Chem­i­cal in­dus­try’s trou­bles are home­grown

Korean com­pa­nies have to do more than just sur­vive to thrive

JoongAng Daily - - Front Page - BY KIM HYUN-YE ojlee82@joongang.co.kr

Win­ter in­ner­wear is be­com­ing a sav­ior to the Ja­panese chem­i­cal in­dus­try and the big­gest contributor is Uniqlo’s Heattech.

At the Ja­panese fast fash­ion store at the IFC Mall on Thurs­day in Yeouido Seoul, a huge crowd turned up after ru­mors spread that the store was of­fer­ing 12,900 won ($11.80) short­sleeve Heattech in­ner­wear for 9,900 won.

“As win­ter is clos­ing in and thanks to the dis­count event, the num­ber of cus­tomers surged more than usual,” said a store clerk.

Heattech, one of Uniqlo’s best-sell­ing prod­ucts for the past 12 years, started the heat-re­tain­ing in­ner­wear fad.

But the business ben­e­fit­ing the most from the con­tin­u­ous pop­u­lar­ity of this item is To­ray, a Ja­panese chem­i­cal company.

Thanks to the pop­u­lar­ity of Heattech, To­ray’s op­er­at­ing profit rate in the tex­tile business reached 7 per­cent last year. This is higher than the av­er­age global chem­i­cal com­pa­nies’ profit rate of 5 per­cent.

“The suc­cess of To­ray is a good ex­am­ple for Korean chem­i­cal com­pa­nies’ top man­age­ment to stop blam­ing over­all eco­nomic slug­gish­ness and China for their prob­lems,” said Lim Ji-soo at the LG Eco­nomic Re­search In­sti­tute. “Un­less top man­agers change their op­ti­mistic opin­ions that the mar­ket will re­cover if they can hold on for sev­eral more years, it will be a dark fu­ture for Korean chem­i­cal com­pa­nies.”

Korean com­pa­nies most of­ten point to China as the cause of sag­ging sales, ac­cord­ing to Lim, adding that’s only part of the story.

Since 2000, China has been the pri­mary rea­son for the ex­pan­sion of the global chem­i­cal in­dus­try. China’s in­flu­ence was so huge that larger de­mand in China meant larger global de­mand. De­mand for chem­i­cal prod­ucts in China ac­counted for 21 per­cent of the global mar­ket from 2003-07 and 59 per­cent from 2008-12.

When global de­mand re­treated 10 per­cent in 2009 after one of the worst global crises of re­cent years, China saw a 12 per­cent in­crease.

But since 2011, growth started to lose mo­men­tum and de­mand for chem­i­cal goods shrank.

How­ever, Lim says de­mand for chem­i­cal prod­ucts in China since 2012 has sta­bi­lized and there­fore it’s dif­fi­cult to con­clude that less de­mand was the pri­mary cause of Korean com­pa­nies’ strug­gles.

“The global mar­ket has been grow- ing 9 per­cent to 10 per­cent ev­ery year and only dipped to 7 per­cent to 8 per­cent in re­cent years,” she said. “It’s dif­fi­cult to say the mar­ket it­self is ‘slug­gish.’”

More specif­i­cally, she said, Korean com­pa­nies have been strug­gling largely be­cause Chi­nese com­pa­nies have be­come more self-suf­fi­cient.

Another fac­tor Korean com­pa­nies blame for their cur­rent strug­gles is the slug­gish global mar­ket.

The re­searcher says if that were the case, other com­pa­nies around the world would be hav­ing the same prob­lem. But an ex­am­i­na­tion of the rev­enues for the world’s top 50 chem­i­cal com­pa­nies shows the sit­u­a­tion in Korea is an iso­lated case.

Lim said that in the past 21 years, the av­er­age op­er­at­ing profit rate of th­ese com­pa­nies has been 9.3 per­cent. But since 2009 after the cri­sis, the av­er­age op­er­at­ing profit rate has sig­nif­i­cantly im­proved. The av­er­age rate of 8 per­cent in 2009 was 12 per­cent two years later and 10 per­cent in 2012-13.

In con­trast, the av­er­age op­er­at­ing profit rate of 21 Korean chem­i­cal com­pa­nies was 9.5 per­cent in 2010, 8.1 per­cent in 2011 and in the neigh­bor­hood of 4.5 per­cent in 2012-13.

Although it could be said that U.S. chem­i­cal com­pa­nies are en­joy­ing the ben­e­fits of shale gas and oil de­velop- ment, Ja­panese and Euro­pean com­pa­nies also have shown an im­proved per­for­mance in re­cent years.

“It’s not cor­rect to say the global chem­i­cal in­dus­try it­self is in trou­ble, be­cause Korean com­pa­nies’ wors­en­ing profit was the re­sult of di­min­ish­ing de­mand from the Chi­nese mar­ket in the past, while their cor­po­rate val­ues failed to re­cover,” Lim said.

She said the prob­lem is within the Korean com­pa­nies them­selves.

By macroe­co­nomic in­di­ca­tors, the Korean chem­i­cal in­dus­try has en­joyed a fa­vor­able year in 2013, with ex­ports of $61.2 bil­lion and im­ports of $39 bil­lion leav­ing a trade sur­plus of $22.2 bil­lion. But a closer look shows a com­pletely dif­fer­ent story.

The global chem­i­cal business can be cat­e­go­rized into three sec­tors: petro­chem­i­cal, which ac­counts for 46 per­cent of global business; new ma­te­rial chem­i­cals, which takes up 45 per­cent; and in­or­ganic chem­istry with 9 per­cent.

How­ever, Korean com­pa­nies are heav­ily con­cen­trated in petro­chem­i­cals, re­port­ing a $31.4 bil­lion trade sur­plus.

On the other hand, high-value pre­ci­sion chem­istry busi­nesses re­ported a trade deficit of $9.2 bil­lion.

Ad­di­tion­ally, last year the com­pa­nies im­ported ex­pen­sive ma­te­ri­als like paint, ink and ad­he­sives and dis­play ma­te­ri­als, whose im­port unit price ex­ceeds $19,000 per ton. They im­ported a to­tal of $2 bil­lion in such ma­te­ri­als, which ac­counted for 12 per­cent of the to­tal.

Korean com­pa­nies also fell be­hind in petro­chem­i­cal de­vel­op­ment, which should be one of their ar­eas of spe­cialty, to Ja­pan, the United States, Ger­many and oth­ers.

Lim said the cri­sis that Korean com­pa­nies face to­day came from within.

Korean com­pa­nies since 2012 on av­er­age have spent $2.1 bil­lion on re­search and de­vel­op­ment, far less than $12.3 bil­lion Europe spent. China dur­ing the same pe­riod spent $10.4 bil­lion, after spend­ing only $2.9 bil­lion in 2006.

Korean com­pa­nies invest 1.3 per­cent of their rev­enue on re­search and de­vel­op­ment, a stark con­trast to the 4 per­cent in­vest­ment of Ja­panese com­pa­nies.

To­ray is a Ja­panese company that started off as a tex­tile man­u­fac­turer in 1926. To­day, it has more than 7,100 em­ploy­ees and last year it saw rev­enue of 1.8 tril­lion yen (17.4 tril­lion won).

Last year, the company raked in 256 bil­lion yen in the tex­tile business, which many ex­perts and mar­ket play­ers con­sider an in­dus­try in de­cline.

The se­cret to the suc­cess of the Jap- anese chem­i­cal company was co­op­er­a­tion. To­ray pro­posed work­ing jointly with Uniqlo in 2000. The company set up a global op­er­a­tions of­fice at its head­quar­ters and started to de­velop the tex­tile that Uniqlo re­quested. As a re­sult, they were able to de­velop Heattech in 2003.

The new tex­tile with high heat re­ten­tion also led to the suc­cess­ful de­vel­op­ment of the fleece jacket. Its not the only tex­tile that To­ray is work­ing on jointly as it is ex­pand­ing prod­uct co­op­er­a­tion to other new ma­te­ri­als, in­clud­ing plas­tics with strong car­bon fiber.

It not only suc­ceeded in part­ner­ing with air­plane man­u­fac­tur­ers Boe­ing and Air Bus, it went on to es­tab­lish an au­to­mo­tive ma­te­rial so­lu­tion cen­ter in 2008 and has been work­ing with Mercedes-Benz on de­vel­op­ing au­to­mo­bile parts.

In 2011, it was able to in­tro­duce its own de­vel­oped con­cept car, the Tee­wave.

“If the only plan is to hold on like in the past, Korean chem­i­cal com­pa­nies will loose their op­por­tu­ni­ties,” said Lim. “Be­fore blam­ing it on the econ­omy, the com­pa­nies have to pon­der on how they would strengthen their busi­nesses from the very foun­da­tion and set the cur­rent strug­gle as the start­ing point for change and in­no­va­tion.”

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