanium. How are you adapting to this demand for these lighter-weight materials?
We understand that there is a global movement to make aircrafts lighter and lighter. As you said, it may be decreasing every 10 years by 10%. It is also aimed at making planes more fuel effective for environmental purposes as well. We understand that trend. However, our stainless steel is used mainly for landing gear, flight control systems, and the parts that require stainless steel and other types of steel, and cannot be replaced at this moment. That is why there has not really been a decrease in demand for our stock.
However, making lighter-weight parts is a big trend right now, and we do have to think of solutions for providing materials from many different perspectives. An example would be making large pipes to make the weight lighter, while at the same time maintaining strength. Even more complicated shaped products could be produced, using 3D printing. which could make the insides hollow for instance. When it comes to landing gear, it has to be strong enough to withstand the impact when it lands though.
Hanshin Metalics is a member of the group Dmet Holdings, and as such, you have various related firms and subsidiaries around the world. For example, Dmet Shanghai also takes care of supplying steel to manufacturers, and Mitra Tamahanshin caters to the Indonesian market. During our research, we learned that these companies were existing independently of the group in their operations, which is very rare for companies of this size. What are the synergies that you are able to create within the group, and what are some of the advantages that the independence of each firm presents to your company?
The reason for our Chinese corporation is, on the one hand, to introduce high-quality Japanese products to the Chinese market and, on the other hand, to import products produced locally in China to Japan. By taking good products from China and returning good products from Japan, we have both advantages and work in a harmonious way.
Not knowing China's growing presence and knowing only the Japanese market can be a risk when considering business expansion, so it can be said that we established our Chinese subsidiary in order to know more about China. Another reason for expanding into China is that there are many Japanese companies in China, and they often use materials made in Japan. For manufacturers in Japan who are unable to meet their costs, we offer them the option of using materials made in Chinese steel mills.
We also believe that our corporate culture encourages the growth of local staff through self-reliance. By letting them think for themselves, they grow by themselves. That is the shortcut to the company's overall prosperity. About our corporate culture, on top of the list, it says "We produce 100 CEOs". This means that we don't want one CEO to control the entire company; we want all employees to think as a CEO thinks, and to increase sales and the company's potential on their own.
During our research, we saw that one of the businesses of Dmet Holdings was the company Soundraw Inc., which is a music business where people can download music without warranty through a subscription-based service. Can you tell us a little more about this business?
Mr. Kusunoki, the person in charge of this sector of our business, used to work for a big company. However, he had a strong passion and vision which he wanted to pursue. He left the company he worked for, and came to our company and presented his ideas to us. That was how we entered that sector of our business.
The number of downloads has been increasing, especially in the US, and this business has proved to be very fruitful for us. Nowadays, everyone makes videos and uploads them to YouTube, but they do not know what music to put on the videos. That was why we created this application for everyone. The music is royalty free and you can download the music that you create.
You mentioned earlier that it is a great time for your company to expand abroad, due to the Yen’s depreciation, and that Europe and the US were good opportunities when it came to wind power and green technologies. What strategies are you putting in place to do so? As your business model relies on networking, what kinds of partnerships are you looking for in Europe and the US, as you look to expand in those regions?
We do not have a concrete vision at this time as to how we will enter the European and U.S. markets. However, we have special materials in Japan, and we are in the process of looking for companies in Europe and the U.S. that actually need such materials. We are starting to consider that as one of our expansion strategies.
In a recent case, a major company in ASEAN consulted with us, saying that they were troubled because they were told that the minimum order quantity would be 20 tons, even though the special steel they needed is 1 ton. Cases similar to this may exist in other countries as well. To solve this, for example, we are planning to have a warehouse in Thailand to expand sales in Thailand.
Your company was founded in 1956. In four years, you will be celebrating your 70th year anniversary. Imagine that we come back in four years’ time and have this interview all over again. What would you like to tell us? What dreams or goals would you like to have accomplished by then?
From a business perspective, I would definitely like to have another branch opened up in a different region. However, my philosophy is to not only make myself and my family happy. I believe that life is about seeing how many people we can make happy. In the next four years, I will be striving to make as many people happy as possible.