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Sus-Tech Corporation: Addressing supply chain challenges and steel Innovations

Interview - January 15, 2024

Sus-Tech Corporation is a steel processing company that supplies its products to various industries, including automotive, construction, electronics, and more. Here, we uncover their unique approach to manufacturing, supply chain flexibility, and opportunities across industries are emphasized.

HIROTOSHI KITAGAKI, PRESIDENT OF SUS-TECH CORPORATION
HIROTOSHI KITAGAKI | PRESIDENT OF SUS-TECH CORPORATION

Japan is currently experiencing a unique period marked by significant supply chain disruptions over the last three years, attributed to factors such as COVID-19 and the US-China decoupling. Additionally, the Japanese yen is at a historical record low. These circumstances have renewed the appeal of Japan to international companies looking to diversify and grow. Do you agree with this perspective, and what do you consider the key advantages of Japanese suppliers in the present macroeconomic climate?

I agree on some aspects. With respect to Export business, The weakened yen has enabled Japan to remain competitive. But production cost itself has significantly increased on other aspect. Around 20 years ago, Japan's GDP per capita was approximately USD 30,000 to USD 40,000, securing its position as the second or third highest in the world, following Luxembourg, which had about USD 50,000. However, over the past two decades, Japan's GDP per capita has remained the same, while Luxembourg's has soared to approximately USD 130,000. Consequently, Japan has dropped to the 32nd position globally in 2022. Regrettably, our salaries have remained stagnant for an extended period, contributing to our cost competitiveness. Notably, the influx of tourists from China and the West has been significant, as they are drawn to Japan for its affordable products. Despite the low prices, we have managed to uphold our quality standards and brand integrity for the present.

Another essential aspect is Japan's long-standing focus on its manufacturing craftsmanship, rooted in the monozukuri tradition, where intricate details are passed down to future generations. Conversely, Our commitment to preserving the quality of technology, refined over generations, has impeded progress in automation. Although we excelled in technology preservation, our ability to boost productivity remained constrained. Unfortunately, Japan has witnessed a lack of improvement in productivity over the past two decades, underscoring another challenging aspect of our situation.

Products made in Japan are often not cheap. However, thanks to globalization, we can now source raw materials from countries with lower costs and manufacture goods in countries like China, and Southeast Asia, where production is more cost-effective. Developed nations, including Japan, the US, and European countries, typically consume these products, following the standard cycle in the global market.

Nevertheless, in 2014, when Mr. Trump became the President of the United States and Brexit occurred, many countries began turning to Nationalism and focusing on domestic production. They implemented safeguards and regulations, insisting on the use of materials produced exclusively in the local market. Consequently, the global supply chain collapsed. In Japan, the inability to access semiconductors disrupted manufacturing processes. Difficulty in obtaining imported materials from China also affected construction and car production. For instance, the price list for Toyota's Land Cruser was at around 7-8 million yen but due to short supply and longer lead time, the pricing at second-hand market rose up to 10-20 million yen. This complete breakdown in the supply chain means Japan currently can't manufacture products from start to finish. Despite existing business opportunities, there are significant losses due to these constraints.

In Japan, standard housing features gas-powered hot water supply systems, ensuring continuous access to hot water without the need to preheat a specific amount of water in the tank. In contrast, many European and US homes use boilers. Once these boilers malfunction, there is no hot water supply. The convenience of having instant hot water in Japan has been widely recognized, leading to growing demand in European countries and the US. Currently, only 20-30% of the US population uses this system, indicating significant potential for growth in the US market.

However, despite this opportunity, Japan faces challenges in procuring semiconductors last year, hindering the manufacturing and export of this product. The scarcity of essential materials and components prevents us from capitalizing on this business prospect.

Regarding our Japanese monozukuri, although we are able to maintain our technologies, the decline in our population means the decline of successors. It is very difficult for us to export these good products to the overseas market.

 

Sus-Tech is a steel processing company that supplies its products to various industries, including the automotive, construction, and electronics sectors, among others. From a business standpoint, which of these industries do you believe offers the most significant growth potential? Additionally, are there any other industries where you would like to provide your processed steel products?

Japan's declining population has led to a reduction in the demand for products, driving a wave of mergers and acquisitions in our industry. We have surplus production capacity, and it is unlikely that the overall market will expand in the future. Analyzing steel usage trends in emerging countries like Africa, we note their transition from zinc-coated steel to painted steel, followed by the adoption of stainless, aluminum, and titanium. Japan is already mature in these developments, making it improbable for the demand for stainless steel to increase unless there is a substantial influx of immigrants. Given Japan's conservative nature and the absence of significant population growth prospects, anticipating further expansion in the domestic market remains a challenge.

Our company's majority shareholder is Metal One, owning 75% of our shares, while Nippon Steel Stainless Steel (NSSC) holds the remaining 25%. NSSC, a significant player in the Japanese Stainless Steel market dominates the market with a certain share of cold-rolled products of 300 series. To promote duplex steel, NSSC has dispatched one sales representative from our company to collaborate with us.

Stainless steel comes in two primary types: Type 300 and Type 400. Type 300 utilizes both chrome and nickel, with nickel providing corrosion resistance and easy forming. Type 400, on the other hand, uses chrome. While chrome is heat-resistant, it is prone to rusting. Duplex steel combines the favorable properties of both types, offering a comprehensive solution. In Japan, NSSC is actively involved in developing this type of steel. Currently, we are working on replacing aluminum and other forms of stainless steel with duplex steel, which is why the NSSC sales representative is collaborating with our company.

Companies in food processing still use aluminum plates. We are actively working to replace their aluminum plates with duplex stainless steel. Although aluminum is lighter, duplex stainless steel offers increased robustness, can be made thinner, and is heat-resistant.

We are witnessing the emergence of new technologies across various sectors. In the electric vehicle (EV) industry, there is Lithium Energy Japan (LEJ),. LEJ manufactures lithium-ion batteries, with the battery cases made from stainless steel. With the growing demand for EVs, there is a corresponding increase in the demand for stainless steel. However, as traditional automakers phase out vehicles with internal combustion engines, the need for mufflers, typically made from Type 400 stainless steel, will decline. While we may lose business in the muffler industry, we anticipate increased opportunities in manufacturing EV battery cases.

Fuel Cell Vehicles (FCV) handle significant heat, especially those used in hydrogen and oxygen fuel cells. These valves require specialized heat-resistant steel. As the demand for FCVs increases, there will be a new market demand for heat-resistant stainless steel in this field.

In the renewable energy sector, specifically in solar thermal power generation facilities, heated salted oil passes through a pipe system, which can lead to rusting over time. Stainless steel has become the preferred material for these pipes due to its excellent anti-corrosive properties. The oil is channeled through these stainless steel pipes to the boiler, where it generates electricity. There is a current effort to incorporate stainless steel in all pipes within this power generation system. As a result, the demand for stainless steel in the renewable energy industry is expected to increase significantly.



With your company's recent merger with Stainless One in 2021, expanding both operations in Japan and exporting products globally, how extensively are you planning to conduct your business overseas to ensure long-term sustainability? Which specific regions are you considering for expansion, and what strategies are you planning to employ? Are you exploring options like mergers and acquisitions, joint ventures, or establishing subsidiaries in these regions?

The steel business structure in Japan operates within a multi-layered system that has been established for more than 50 years. At the top tier, there are wholesale agents such as Metal One Corporation, Marubeni-Itochu Steel Inc., SUMISHO METALEX CORPORATION, Mitsui & Co. Steel Ltd., and others. These entities are responsible for handling cash interest and credit lines. Below them, we have service centers like Sus-Tech, followed by traders, and finally, the end customers.

While manufacturers upstream have become more integrated over the years, there has been relatively little change in the succeeding layers of this structure. This lack of evolution is our primary concern, and it leaves us feeling exposed to risks. It might mean that multiple functions might merge in the future.

European manufacturers have been integrating their supply chains. This allows them to directly sell processed products to customers. In my view, Japan is likely to follow a similar trajectory to what has occurred in Europe.

In the US, most steel manufacturers collapsed in about 30 years and steel users faced procurement challenges. Under the circumstances, Service centers supported the users and established certain positions in the market. Both suppliers and customers follow service centers. It is different from Europe.

While we currently focus on basic processes like cutting and leveling, we are exploring more advanced processes such as stamping, assembling, and other complex operations. This expansion includes horizontal and vertical integration as we seek to enhance our capabilities.

 

Are you looking at using your Metal One network to sell your products overseas? Which countries would you like to expand into?

Certainly, Our parent company, Metal One, is currently expanding the business in US, which is why Metal One has dispatched stainless steel professional staff member there. They also have a workspace at a US-based steel processing service center. This steel processing service center has introduced the use of stainless steel and aluminum in its operations, and our staff is primarily focused on managing the stainless steel business. We aim to eventually initiate steel processing operations there.

 

Looking ahead to your 115th anniversary, what specific goals and aspirations for the Sus-Tech would you like to have achieved by then?

My objectives are to establish a certain position in the Japanese market and expand our business internationally, and this includes not just the US but also other regions. Given the disruptions in supply chains, the ongoing conflict between Israel and Palestine, escalating commodity prices, and the slowing down of the Chinese and the US economies, predicting demand and the direction of exports has become quite challenging. In this uncertain environment, our current focus should be on patience and enhancing our performance in the domestic market. This will prepare us to restart overseas operations when the right opportunity arises.

Currently, our stainless coils are cut vertically, with the width being determined by customer specifications. Our production management team is actively working on optimizing the use of stainless steel to accommodate diverse customer demands. During the cutting process, the edges of the stainless coil often result in scrap material. Minimizing this scrap is crucial as it directly impacts our recovery ratio. Mistakes during cutting lead to increased waste and higher production costs.

To address these challenges, we are using digital technology to develop an algorithm for cutting processes based on customers' historical data and forecast and for truckage based on optimal loading and route. This algorithm for the cutting process will help predict the most efficient way to cut the stainless coils, thereby enhancing productivity. It's worth noting that, unlike other industries such as automotive and construction, our customers frequently place orders for small quantities (around 100-200 kg) of stainless coils. For these smaller orders, we face the challenge of having to stop operations midway, resulting in the need for additional cutting attempts. We are exploring methods to optimize the cutting process. Our goal is to achieve a one-time, efficient cut of the coil, reducing both waste and production costs.

Effective management of productivity and salaries is paramount, especially given the declining population and the ongoing challenge of recruiting new graduates. Enhancing productivity is essential for our business's survival. Integration of digital transformation (DX) into our operations could enable us to automate the coil-cutting process. By 2024, it's imperative that we reduce truck drivers' overtime to less than 960 hours. To achieve this goal, we are focusing on efficiency enhancement.

We are currently evaluating various strategies, including optimizing loading and unloading processes for coils and determining the most efficient transportation routes. Additionally, we are developing an algorithm to decrease the number of trucks needed for logistics. Furthermore, we are optimizing our product sales platform and supply chain to reduce labor and associated costs while upholding our technology's quality standards.

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