A company that has made significant contributions to the energy and water industries through its screen technologies, Nagaoka generates 84% of its turnover from overseas markets. Recent years have seen the company devote more resources to its water division in a bid to achieve the U.N. Sustainable Development Goals and help address the world’s growing water crisis through its business. According to Nagaoka president and CEO Yasuhisa Umezu, “only about 3% of the Earth’s water is fresh water and even less is currently drinkable.” Fortunately, with its CHEMILES technology, the company has a solution.
Nagaoka is a company contributing to both the energy and water industry through your screen technologies, why do you believe Japanese manufacturing so esteemed in terms of safety, quality, and reliability for such industries? What are the unique qualities of Japanese monozukuri?
The reason why Japanese companies have high standards is because customers are so particular about quality. In a sense, we could say it's an obsession with perfection. Japanese companies developed in response to 100 million Japanese people who are very sensitive towards good quality, features and functionality. There's a high demand for that.
Companies keep evolving through competition. In order to maintain an advantage, you have to keep developing the quality, and the extent to which you can respond to customers’ demands determines the extent to which you can deliver high quality to customers. Having said that, demand for high end quality is only a very small portion of total demand.
Japanese companies can meet the requirement of high end customers by improving quality, but it's such a small pie compared to the middle or the low end customers who are the volume consumers. Japanese companies are not good in those areas.
The Japanese population has the oldest average life expectancy in the world at 85 years. More than 1/3 of the population is over 65, which results in a reduced labor force and diminishing domestic demand for products in general. How has this declining demographic affected your company and how are you reacting to this particular challenge?
Our products are for niche sectors both in the Japanese and global market. The reason why we also focus on the Japanese market is because once you understand the Japanese market and its emphasis on quality, you can use the fact that the product is made in Japan as a kind of branding, and that is important when facing global competition. So we are focused globally – in fact, of our turnover, 84% is from overseas markets – but at the same time we have our foot in the Japanese market also.
The issue of passing down the knowledge and know-how in the face of a shortage in the workforce will become ever more challenging in future. Our focus is not only on the Japanese market, but the global market too. Whilst positioning our company as a global company, we will still retain our identity as a Japanese company, however we don't necessarily need to have our headquarters in Japan or employ only Japanese workers. We need to adapt appropriately to the global market.
In the case of your company, how are you adapting your technology to be more carbon neutral, and what do you believe needs to be done more generally in order to achieve global targets on carbon neutrality?
As you know we have two major lines of businesses – the energy business, which works with oil and gas, and the water intake and treatment business. We consider ourselves as part of the chemical industry, and since we provide a product that is used in oil and gas plants and petrochemical reactors, our energy business is going against the trend of carbon neutrality or SDGs (Sustainable Development Goals). Of course, we are working towards carbon neutral production as well as contributing to the generation of hydrogen.
However, looking at the big picture, using fossil fuel itself is going against the idea of carbon neutrality so in that sense our existence is contrary to carbon neutrality. Therefore we are developing our second line of business in water processing or water purification systems in order offset future risk associated with fossil fuels. There is a huge shortage of water globally and our company strategy is to shift ourselves out of the energy sector and devote more resources to enlarging our water division.
What do you think can be done in order to address the impending water crisis, and how can your company, especially with your CHEMILES and AERSYS technology, contribute to addressing this water crisis particularly in developing nations?
Only about 3% of the Earth’s water is fresh water and the less is drinkable, but the technology we have makes underground water drinkable. The unique feature of our CHEMILES technology is that we take underground water and remove harmful substances from it without using any chemicals. We don't actually take water from rivers or anywhere else except underground water. Generally speaking, many companies working on the water supply take river water – which is considered to be surface water - and treats it, and there's a lot of competition over the technology used to do this. However, our uniqueness is to focus on underground water, which is considered an untapped and underlying natural resource.
There are two types of issues when you talk about water. There's the water supply issue and the sewage treatment issue. Our focus currently is on water supply systems and making underground water drinkable. By fully utilizing our technology, we are determined to contribute to these water solutions, especially in developing nations. Of course we are an SME company, so we cannot solve all the water issues by ourselves, but we hope to contribute as much as we can with our technology.
CHEMILES water treatment mechanism
Tapping underground water involves operating in difficult environments such as undeveloped region. How do you solve the problem of needing human operators in such dangerous places?
Currently we're dispatching operators, but in the near future we will be able to fully automate and control the process remotely. That would be the best fit solution for water purification in rural areas. But at the same time, we always need to think about our core business strategy and the marketing strategy. That's the dilemma that we have right now. The issue of water is critical but the question is whether it could be a sustainable business, particularly as most client countries are poor.
Public waterworks companies will be most interested in your technologies, but you also want to target private firms. What type of private enterprise are you targeting, and how are you doing that?
Our main target in the private sector is the food and beverage industry whose companies use a lot of water, like breweries. We supplied a number of CHEMILES to food and beverage companies in domestic and overseas markets. In Japan we supply CHEMILES to one of the top food companies for the use in food processing. We have also had experience with cleaning companies, who also use a lot of water which directly relates to the final cost of their services. We are looking for more private sector business opportunities not just public sectors projects, and we see some growth opportunity for private sector not only in Japan but abroad, starting with Southeast Asia.
CHEMILES in operation
What role does co-creation play in your product development in terms of your international strategy, and what type of partner are you looking for?
We have collaborated with other companies in the past. Our HiSIS product, for example, was developed by us in collaboration with Hitachi-Zosen. Co-creation between Japanese companies is not unusual but in my opinion, international co-creation is indispensable for future growth. For example, on our Malaysian project we collaborated with a local company. We are looking for core international partners who can handle global business practices.
Just to clarify, we're not taking unfiltered water directly from rivers, we drill wells near rivers so that the water we take has already been filtered naturally. The water is then taken via pipelines to be treated using our oxidation nozzles and bacteria to remove substances such as Iron, Manganese, Ammonium Nitrogen, and even Arsenic.
HiSIS High-speed Seabed Infiltration System
Your HiSIS (High-speed Seabed Infiltration System) purifies seawater without using harmful chemicals through an installation on the seabed floor. What role do see your company playing in the desalinization of seawater to supply drinking water to developing nations?
There are two kinds of desalination facility. One is the above-ground treatment facility and the other is underwater and uses our HiSIS intake technology which is dug into the seabed. There are many manufacturers of water treatment equipment but they’re focused on above-ground facilities. Traditionally, seawater is drawn into the treatment system using pumps, and then you have to go through many further steps in the process. Our innovative HiSIS technology works by embedding a screen in the seabed and filtering the water through the sand layer. This way, we are able to remove harmful substances to some extent as a pre-treatment step. By using HiSIS, you can replace many processing steps in conventional facilities thanks to that pretreatment. With the technology we developed together with Hitachi-Zosen we are able to replace all the conventional systems needed for desalination.
In business terms, 60% of water treatment costs come from over-ground facilities and the price varies depending on the company involved. The dilemma we're experiencing is that the major companies which do over-ground facilities are the prime communicators with clients and our pre-treatment system is only discussed afterwards so it’s hard for us to actively promote our technology. We don’t mind collaborating with other companies such as Hitachi, but we always have to wait for the key decision to be made by the customer following discussions with the main treatment company. It's very difficult for us to have direct communications with the customer as we always have to work through the main EPC (Engineering Procurement and Construction) contractor.
You’ve done projects in such varied places as Malaysia and the Middle East, where the soil composition and humidity are completely different. How are you able to tailor your approach to each of these markets?
Actually, we worked together with local construction companies specializing in drilling wells, so we never actually experienced the drilling or temperature differences. In Malaysia, we delivered the drilling machinery itself, however we're not a construction firm and we delegate that to local construction firms, so we have never experienced the hardships of construction.
In terms of further expansion, where are you looking to establish yourself next, and how would you do that? Would you consider engaging in a joint venture again as you did with Hitachi Zosen?
With China we have to be sensitive to operational risks as well as business and political risks, and issues involving intellectual property. There are already some manufacturers copying our technology in the oil and gas field. We call them imitators.
Marketwise, it is a big market but we have to consider the balance between risk and reward. We have production sites in Japan, China and Vietnam in order to mitigate the Chinese risk that we are experiencing. Vietnam has very low labor costs, is geographically well placed and is a politically neutral country. Our Vietnamese factory is a recent startup, so we are currently focusing our resources and strengthening as well as enlarging the capacity of the factory and improving the skills of the workers.
The Chinese market is important for our energy market, especially since half of our sales are from there. Our products are locally manufactured and locally consumed in China. However, as I have mentioned, there are many risks involved and to sustain a stable business we need to always think of the positive progression of our core competencies. And of course, our shift in business from oil to water will certainly have an impact on where we will locate ourselves.
Let's say we come back to interview you again on the last day of your presidency. What would you like to tell us about your goals and dreams for the company by that time, and what would you like to have achieved by then?
It's a difficult question, so I can only answer it quite vaguely. Since shifting ourselves more towards the water business – which is quite a niche field - we are becoming a known company and we have received multiple awards. However, we still feel there is a lot yet to do in the global market in order to make our brand well known. It's not only the PR or the IR that is important. We need to have more projects and gather more experience, especially in introducing our CHEMILES technology to every continent including developing countries, for example.
By having multiple projects around the world, we hope to increase our brand awareness and make ourselves known, like Sony, not only in Japan but globally. I know there's a long way to go to do this but if we can quickly take advantage of the good business opportunities currently available and draw out a good success curve, we are sure we can achieve it.