With a new factory in Myanmar and a fresh outlook, Koyorad is ready to provide the highest quality radiators to clients worldwide.
Over the last 25-30 years, Japan has seen the rise of regional manufacturing competitors who have replicated Japanese monozukuri processes, but at a much cheaper labor cost, pushing Japan out of mass industrial markets, however, we still see that many Japanese firms are leaders when it comes to niche B2B fields. In your opinion, how have Japanese firms been able to maintain this leadership despite the stiff price competition?
Our business is to manufacture and sell automotive parts, such as radiators and AC condensers, in the aftermarket. We do not have any business directly with car manufacturers. That is why you need to develop many different applications. Let's take radiators as an example, every three years the part number changes, so if we take a Toyota Corolla from three years ago, the radiator specification will be different.
There are two demands on aftermarket parts, basically, those are repair, then replacement after collisions. Even in a new car, if an accident occurs, there might be a need to replace a part completely due to damage. Honestly speaking however, we do not see a huge demand for repair replacements of radiators in new cars. OE manufacturers usually offer at least three-to-five years as a warranty period. If a problem happens in a new car due to the heat exchange, a service department in a car dealer or car repair shop will usually go back to the OE manufacturer and they will be able to offer OEM parts for free as part of the warranty. Collisions really are the only way we see demand for new parts, and that is because an accident might void the warranty.
Older cars, however, are our bread and butter, and cars over 15 years old are where we see the most demand for our products. We see demand for over 10-year-old parts or even 40-year-old parts, but to be completely frank, 40 years might be a bit old. Even though the economic situation in Japan is not doing so well, in general, Japanese people can afford to purchase a modern car. The over 15 years old cars that we see tend to be exported as used cars, usually to developing countries such as Asia, the Middle East and Africa. Moreover, there are many old cars driving on the road even in the developed countries, such as the United States and Europe, because the bigger gap between rich and poor exists and vehicle inspection is not demanded by law unlike Japan. Those cars are still on the road, and because we operate globally, that is where we are seeing a demand for our products.
Every three years we need to prepare and offer this kind of product range to our customers. Actually, the distribution channel in Japan is totally different from countries like the US, and our main customers here are mainly radiator repair shops, whereas internationally, our main customers are more wholesale.
Once a car repair shop sees that there is a problem with the heat exchange in their vehicle, they contact a radiator repair shop. The repair shop will then contact us to manufacture and distribute a part that they cannot repair themselves. This is how the Japanese market business tends to go in general. In the US and Europe, there are almost no independent radiator repair shops, and overseas they often think it is a better option to change a part completely. That is why internationally we do not really have any radiator repair shop customers, rather we sell wholesale in those markets.
Taiwanese and Chinese manufacturers are seen as our main competition, and they will often try to undercut the price. I do not want to say they produce cheap quality, but I think it is fair to just describe it as reasonable quality. As a Japanese manufacturer, we have a long history and experience. I think we are able to produce products that are high in quality. My grandfather founded the company after WWII, and during that time it was difficult for Japanese people to get any item from any kind of industry. In regards to our regional competitors, I think that unfortunately, they are a little less concerned about the quality and more concerned about mass production and distribution. There was a shortage of items after WWII, but my grandfather was more focused on his passion for high quality. He could have established a company that mass-produced items of decent quality, but I think that would have betrayed his passion for high-quality products. This spirit has been passed down to all employees of Koyorad and even to this day, is still present in everything we do. That is why quality is our first priority and we never look to compromise on that.
Obviously, we are trying our best to lower the costs and it is vital that even a high-quality company like ours stays competitive in the market. However, we have looked to add value in order to differentiate ourselves from our regional competitors, and I think the key to that is sales services. We are a family business, so therefore we are always thinking about the long-term relationships we have with customers in whatever industry or country they are.
We are careful when establishing a new agent or distributor in each market, and it requires us to delicately study what the market looks like. Our competitors in markets like China will often tend to think about the short-term outcome and relationship, meaning they will just try to sell as much as they can in one market, and they will do this by establishing many agents in a region. They do not really care about the distribution channel in the market, and they just try to sell the product to everyone in the same market. This results in local distributors complaining to the manufacturers and it really creates confusion and frustration in the market. We never do that, because we feel that might jeopardize our long-term relationships. Granted, it takes a while to accept new customers and new distributors, but once we start a business, we like to think of it as a marriage. Basically, we are trying to create win-win situations on both our and the customers’ sides. That is why we will not open channels for many distributors in one market. It is ok for us to see competition between our products and another company’s products, but we do not want to see competition between too many distributors selling our products. I think that is our advantage when compared to regional competitors.
Japan has an old and shrinking population, which is presenting some problems such as a labor crisis and a shrinking domestic market. What are some of the challenges and opportunities this demographic shift is presenting for Koyorad?
While the population of Japan is shrinking, there are more and more older people. We are now facing the problem of what to do with this situation. We need to hire new employees, especially for the factory that we are running in Nagoya. In 1994, we established a new factory in Indonesia and then China as well as Myanmar. Usually with a big listed company, when they try to open a factory overseas, they try to use the know-how and systems that have already been established in Japan. Basically, the factory in Japan is like a parent, and the factory overseas is like a subsidiary.
When we established our factory in Indonesia back in 1994, we tried to send an older director to go and train the local staff, and we felt it was important that the people there learned about how vital quality is to our entire operation. Nowadays, the production volume in Indonesia, China and Myanmar is way higher than in Nagoya. The factory in Nagoya never exports overseas and they only do business in the local market. Japan is a small country and we can guarantee customers same day delivery and the distribution channels are well established. We have warehouses in Sapporo as well as Chiba, Nagoya, Osaka, Fukuoka, and Okinawa, so as you can see, we have already established our distribution network. Once the sales staff have checked the inventory, the factory in Nagoya will produce based on if the order is in stock or not. We then take that order and try to deliver on the same day, and if not, the next day.
We also do special items for vehicles with specific needs such as agricultural vehicles and construction. We do not see a big volume in those orders, but those items can be sold at a higher margin because of their specific nature. That leads to a higher profit for us. We still see a demand for those items, so it is important that we maintain production on such products. In order to do that we need labor.
It really is a challenge these days to hire labor, especially locally, but we do recruit every year. That is important to maintain the level of labor we have become accustomed to. At the same time a few years ago, the Japanese government set up regulations that allow companies like ours to invite workers from overseas. We actually now have four international workers from our Indonesia factory working in our Nagoya factory, and once those workers pass some Japanese language proficiency tests, we are able to extend the duration of their visas. The number of workers that can have visas issued to them depends on the company size. We plan to increase the number of foreign workers at Nagoya factory by letting them pass some Japanese language proficiency tests according to government regulations. They are actually skilled and experienced workers, who are necessary to maintain our production in Japan.
As a result of the automotive sector switch to EVS, many vehicles require new specifications such as lightweight materials. What are your thoughts on the switch to EVs and what opportunities are there for your firm?
We are in the market of aftermarket parts as I told you, so the transition from internal combustion engines (ICE) to EVs is not going to have a big impact on our business. Nowadays, ICE vehicles come with radiators to basically cool down the engine system. EVs do not come with engines, but they do come with inverters, which in turn converts electricity from DC to AC generating from the batteries in order to run the motors. Inevitably that inverter is going to get hot and there is a need to cool that part down. So basically, EVs are still going to need radiators, but that radiator is used for the inverter rather than the engine. The demand for radiators it not going away.
Also, we are seeing the designs for some upcoming EVs and carmakers are trying to make the exteriors more modern in design in order to differentiate them from ICE cars. Usually, on traditional cars, there is a grill at the front, and between the grill and the interior, there is a space just behind the grill, and honestly, it is the best spot to absorb wind. This results in good heat exchange. However, if you look at some EVs, there is a much smaller grill at the lower front, but they do have some small grills on the side. That is the spot where they put heat exchange products. What this means is that where there used to only be one product, now carmakers are making space for more. Obviously, those will not be the same size, in fact, they are smaller and more compact, but it does mean that demand is going to rise. There is the possibility to replace those with aftermarket parts and we see some future potential.
Mechanical watches are sold at a premium these days, especially when compared to digital ones. This is despite claims that digital watches would completely replace mechanical ones. This situation could be replicated in the automotive industry, and the thought is that ICE vehicles will still be valued by enthusiasts or certain markets that are slow to transition. Do you agree with this and how quickly do you think consumers will take to EVs?
Yes, I agree. There was actually the Tokyo Auto Salon in January 2023 and we had a booth at that expo. This is the second time they have run the exhibition in the past few years because of the COVID-19 pandemic. At the event, we usually show off our radiators that are used in racing cars. Those kinds of cars rely on more powerful heat exchange to increase the performance of the vehicle. We customize the radiators based on original dimensions and then tune up from there. This is still a niche market and a small percentage of our total business, but we do this kind of thing for Japan, the United States, Europe and so on.
The transition to EVs is happening all over the world, and especially in Europe, they are moving at a rapid pace. In the United States, we see growth in racing radiator sales. There are still many people that like to drive high-performance vehicles, and I think the sound of those cars is really key to the appeal of these reciprocating engine vehicles.
This transition in my mind is related to carbon neutrality goals, and of course, it is important for all of us to think about global warming and the environment. There are however a few elements that I think need to still be thought about, for example, if we all change to Evs, how are we going to be able to produce enough electricity to power them? In Japan, the government is trying to re-establish nuclear power plants, but nowadays fossil fuels are still providing the majority of the power for the country. This applies to almost all developing countries as well. I understand that nuclear power is a viable option for some countries, but it is my honest opinion that this should not be the case for all countries.
Those European countries are now setting up regulations to complete the transition to EVs by 2030 or 2040, but to be realistic, I think a more hybrid approach is required. There are many more ways for carmakers to increase fuel efficiency, and I think this ties into my point that we need to think about how we are going to supply so much electricity to vehicles all around the world.
There are a lot of requirements for setting up a society that can support EVs. Infrastructure needs to be built and the electricity supply problem needs to be solved. Of course, solving these problems requires additional costs, and it feels like it might be almost impossible for developing countries. In some countries, I feel that the trend is slowing down.
Are you looking for any new partnerships in overseas markets?
We have three overseas factories right now, and when we established our factory in Indonesia, at that time Indonesian laws said that we could not establish a 100% capital company, especially for our automobile parts. For that reason, we have no other choice than to find partnerships or more like a joint venture with other companies. This company that we have a partnership with is a shareholder, but they are more like a silent partner. They really do not get involved with our management. We are now at a point however where all of the companies overseas that are under our umbrella are 100% owned by us.
The Myanmar factory is the latest place in which we have invested into in 2014. As we already have quite a bit of experience in running production, we tend not to rely on partnerships to set up factories. The sales side however is a completely different matter. Before we established our sales offices in the United States, we had the opportunity to visit trade shows there and we found a reliable partner then. We established a full, exclusive distribution with two partners in the US, but after a few years we decided that we had enough experience of our own and set up to sell by ourselves. The US is one of the biggest countries in terms of car population and we saw a lot of potential in setting up our own sales office. The China factory came after that, and eventually, the car population in China will exceed the one in the United States, which will be bigger potential market. I would say that these days, we do not have any plans to set up partnerships, but of course, we are always looking for new customers and locations. The Middle East and Eastern Europe are of particular interest to us right now. We have a warehouse in the Netherlands which is taking care of Western Europe, and our biggest competitor has set up warehouses in both Eastern and Western Europe. Currently, we are under consideration to potentially set up another warehouse in Europe, one that will cater to the needs of Eastern Europe.
Can you share with us your mid-term strategy in order to continue your corporate growth? Do you have any financial or business targets?
Right now, interest rates all over the world are increasing, and this is affecting our business. Higher interest rates mean that the entire economy is slowing down, and we are rarely receiving big orders, and the number of orders is decreasing. Additionally, the COVID-19 situation before that had a big impact on transportation, especially ocean freights. The cost of freight increased dramatically and the actual transport time became very unpredictable. All of the ports became congested and to be honest it was just chaos.
During that period, we faced lost sales because we simply could not deliver on time. In the later part of 2021 and the beginning of 2022, our customers started placing orders that exceeded the demand they had. I think it was because they were afraid of the unpredictable shipping time and potentially long lockdowns. Ocean freight costs increased month by month, and therefore they booked orders as early as possible in order to save on costs. Luckily, now we are seeing the transport times returning to normal, and the costs are also going back down. Our factories have been pretty busy thanks to this situation over the past couple of years, and our solution was to increase our production capacity.
Unfortunately, we are now heading into a recession period worldwide, and I think this situation is going to persist by the end of this year. Our strategy right now has shifted to one that saves costs. The economy is going down and we really do not see huge demand coming in. Basically, we are trying to rebalance our company to survive the current market situation.
Obviously, there are risks involved. Last year Russia suddenly invaded Ukraine, and that is clearly affecting the market. Oil and energy prices are going up. We also have the situation in China, and there is a possibility that China may try to invade Taiwan soon. This sentiment is shared by many of our customers in Europe. They saw how suddenly Russia invaded Ukraine and they think that the same situation may happen to Taiwan. That had a huge impact and companies in Europe are trying to better prepare for the chance that such an event might happen again. Some European customers are now trying to stay away from importing from China and are looking for alternative importers and suppliers. We have seen some customers try to work more closely with us as a result because we have factories not only in China but also in Indonesia and Myanmar. Having said all of this, who really knows what is going to happen in the future? Honestly, none of us can really predict the future, but we need to appeal our advantage to our customers and need to be prepared in advance as much as we can.
We can implement more automated machinery in our Indonesian and Chinese factories so that we require less labor, because the labor costs have been increased more than we expect and it is getting more difficult to hire the production workers especially in China. This is why we set up our factory in Myanmar. In order to provide the wide range of items to our customers, we still need to maintain the labor oriented production for low volume items. If we set up a factory in an African country, that is more accessible than Europe and would be faster to deliver from Africa to Europe than from Asia to Europe. However, I would say that right now we are in a position where we do not need to set up another factory overseas, however, stable supply is one of our responsibilities to our customers. That is why we think about these ideas and plan ahead, just in case something happens. We will keep doing feasibility studies so that we can find a suitable candidate for a new factory.
Your company has recently diversified into the cafe business. Could you elaborate on why you made this decision to diversify into such an industry?
It is actually related to what you mentioned earlier about the labor crisis in Japan. The population is decreasing in Japan, that is just a fact, so now we are just running our B2B business in Japan. With our long history running our business, we are fortunate to have made a profit, and we are also lucky to be in a position where we can maintain an employee count of more than 100 in Japan. However, as I have mentioned throughout this interview, none of us can accurately predict the future 100%, and with the population decline, it is going to become increasingly more difficult to hire labor. The size of the market also is shrinking. Now we can make a profit off of our heat exchanger business, but looking 20-30 years down the line, who knows? We have to think about new types of businesses, and we need to do that before we face big problems.
Before my sister joined our company, she worked in a totally different industry. She was working for a supermarket, one that is quite famous in Aichi. After my sister graduated from university, she joined this supermarket company and she started as a buyer of fruits and vegetables. At times, she was required to promote whatever she was buying for the stores to stock. She was then promoted to the sales promotion and product development team and moved to their headquarters. Obviously, that kind of business is B2C, which is the opposite of what we are doing here at Koyorad. She decided to resign for a new challenge and join us, and that happened in 2019. Rather than work together with me on the heat exchanger business, we had the plan to diversify to a B2C business. She was appointed the director of that business. She has some good experience from her time at the supermarket, and with that knowledge, we were able to open a cafe business. Luckily my father has some good connections in the food and drink industry. We are able to use those connections to get some valuable advice. Additionally, we are trying to set up cafe place as a portal site, so that customers of one business can be introduced to our other businesses.
My goal is to keep our company moving forward. Obviously, we all die one day, but ideally, I would like to create a situation where the company will always live on. In order to do that we need to make plans in advance and diversify to survive. It is my responsibility to make sure the company is in the best condition it can be when I inevitably pass the company on to the next generation.
Imagine that we come back on the last day of your: what goals or dreams do you wish to have accomplished by then?
I only just became the president of Koyorad only a few years ago, so I am not exactly ready to think about succession, but I wish to keep running business making our stakeholders, such as suppliers, customers, and employees happy and train my successor to be more outstanding than myself by my last day. Personally, for me, I think the best thing I have done since taking over was opening the factory in Myanmar.
It feels tough to answer on succession because although I have a son, he is only at the pre-school age right now. He still has a long way to go. As far as personal goals go, however, it all really depends on the political and economic situation, especially in the short term. If everything remains as it is right now my goal is to extend our Myanmar factory building. We have the land available to build twice as much as we currently have now. Not only can we extend the buildings we have, but we can also upgrade the machinery and further increase our production capacity. I see a lot of potential in laborers in Myanmar and I saw a lot of growth in terms of the high-quality products they are able to produce.
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