Known throughout Japan as the market leader of screws, TORQ has transformed into a digital services provider for SMEs in the construction and manufacturing trades.
The current landscape is pivotal for the Japanese industry, marked by supply chain disruptions caused by the COVID-19 pandemic and the decoupling between the United States and China. Consequently, corporate groups are seeking supply diversification for reliability. Japanese firms, renowned for their reliability and advanced technology, are in a unique position, partly due to the weak Japanese yen. Many observers suggest that this presents a distinct opportunity. Do you share this sentiment, and could you elaborate on the advantages Japanese firms possess in the current macro environment?
I agree with the overall sentiment of your premise. As you might be aware, TSMC and Sony are building a new semiconductor fabrication plant in Kumamoto, and this investment move by TSMC is part of this trend in my opinion. Looking at the fastener industry, however, your sentiment might not exactly ring true. Before and during the COVID-19 pandemic, we were able to procure materials and components from countries like China and Taiwan. Those countries are important sources of procurement for us. There are many fastening manufacturers in Japan which have high quality and high production capabilities. However, Japanese fastening companies cannot really be competitive in overseas markets because of the high price of materials that they procure from the domestic market.
Unfortunately, Japanese fastening manufacturers need to procure from the domestic market, and those suppliers tend to supply materials to Japanese makers at relatively high prices when supplies from overseas markets are much cheaper. However, we are in a Catch-22 situation because unless we procure materials from those domestic suppliers, they will stop supplying the materials to us. If we compare the prices of the materials we procure from the domestic market, sometimes they are more expensive than even the prices of the screws themselves that are made in China.
Japan is the world’s oldest society with a rapidly declining population due to low birth rates. This presents issues such as a shrinking domestic market and a labor crisis. What have been some of the challenges your company has experienced from this demographic shift and how are you reacting to them?
I would not necessarily say that the market is shrinking that much, and honestly the market growth has stagnated for a while now. Since large bolts and nuts were used for infrastructure in Japan, lots of the infrastructure here was built during the high growth period which was the 1970s following the Tokyo Olympic Games in 1964. Most of these buildings and infrastructure now need to be renovated so once again we see a large market for large nuts and bolts which our company has more strength than micro screws and smaller nuts and bolts. Rather than a shrinking market, in recent years the challenge lies in production capabilities.
Looking at the fastening industry as a whole, the largest challenge is faced by a number of SMEs who have had issues with succession. That is caused by young people leaving the primary industry in addition to the declining population. Since they have so many succession issues they are also having difficulties in passing on accumulated technologies. As so many firms have failed to do so a number of them are now shutting up shop and exiting the industry for good.
The succession problem resulted in a lot of SMEs closing without passing on their accumulated technology, so we have to ensure that these technologies are absorbed by larger firms.
We know that you supply your screws and other products to fields such as construction machinery, large buildings, and the automotive industry. Are there any specific fields that you are currently focusing your services on? In addition to your recent expansion into machinery tools, are there any other new fields that you would like to cater your services toward?
I spoke about the challenges faced by the industry overall, but I would also like to briefly talk about the challenges our firm faces specifically. We are a publicly listed company, so we are required to make growth while increasing profits. In order to do that, we have set out three directions for the company; controlling the current situation, SMEs, and traders. As mentioned a few times now, a lot of SMEs and secondary traders have had serious succession issues, so in most cases they are now being absorbed by larger companies in order to obtain their knowledge and take over their good clients. In order to grow within the existing market, we try to do M&As or engage in partnerships within the industry.
Secondly, we are trying to provide new types of services besides the screws themselves. Those services could be IT-related to support digital transformations for SMEs and secondary traders. Those kinds of companies do not have the capacity for DX or the introduction of digital devices. Most of them only have 5-10 employees, so for that reason, we have developed a kind of B2B e-commerce application which is called Neji Net. This allows clients to easily complete transactions online. By providing this service we are supporting the enhancement of their production capabilities and to date, we have completed transactions with approximately 4,000 businesses. Among those transactions, around 3,000 are active annually. A lot of them are small-scale companies, and among these 4,000 businesses, less than ten of them are capable of their own technological development. I think this is a key strength of the company that differentiates us from our competition.
My third point is regarding overseas markets. Our company actually used to be called Kobayashi Sangyo, but we renamed ourselves to TORQ in April 2020, and that renaming was based on our intentions to provide high-quality Japanese products to the overseas market.
If you would allow me, I would love to talk about some of the key milestones of my company. I think if you were to pinpoint the most important milestone for TORQ, that would be in 1968 when we established our first overseas branch in New York, USA. We were really the first firm in the fasteners industry to do so, and also the first to import large amounts of components or materials from overseas markets. The transactions with overseas markets were the trigger that made this company grow exponentially.
In 1985, the Plaza Agreement was signed by G-5 nations and Japanese companies lost their capabilities to export. After that, the New York branch was closed and since then 99% of our business is now import-based.
Earlier I mentioned how the domestic market had stagnated and I do not foresee that changing anytime soon, so in order for us to grow we have to sell products to overseas markets. We are a major shareholder in two major hand tool makers in Japan and they produce high-quality hand tools. We are aiming at exporting these products to more overseas territories.
You talked about the importance of partnering with the right companies in the domestic market. Are you also looking to find partnerships or M&A opportunities in overseas markets to foster this international growth you are looking to establish?
Yes, we are actually looking for partners in overseas markets, but doing M&A activities is difficult for us overseas. The reality is that we must look for strong distribution channels so that we can distribute high-quality Japanese products and components. Although I mentioned the domestic market’s stagnation, we can continue to maintain a certain scale there. If an overseas potential partner wants to enter the Japanese market, they might actually look to invest in our company since overall stock prices in Japan have been relatively low to those in developed countries including the United States recently and the Japanese Yen is now historically cheap. In fact, I think domestically we are the only listed company in this industry, so I think there is great potential for investment.
Are there any specific regions that you believe are key to your company?
We are now focused on selling the hand tools I mentioned, and they are manufactured on a small scale. Those hand tools are high-quality so I believe that any market in the world might be a potential location. In fact, I believe their hand tools are globally competitive, and there is demand all over the world for professional hand tools. We believe that the competitiveness will further increase due to the weaker Yen.
We know that last year you opened a new logistics facility in central Osaka that you are calling the Taisho Distribution Center (DC). In fact, the Taisho DC is one of the largest logistics facilities in the industry and is equipped with advanced logistics systems as well as automation technology. Can you give us an overview of the Taisho DC and how it has improved your business operations since it began?
We used to have an old warehouse in East Osaka, and we renovated this particular location. There were two purposes behind this renovation. One is the reorganization of the industry as a whole. As I mentioned, many small companies are either merged or acquired by larger companies, so my belief is that the industry as a whole will be simplified, leading to enhanced efficiency. We really do not need so many small companies moving forward.
As this trend continues, the larger companies will gain a significant competitive edge as they become more focused on larger warehouse capabilities. Smaller companies that do not have these capabilities will need to be absorbed by larger ones that do.
These reasons are why we established the Taisho DC, the largest logistics facility in this industry. In the past, these small companies or makers used to sell products and components by the case or pallet, which was a large lot. This is why secondary traders were required, and their role was to divide these components in the case of users who were trying to simplify their processes. We removed the second layer and were able to directly sell small lots to users. Basically, we are no longer selling pallets or cases, and in exchange, we now have the ability to sell smaller lots.
Let me add a bit more information for you about the fastening industry at large. There are two different distribution channels for firms operating with fasteners. I am actually looking at Toyota as a specific example, and when they produce cars they need a huge amount of screws, nuts, and bolts. The types they require are actually already fixed which are then directly supplied by the makers. The same actually applies to more standardized and mass-produced screws used for railways and so on. Basically, they do not use traders. However, when they process components; in a large press machine, for example, they then need small lots of screws. The same actually applies to maintenance activities and also the construction industry which requires different screws, nuts and bolts for each property. In this use case, traders like ourselves, are utilized in order to purchase smaller lots.
Imagine we come back in three years and have this interview all over again: what goals or dreams would you like to have achieved by then?
Ioften think about the real value of trading companies, and my personal belief is that it is to pioneer or pave the way for new businesses and new markets. During the 1990s and 2000s, Japan had the Lost Decades, and Japanese businesses were not able to make a lot of profits. To break through this difficult situation something needs to change. I think in three years it will still be quite difficult to make profits, but we will at least be on the right trajectory to furthering our company towards international endeavors. As spoken by our corporate philosophy, we would like to be a leader in the industry and do work befitting of a leader. Ideally, we would like our company to be seen as a viable option for international investment as well.
Interview conducted by Karune Walker & Sasha Lauture
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