Shin-Etsu Reloaded

Investing $2 billion would make anyone nervous. But as Chihiro Kanagawa, Shin-Etsu Chemicals president and chief executive officer sees it, the alternative of not spending the money would have been worse.

The company announced last December that it was spending $1 billion to build new silicon wafer plants in Japan and another $1 billion on a polyvinyl chloride complex in Louisiana. A few weeks later, Shin-Etsu said it would spend $200 million to expand its methylcellulose business.

To make two $1 billion investments may sound very risky, he notes. But for me, its the safest way to maintain my position in the fields of silicon wafers and PVC. Strongly identifying with the company he leads, Kanagawa often refers to Shin-Etsu in the first person.

Shin-Etsu is the worlds largest producer of both silicon wafers and PVC. To make PVC, the company uses a proprietary large-reactor process that it stopped licensing to others about 20 years ago. It claims that the technology yields high-quality resin more efficiently than other methods.

In wafers, Shin-Etsu was the first major producer of 12-inch wafers, a size that semiconductor fabricators are increasingly using instead of 8-inch ones. In both business areas, Kanagawa believes that it will be hard for competitors to catch up as long as Shin-Etsu keeps strengthening its lead.

As for investing in silicon wafers, Kanagawa explains that global demand for 12-inch wafers will keep rising for at least a decade. And global semiconductor sales grew 28% last year, according to the Semiconductor Industry Association. Under these conditions, it is essential for Shin-Etsu to add to its capacity if it hopes to maintain its leading market position, Kanagawa says.

As for the PVC investment, many in the petrochemical industry have been wondering why Kanagawa selected the U.S. for its new complex when the country seems to be losing its attractiveness as a source of cheap natural gas and when China and India are the major growth markets.

Moreover, when it announced the plant, Shin-Etsu did not disclose whether it would satisfy all its needs for the raw material ethylene by buying from others or whether it would build its own ethylene plant, a move that would add considerably to the cost of the project. Shin-Etsus U.S. subsidiary is Shintech, a company Kanagawa launched in 1973 and still manages.

Kanagawa tells C&EN that Shin-Etsu has recently opted to buy its ethylene from five different outside suppliers, rather than make its own. Our people have almost finalized the negotiations, he says.

If there is an opportunity in electronic materials, in chemicals, or in other areas, I am always considering, Kanagawa says.

As for chlorine, PVCs other key raw material, Shin-Etsu will produce it internally from Louisiana brine. Incidentally, Kanagawa notes that Shin-Etsu will not restart a PVC plant that it bought from Borden Chemical in 2001 because the plant can be operated safely only after an expensive overhaul. When Shin-Etsu purchased the plant, it hoped to raise the efficiency of the 270,000-metric-ton plant in Addis, La., by introducing Shin-Etsu technology into the facilities.

Compared with the alternatives, the U.S. is the least risky location for a large PVC complex, Kanagawa believes. The U.S. offers low political risk, an advantage that should not be overlooked, he says.

In the 1960s and 1970s, Kanagawa managed a PVC compounding subsidiary in Nicaragua that Shin-Etsu lost in the aftermath of the Sandinista revolution. Acknowledging that the Middle East does offer cheaper feedstock nowadays, he says the growing violence in the region makes it too risky for Shin-Etsu to set up there.

At a time when major developed countries are competing for access to energy, the U.S. also stands a better chance than others to meet its own needs, Kanagawa believes. Whereas Europe and Japan depend largely on the Middle East for energy, the U.S. can also source from Canada, the Gulf Coast, Alaska, and Central and South America. And the U.S. has the military might to maintain its sources of supply in other parts of the world, he says.

Furthermore, Kanagawa has a soft spot for his U.S. employees, of whom he speaks highly. He recalls that, despite his instructions that all employees evacuate Shintechs Freeport, Texas, PVC plant ahead of Hurricane Rita in September, 39 staff stayed behind to protect facilities. I was so impressed and touched, he says. The plant did not suffer much damage.

Most major chemical companies are rushing to set up large facilities in China, but Shin-Etsu will not go down that road for now. Kanagawa is most concerned about the governments control of the oil and gas supply. In the U.S., Shin-Etsu can freely source its feedstock from numerous private companies, but Chinas oil and gas suppliers consist of a handful of state-owned firms. For this reason, he fears that Shin-Etsu could find itself unable to control production costs at Chinese facilities.

One of the more minor benefits Kanagawa sees in his decision to spend more than $2 billion is dispelling the impression that Shin-Etsus best days are behind it. In 2002, he recalls, several financial analysts came to see Shin-Etsu as a has-been. Their belief energized Kanagawa to prove them wrong.

Another argument in favor of the spending is that it helps to reduce Shin-Etsus growing cash reserves—roughly $4 billion and increasing by several hundred million dollars annually. Kanagawa insists that he invests only in sound projects that enhance shareholders value. But he is reluctant to return a lot of money to the stock market by engaging in share buybacks. He perceives such actions as an admission of management failure to uncover profitable investment opportunities.

In its latest financial year, Shin-Etsu did decide to raise its dividend by 25% to 20 yen per share, a yield of about 0.5%. This year, it plans to raise the dividend further to 35 yen. Despite the increased payout and the projects now under way, Shin-Etsu still has surplus cash of more than $2 billion. Kanagawa says the company needs the cash to move quickly when opportunities present themselves. If there is an opportunity for a [merger or acquisition] in electronic materials, in chemicals, or in other areas, I am always considering, Kanagawa says. The money is there; we are ready to act.

At an age when most CEOs would start taking a backseat and delegating responsibilities to others, Kanagawa in his late 70s continues to immerse himself daily in the nitty-gritty of running his $9 billion-per-year company.

Arriving at the office early in the morning, he absorbs data ranging from the prices of oil and gas to internal reports about his companys operations. Doing so is essential to decision-making, he believes. If I were to play golf in the morning instead of coming in early, I am sure that I would immediately lose my instinct for making sound decisions, he says.

Kanagawa exercises more control over Shin-Etsus operations than do the CEOs of most major chemical companies. According to the companys annual report, no -executive besides Kanagawa has respon-sibility for managing the companys core businesses. He tells C&EN that he must main-tain control because he is the person who answers to shareholders. A company CEO has the most responsibility, he says.

For shareholders, Kanagawa is a key asset. The company has enjoyed record profits every year for the past 10 years. Its stock price has been rising for the past few months because, Kanagawa says, the financial community has come to understand that Shin-Etsus future is bright.

It may eventually become more difficult to maintain annual profit increases, he acknowledges. But for now at least, the Shin-Etsu growth story appears far from over.