Buying Zoltek: into industrial-grade carbon fibre (2013)

A company that wins on technology reads demand in a volume market

The heart of this acquisition is that Toray — which had built the world’s top position by growing technology in-house — deliberately let go of the self-reliance that was an extension of that success, and, in its first large M&A, stepped into a volume market of a different character. Carbon fibre for aircraft has a high wall of certification; once adopted, it is used for a long time, and that height of the entry barrier was Toray’s strength. But in industrial uses the substance of the strength switches from a technology wall to price competitiveness and a reading of market size. The judgement that taking in Zoltek’s mass-production technology would put industrial uses within reach rested on the premise that wind-power demand would grow as planned.

Wind-power demand betrayed that premise. It is premature to pronounce the acquisition itself a mistake, but there is no moving the fact that the decision to commit about $548M (¥58bn) ($862.6M (¥91bn) on a securities-report basis) was judged by the market in the form of a goodwill impairment. Together with the subsequent TenCate purchase, Toray’s carbon-fibre business gained the depth of holding everything from raw material to composite, while taking on the question of whether it could earn a return worthy of the capital invested. How far can a company that has won on technology read demand in a volume market? The Zoltek acquisition and its impairment remain a case that inscribed that difficulty onto Toray’s own ledger.