In Japan, longstanding chemical makers adjust their focus

Companies sometimes change their name just for an image boost. In Japan, two venerable chemical producers—Showa Denko and Ube Industries—have more important reasons: the are rebranding to reflect a major restructuring of their business focus and product lineup.

Showa Denko, founded in 1939, will become Resonac on Jan. 1, about 2 1/2 years after completing its acquisition of Hitachi Chemical for about $9 billion. Under the new name, a firm that once focused on commodity chemicals and its home market of Japan will pursue a new path as a global supplier of specialty chemicals, with an emphasis on electronics materials, automotive materials, and the life sciences.

Ube Industries, founded in 1897, became UBE (the letters are pronounced separately) Corporation in April. It once counted cement, machinery, and chemicals as its three major activities. But in recent years the firm has spun off both the cement and machinery businesses; it is now chemicals’ turn to be overhauled.

“Behind the name change is the intention to escape from ‘industries’ and focus on specialty chemicals,” says Masato Izumihara, the soft-spoken UBE veteran of almost 40 years who became CEO in 2019. “It is hard in Japan to survive in the commodity chemical business.”

For decades, financial analysts, business journalists, and even company managers and executives have been saying that the path forward for the chemical industry in Japan is to reduce local production of energy-intensive commodities and focus on the global market for high-quality, premium-priced chemicals and synthetic materials. The shift may finally be happening.

Mitsubishi Chemical Group, Japan’s largest chemical maker, last year announced plans to spin off its petrochemical and carbon operations to concentrate on performance chemicals. Other firms have stopped producing chemicals that they had long considered core businesses—because of high energy costs in Japan and to meet their commitments to carbon neutrality.

UBE is one such firm. It has made caprolactam and ammonia in Japan almost since its founding but now plans to stop local production of both. Caprolactam production in the country will be phased out in 2024; ammonia output will end by 2030.

“We are aiming to convert the business structure through positive investment in specialty chemicals and combining growth with reduction of greenhouse gas emissions,” Izumihara says. UBE expects to pare its greenhouse gas emissions from 4.3 million metric tons (t) in 2021 to 2.4 million t in 2030, primarily through the caprolactam and ammonia plant closures.

UBE is reorganizing other businesses as well. It has transferred its business in electrolyte solvents for lithium-ion batteries to a joint venture with Mitsubishi Chemical in which it has a minority share. On the other hand, UBE has shifted its lithium-ion battery separator business—where it sees itself as a technology leader—to a joint venture in which it has a controlling stake. And the company has spun off its butadiene rubber business into a separate company.

At Showa Denko, several divestments are underway as part of a plan to exit businesses worth 200 billion yen (about $1.4 billion). This includes the manufacture of aluminum cans.

“The business didn’t generate our expected return on investment and didn’t fit our business policy to be a materials supplier,” says Hidehito Takahashi, a former GE executive who joined Showa Denko in 2015 and became CEO last year. The buyer is the private equity firm Apollo Management, which earlier bought Mitsubishi Materials’ aluminum can business.

Showa Denko has a substantial petrochemical business. It’s not a core business, but, unlike Mitsubishi Chemical, Showa Denko says it will not sell or close it. The company claims to have favorable costs for the ethylene it produces at its Oita facility. Rather, Takahashi foresees mergers and alliances in Japan’s petrochemical industry, possibly aided by the government. “We’ll take a thoroughly defensive stance for the petrochemical business,” he says.

Showa Denko’s favorable cost position in petrochemicals was achieved by diversifying feedstock supplies, according to Mikiya Yamada, a financial analyst at Mizuho Securities who has covered the Japanese chemical industry for some time. The weakness of the Oita complex is that it makes fewer derivatives than other petrochemical facilities in Japan, he notes.

In parallel with downsizing and reorganizing their existing businesses, UBE and Showa Denko are investing in new businesses and production facilities, both in Japan and internationally.

“Our major target is to build a production base for fine chemicals in the US,” Izumihara says. UBE has begun designing a plant in Louisiana that will make 100,000 t per year of dimethyl carbonate (DMC) and 40,000 t of ethyl methyl carbonate (EMC), a derivative.

UBE will make its final decision on the investment during its fiscal 2023; the plants would start up in fiscal 2025. Known as a C1 chemical, DMC is, along with EMC, a key ingredient in the electrolyte solvents made by UBE’s venture with Mitsubishi Chemical. DMC is also a raw material for polycarbonate diol and water-based polyurethane dispersions. Izumihara notes that UBE is the only non-Chinese producer of DMC and EMC.

Separately, UBE recently bought a pharmaceutical contract manufacturing business from Mitsubishi Chemical. It also intends to build a new business in semiconductor encapsulating materials. For this purpose, it has brought in-house a phenolic resin business that had been a separate subsidiary. The move will let UBE “build up a semiconductor encapsulating business in collaboration with our performance materials team,” Izumihara says.

He says the investments are in keeping with a long-term plan to put $1.1 billion into eight sectors, including fine chemicals, high-performance coatings, engineering plastics composites, and polyimide. The goal is to establish a company that can make an annual operating profit of about $500 million and post an operating profit ratio of at least 10%. “We’ll develop into a company in which the specialty chemicals sector alone can generate 70% of the target figures,” Izumihara says.

UBE’s changes to its business portfolio earn high praise from Mizuho’s Yamada. “UBE has established a unique production process for special grades of polyimide,” he says. It also “commercialized C1 chemicals and many differentiated products such as polycarbonate diol as their downstream products.”

For its part, Showa Denko is now focusing on three business sectors, the most promising of which is semiconductor and electronics materials. When Resonac launches, it will rank first in the global market for ceria slurries and etching gases used to fabricate computer chips, Takahashi says. In the chip-packaging field, it will have the number one position in photosensitive films and copper-clad laminates. The company also claims that it will be the leading player in the merchant market for silicon carbide epitaxial wafers for power-device semiconductors, products expected to enjoy strong growth as electric vehicles proliferate.

As semiconductors become increasingly complex, more of Showa Denko’s materials will be required per chip, Takahashi says. He predicts that the chip market will grow 5–8% annually over the coming decade, and that the firm’s semiconductor and electronics materials business will do even better than that, more than doubling sales to $6.3 billion.

To support its leadership in semiconductor materials, Showa Denko employs 70 specialists in artificial intelligence and materials informatics. “We’ll concentrate all the human resources on the development of semiconductor-related materials,” Takahashi says.

In guiding strategy at Resonac, Takahashi stresses that the company should maintain at least its current size to meet the expenses of doing business today. “Sales of 1 trillion yen [$7.5 billion] is an entry point to recover all costs associated with sustainability and digitalization technology,” he says.

Yamada at Mizuho likes Showa Denko’s position in semiconductor materials, but he is not as optimistic about its prospects in its two other major businesses: automotive materials and the life sciences. In the latter it provides contract development and manufacturing of autologous cells used in regenerative medicine.

“The profitability of the mobility segment is not high at present, and it is hard to position the whole of the segment as a core business,” Yamada says. As for autologous cells, maintaining competitiveness “requires comparatively large investment, including an increase in human resources when the market expands,” he says.

Moreover, Yamada notes, Japanese chemical producers continue to be hampered by the country’s legal environment. In particular, the Antimonopoly Act prevents companies in certain sectors from easily purchasing competitors’ businesses to build scale and market share. “If frameworks like the Antimonopoly Act undergo change, the industry may move toward integration and exchange of business operations, both of which would strengthen operations and boost competitiveness,” he says.

Yamada’s observation suggests that while companies like Showa Denko and UBE are making progress in restructuring their operations, they still have much more to do.

Katsumori Matsuoka is a freelance writer based in Japan.