Uncertainties remain for the Japanese chemical industry. However, M&A activity is expected to continue among Japanese chemical manufacturers.
Japanese chemical companies showed strong performance in 2017, driven by export growth focused on technologically advanced materials.1
However, the nation's chemical industry faces serious challenges ahead, from low-growth domestic markets to increased competition in ethylene and ethylene products from North America and the Middle East. In response, a growing number of Japanese chemical companies are undertaking overseas expansions or acquisitions. Looking to the future, the Japanese players might consider European chemical companies as a model for transitioning to a more consolidated industry focused on specialty products.
By any metric, Japan is a major player in the global chemical industry. In 2017, five Japanese companies ranked in the world's top 30 chemical companies as measured by chemical sales:2 That said, the industry faces a number of challenges today, some of them shared by chemical sectors in other developed regions such as the EU.
To address these challenges, Japanese companies are acquiring greater market share by entering new markets, divesting assets or expanding into new growth areas. Relying purely on in-house R&D and organic growth from the domestic market alone is insufficient to achieve growth objectives. For this reason, many companies now seek to supplement internal efforts with M&A and other transactions overseas.
Armed with a more aggressive and proactive attitude toward M&A, Japanese companies can benefit from a number of funding advantages through the country's financial institutions and national government.
Funding costs remain low, with near-zero interest rates and supportive bank lending. The Bank of Japan has implemented a number of monetary easing policies with the objective of lowering borrowing costs for Japanese corporations, to encourage expansion of investments. 3
In addition, the Japanese government has introduced a number of initiatives and policies to support strategic investments, both domestically and overseas. The Development Bank of Japan (DBJ) provides numerous financial services, including financing, co-investing and advisory services, to help Japanese corporations expand their businesses and achieve their strategic goals, such as acquiring overseas companies. 4
The Japanese chemical industry can look to the West and the EU in particular as a possible model for strategic development. In the late 1990s, major European chemical companies were able to improve their revenue by shifting from basic chemicals to specialty and fine chemicals. Most are now focused on a specific area through a process of elimination and consolidation.
For the moment, the possibility of a similar level of consolidation in the Japanese industry is limited. Ethylene crackers in Japan are not concentrated in a particular area but spread across the country, and each facility is shared by multiple companies. Consolidation is also problematic given the opposition to large mergers of any kind in Japan.
Uncertainties remain for the Japanese chemical industry. However, M&A activity is expected to continue among Japanese chemical manufacturers. Many companies in the Japanese industry view M&A as a key tactic for achieving growth and enhancing their corporate value in their mid-term business plans. These companies will most likely continue to search for potential acquisition targets to support their corporate strategies.