Nakayama Steel Works, a 100-year-old Japanese steel manufacturer, discusses the company's positioning in a changing global landscape. Key topics include the advantages of Japanese suppliers amid supply chain disruptions, the impact of Japan's demographic shift, the firm's foray into marine engineering, the development of Nakayama Fine Grain (NFG) technology, and their approach to collaborations and future aspirations for environmental sustainability.
For the past few years, there have been huge supply chain disruptions caused by Covid-19 and US-Chinese decoupling. As a result, international firms are looking to diversify their supply chains. Known for their reliability, Japanese companies are now in a very interesting and unique position, especially since the JPY has reached its peak low to the USD, making Japanese products the most cost-effective they have been in 20 years. Do you agree with this sentiment, and what are the advantages of Japanese suppliers in this current macroeconomic environment?
Yes, I agree with this opinion. I feel that the opportunity is coming for Japanese companies, both small and large, to take advantage of the opportunities that are currently available. For many years, many Japanese companies have been developing and designing technology domestically and manufacturing overseas, but this has become more difficult to do, especially with the decoupling of the U.S. and China. In particular, there are threats to China from the perspective of its leadership system and defense, and both Japan and the U.S. are now realizing that it is dangerous to be overly dependent on a single country for production. In addition to the impact of the weak yen, domestic companies are beginning to return to their manufacturing bases in Japan, and I feel that domestic companies are attracting renewed attention from the standpoint that they can take advantage of Japan's strengths in product reliability and quality, and guaranteed delivery times.
I believe that Japanese manufacturing companies have several advantages in this current macroeconomic environment. Firstly, Japanese companies have a strong reputation for high-quality products and advanced manufacturing processes. This reputation has been earned throughout the many years of their existence. Japanese culture is known for its long-term relationships and its commitment to quality. This encompasses all Japanese industries. The depreciation of the JPY also puts Japanese manufacturing companies in an advantageous position, and this has led to a lot of interest in Japanese manufacturing. In the past many Japanese companies localized their production overseas. However, currently, we are seeing some Japanese companies rethinking and relocating their manufacturing back to Japan. The reopening of these production sites in Japan will be an advantage as more job possibilities for Japanese people will be available. A lot of good things are happening for Japanese companies right now. I totally agree with your sentiment regarding the current macroeconomic situation.
In the next 15 years, one in six Japanese people will be over the age of 60. This could lead to labor shortages as well as a shrinking domestic market. What are some of the challenges that Japan’s demographic shift has presented to your firm, and how have you been reacting to those challenges?
The decline in the domestic population is a major problem for Japan. Although Japanese steelmakers have traditionally relied on exports for more than half of their steel products, we are still facing a very severe situation and a great sense of crisis with regard to the future decline in domestic demand. We are most concerned about the decrease in the working population due to the declining birth rate and aging population, as well as the decline in population. For our company as well, in terms of recruitment, how to secure excellent human resources has become a matter of life and death, and this is a major concern for domestic companies in general. Specifically, it has become extremely difficult to recruit young people. This is especially true for securing on-site workers who have graduated from high school. The acquisition of staff, especially talented people, is also extremely intense among the companies. Another major problem is the low retention rate and the increasing number of cases where workers are hired but leave the company soon after being hired. These are the human resource issues. Our response to these problems is, first, to show that we are a company that can grow and develop in the future as a manufacturer of electric furnaces against the backdrop of the carbon neutral trend, and second, to show that we can offer challenging and rewarding jobs in our company. These are the two macro measures. I feel that young people are divided into two types: those who aim to become wealthy by starting their own businesses at start-up companies, and those who want to grow steadily and stably in their hometowns with an eye on the future.
Another result of Japan’s demographic decline is a diminishing domestic market. By 2050, Japan is expected to have less than 100 million people which means fewer consumers, less demand for steel, and less demand for products that are made from steel. In terms of your business, have you had to look more overseas in recent years as the market gets smaller here in Japan?
Our current export ratio is less than 10%, and we have no immediate plans for rapid expansion due to our production cost and profit structure. To elaborate, our crude steel composition comprises approximately half in-house production and half purchased, with the latter being chosen for its cost competitiveness. Our strategy involves increasing the in-house crude steel ratio by expanding our electric arc furnace production capacity. Only after this expansion is completed will we consider raising our export ratio.
While many Japanese manufacturing companies are seeking overseas markets to counteract the domestic market's decline, our primary focus has always been the domestic Japanese market. Approximately 10% of our products are currently exported overseas, and though the potential for increasing this ratio exists, we are not actively pursuing it at the moment. Our production facilities and warehouses are strategically located in Japan to cater to the domestic market. Expanding exports poses challenges at this time, but it may become a consideration in the future. Streamlining production sites to enhance efficiency and reduce costs could make it a viable option, contingent upon assessing its profitability.
Are there any specific regions or markets that you would like to cater your products to? As you mentioned, 10% of your sales are in Asia and North America, but are there any other regions that you would like to expand your products to?
Our current exports primarily target Southeast Asia and Korea, and this trend is expected to continue in the foreseeable future. Notably, we have no intentions of expanding our exports to Europe or the United States.
However, it's important to highlight that exports are not our primary focus at this time, constituting only a small percentage of our sales volume. If we were to consider increasing our export ratio in the future, our focus would remain on the same regions where we currently export, namely Southeast Asia and East Asia, with no immediate plans to venture into the US or European markets.
Instead, we see significant opportunities within the domestic market, where we believe we can play a pivotal role. Our approach involves maximizing our expertise and technology in electric arc furnace production, aiming to differentiate ourselves from domestic blast furnace manufacturers.
Additionally, our efforts align with the industry's shift towards carbon neutrality, with a significant transition from conventional iron casting to electrical furnaces. This shift is already underway within our company, aimed at increasing product awareness, profitability, and energy efficiency while demonstrating our commitment to environmental responsibility.
In our forthcoming annual CSR report, we will provide more detailed insights into our current objectives and progress toward these goals.
You just mentioned that Japan is in a deficit in terms of raw materials. Japan is known to be quite a resource-poor country, and as a result, the country has to rely on imports. Despite this setback, Japan has the third-largest steel-producing industry in the world, with companies such as Nippon Yakin Kogyo and Nippon Steel Corporation ranking amongst the highest in the world. How has Japan been able to be so successful in the steel-producing industry?
Japan's prominent position as one of the world's leading steel producers can be attributed to several key factors. Initially, steelmaking technology did not originate in Japan but was imported from Europe and the United States, including methods like the converter (LD) and continuous casting (CC). Despite this, Japan's ascent to a leading crude steel producer was fueled by resource scarcity, necessitating iron ore and coal imports, and the diligence and capabilities of its workforce.
Furthermore, Japan's steel industry saw significant growth in tandem with the development of the automobile manufacturing sector. Collaborative efforts between steel manufacturers and automakers resulted in the establishment of a quality assurance system, leveraging Total Quality Control (TQC) and a market-oriented approach. This synergy led to the creation of safe and reliable automobiles, solidifying Japan's position in the global steel industry.
Beyond these historical factors, Japan's steel prowess stems from its adaptability to new technologies and manufacturing principles. Despite its resource dependency, Japan excels in processing raw materials, developing innovative machining methods, and manufacturing cutting-edge equipment. The country's geographical advantage, with production facilities situated near the sea, ensures efficient access to raw materials, enabling Japanese companies to devise optimal solutions for their customers.
However, successful steel production goes beyond equipment alone; effective marketing strategies are crucial. Japanese manufacturing companies excel in this aspect, maintaining strong connections with industries that heavily rely on iron-casted products, notably the automobile sector. Japan boasts a robust automotive industry with substantial demand for products from iron-casting and steel-producing companies like ours, further cementing its global leadership in steel production.
Your steel products have a wide variety of applications including civil engineering, construction, automotive, industrial machinery, and more. We also know that you have entered marine engineering regarding the “Three Star Reef”, being able to easily manufacture and design steel-made high-rise and large-scale structures for marine conditions. What factors led your company to venture into the field of marine engineering, and what challenges have you faced within this business sector? Also, are there any new applications that you would like to cater your products to?
Our primary focus in the steel industry centers on supplying products to the construction sector, with a particular emphasis on thin, lightweight steel frames such as pipes and C-beams, primarily for low-rise structures. These components are processed and delivered to the fabricator stage, with base materials hot-dip galvanized for superior corrosion resistance. Lightweight steel shapes are further coated with specialized colors to enhance user-friendliness for our customers.
In the marine engineering realm, we hold a prominent position as Japan's leading manufacturer of steelfish reefs designed to attract marine life. This initiative aligns with the evolving landscape of fishing practices and a growing emphasis on domestic food self-sufficiency. We aim to ensure a consistent supply to meet the changing needs of this industry.
Another noteworthy endeavour involves the application of NFG's (Nakayama Fine Grain) rolling technology, primarily for construction machinery and selecting automotive parts. While past attempts to implement this technology for major automotive components faced limitations due to the absence of cold-rolling facilities and reliance on hot-rolled finishes, recent trends toward carbon neutrality have sparked increased interest in electric furnace materials.
In summary, our core focus remains on the construction industry, particularly lightweight pipes tailored for civil engineering and residential applications. We actively seek to expand our presence in this sector, continually exploring new applications and collaborating with industry leaders to introduce high-value, environmentally friendly products. Furthermore, our commitment extends to the marine engineering and fishing industries, with lightweight steel reefs gaining traction as a sustainable solution in response to seafood deficits and import restrictions. Lastly, we strive to enhance our presence in the automobile industry by leveraging our cutting-edge technologies and materials like NFG to meet the evolving demands of the market.
When it comes to your energy technologies, as you mentioned, in 2001, you developed your NFG which is a dream super metal that is the only one of its kind being produced in the world. The grain size is extremely fine at 2 to 5 microns which is approximately one-third the grain size of conventional hot-rolled steel sheets. Can you tell us why you decided to develop your NFG and what applications it is most suited to?
The development of NFG (Nakayama Fine Grain) technology emerged against the backdrop of several considerations. Historically, fine graining through TMCP (thermal processing control) in the steel sheet (plate) field was known to enhance impact strength (Charpy value) and toughness, a practice already applied in shipbuilding and similar sectors. In the year 2000, we introduced a new hot-rolling line and purposefully designed it to enable fine grain reduction in thin steel, sparking our research and development efforts. The goal was to leverage fine grain size for strength, eliminating the need for additional alloys like Nb and V, which had previously increased production costs. This approach paved the way for more affordable production methods and expanded applications.
Our NFG technology employs an eccentric deformed strip-driven rolling mill, facilitating significant pressure reduction (to reduce grain size) and rapid cooling (to prevent fine-grained structure growth) in the finishing mill, effectively reducing grain size. While originally intended for cold-rolled materials, we sought to commercialize it, albeit with limitations due to our specialization in hot-rolled finishing. Consequently, our application of NFG is primarily focused on slightly thicker products, such as some automotive parts and construction equipment components.
In the construction sector, unique requirements demand that the yield ratio (YR) remain low for seismic resistance, making the application of NFG somewhat challenging in this regard.
Despite these limitations, NFG technology offered an innovative solution to the issues associated with thin hot-rolled steel sheets. It allowed us to create thinner steel plates without the need for additional alloys, which had previously increased costs and production time. This breakthrough was particularly significant in meeting the demands of Japanese construction companies seeking durable and reliable solutions for their evolving construction methods and equipment.
While the initial introduction of NFG faced resistance in an industry accustomed to hot-rolled steel sheets, we gradually expanded its usage. In the automobile industry, although NFG adoption was relatively modest, we are actively working to broaden its customer base and enhance our NFG technology. However, it's essential to acknowledge that due to its durability ratio limitations, NFG may not find widespread application in the construction industry, given the sophisticated production requirements in that sector.
We would like to ask you about the role that collaboration plays in your business. You have spoken about how important environmentally-friendliness is for your business moving forward. On that front, you are collaborating with companies such as Mitsubishi to create sustainable steel-based products, but you are also adapting your technologies to electric arc furnace-based production methods. In terms of further expanding the environmental technology base of your business, are you looking for partnerships, especially from international companies that could help you enhance those products?
About 15 years ago, we engaged in a collaborative research initiative on NFG (Nakayama Fine Grain) technology, as part of a national project for the development of high-performance steel. This venture involved several prominent entities, including Kawasaki Heavy Industries (KHI), Honda, our company, and the National Institute for Materials Science (NIMS). The project was primarily geared toward addressing the needs of the automobile manufacturing industry, and it exemplified our commitment to collaborative efforts with industry leaders. However, despite the considerable effort invested, the project did not yield the desired customer satisfaction in terms of overall performance.
Moving forward, a key consideration is how to navigate this situation effectively. One prominent challenge lies in the absence of cold-rolling capabilities, which is a subject of concern. We firmly believe that the potential for improving the functionality of final products extends beyond fine-grain steel finishes to include the fine-graining mechanism in hot-rolling processes. This exploration serves as the focus of our future research and development endeavours. While we are not currently pursuing collaborations with manufacturers, this avenue remains open for potential exploration in response to customer demands and opportunities.
While discussing collaborations, it's worth noting that our past collaborative project, involving well-known names in the automobile industry like KHI, Honda, ourselves, and NIMS, did not result in commercial success despite our collective efforts. This project exemplified the inherent challenges in bringing a product to market, even when technology and products meet high standards and expectations. It underscores the complexity of achieving commercial viability, as products must undergo rigorous testing and customer validation. Although this particular collaboration did not lead to successful commercialization, it provided valuable experience and insights gained from working alongside like-minded companies.
Your business is more than 100 years old. If we were to come back to interview you again on the 110th anniversary of your business, are there any goals or ambitions for the business that you would like to have achieved by that date?
In our 104th year of operation, we are crafting a visionary roadmap that extends to 2030, marking our 111th year in business. Our foremost ambition is centered on carbon neutrality, aspiring to become an environmentally conscious company as we transition from conventional hot furnaces to electric furnaces (EF). Currently, we maintain a balanced production ratio between these two methods, but our vision is to progressively shift towards 100% EF production.
Simultaneously, we aim to expand our customer base, with a particular focus on the automotive industry. The evolving demands from this sector necessitate advanced products, including lightweight solutions and innovative alloys and materials. In our pursuit of progress, we are committed to streamlining manufacturing processes and reducing production costs. Moreover, we are dedicated to enhancing the flexibility and user-friendliness of our products, ensuring we meet the diverse needs of our valued customers.
This strategic journey toward 2030 aligns with our overarching goal of increasing our own electric furnace capacity to produce all our crude steel for steel sheets. By achieving this, we not only bolster our product development and processing capabilities but also broaden our customer reach. Ultimately, our vision positions us as contributors to carbon neutrality, enhancing our value proposition and profitability in the years ahead.