Hirano Steel has been supplying wires for use in reliable and high-quality springs for more than 80 years. And president Yoshihiko Hirano knows how trading firms like his that specialize in smaller, niche fields are well placed to meet the growing and ever-changing demands of domestic and overseas markets.
In the 1980s, sogo shosha made up 50% of Japan’s total exports, and these included firms such as Mitsubishi, Mitsui, and Marubeni. However, with the trading bubble bursting in the 1990s, trading firms were seen as superfluous. Today, there are over 9000 trading firms operating in Japan. Could you tell us your assessment of the role that Japanese trading firms play in the world economy?
I think that in the past, only the major companies had the capacity to go overseas or into foreign markets. Nowadays however, we see that small and mid-sized companies can go overseas and enter those foreign markets, but we see that the size of those companies does vary. Major companies are not good at providing services in niche detailed fields, so this is where we see trading firms that specialize in these smaller, niche fields coming in and meeting the demands of local markets.
In the last two years, we have seen COVID-19 pose major logistics and shipping challenges. This has proven to be problematic to trading firms as quarantine measures have impacted human resources, grounded commercial air flights have restricted shipping capacities and in addition to the near tripling of oil prices, 77% of international ports reported delays last year. This has been even further exacerbated by China’s zero COVID policy. How are these challenges in global shipping and logistics affecting your company?
We have been affected quite a bit by the COVID-19 pandemic. To continue our business, we must secure a stable supply of our products, but we have been having delivery issues. To add to that, freight costs have been soaring in recent years, and we are still facing the challenge of how to bear the cost of the freight. Business overseas has been growing and will continue to grow, so going overseas is very important. How to continue to conduct business overseas, however, is the biggest challenge we have faced, and to be frank, we are still reviewing that as we speak.
In the last 25-30 years, Japan has seen the rise of regional competitors who have been able to replicate Japanese processes, but at a cheaper labor cost, pushing Japan out of certain industrial markets. However, we know that Japanese firms are still the leaders in niche B2B fields. Can you tell us as a trader, how has Japan maintained their leadership despite stiff price competition?
I think there are different factors that come into play. One thing is the Japanese people’s characteristics, as well as Japanese corporate culture. Many Japanese companies have high technical capabilities and those are very much superior to other Asian competitors. Japanese people are very hardworking and very serious about their jobs. This helps develop trust from the customers, in both domestic and overseas markets. Many non-Japanese companies tend to withdraw from overseas markets if they see that those businesses are not profitable. Many Japanese firms look at those places from a long-term perspective and continue to invest in overseas markets in order to build long-term relationships with local partners.
In the past, we have enjoyed high economic growth and many Japanese companies have lifetime employment. It means that these companies value people and I think that is our strength.
Hirano Steel was founded in 1939, and you have been supplying wires for use in springs for over 80 years. Can you tell us what are some of the competitive advantages that have allowed you to be so successful?
I think the source of our competitive advantage is our history. The founder of the company is my grandfather, and he grew up in the countryside of Niigata prefecture. He came to Tokyo to get a job, and he did a lot of part-time work such as delivering milk and newspapers. He only graduated elementary school in Niigata, and whilst he was working part-time in Tokyo, he attended night school. He became independent in 1939 and established this company. He could not take the customers from his previous job because of his honesty and sincerity. He started the business completely from scratch. Through steady efforts over the years, he was able to successfully increase his number of customers. Nowadays, we have around 1000 customers. Our company’s policy is “Honesty and Breakthrough”. I think this is the core of our strength and also our competitive advantage.
A lot of your customers are in Japan, with firms such as NHK Spring and Murata Spring. Are you also looking to add foreign companies to your list of clients?
We remain focused on domestic customers, so we will not proactively seek overseas customers. Of course, should the opportunity present itself, we would like to create relationships with new customers overseas, but it is not something we are proactively pursuing.
Your business comprises six product divisions. You have wire, bar, plate/strip, electronic material, agricultural material and machines. Which product division are you currently focusing on and which you believe have the most potential for future growth?
Actually, 70% of our revenue comes from the wire division. We would like to continue to focus on this area. In the future, we would like to develop a new seventh division to develop new materials and further grow the business. We are focusing on medical and agriculture as we see those fields as having good growth potential.
In terms of agriculture, currently, the Japanese food self-sufficiency rate is less than 40%. The government is aiming to raise this to 45%, so I think there is a lot of potential for growth there.
In terms of the medical field, Japan has a super-aging population and there is an ever-increasing need for medical equipment. Right now, 60% of medical equipment is imported into Japan, so you can see there is a real need to increase the number of domestically produced medical products going forward. We would like to provide the materials used in these fields.
Japan is the oldest society in the world and has a rapidly shrinking population. In fact, in the next 15 years, one in three people will be over the age of 65. This is presenting several issues including a smaller pool of graduates to hire from and a shrinking domestic market. What are some of the challenges and opportunities this demographic shift is presenting for your company?
One of the major challenges we are facing is the declining population. Going forward, we will have a smaller workforce. One solution is to raise the retirement age so that we can maintain employment. Another solution lies in automation. You can see some digital transformation trends in society right now, and we would like to strengthen this area. Last year, we launched our own digital transformation (DX) promotion team. In collaboration with our suppliers, we are now developing and building a new system. If this system is implemented, we can improve the efficiency of the business. This does not solve all the issues, but it can help alleviate some.
Our second challenge is the shrinking domestic market. With the decline in population comes a decline in demand going forward. Of course, the demand for our wires for springs will decrease in the future, and to counter this, we launched a new business development team last year who are charged with seeking opportunities for new businesses to help supplement our revenue shortages.
Japan has often been criticized for its slow adoption of digital technologies and was ranked 28th in IMDs World Digital Competitiveness Ranking. Could you tell us more about this DX system you are developing and how such digital tools are benefiting your business?
We are still in the testing phase, but we want to share information with suppliers and manufacturers through the system. We are making a shift from paper to digital. We want to be able to visualize our stock status so that we can reduce the stock while improving our business’s efficiency.
Your company also offers processing services, where you provide techniques such as the straight cut processing method to customers. What added value do you provide to clients through your processing services?
Actually, the demand for processing services has been decreasing because many companies are now insourcing those processes. They no longer need to outsource. However, in order to keep a presence in this field, we would like to continue this service.
Historically trading firms were responsible for just handling, distribution and finance. However, we see this changing with trading firms such as yourself providing a variety of extra services in addition to the trading of products. How do you see the evolution of trading firms taking place in the future?
That is a tough question. You mentioned us as a trading firm, but we see ourselves as a distributor as well. Some people have questioned the existence of those distributors in the past. In order to survive in the market, we must show our presence. One way is by differentiating ourselves from our competitors and adapting to the market environment. Also, we need to establish a solid financial foundation as well.
Looking at social trends, we are shifting to online sales, but our business is basically face-to-face. We need to develop people in order to increase the capabilities of our salespeople. This is vital for face-to-face communication and business.
What role do partnerships play in your business model and are you looking for any partnerships in overseas markets?
For the time being, we would like to strengthen the existing partnerships we have with our suppliers. Therefore we are not planning to develop partnerships with overseas companies right now because it is too difficult to collaborate with overseas firms. Actually, we have experience with overseas partnerships dating back to 1992. We established a local entity in Singapore, but it did not go well and was not successful. In the end, we were forced to terminate the partnership.
In 1997, you established your first overseas operation in Thailand through a joint venture. Since then, you have expanded into China, and most recently Mexico in 2015. Moving forward, which countries or regions have you identified for further expansion into and what strategies will you employ to do so?
We have around 115 Japanese employees and 15 international staff members at the moment, but it is very difficult for us to send one Japanese staff member overseas to develop business. Currently, we have two members of staff in Thailand and one person in Mexico, as well as one in China. We send those members of staff to those countries, but we cannot send them anymore because we have to maintain our domestic business too. Considering the risks involved, it is difficult to increase the number of staff overseas further.
In the future, however, we see ASEAN countries have an increasing population as well as the potential for growth. We would like to increase or expand our business in those countries. Centering in Thailand, we can develop our business to neighboring countries. In Thailand, our business currently is domestically focused, with 70% of our revenue coming from the automotive industry. It might be why so many car manufacturers base their ASEAN operations around Thailand, and why we set up our base there. By establishing Thailand as a hub, we can expand into Malaysia, Singapore and maybe Vietnam. There is an existing Japanese manufacturer in Thailand that has a trading department, so we can collaborate with this company to expand our business.
Imagine we come back seven years from now and have this interview all over again. What are your goals and dreams for the next seven years?
It has been 20 years since I assumed the presidency, and the company’s founder handed over the business to my father when he was 66. When my father was 62, I inherited the business from him. In a few years, I will turn 60 myself, so by that time, I would like to make this company more attractive so that successors will want to take over the business. The capital ratio of our company was 3% before, and recently I increased the ratio to 24%. In seven years' time, I wish to raise this to 30% so that we can enjoy a very sound and strong financial foundation. In seven years, I would like to achieve JPY 1 billion in revenue for new businesses.
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