Toray Industries — Company History

Water quality chose the site, and a technical culture began

Rayon — artificial silk — first reached Japan as a commercial product in 1905, and from then on demand grew at home for it as a new material to supplement natural raw silk, with imports rising year after year. Against this widening market, Mitsui & Co. drew up a plan to start a rayon manufacturing company of its own, and settled on building a viscose-process rayon yarn works on the shore of Lake Biwa in Shiga Prefecture. At the inaugural general meeting, held in January 1926 inside Mitsui & Co.’s offices at Nihonbashi in Tokyo, Yasukawa Yunosuke (安川雄之助), who had done the work of bringing the company into being, was proposed as chairman. Toyo Rayon was born out of that Mitsui & Co. business plan, and it took as its starting point the raising from nothing of a rayon yarn works aimed at the highest standard in the world (企業の歴史：明治百年, Corporate Histories: A Century of Meiji, 1968).

In January 1926 Toyo Rayon was incorporated as a subsidiary of Mitsui & Co. with capital of ¥10 million. Mitsui & Co. chose the chemical-fibre business as an outlet for the profits it had accumulated during the First World War, expecting demand for a new material that would supplement natural fibres. In choosing the site for the works the company surveyed water quality at more than twenty locations across Japan, and settled on Otsu in Shiga Prefecture as its production base on the judgement that the water of the Lake Biwa system suited the manufacturing process best. As for putting Toyo — “the Orient” — at the head of the name, Maeda Katsunosuke (前田勝之助) recalled it this way: The reason “Toyo” came to be attached to the front of the name was that, in the founding years at the end of the Taisho era, man-made silk production was thought to be a fairly risky business, and we anticipated that failure would cause trouble for the Mitsui family and tried to avoid that in advance. In other words, Toray was what you would now call a venture business. (Nikkei Business, 6 August 1984). The origin of the technology-first management culture the company would later build was formed in these founding years.

In August 1927 the Shiga works spun its first rayon yarn, and from the following year, 1928, full production began on forty spinning machines. By 1931 the company had reached one of the leading domestic shares in rayon; in 1938 it built the new Seta works to widen capacity; and in 1941 it merged three domestic companies to extend its production base to a nationwide scale. Rayon held steady demand as a substitute for the natural fibres of the day, and even under the harsh economic conditions of the Great Depression and wartime controls it could keep a certain outlet for its output. It was not only the earnings base of Toray’s founding years but also the source of the retained earnings that funded the later move into synthetic fibres and diversification, and as a management resource it held an important position over a long period. By 1962 the company had built up a standing in rayon such that it was described as running away with the field even in the retreat from rayon (ダイヤモンド Diamond, 26 February 1962).

Buying only the patents, and the self-reliant technology that grew from it

In June 1951 the company concluded a nylon technology alliance contract with DuPont of the United States. It was a decision to pay US$3 million as a prepaid royalty — $3M (¥1bn) at the exchange rate of the day — an investment larger than the company’s capital of $2.1M (¥750m). The contract centred on acquiring the right to work the patents and also covered technical assistance towards raising quality and lowering cost, but much of the mass-production technology itself had to be raised by the company’s own effort, and the actual production start-up demanded trial and error and the ingenuity of engineers on the floor. An in-house article the following year, in 1952, spoke with candid urgency of how the success or failure of Amilan fibre would decide whether the company rose or sank; the prototype of obtaining technical assistance and still having to raise the technology oneself was cut into the company during this period of domesticating nylon (産業と産業人 Industry and Industrialists, January 1952). That hard experience took root at Toray as a management principle of establishing technology independently, later became the wellspring of its accumulated technology, and formed the origin of the organisational culture that would sustain forty years of patient technical investment in carbon fibre.

In April 1951 nylon production came fully on stream at the Nagoya works, building a second pillar of business after rayon. In 1953 the shop price of domestically produced nylon goods halved from $11 (¥4,000) to $6 (¥2,000) for a blouse, falling into the same bracket as pure-silk crêpe de Chine and entering its phase of market diffusion (読売新聞 Yomiuri Shimbun, 2 June 1953). In 1957 the company brought in polyester fibre technology from ICI of the United Kingdom and put in place an arrangement to sell it under the Tetoron trademark as a joint industry undertaking with Teijin. Having secured the two pillars of synthetic fibre, nylon and polyester, it converted its business structure from the rayon maker of its founding years into a synthetic-fibre maker representative of post-war Japan, and expanded on the wave of rising clothing demand during the high-growth years. In 1962 it opened new Basic Research Laboratories, completing a management structure for pursuing research and development in an organised way, and the distinctively Toray style of nurturing technology over the long term took root as an institution.

The paradox of staying in the core business the industry was fleeing

In the 1970s the Japanese fibre industry ran into a structural deterioration in earnings, driven by the sharp appreciation of the yen and the rise of the emerging economies of Asia. Toray, once rated alongside Toyota and Matsushita as a star pupil of the Mitsui group, saw its standing fall so far that Diamond wrote in 1965 that its old image as a high-growth company had disappeared, and that by 1975 Shukan Toyo Keizai ran a feature titled “The fallen star of Mitsui” (ダイヤモンド Diamond, 6 September 1965; 週刊東洋経済 Shukan Toyo Keizai, 19 July 1975). While the major fibre companies moved one after another into non-fibre fields — Kanebo into cosmetics, Teijin into pharmaceuticals, Toyobo into film — president Fujiyoshi Tsuguhide (藤吉次英) in September 1975 rejected the industry current of “moving out of fibre”, setting out inside and outside the company a philosophy particular to Toray: that fibre is a necessary material underpinning clothing, food and shelter, and that the source of competitiveness lies not in the business field itself but in the depth of technology in materials and its organised accumulation.

Alongside that declaration, the company placed at the centre of its management strategy a policy of taking the varied technologies thrown off as by-products of fibre research and development and branching them into adjacent fields such as resins and films. In 1970 it built a new ABS resin plant at Chiba and a PP film plant at Tsuchiura, and in 1971 a polyester film plant in Gifu; diversification was positioned as an extension of fibre technology. In the 1980s magnetic-tape applications expanded within the film business, which grew to hold roughly half of the domestic market. The method of not abandoning fibre but nurturing the technologies derived from it took root inside the company as a distinctive management style, different from the unrelated diversification of its rivals, and worked as the undercurrent of the management culture that made the later long-term investment in carbon fibre possible.

A position in aerospace won at the end of forty loss-making years

In August 1971 Toray began production of the carbon fibre Torayca. Its initial uses were confined to sport and leisure — fishing rods and golf shafts — and with manufacturing costs staying high and the base of demand refusing to broaden, the business ran at a loss for a long period. Toray did not choose to withdraw. It held to a management decision to keep investing in equipment improvement and quality stabilisation while carrying an annual loss. In 1982 it was designated by Boeing as a materials supplier for the B767, and full supply as a structural material for aircraft began. It was the historic turning point at which technical investment funded by years of losses first bore concrete fruit in the market.

In 1990 deliveries of carbon fibre for the B777 began, and the widening of the parts to which it was applied was the result of deep involvement from the design stage and a meticulous accumulation of quality control. In 2006 its adoption as a principal structural material across the B787 was officially announced, with composites reaching about 50 per cent of airframe weight. Toray signed a long-term exclusive supply contract with Boeing, and the patient technical investment that had tolerated losses for some forty years bore fruit as a market position in carbon fibre for aircraft. In 2012 Shukan Toyo Keizai took up Toray’s choice not to stop investing in the fibre business — while Teijin shifted its centre of gravity to pharmaceuticals and Kuraray to resins and chemicals — as a case of a declining business brought back to life (週刊東洋経済 Shukan Toyo Keizai, 12 April 2012). The management culture Toray had held since its founding, of not choosing withdrawal and nurturing technology on a long view, was the source of that result.

The Maeda reform, and a diagnosis of “large-company disease”

In 1985 Toray pushed through a redeployment of personnel in its fibre division, and in the same year obtained manufacturing approval for an interferon-beta preparation, entering pharmaceuticals. Maeda Katsunosuke, who became president in 1987, looked back on the company’s malfunction in unsparing terms: From the mid-1960s through the mid-1980s we caught large-company disease. That is our diabetes. Over those twenty years Japan’s GNP swelled roughly twentyfold, but measured by sales this company grew only threefold. Then around 1985, on top of the diabetes, we developed acute pneumonia as well. We tried this and that — new businesses, moving out of fibre — and what was left of it in the end was acute pneumonia. The fibre division, our core business, was making enormous losses, and we had to cut recruitment of new graduates to zero. (日経ビジネス Nikkei Business, 9 September 1991). In 1991 the company drew up the long-term management vision “AP-G2000”; in 1993 it began volume production of colour filters for liquid-crystal displays, and in 1994 local production in China, widening its business territory.

Maeda passed judgement on the rigidity of the organisation as well: On both the technical and the administrative side, this company has any number of employees clever enough to become critics or university professors. […] Tell them to take a swing or throw a pitch and they can do nothing. […] We had no choice but to let a great many of them go. (日経ビジネス Nikkei Business, 9 September 1991). The company fell to a net loss in the year to March 2000, and posted net losses in two consecutive years to March 2009 and March 2010, exposing the weakness of a company whose earning power in fibre alone could not guarantee stability across the group. In 2002 it drew up the medium-term management agenda “NT21” and accelerated concentrated investment into growth fields such as carbon fibre and environmental materials. While holding to the policy of staying in fibre that it had kept since its founding, the source of its profits moved from the traditional fibre business to advanced materials — carbon fibre, electronic materials and film. The character of the company underwent an internal transformation from fibre maker to advanced-materials maker, and that became the precondition for the full evolution into an advanced-materials maker from 2014 onwards.

Widening from the air to the ground, with earnings failing to follow

In February 2014 Toray completed the acquisition of Zoltek Companies of the United States and made it a subsidiary (the acquisition outlay on the basis of the annual securities report was $862.6M (¥91bn); at the time the agreement was announced in September 2013 the price was US$16.75 a share, some $594.3M (¥58bn) in total). Acquiring a company whose main product was large-tow carbon fibre for wind-turbine blades marked the point at which management showed its intent to widen a carbon-fibre application mix that had leaned heavily on aircraft towards industrial uses. In July 2018 it made a further acquisition, buying TenCate Advanced Composites Holding of the Netherlands for about $1.1B (¥117bn) and taking on a product range of carbon-fibre composites using thermoplastic resins. Through the two cross-border acquisitions, goodwill related to carbon fibre piled up to a combined scale of about $815.2M (¥90bn). The business mix widened from aircraft to wind power, automotive and industrial equipment, and the carbon-fibre business derived from fibre reached the point of staking its next round, after aircraft, on industrial applications.

Demand for wind power did not expand at Zoltek as had been hoped, however, and progress towards making industrial applications pay stopped halfway. As the 2020s began, the question of whether the carbon-fibre business as a whole could generate returns commensurate with the capital invested in it was pushed to the centre of management’s concerns, and how to realise a scenario of earnings growth in applications other than aircraft came to be seen as the most important medium- to long-term issue. The very effectiveness of acquisition as a strategic means of growth was questioned severely by the market, and a management environment settled in under which the risk of an impairment of goodwill was always present in the background of the results. Between the original strategic purpose of escaping dependence on aircraft and the practical business problem of profitability in industrial applications, Toray’s carbon-fibre business was placed on a delicate balance.

From managing to defend scale to managing for efficiency

As the 2020s began, Toray confronted a structural management problem: for all the size of its sales, its margins would not improve. When it calculated ROIC by business, it became systematically visible for the first time that some existing businesses, in which it had given management priority to maintaining volumes and equipment utilisation, were dragging down capital efficiency across the group. With the discreditable state of a price-to-book ratio below 1× becoming the norm in shareholder-value terms, the board shared an analysis that located the cause of the low PBR not in growth but in the rate of return itself. The external pressure of the Tokyo Stock Exchange’s call for management conscious of the cost of capital came on top of it in March 2023, and capital efficiency came to the front as the highest priority of the management team.

In 2024 Toray began the structural reform programme “D-Pro”. It selected as its targets business groups where the scale of invested capital was large but the scope for improving earnings limited — PP spunbond, the film subsidiaries in Europe and the United States, polyester staple fibre, Zoltek — and built in a system of verifying, business by business, the conditions under which ROIC would hold, with businesses failing to meet them proceeding to contraction or withdrawal. In 2024 it also announced the phased sale of its cross-shareholdings, changing the conventional management policy that had taken the maintenance of scale as an unspoken premise. While preserving the ideal of staying in fibre held since Fujiyoshi, a new management philosophy — imposing thoroughgoing capital-efficiency discipline at the level of individual businesses — began to permeate the company.