Nippon Shokubai
Corporate History & Strategy

The career of Taizo Hachiya, the de facto founder of Nippon Shokubai, was unconventional. After graduating from the Faculty of Engineering at Osaka Imperial University in 1932, he faced difficulty finding employment due to the economic recession and joined Yura Seiko, a dye manufacturer in Wakayama Prefecture. However, he incurred jealousy within the company and was forced to leave after three years. Subsequently, through an introduction from a university professor he knew, he joined the 'Osame Sulfuric Acid Research Institute,' led by sulfuric acid researcher Gohei Osame, starting in 1935. The institute worked on sulfuric acid catalysts for rayon production.

While engaged in sulfuric acid catalyst research, Hachiya independently began work on the industrialization of phthalic anhydride using vanadium catalysts. Phthalic anhydride was a raw material for industrial paints, and President Osame opposed the research on grounds that the market was too small, but Hachiya continued development on his own initiative. In 1941, he succeeded in manufacturing phthalic anhydride, and in August of the same year established Osame Synthetic Chemical Industries Co., Ltd. to begin mass production. Osame became president and Hachiya assumed the position of director.

The manufacture of phthalic anhydride carried explosion risks. In March 1944, a newly constructed 50-ton plant in Suita suffered an explosion on just its fifth day of operation, resulting in fatalities. Voices within the company called for halting phthalic anhydride production, but Hachiya decided to continue the business. There were also circumstances preventing a halt in production, as there was demand for aircraft paints during wartime.

This explosion risk paradoxically became a barrier to entry. When demand surged in the 1950s for use as a PVC plasticizer, major chemical manufacturers such as Mitsui Chemicals, Daicel, and Asahi Kasei successively entered the phthalic anhydride market, but companies withdrew one after another due to the risk of explosion accidents inherent in vapor-phase oxidation. Even zaibatsu-affiliated manufacturers abandoned production, while Nippon Shokubai continued production while managing the explosion risk.

As competitors withdrew citing explosion risks, Nippon Shokubai secured approximately 70% of domestic phthalic anhydride production share by around 1960. Competitors exited in exchange for the danger, and the company built a dominant position as the survivor. The technological tenacity of the founding period and the decision to continue business after the explosion accident ultimately formed the business foundation of Nippon Shokubai.

Hachiya himself later reflected, 'If we had stopped at that point, our phthalic anhydride business would not have existed, and Nippon Shokubai itself would not exist today.' The decision to continue business amid explosion risk—a life-threatening hazard—became the origin of Nippon Shokubai.

After the war, Gohei Osame, the founder of Osame Synthetic Chemical, gave up on rebuilding the company, selling his shares to third parties and losing the will to continue the business. The small company with capital of 600,000 yen was on the verge of extinction. In this situation, Taizo Hachiya, a director, took over the company and assumed the presidency. He changed the company name to 'Nippon Shokubai Chemical Industry Co., Ltd.,' seeking to transform the company from one with a strong personal business character into a public enterprise.

Hachiya clearly set forth a capital policy of avoiding family-controlled management. Learning from the failure of Osame's personal management, he established a policy of aiming for an open publicly listed company rather than one belonging to the Hachiya family. Through repeated capital increases, he intentionally diluted the ownership ratios of the founder and himself, aspiring to build a management system based on meritocracy under the philosophy that 'an enterprise is a public institution.'

From around 1950, the PVC market expanded rapidly, and demand for phthalic anhydride as a plasticizer increased. Nippon Shokubai planned to increase production and improve quality by constructing a new vacuum distillation plant at the Suita factory, but bank borrowing was difficult. The company therefore chose to raise capital through share issuance and approached Fuji Iron & Steel, a supplier, as the underwriter. The business relationship through which Fuji Iron & Steel supplied naphthalene, the raw material for phthalic anhydride, provided the connection.

Hachiya personally approached Shigeo Nagano, president of Fuji Iron & Steel, to propose the capital increase. Although the proposal was rejected within Fuji Iron & Steel, the capital increase was ultimately approved at President Nagano's discretion. As a result, Fuji Iron & Steel became the largest shareholder holding 33% of Nippon Shokubai's shares, and Nippon Shokubai achieved a capital-structure transition away from personal ownership. An unusual capital relationship was established in which one of Japan's leading steelmakers invested in a small Osaka company.

With the investment from Fuji Iron & Steel strengthening its financial base, Nippon Shokubai executed facility upgrades at the Suita factory. The construction of a new vacuum distillation plant improved the crystal structure of phthalic anhydride from the conventional needle-like crystals to pure white flakes, differentiating from competitors on quality. As the PVC market expanded, demand grew, and phthalic anhydride accounted for 90% of Nippon Shokubai's sales throughout the 1950s.

Hachiya later stated, 'I myself believe that if I lack ability, I must be prepared to fall from my position at any time.' The capital policy of transitioning away from personal ownership and avoiding family control was born from the lessons of the founding-era management failure, and became the prototype of Nippon Shokubai's corporate governance.

When the Japanese economy entered a temporary recession in 1952, the market for industrial products including PVC contracted. Demand for phthalic anhydride declined and prices fell, directly impacting Nippon Shokubai, which depended on phthalic anhydride for 90% of its revenue. In the November 1953 half-year period, Nippon Shokubai fell into a net loss, recording losses exceeding its capital.

For President Taizo Hachiya, this was a trial in his third or fourth year after becoming president. While he had experience as an engineer, he lacked experience as a manager, and was forced to carry out workforce reductions. Bank borrowing was difficult, and the only means of financial improvement was raising capital through share issuance.

Hachiya requested that Fuji Iron & Steel, the largest shareholder, underwrite a third-party allotment. The company had a business relationship as a supplier of naphthalene, the raw material for phthalic anhydride, and Fuji Iron & Steel had previously underwritten a capital increase. Hachiya personally approached Shigeo Nagano, president of Fuji Iron & Steel, in a car during transit, to request the capital increase.

The capital increase proposal was rejected once within Fuji Iron & Steel, but was ultimately approved at President Nagano's discretion. However, as Fuji Iron & Steel itself was also affected by the economic recession, it contributed naphthalene as an in-kind capital contribution rather than cash. Through this in-kind contribution of raw materials, Nippon Shokubai was able to strengthen its capital while reducing the burden of working capital.

When the 1953 economic recession subsided, the PVC market returned to expansion. As the top phthalic anhydride manufacturer, Nippon Shokubai benefited from the demand recovery and secured approximately 70% domestic market share. Surviving the recession with Fuji Iron & Steel's support paved the way for the company's advantageous position during the subsequent market expansion phase.

Hachiya later recounted, 'I pleaded with Mr. Nagano of Fuji Iron & Steel to let us do a capital increase, and we barely got through. To this day, I cannot sleep with my feet pointing toward Mr. Nagano.' The relationship with Fuji Iron & Steel, which was both supplier and largest shareholder, sustained the survival of the fledgling Nippon Shokubai. This was a case where capital ties based on a business relationship functioned as a safety valve when the risk of single-product dependence materialized.

Throughout the 1950s, Nippon Shokubai's phthalic anhydride used naphthalene as its raw material, but examination of production methods using petrochemical feedstocks (ortho-xylene) began around 1950. Applying the vapor-phase oxidation technology cultivated since its founding, Nippon Shokubai became the first in the world to successfully industrialize phthalic anhydride from petrochemical feedstocks in 1951. While technology imports from overseas were common in the petrochemical industry at the time, Taizo Hachiya insisted on domestic technology.

In 1955, a pilot plant (3 tons/month) was put into operation to accumulate production data for petrochemical-derived phthalic anhydride. However, mass production required participation in an ethylene center, and it was not easy for the relatively small Nippon Shokubai to join industrial complex plans led by zaibatsu-affiliated and major chemical manufacturers.

Nippon Shokubai decided to participate in the ethylene center being newly established by Nippon Petrochemicals in Kawasaki. The participating companies in the industrial complex comprised independent manufacturers not affiliated with zaibatsu, including Furukawa Chemical, Showa Chemical, and Asahi-Dow, and Nippon Shokubai was recruited as one of them. In 1958, the company acquired 26,000 m² of land in Kawasaki, and in June 1959, constructed and commenced operations of an ethylene oxide plant (5,000 tons/year).

The investment amounted to 980 million yen, exceeding twice Nippon Shokubai's capital of 480 million yen at the time. Industry observers reportedly mocked the company, saying it would go bankrupt. Furthermore, in 1960, the Himeji Plant was constructed, establishing a two-site production system where ethylene oxide manufactured in Kawasaki was used as raw material to increase phthalic anhydride production. To secure investment funds, capital increases were successively implemented—to 1 billion yen in 1959 and to 2.1 billion yen in 1961.

With the establishment of the two-site production system at the Kawasaki and Himeji plants, Nippon Shokubai expanded production volume and sales throughout the 1960s. On the demand side, phthalic anhydride came to be used in the manufacture of polyester fiber, adding a third application to the existing uses of paints and PVC. The synthetic fiber boom of the 1960s served as a tailwind, and the company benefited from market expansion.

Hachiya reflected, 'People said that I should stick to what I can handle and that Nippon Shokubai Chemical Industry would eventually go bankrupt, but I believed in my own abilities and pushed through stubbornly. After the success, everyone congratulated me, but my state of mind was one of solitude amid glory.' The capital investment exceeding twice the company's capital was literally a bet-the-company decision, but the transition to petrochemical feedstocks and the construction of an integrated production system using domestic technology transformed Nippon Shokubai from a small company into a mid-sized chemical manufacturer.

In the 1980s, the adoption of superabsorbent polymer (SAP) in disposable diapers caused the market to expand rapidly. The conventional diaper material was wood pulp, but SAP's dramatically superior absorption capacity established it as a standard absorbent material—a technological innovation. The pioneers were Sanyo Chemical and Unicharm: Sanyo Chemical succeeded in industrializing SAP in 1978, and Unicharm launched 'Moony,' a diaper using SAP, in 1981, expanding its market share.

In this competitive landscape, P&G found itself in difficulty. P&G, which had held the top share in domestic diapers, lost its leading position to Unicharm, which had been first to adopt SAP. P&G rushed to develop SAP-based diapers as a counter-measure, but the stable procurement of superabsorbent polymer, the raw material, was a challenge. P&G therefore requested Nippon Shokubai, the domestic leader in acrylic acid—SAP's raw material—to manufacture SAP.

In 1985, Nippon Shokubai began manufacturing SAP at the Himeji Plant. The company had succeeded in domestic production of acrylic acid in 1970, and the key differentiator from competitors was the establishment of an integrated production system from acrylic acid to SAP. Through capital investment, SAP production capacity was estimated to have increased approximately 30-fold from 1,000 tons to 30,000 tons.

The manufactured SAP was primarily supplied to P&G. While Sanyo Chemical supplied the Unicharm alliance, Nippon Shokubai supplied the P&G alliance, forming a competitive structure. P&G was the world's largest hygiene products manufacturer, and Nippon Shokubai came to serve as a global-scale SAP supplier. Although a late entrant, the company entered the market having secured the world's largest customer.

Throughout the latter half of the 1980s, Nippon Shokubai rapidly expanded its business through SAP supply for P&G. As P&G expanded its global diaper business, Nippon Shokubai increased SAP supply through exports in addition to domestic sales, achieving #1 domestic SAP production volume (20,000 tons) and #1 acrylic acid production volume (60,000 tons) in FY1986. SAP-related exports reached 80% of sales.

Integrated production from acrylic acid to SAP provided advantages in both raw material procurement stability and cost competitiveness. While competitors such as Sanyo Chemical needed to procure acrylic acid externally, Nippon Shokubai could maintain higher profit margins by producing raw materials in-house. Despite being a late entrant, the structural advantage of integrated raw material production enabled the market share reversal.

In the late 2010s, the disposable diaper SAP market entered its mature phase, and both Nippon Shokubai and Sanyo Chemical faced declining profitability. While the two companies were competitors in the SAP business, the slowdown in market growth and intensifying price competition made it clear that there were limits to improving profitability independently. Nippon Shokubai in particular had been caught in price competition in its European SAP business centered on its Belgian operations.

Meanwhile, Sanyo Chemical maintained relatively stable earnings in its China-oriented SAP business. The business portfolios of the two companies were complementary, and it was judged that there was room to expand the SAP business scale and improve cost structure through integration. The integration of competitors in the SAP market was conceived as a survival strategy through industry consolidation.

In May 2019, Nippon Shokubai and Sanyo Chemical announced plans to establish a new company 'Synfomix' through management integration. The integration was planned using a share transfer method, with implementation scheduled for October 2020. The integration of two competitors in the SAP business aimed to restructure the supply chain from raw materials to finished products and strengthen competitiveness in the global market.

However, the business environment changed dramatically during the preparation period for integration. The COVID-19 pandemic expanded in 2020, and Nippon Shokubai's European SAP business deteriorated. In October 2020, Nippon Shokubai announced a downward revision of its earnings forecast and was to record an impairment loss of 11.9 billion yen related to its Belgian operations.

Nippon Shokubai's deteriorating performance undermined the assumptions underlying the integration ratio. While Sanyo Chemical's China-oriented SAP business was relatively stable, Nippon Shokubai's European business was recording substantial impairment losses. As the performance gap between the two companies widened, Sanyo Chemical reportedly requested Nippon Shokubai to cancel the integration.

On October 21, 2020, Nippon Shokubai and Sanyo Chemical announced the complete withdrawal of the management integration. Nippon Shokubai recorded 1.7 billion yen in special losses related to the cancellation of the management integration for the fiscal year ending March 2021. The industry consolidation aimed at improving SAP business profitability fell through due to performance fluctuations during the integration preparation period. This was a case where the risk of making a management integration decision when the stability of earnings forecasts underlying the integration could not be assured became manifest.