Koyo-Sha is known for its cutting-edge polishing products, designed to meet the specific demands of various industries, including automotive, electronics, and more. Explore their dedication to quality and adaptability in a rapidly changing market.
It is our view that Japan is at a very exciting time for manufacturing. On one hand, we have had major supply chain disruptions in the last three years, caused by the COVID-19 pandemic as well as tension from the China-US decoupling situation. As a result, we are seeing many multinational groups try to diversify their supply chains with a focus on reliability. This is where Japan can enter; a country known for decades of high reliability, trustworthiness, and short lead times when it comes to production. Now, with a depreciated JPY, it is our view that there’s never been a more opportune moment for Japanese manufacturers to meet the pressing needs of this macroeconomic environment. Do you agree with this premise, and why or why not? What would you say are the key advantages of Japanese companies in this economic environment?
As mentioned, the yen depreciation has both positive and negative effects, especially for small and medium-sized enterprises (SMEs). Since Japan is a resource-poor country, a weaker yen has a negative impact on SMEs. Due to the ongoing depreciation of the yen, the prices of raw materials we source from overseas have been rising. Over the past two years, our company has raised product prices, but with the yen depreciation intensifying, the prices of imported raw materials have effectively increased, necessitating further adjustments. In other words, the current situation requires us to position ourselves more favorably, as it surpasses the price increases applied to our products in the past two years. While our revenue has been increasing, it does not accurately reflect the current status of our gross profit.
In Western countries, it may be common to simply pass on the price increases of raw materials to the selling prices, but it's not as straightforward in Japan. Japan is an island nation, and many people here consider everyone to be like family, so finding ways to coexist is necessary. Even in challenging situations, we believe that we should not and cannot pass on all the price increases of raw materials to selling prices in order to prioritize coexistence and mutual prosperity with our customers.
We are facing a dilemma. If the JPY’s price remains the same the depreciation works in favor of us, but if the material cost increases then it is increased in orders of magnitude for us because of the JPY’s depreciation. One prime example that I would like to highlight is China, where we are exporting our products. There they did not see a price increase, but we saw our material and machine processing costs rise. If we were to pass on those price increases, we would end up seeing a lot of fake products copying our products in the Chinese market as a backlash from the price increase.
If you have had the opportunity to use buffing polishing compounds, please try to avoid counterfeit products.
The Japanese population is aging and declining. Already Japan is the oldest society in the world and with a low birth rate, experts are predicting that the population will dip below 100 million by as soon as 2050. This raises a few key issues, those being the labor crisis and the shrinking domestic market. To what extent must you rely on overseas business to mitigate the damage of these issues and ensure your company’s future success?
Due to the tendency of rising prices in Japan outpacing income increases, the cost of living in Japan has become considerably higher than living abroad. Therefore, it is anticipated that domestic companies may find it increasingly challenging to introduce foreign labor in the future. Our main customers are in the automotive industry, and many Japanese-made automobiles are exported and sold overseas. We were affected by the depreciation of the JPY, but we still consider ourselves in an okay position for now. However, as the industry continues to progress towards EVs and Connected Autonomous, Shared, Electric (CASE) vehicles, Japanese automobiles might not sell as well as they do today. That would be a hit on our business. Currently, exports to the United States and China are on the decline, but still our business is profitable. I think however that once the Chinese economic bubble bursts we will be in big trouble.
The past two years have been a challenging time for countries with relationships with China. We’ve seen big trade disputes between the US and China, and we saw very strict COVID-19 measures that isolated the country. One of the effects this has had is that international groups are now looking to diversify their supply network, and somehow in this situation Japan is benefiting. More and more we are seeing manufacturing returning to Japan. In addition, some foreign companies are looking to Japan as a base for their manufacturing. You mentioned your company’s exports to the US and China, so with that in mind, how profitable do you foresee the Chinese market in the future? What is your outlook for the relationship with that market?
We do have our own concerns about a potential Chinese economic slowdown.
Furthermore, there is concern about counterfeit or imitation products being manufactured inexpensively and using the Japanese brand names, which are then circulated in the market. In fact, this is something that is quite tiring at this point. For these reasons, India and Vietnam are the locations that we and many other companies are considering.
The potential for duplication in China is a very real threat and over the last 25-30 years Japan has seen the rise of regional manufacturing competitors from countries like China, Korea, and Taiwan, who have replicated Japanese manufacturing processes but done so at a much cheaper labor cost. As a result, a lot of Japanese firms have been pushed out of mass markets into more niche, B2B fields. What do you believe are the main competitive advantages of your company that will appeal to foreign prospective clients in the future?
I think that rather than price, quality is the key factor in many customers’ decision-making processes. We need to sell our products to those customers who are willing to pay for quality, otherwise, Japanese SMEs won’t survive. I believe that we can no longer survive on price competition alone.
We know that besides the automotive industry, you cater your products to a wide range of industries such as electronics, kitchen tools, golfing manufacturers, and the jewelry industry. Is it the automotive industry that you consider has the most growth potential? Are you looking to introduce your products to any new industries in the coming years?
Our company specializes in abrasive materials, so we target metal, plastic, and paint surface polishing processes. However, the specific products we provide and where we provide them depend on our customers' requests. They are the ones that make the decision on which material to use, so in a sense that is our weak point. Unless we know what the customer wants, we cannot offer our products, so sales representatives play a very important role in collecting information for us, however, over the past three years because of the COVID-19 pandemic they have not been able to do this activity much. This is now a focus for us since we are quite reliant on the materials that our customers use.
You mentioned the customer material of choice is focus and the automotive field being a main focus. The automotive industry is currently undergoing a once-in-a-lifetime transformation with the move to EVs, but more importantly to a firm like yours, we are also seeing a parallel transformation of the materials being utilized in the field. Before automakers used a lot of heavy ferrous metals like steel, but today we are seeing a switch to lightweight like aluminum, magnesium, and carbon fiber reinforced polymers (CFRP). Within the product portfolio that you have, how do you cater to the material demands of the automotive industry?
This might sound conflicting to what I just said but I don’t think we are facing a big risk coming from the material transformation in the automotive industry. When it comes to polishing there are two types. One is for aesthetics and the other is for functionality. The automotive industry is usually for functionality, so in the industry, they are using our polishing compounds or abrasives to increase performance. Prime examples include shock absorbers and major automakers used our products for this particular component. This sort of component is still going to be a necessary part of both CASE and non-CASE vehicles in my opinion. In that sense, we don’t feel there is going to be a big impact on our business due to this material transformation.
Of course, when it comes to the switch in coatings, we see a need for different polishing materials. Additionally, with this switch to lighter materials, there is a good possibility that new needs may arise. If that is the case, then we will begin work to address those new industry demands. However, when it comes to functional polishing, we are not really worried about the changes happening. The reason for this is that safety is given a higher priority.
Just to give you a little more context, producing engines requires grindstones, but with the switch to CASE vehicles engines will disappear, so grindstone makers will be affected, however, we are not affected in this case. I believe our business will stay healthy for now.
One side of your business is industrial products, and the other side of your business is targeted at consumers in the Do It Yourself (DIY) market. We found some diverse and interesting products such as a nail polish remover and Polimall. As a company that has both a B2C and a B2B business, what are some of the synergies you are able to create between the two? What are some of the advantages of having knowledge in both the consumer and industrial sectors?
Most of our products are for industrial use, and the consumer-oriented products you mentioned are more side projects. However, we have received many suggestions from customers who have actually said, "We would like you to create this product." in the case of precious metal polishing cloths and nail polishing cloths. This is because our company has accumulated expertise in polishing over many years.
Using polishing compounds or abrasives has a lot of advantages, but they also have their limits. It can be hard to manage based on the surface, and in the automotive industry, it can damage paints, coatings, and surfaces if poorly used. We know that you recently developed the ALOX 8, which is a low-cost, high-quality non-chromium polishing compound for mirror finishing. You also recently released the POLIMALL VERDE, a buffing wheel impregnated with polishing compounds for mirror-finishing precious metals and non-ferrous metals. How do these products overcome the challenge of not damaging the finish of surfaces? Why was it important to develop these kinds of products when you already have a wide range of products available?
Simply put, it is because we receive requests from our customers (users) to produce those products. The development of abrasive materials and related products is largely customer-driven, and it is the customers who determine whether a polishing product is effective or not. Even if our test shows its high performance, if our customers are not satisfied with the performance, it means that the product is not valuable for them, if customers want the product, it clearly holds value for them.
Our company has a history of approximately 100 years, and during that time, we have created many hit products. However, many of these products were not developed solely based on our company's intentions.
What was the ALOX 8 designed for? What kind of industry would need this kind of product?
Many buffing polishing compounds were originally developed and designed to create a similar shine to silver on stainless steel knives, forks, and spoons, which were considered luxurious items. However, since most general consumers had never actually used silverware, the focus gradually shifted to just achieving a higher level of shine. This led to the development of the buffing polishing compound "Alox 5," which was not only used for polishing the luster of stainless steel knives, forks, and spoons but also for the frames of many companies' smartphone cases and the luster polishing of wristwatches. The newly developed "Alox 8" can be considered a versatile product.
Your company is clearly driven by quality, and R&D is something Japan is very famous for. In that regard, you told us that your creativity is driven by your client’s needs. With that in mind, what is the current focus of your R&D? Are there any new products or developments that you would like to showcase for us today?
Many of our company’s products are offered to customers based on quality (performance), but as I mentioned earlier, there are many counterfeit products circulating, especially in China and Southeast Asia. This has led our company to prioritize the development of products that can eliminate counterfeit and fake goods. We have learned that counterfeit versions of our leading product, the buff polishing compound known as 'Alox 5,' are being sold in the Chinese market at a volume several times higher than our exports. The development of “Alox 8” was aimed at being a versatile product and at the same time, eliminating counterfeit versions of “Alox 5” that are widely circulated in China. Unfortunately, due to the COVID-19 pandemic and the strong name value of “Atox 5”, we were unable to promote sufficiently, and as a result, counterfeit products continued to proliferate during that time.
At the moment, we do not have a specific focus on research and development. This is because even if we design a product for precious metal surface finishing or stainless steel surface finishing, there have been many customers in the past who were very satisfied when they tried using it on brass, for example.
"Ultra Alox" is a high-performance product that surpasses the quality of "Super Alox," which is actually exported and used for precious metal surface finishing (polishing) in regions like Europe, Southeast Asia, and Turkey.
In addition to our own branded products, we also manufacture many OEM products without revealing our company's brand, and we supply products to various fields. This approach allows us to maintain a more flexible research and development strategy, enabling us to cater to the practical needs of customers in a wider range of fields. If we were to overly specialize in highly specific niches, there is a risk that our company could become trapped and cornered.
Several times during the interview you’ve alluded to the idea of exporting more to the US, China, India, and even more generally Asia as a continent. Many of the interviews we conduct tend to have a theme of partnership as a way for firms to develop new products or penetrate new markets. What role do partnerships play in your business model and are you currently looking for any new partnerships in overseas markets right now?
We are always looking for new partners, and one of our approaches is to schedule regular visits when domestic companies establish overseas factories. This allows us to get to know the factory and the local partners the factory is dealing with. Building strong relationships with local partners often leads to referrals to other local companies. However, it's important to note that this approach may not work effectively in every country.
Especially in India, there are customers of our company in the regions where Japanese automotive manufacturers operate their businesses. Unfortunately, we don't yet have direct channels with local companies. To expedite this process, we have partnered with Japanese trading companies based in India to promote our products.
You have a presence not only in Japan, but also in the US, Europe, and all over Asia. What countries or regions do you believe have the potential for further international expansion?
As mentioned, a lot of our initial international business is done through local trading partners or companies that have operations overseas. Since our employees are not stationed abroad, we are not able to consistently provide product handling and maintenance services. Therefore, we rarely sell our products directly to end-users. All sales to end-users are conducted through the branches or offices of Japanese trading companies or local trading companies.
In fact, about 20 years ago we started a joint venture in Singapore, and we’ve never been able to make a profit there. That taught us a very tough lesson in international business, and we now understand how difficult it is to manage such operations. It may sound cliché, but we believe that there is potential for international expansion in countries like India and Vietnam. We have already taken some initial steps in this direction.
Imagine we come back in 2026 to have this interview all over again for your company’s 100th anniversary. Do you have any goals or dreams that you would like to achieve by the time we come back for that new interview?
It becomes a personal goal for me, but first and foremost, it will be to lead our company to its 100th anniversary. Since its founding, our company has been managed with a self-reliant style, handling all aspects of product design, development, manufacturing, and sales in-house. Being able to stand alone is the key reason why I believe Koyo-Sha has been able to thrive nearly 100 years now.