Nisshin Seifun Group - Company History

The Shoda family's roller mill in a market nine-tenths watermill-ground

In 1900 Shoda Teiichiro (正田貞一郎) founded Tatebayashi Seifun — today's Nisshin Flour Milling — at Tatebayashi in Gunma Prefecture[1]. It was a newcomer that entered milling by importing the newest American mechanical roller mills. Capital at the outset was ¥30,000 and milling capacity 50 barrels a day, which in grist terms came to about six tonnes a day: a small start[2]. Traditional watermill-ground flour and imported flour then accounted for roughly 90 per cent of domestic consumption, with mechanical milling under 10 per cent[3]. The Shoda family had built a financial base in the rice trade and soy-sauce brewing it had long run at Tatebayashi, and had the capital to bear the upfront cost of expensive imported machinery and its own generating plant; mechanical milling was entered as a diversification of the family business.

Transport, the bottleneck, was resolved when the Tobu Railway extended to Tatebayashi in 1907, clearing the constraint on shipping finished product and opening nationwide despatch. Flour milled in the Gunma district began to be shipped across the country.

In 1908 Tatebayashi Seifun merged the financially troubled Nisshin Flour Milling of Yokohama — the former company of that name — and took over the Nisshin Seifun name[4]. Head-office functions moved from Tatebayashi in Gunma to Tokyo[5], and the firm turned from a provincial miller into the company leading the reorganisation of the domestic industry. Reading an industry structure in which the milling companies that had proliferated across the country after the Russo-Japanese War fell into difficulty with every downturn, it adopted rational management as its corporate creed and expanded production scale by merging and absorbing domestic mills. Under the boom of the Taisho era it built new plants at Nagoya, Mito, Okayama and Kobe and merged four companies including Jomo Seifun (上毛製粉)[6], lifting capacity beyond 10,000 barrels[7]. Pursuing economies of scale through industry consolidation became Nisshin's formative experience of success in milling.

The Tsurumi sea plant and the peak of 15 million bags of exports

The Tsurumi plant, whose second construction phase was substantially complete in 1928, had a capacity of 7,000 barrels — among the largest in the country at the time — and lifted the company's total capacity to 19,400 barrels, first nationally. Ships berthed directly at the coastal quay and vacuum suction gear took the grain in automatically: a so-called “sea plant” that made bulk handling of imported wheat and quality control possible at one site. Construction absorbed ¥8 million, a scale that demanded a considerable decision from a company capitalised at ¥12 million.

The aim behind building Tsurumi came from Shoda Teiichiro, then senior managing director, who on an overseas tour in 1913 inspected a milling plant at Manchester and saw steamers moored alongside the quay with pneumatic pumps drawing the grain up — and from his judgement that Japanese milling would need exports if it was to develop.

Expanding Tsurumi's capacity was the precondition for growing flour exports into a second pillar of growth. A proprietary processing technology that turned low-grade Canadian wheat into high-quality flour, together with Tsurumi's throughput, became the source of international competitiveness, and in 1933 flour exports reached a record 15 million bags. That was equivalent to roughly half the year's domestic sales volume[8], and Nisshin made its mark in global markets as well. After Tsurumi the company went on building coastal plants with direct steamer berthing ahead of its rivals at home, and through this “sea plant” conception — everything from taking in the grain to loading out the flour completed at a single site — concentrated on securing milling share.

Designated non-essential under wartime control, and five plants burnt in 1945

The outbreak of the Second World War transformed the position of the milling industry. Under military control milling was designated a non-essential industry subject to rationalisation, and orders suspending plant operation were issued one after another. The Tsurumi capacity built up on the assumption of exports lost its chance to run as grain imports were cut off and the economy shifted to state control, and the industry-leading production system assembled before the war was reduced uniformly as an industry that did not contribute directly to armaments. Under the double constraint of losing the export pillar while operation for domestic consumption was held down by controls, the premises of pre-war expansion collapsed.

In the air raids of 1945 Nisshin lost five main plants in succession — Okayama, Utsunomiya, Tsurumi, Mito and Tosu — to fire[9]. Capacity remaining at the end of the war was 4,958 barrels, less than a fifth of the pre-war peak[10]. Tsurumi, the coastal plant that had carried exports, was among those destroyed, and most of the plant assets built up over more than thirty pre-war years were lost to a single year of war damage. Post-war recovery therefore began with the surviving equipment alone.

Aid wheat, the food control system, and a fast recovery of milling capacity

The wartime air raids had cut milling capacity, but after the war the business expanded on policy support. Resolving the food shortage became the country's first priority, and under the Food Control system, with government backing, the domestic supply of wheat was expanded to around three times its pre-war scale. Aid wheat from the United States — the ガリオア・エロア援助 GARIOA and EROA aid — further encouraged the spread of bread eating, a tailwind for Nisshin's sales. Procurement and distribution alike, however, were designed by state institutions, a structure in which differences from competitors were hard to create.

Rebuilding the burnt plants was financed by combining government subsidies with the company's own capital, and the price was dilution of the founding Shoda family's shareholding. At the end of March 1962 the largest shareholder was Sumitomo Trust Bank, holding 7.0 per cent, and the founding family did not appear on the list of the ten largest shareholders[11]. While its backing in capital was limited, Shoda Eizaburo (正田英三郎) continued to run the company as president, and the family's involvement in management was maintained in changed form.

Pneumatic conveying, and consolidating the domestic lead

In 1957 Nisshin became the first company in Japan to install pneumatic conveying — air-borne transport — in its milling equipment, at both the Tsurumi and the Kobe plants[12]. Switching the movement of flour from mechanical conveyors to air pressure reduced contamination by foreign matter and improved yield, surpassing the older equipment in both milling quality and production efficiency. Adopting the new method demonstrated the company's technical advantage inside and outside the industry and pushed rivals into a race of capital investment. Through the 1960s and 1970s processed foods such as bread, pasta and prepared mixes spread, and the westernising of the Japanese diet worked as a factor expanding demand for flour. That growth in demand underwrote the return on investment in high-efficiency equipment of the kind pneumatic conveying represented.

Riding the wave of demand, Nisshin brought the Kobe No. 2 plant on stream in 1971 and the Chiba plant in 1974, building high-capacity sites next to ports able to handle everything from receiving imported wheat through to milling it in one flow. Its domestic milling share ran at around 35 per cent through this period, consolidating its lead in the industry. Because more than 80 per cent of the wheat used as raw material is imported, the structure favoured operators holding “sea plant” type high-capacity mills — ships berthed at the quay and grain taken in by vacuum suction — on both raw-material logistics cost and processing cost. An industry in which the combination of location and capacity decides the outcome directly shaped an oligopoly of a handful of leading firms. Nisshin stood on the side that made the most of the economies of scale won by investing first.

The one-legged risk of milling, and building the five-pillar diversification

While consolidating its domestic lead in the core milling business, from the 1960s the company began diversifying in earnest with the risk of single-business dependence in mind. Entry into compound animal feed in 1961[13] was followed in 1965 by the establishment of Nisshin Kagaku (日清化学) in pharmaceuticals[14], turning vitamin-synthesis technology accumulated within the group towards the development of new drugs. In 1972 it launched Nisshin Engineering in plant design[15], directing to outside customers the engineering capability built up by developing milling equipment in-house. Through these moves a five-pillar structure of milling, feed, food, pharmaceuticals and engineering was put in place during the 1970s[16]. Each business was chosen from an adjacent field with technical or customer affinity to the milling core, so that diversification was assembled without entering anything from scratch.

Building the five pillars also had the character of management's response to the institutional profit structure under the Food Control Act. Domestic flour prices were then set under that Act by a government standard price with a fixed margin built in, maintained above international wheat prices while the freedom to revise them was held low. Milling profits were structurally squeezed against an institutional ceiling, and the means of raising the margin in the core business were limited. Diversification carried the character of symptomatic relief, making up for the limits of that profit structure by stacking up other businesses. The earnings contribution of the new businesses remained gradual, however, and the improvement in group margin stayed within a few percentage points. Management in this period placed its centre of gravity on expanding the scale of sales rather than on lifting the margin.